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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
For the fiscal year ended June 30, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9620 Chesapeake Drive, San Diego, California 92123
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(Address of Principal Executive Offices) (Zip Code)
(619) 715-5500
- ------------------------------------------------
(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
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definitive proxy or information statements by reference in Part III of this
Form 10-KSB or any amendment to this form 10-KSB. (X)
Revenues for the fiscal year ended June 30, 1998 were $7,876,861.
APPLICABLE TO CORPORATE REGISTRANTS
As of June 30, 1998, the Issuer had outstanding 3,148,518 shares of Common
stock, no par value, 110,000 shares of preferred stock, $0.50 par value, and
70,645 shares of Preference Series B stock, $1.00 par value.
The approximate aggregate market value and total number of shares of Common
stock held by non-affiliates at June 30, 1998 was $598,071 and 956,914,
respectively. The total number of non-affiliate shares of Common stock was
multiplied by $0.625 per share (the average of the bid and asked prices of such
shares of Common stock on June 30, 1998) to determine the aggregate market value
of non-affiliate shares of Common stock set forth above. (The assumption is
made, solely for purposes of the above computation, that all Officers, Directors
and holders of more than 5% of the outstanding Common stock of registrant are
affiliates.) The approximate total aggregate market value of Common stock,
including affiliates, is $1,967,824.
DOCUMENTS INCORPORATED BY REFERENCE
Refer to Exhibits set forth in Item 13 of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes No X .
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SYS
FOR FISCAL YEAR ENDED JUNE 30, 1998
FORM 10-KSB ANNUAL REPORT
INDEX
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PAGE
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PART I
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Item 1. DESCRIPTION OF BUSINESS 5
Description of Business 5
Products and Services 5
Business Developments 5
Contract Backlog and Customers 7
Competitive Conditions 7
Employees 7
Factors Which May Affect Future Results 7
Item 2. DESCRIPTION OF PROPERTY 10
Item 3. LEGAL PROCEEDINGS 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-
HOLDERS 10
PART II
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Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 11
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION 12
Selected Financial Data 12
Results of Operations 13
Liquidity and Working Capital 14
Impact of the Year 2000 15
Item 7. FINANCIAL STATEMENTS 16
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 16
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PAGE
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PART III
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Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT 17
Item 10. EXECUTIVE COMPENSATION 22
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 23
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K 27
SIGNATURES 28
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FINANCIAL STATEMENTS F-1
to
F-17
</TABLE>
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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:
<TABLE>
<S> <C>
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
</TABLE>
BUSINESS DEVELOPMENTS
Company revenues for Fiscal Year 1998 increased 3% over the previous fiscal
year. Net income for Fiscal Year 1998 increased 24% over the previous fiscal
year.
The Company was successful in winning the recompete of the Underway
Replenishment (UNREP) Program which provides in-service engineering support
to the U.S. Navy Fleet. The new contract became effective on December 4,
1997 and consists of a base year and three one year options. The Company is
continuing its support for the research and development project to design and
build a full size ship mock-up of a missile rearming system. An Aegis
Cruiser Vertical Launch
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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 continues to refine the detail design. Shipboard technical
assistance continues to gain strength and is the basis for continued business
confidence in the coming year. Due to the declining number of Underway
Replenishment Ships in the active U.S. Navy fleet and the transfer of many of
these assets to the Military Sealift Command (MSC), a significant upgrade or
backfit program has developed to extend the serviceable life of these ships.
The Company is playing a major role in this program including design, asset
procurement, shipboard installation and the subsequent changes to the
technical documentation. The Company also has a key role in developing the
UNREP depot repair capability for selected equipments.
The Management, Planning and Analysis (MPA) Program had its third of
four option years exercised on February 1, 1998. This program supports the
U.S. Navy's Port Hueneme Division, Naval Surface Warfare Center. 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 Naval Architecture and Marine Engineering (NAME) Program had its
second of four option years exercised on November 25, 1997. This cost plus
fixed fee contract was issued by the U.S. Navy's Port Hueneme Division, Naval
Surface Warfare Center (PHD NSWC). The Company's largest customer on this
contract is the Ship Self Defense Department of PHD NSWC. Along with our
Associate Subcontractor, John J. McMullen Associates, Inc. (JJMA), the
Company provides extensive support for Ship Self Defense Systems in the areas
of weapon systems installation design, planning and coordination. The
outlook for this contract next year is good, but challenging. We are
attempting to expand our customer base in an environment of decreasing
customer budgets.
The Company was awarded a two-year subcontract on August 18, 1997 from
Systems Application and Technologies to continue its support to the Naval Air
Systems Command. This support provides environmental engineering and
technical services focusing on the identification and reduction of hazardous
material when providing maintenance to weapons and associated handling and
shipping equipment. Hazardous material reduction support is being expanded to
include support for Foreign Military Sales.
Washington, D.C. Operations successfully recompeted a five-year
subcontract with their prime contractor, Tracor, on April 24, 1997. This
will allow continued program management support to the Program Executive
Office, Surface Combatants/AEGIS Program (PEO,SC/AP), PMS400. The Company
provides contract and other financial reconciliation and closure support for
the Japanese AEGIS Foreign Military Sales cases. The Company also provides
other financial management support including case closure processing support
to PMS400.
The Company was successful in its bid to provide UNREP-type services to
the Republic of Korea Navy through a subcontract with Lake Shore, Inc. This
contract was completed this year.
The Company has plans to apply the skills acquired in the Defense arena
into the commercial sector. A concerted effort is now being launched to move
these plans into reality. The Company has also received notification from
the State of California that it has been approved as a supplier of training
services to the State.
The General Services Administration (GSA) has awarded the Company two
contracts. The
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first contract awarded is for Information Technologies (IT). The other
contract is for Financial Management Services. We have a Blanket Purchase
Agreement (BPA) in place at SPAWAR headquarters in San Diego for the IT
contract. We anticipate expanding our business in the San Diego area using
these contract vehicles.
CONTRACT BACKLOG AND CUSTOMERS
As of June 30, 1998, the Company's contract backlog, including
negotiated contract options, was approximately $22,047,000, compared with
approximately $20,342,000 on June 30, 1997. The primary reason for the
increase in year-to-year backlog is due to the fact that the Company won the
recompete on the UNREP contract during Fiscal Year 1998. 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, 1998
was approximately $5,024,000, as compared with approximately $5,718,000 on
June 30, 1997. The reason the actual backlog is less in fiscal year 1998 is
due to fewer fully funded D.O.s at year end.
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.
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 72 full-time and 21 part-time employees on June 30,
1998, compared to 58 full-time and 37 part-time employees on June 30, 1997
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
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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 employees were to leave the
company.
3. COMPETITION The Company has many competitors who vie for the same
customers. They are competent, experienced and continuously working to take
work projects away from the Company.
4. RECEIVABLE FROM AFFILIATE & ABSENCE OF COLLATERAL Big Canyon
Investments, Inc. (BCI), a wholly owned subsidiary of UniPrise Systems, Inc.
(UniPrise), a company partially owned by Robert D. Mowry, the Company's Chairman
and one of the Principal Executives of the Office of the Chief Executive, has
entered into an agreement with the Company in which BCI is providing collection
services for certain receivables. The Company could potentially benefit from
these receivables over and above the amount owed. Under this arrangement and as
of October 3, 1998, UniPrise owes the Company an aggregate of about $90,000.
Some of the $90,000 owed to the Company is subject to other agreements between
the Company and BCI and/or UniPrise and will be paid pursuant to those
agreements and as payments are received on the receivables. The total of these
receivables is greater than the debt owed to the Company, however, the Company
has no means to determine the validity of these receivables. Although the
Company's Board of Directors is working to collect these funds from UniPrise and
assist in the collection of the receivables, the amount of this indebtedness is
not secured by any collateral. In the event that the Company is not able to
secure the return of these advances, the Company may incur losses. (See "Item
12, Certain Relationships and Related Transactions.")
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.
6. LIMITED MARKET FOR COMMON STOCK. The Company's stock is traded (OTC)
on the Electronic Bulletin Board. Trading for the stock is sporadic and at
present there is a limited market for the Company's Common Stock. There can be
no assurance that a market will in fact develop. Even if a market does develop,
it may not be sustained.
7. POSSIBLE RULE 144 STOCK SALES. A total of 2,191,604 shares of the
Company's outstanding Common Stock are "restricted securities" and may be sold
only in compliance with Rule 144 adopted under the Securities Act of 1933 or
other applicable exemptions from registration. Rule 144 provides that a person
holding restricted securities for a period of one year may thereafter sell in
brokerage transactions, an amount not exceeding in any three month period the
greater of either (i) 1% of the Company's outstanding Common Stock, or (ii) the
average weekly trading volume during a period of four calendar weeks immediately
preceding any sale. Persons who are not affiliated with the Company and who
have held their restricted securities for at least two years are not subject to
the volume limitation. Possible or actual sales of the Company's Common Stock
by present shareholders under Rule 144 may have a depressive effect on the price
of the Company's Common Stock in any market which may develop.
8. RISKS OF LOW PRICED STOCKS. Trading in the Company's stock is
limited. Consequently, a shareholder may find it more difficult to dispose of,
or to obtain, accurate quotations
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as to the price of, the Company's securities. In the absence of a security
being quoted on NASDAQ, trading in the Common Stock is covered by Rule 3a51-1
promulgated under the Securities Exchange Act of 1934 for non-NASDAQ and
non-exchange listed securities.
Under such rules, broker/dealers who recommend such securities to persons
other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000
jointly with their spouse) must make a special written suitability determination
for the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are also exempt from this rule if the market price is
at least $5.00 per share, or for warrants, if the warrants have an exercise
price of at least $5.00 per share. The Securities Enforcement and Penny Stock
Reform Act of 1990 requires additional disclosure related to the market for
penny stocks and for trades in any penny stock defined as a penny stock.
The Commission has recently adopted regulations under such Act which define
a penny stock to be any NASDAQ or non-NASDAQ equity security that has a market
price or exercise price of less than $5.00 per share and allow for the
enforcement against violators of the proposed rules.
In addition, unless exempt, the rules require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule prepared by the
Commission explaining important concepts involving a penny stock market, the
nature of such market, terms used in such market, the broker/dealer's duties to
the customer, a toll-free telephone number for inquiries about the
broker/dealer's disciplinary history, and the customer's rights and remedies in
case of fraud or abuse in the sale.
Disclosure also must be made about commissions payable to both the
broker/dealer and the registered representative, current quotations for the
securities and, if the broker/dealer is the sole market maker, the broker/dealer
must disclose this fact and its control over the market.
Monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. While many NASDAQ stocks are covered by the proposed definition of
penny stock, transactions in NASDAQ stock are exempt from all but the sole
market-maker provision for (i) issuers $2,000,000 in tangible assets ($5,000,000
if the issuer has not been in continuous operation for three years), (ii)
transactions in which the customer is an institutional accredited investor and
(iii) transactions that are not recommended by the broker/dealer. In addition,
transactions in a NASDAQ security directly with the NASDAQ market maker for such
securities, are subject only to the sole market-maker disclosure, and the
disclosure with regard to commissions to be paid to the broker/dealer and the
registered representatives.
Finally, all NASDAQ securities are exempt if NASDAQ raised its requirements
for continued listing so that any issuer with less than $2,000,000 in net
tangible assets or stockholder's equity would be subject to delisting. These
criteria are more stringent than the proposed increase in NASDAQ'S maintenance
requirements. the company's securities are subject to the above rules on penny
stocks and the market liquidity for the Company's securities could be severely
affected by limiting the ability of broker/dealers to sell the Company's
securities.
9. CONTROL BY OFFICERS AND DIRECTORS. Officers and Directors of the
Company own 69.6% or 2,191,604 shares of the Company's common stock (before
including any shares acquired upon exercise of any stock options) and thereby
control the Company's affairs. (See "Principal Shareholders").
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ITEM 2. DESCRIPTION OF PROPERTY
The business and operations of the Company are now conducted in the following
office spaces:
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Approx.
Location Sq. Feet Lease Term Rental
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9620 Chesapeake Drive 6,820 Expires April 30, 2003 $ 6,479/mo.
San Diego, CA 92123
2011 Crystal Drive 1,553 Expires July 31, 2001 $ 3,785/mo.
One Crystal Park
Arlington, VA 22202
1721 Pacific Avenue 7,117 Expires March 31, 1999 $ 8,567/mo.
Oxnard, CA 93033 (Cancelable with 6 months
prior written notice)
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On February 7, 1997, Systems Exploration, Inc. (SEI) filed a lawsuit
against TRW for non-payment of services. These services were performed by SEI
in accordance with their obligation under a subcontract from TRW. On April 8,
1998, the Federal court ruled that the Company was a party of interest on behalf
of the plaintiff, SEI. Based on previous court orders, management believes that
the Company will not be materially effected.
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
1998.
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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 two most recent
fiscal years are as follows:
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Fiscal Year 1997 BID ASK
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First Quarter $0.067 $0.379
Second Quarter $0.211 $0.539
Third Quarter $0.291 $0.688
Fourth Quarter $0.415 $1.003
Fiscal Year 1998 BID ASK
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First Quarter $0.452 $0.452
Second Quarter $0.478 $0.549
Third Quarter $0.625 $1.125
Fourth Quarter $0.529 $0.886
</TABLE>
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 light trading in the Company's Common Stock for
the past year.
(b) As of June 30, 1998, there were approximately 420 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:
AS OF AND FOR THE FISCAL YEARS ENDED JUNE 30
(thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
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OPERATING RESULTS:
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Contract revenues $7,877 $7,649 $5,942
Costs and expenses:
Contract costs 6,653 6,596 4,933
General and administrative 868 783 681
Income from operations 356 270 328
Other (income) expenses:
Expenses related to settlement of
litigation and rescinded acquisition 0 0 156
Interest income (9) 0 0
Interest expense 38 40 44
Income before income taxes 327 230 128
Provision for income taxes 43 1 0
Net income 284 229 128
Net income applicable to
common stock 274 220 126
Basic earnings per common share 0.09 0.07 0.04
Diluted earnings per common share 0.08 0.07 0.04
BALANCE SHEET DATA:
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Total assets 1,816 1,615 1,310
Borrowings-bank line of credit 119 0 98
Long-term obligations (including
current portion) 157 125 28
Stockholders' equity 892 612 380
</TABLE>
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RESULTS OF OPERATIONS
FISCAL YEAR 1998 VS. FISCAL YEAR 1997
The Company's revenues from government contracts were approximately
$7,811,000 and $7,608,000 for 1998 and 1997, respectively. Total revenues
for 1998 were $7,877,000 compared to $7,649,000 for 1997.
The improvement in the Company's revenues was primarily related to
approximately $174,000 in increased sales on the MPA contract, $90,000 in
sales on the NAME contract and $141,000 in sales to the Republic of Korea
Navy. The increase in sales occurred despite reduced sales on the UNREP
contract of about $92,000 and in the Washington, D.C. operations of $101,000.
Other contract sales remained relatively stable.
During 1998, the Company's income from operations was $356,000 compared
to $270,000 in 1997. During 1998, the Company had net income of $284,000
compared to $229,000 in 1997. The increase in net income occurred despite
the provision for income taxes of $43,700 required in 1998, compared to $800
in 1997.
Substantially all the Company's contracts are of the cost reimbursable
plus fee type. 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. Contract costs increased to
$6,653,000 in 1998 from $6,596,000 in 1997 and general and administrative
expenses increased to $868,000 in 1998 from $783,000 in 1997 primarily as a
result of the increase in sales.
Primarily as a result of the utilization of net operating loss
carryforwards, the provision for income taxes in 1997 was approximately
$78,000 below the amount expected based on statutory rates. At June 30,
1997, the Company had federal net operating loss carryforwards of
approximately $190,000 available to offset future taxable income. As of June
30, 1998, all loss carryforwards have been used by the Company.
Basic earnings per common share was $0.09 in 1998 compared to $0.07 in
1997. The related weighted average number of common shares outstanding was
3,144,171 in 1998 and 2,946,054 in 1997. Diluted earnings per common share
was $0.08 in 1998 compared to $0.07 in 1997.
FISCAL YEAR 1997 VS. FISCAL YEAR 1996
The Company's revenues from government contracts were approximately
$7,608,000 and $5,821,000, respectively, for 1997 and 1996. Total revenues
for 1997 were $7,649,000 compared to $5,942,000 for 1996.
The improvement in the Company's revenues was primarily related to
approximately $250,000 in increased sales on the MPA contract and $1,815,000
in sales on the NAME contract which had no sales in 1996. The increase in
sales occurred despite the reduced sales on the UNREP contract and in the SYS
Computer Division which experienced sales reductions of $210,000 and $87,000,
respectively. Other contract sales remained relatively stable.
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During 1997, the Company's income from operations was $270,000,
compared to $328,000 in 1996. The Company's income from operations was lower
in 1997 than in 1996 due primarily to a write-off of $25,000 in old contract
receivables and reserving $26,000 for doubtful accounts in 1997. On the NAME
contract, the Company does not receive any fee on its Associate
Subcontractor's work and the Associate Subcontractor has performed almost
half of the $1,815,000 in sales on the contract.
During 1997, the Company had net income of $230,000, compared to
$128,000 in 1996. Earnings were negatively impacted by a judgement against
the Company for $156,000 in 1996 which was attributable to the GCAF
litigation settlement. The Company is appealing the judgement.
Contract costs increased to $6,596,000 in 1997 from $4,933,000 in 1996
and general and administrative expenses increased to $783,000 in 1997 from
$681,000 in 1996 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.
Primarily as a result of the availability of net operating loss
carryforwards, the provision for income taxes in 1997 was $78,000 below the
amounts expected based on statutory rates. At June 30, 1997, the Company had
federal net operating loss carryforwards of approximately $190,000 available
to offset future taxable income.
Basic earnings per common share was $0.07 in 1997 compared to $0.04 in
1996. The related weighted average number of common shares outstanding was
3,057,269 in 1997 and 2,822,086 in 1996. Diluted earnings per common share
was $0.07 in 1997 compared to $0.04 in 1996.
LIQUIDITY AND WORKING CAPITAL
The Company had working capital of $786,000 at June 30, 1998 compared
to $574,000 at June 30, 1997. Contract receivables increased by $143,000
during 1998. The Company's line of credit borrowings increased by $119,000
during 1998. This was primarily as a result of the increase in related party
receivables. Subsequent to June 30, 1998, the majority of this receivable
has been paid and the line of credit was reduced to zero. Accounts payable
was $144,000 lower in 1998 than in 1997. This was mainly attributable to
fewer subcontracts and other direct costs on the Company's contracts in 1998.
Accrued liabilities were further reduced in 1998. There are three notes that
make up the total of the current and long-term notes payable. The Company's
net assets increased by $280,000 in 1998 to $892,000. This improvement was
due primarily to the net income of $284,000 generated in 1998. Net furniture
and equipment increased by $98,000 in 1998.
The Company's primary source of liquidity is its $500,000 revolving
line of credit facility under a loan agreement with Scripps Bank that expires
on October 15, 1998. The loan is secured by all of the Company's assets
including contract receivables. Scripps Bank advances funds to the Company
of up to 80% of the Company's billed contract receivables which are less than
90 days old. Scripps Bank charges an interest rate of 1.5% over prime.
The Company also finances a portion of its operations through leases.
At June 30, 1998, the Company had noncancellable operating leases for its
offices which expire at various dates through April 2003. The Company also
leases certain computer and office equipment under capital leases
14
<PAGE>
expiring at various dates through May 2003.
Annual future minimum lease payments under capital leases with initial
terms of one year or more as of June 30, 1998 totaled $86,509, of which
$16,245 relates to the year ending June 30, 1999.
Annual future minimum lease payments under operating leases with
initial terms of one year or more as of June 30, 1998 totaled $637,893, of
which $200,856 relates to the year ending June 30, 1999.
Several key factors indicating the Company's financial condition
include:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
<S> <C> <C>
Current ratio 2.03 1.65
Maximum debt to net worth 1.03 1.64
Net worth $892,000 $612,000
Net working capital $786,000 $574,000
Debt to total assets 51% 62%
Book value per Common share $0.24 $0.15
</TABLE>
The Company continued to demonstrate improvements in the above financial
factors during fiscal year 1998. The current ratio is derived by dividing total
current assets by total current liabilities. Maximum debt to net worth is
calculated by dividing total liabilities (total current liabilities plus other
liabilities) by net worth. Net worth is total stockholders' equity. Net
working capital is total current assets less total current liabilities. Debt to
total assets is total liabilities divided by total assets. Book value per
common share is stockholders' equity related to common shares divided by the
weighted average number of common shares outstanding.
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, 1999.
IMPACT OF THE YEAR 2000
The Year 2000 issue exists because many computer systems and applications
use two-digit date fields to designate a year. As the century date change
occurs, date-sensitive systems may recognize the year 2000 as 1900, or not at
all. This inability to recognize or properly treat the year 2000 may cause
systems to process financial and operational information incorrectly. The
Company is continually upgrading its software and is in the process of upgrading
its financial software to insure compliance with the Year 2000 issue. The
Company believes that with these software upgrades, the Year 2000 issue will not
pose significant operational problems for its internal computer systems. The
Company anticipates that all systems will be Year 2000 compliant by June 30,
1999 through the use of internal and external resources and does not anticipate
incurring significant costs on this issue. There can be no assurance that the
systems of the Company's customers or suppliers will be converted on a timely
basis or that such failure to convert by another company will not have an
adverse effect on the Company. However, since the Company is primarily a
provider of services, the
15
<PAGE>
Company does not believe that suppliers will have a significant impact on the
Company's possible Year 2000 problems. The Company does not expect the Year
2000 issue to have a material effect on its financial position, results of
operations or cash flows in any given year.
ITEM 7. FINANCIAL STATEMENTS
The full text of the Company's audited financial statements for the fiscal
years ended June 30, 1998 and 1997 begins on page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
16
<PAGE>
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) Mr. Paul I. Anderson, age 63, was elected to the Board of Directors
on October 4, 1996, and served as Acting Chairman of the Company from March 21,
1997 to July 31, 1997. Mr. Anderson is President and CEO of Strategic
Catalysts, Inc., an international strategic consulting organization. In 1983
and 1984, Mr. Anderson was Division Vice President of RCA Video Disc Operations.
From 1979 to 1983 he was Senior Vice President and General Manager of Rayovac
Corporation, a manufacturer of primary power sources and lighting devices. In
this capacity, Mr. Anderson was responsible for the restructuring of North
American Operations which included product development, eight manufacturing
facilities, ten distribution centers, and a direct sales force. From 1956 to
1979 he was with the 3M Company in various management capacities including
engineering, marketing, business development, and general management. These
responsibilities included four years as General Manager, 3M Europe, where he was
responsible for the manufacture and sales of 3M's optical and magnetic systems
and media throughout Western Europe, Eastern Europe, and the Middle East. Mr.
Anderson's educational background includes an engineering degree from Oregon
State University and graduate business studies at Boston University.
(2) Mr. Robert E. Carroll, age 76, 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 Founding
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.
(3) Michael W. Fink, age 41, 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
17
<PAGE>
Business Administration (Accounting) from San Diego State University (SDSU).
He has also attended Graduate School at SDSU where he studied mechanical
engineering.
(4) Dr. Lawrence L. Kavanau, age 71, 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 and remained Chairman until March
21, 1997, and CEO until August 1, 1997. Effective August 26, 1998, The
Company's Board of Directors established an Office of the Chief Executive (OCE),
Dr. Kavanau is one of three Principal Executives of this office. 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
Department's 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.
(5) Mr. L. Randolph Knapp, age 61, was elected to the Board of Directors
effective as of September 16, 1997. Mr. Knapp was founder of KCG, a management
consulting company. He has served as Chief Financial Officer, Chairman and
member of the Board of Directors of UniPrise Systems Inc., a software developer
and RDI Computers Inc., a computer manufacturer. He is a member of the Board of
Directors of Storage Concepts Inc., an image storage systems manufacturer. Mr.
Knapp has also served in a consulting capacity as management advisor in a number
of companies. He was also a member of the Board of Directors and Chief
Financial Officer of Wilson Laboratories for four years. He was founder and
Chief Executive Officer of Wespercorp (ASE), for nine years and has held
positions in senior management with MSI Data Corporation (ASE), Datum Inc.
(OTC), Invecom Systems Inc. and the University of California L.R.L. Mr. Knapp
also serves as an advisory member of the Board of Directors of the National Bank
of Southern California. He was past Chairman of the Board of the Quality
Education Project, a non-profit corporation, a commissioner for the California
Commission for the Teaching Profession, past Chairman of the American
Electronics Association (Orange County Chapter), and past member of the board of
Personal Computer Centers, Inc., a computer retailer. Mr. Knapp is a curriculum
advisor to the Schools of Engineering and Computer Science at the University of
California at Irvine and the School of Engineering at Cal State Long Beach and
overall curriculum at Cal State Fullerton. He is a graduate of the Business
Management program at the College of San Mateo.
18
<PAGE>
(6) Mr. Robert D. Mowry, age 42, was elected to the Board of Directors on
March 21, 1997, and became the Company's Chairman of the Board and Acting Chief
Executive Officer effective August 1, 1997. Effective August 26, 1998, The
Company's Board of Directors established an Office of the Chief Executive (OCE),
Mr. Mowry is one of three Principal Executives of this office. Mr. Mowry is the
former Chief Executive Officer of UniPrise Systems, Inc. and is currently a
director of that company, which is engaged in the development and marketing of
proprietary software products. Mr. Mowry is the founder and CEO of Big Canyon
Investments, Inc., which was formed for investment and management of investments
and entered into an agreement to sell BCI to UniPrise Systems, Inc. in December,
1996. Mr. Mowry is currently in negotiations with UniPrise to reacquire BCI.
He is also President of North American Timeshare, Inc., dba United Computer
Systems, a computer hardware and software company, and is President and owner of
American Technology Investments, Inc., formed in May, 1997 for investment and
management of investments. In 1983, Mr. Mowry was founder and President of
Personal Computer Centre, which was a retail outlet for Compaq, IBM and Apple
Computers. He sold his interest in this company in 1985. Prior to this, in
1974, Mr. Mowry founded California Minicomputer Systems, Inc. (CMS), which
installed on-line distributed computer systems to large corporations. In 1982,
he sold CMS to a computer electronics manufacturer and remained President of
CMS, overseeing operations of the subsidiary company including new business
activities with the Federal Aviation Administration until 1984.
(7) Mr. W. Gerald Newmin, age 61, was elected to the Board of Directors as
of October 19, 1993 and has served as Corporate Secretary since December 10,
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, Greene International West,
Inc., and Caldwell Industries, Inc., both industrial manufacturing companies.
Mr. Newmin is also currently Chairman of International Forum of Corporate
Directors, a non-profit organization. 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.
(8) Charles E. Vandeveer, age 55, was elected to the Board of Directors on
March 21, 1997, and 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. Mr. Vandeveer served as
a Director of Naval Supply Centers and Supply Annexes, managing material
operations and ship repairable
19
<PAGE>
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.
(9) Charles H. Werner, age 71, 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. Effective
August 26, 1998, The Company's Board of Directors established an Office of the
Chief Executive (OCE), Mr. Werner is one of three Principal Executives of this
office. 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.
(10) Mr. Richard W. Wood, age 44, was elected to the Board of Directors as
of November 7, 1997. Mr. Wood is President and CEO of Digital Venture
Solutions, Inc. Mr. Wood is a seasoned operating executive with 22 years of
experience in the management of corporate finance, strategic planning, private
and public debt financing, public equity offerings, acquisitions, divestitures,
Treasury, SEC reporting and regulatory affairs. He has held senior level
positions at six companies, including roles as Chief Operating Officer and
President. Mr. Wood is also currently Vice President of American Technology
Investments. Mr. Wood earned a B.S. in Public Administration/Business from the
University of Missouri and completed post-graduate work at Georgetown
University's International School.
CERTAIN SIGNIFICANT EMPLOYEES
(11) Larry W. Moe, age 45, was elected Vice President of the Information
Technology Division on June 3, 1998. Prior to this promotion he was 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.
20
<PAGE>
OFFICERS OR DIRECTORS RESIGNING OR TERM ENDING IN 1998:
None
FAMILY RELATIONSHIPS AND AFFILIATES:
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 (11) above is
affiliated with the Company with the following exceptions: At June 30, 1998,
the Company's Chairman and Chief Executive Officer was Mr. Robert D. Mowry. Mr.
Mowry also had the following associations:
1. Chief Executive Officer of Big Canyon Investments, Inc. (BCI)
2. Owner of KRW Contracts and Financial Management, Inc. (KRW)
3. Former Chief Executive Officer of UniPrise Systems, Inc. (UniPrise)
The Company has pledged certain rights it holds in Systems Exploration, Inc.
(SEI) accounts receivable and claims to KRW for payment on a loan owned by BCI.
BCI is the first secured debtor of all SEI accounts receivable and claims up to
the value of the loan BCI purchased from First National Bank of San Diego plus
interest and collection costs. The Company has had an agreement with BCI to
support the collection efforts on a cost reimbursement basis and two Company
employees have been assisting BCI in the collection of SEI receivables, claims
and contract closeouts. UniPrise entered into an agreement to acquire BCI on or
about December 1996 and Mr. Mowry became the Chief Executive Officer of
UniPrise. About January of 1998, UniPrise ceased paying the Company's
collection costs. At the Board of Directors meeting held on April 15, 1998, the
Board formed a subcommittee that was tasked with the development of a plan to
insure repayment of the debt owed the Company by UniPrise as soon as possible.
As of June 30, 1998, UniPrise owed the Company approximately $190,000.
Subsequent to year end, this amount had been paid down to approximately $75,000;
the Company has incurred an additional $15,000 in collection costs, which brings
the total amount owed to the Company at October 3, 1998 to about $90,000.
Subsequent to June 30, 1998, Mr. Mowry became one of three Principal Executives
of the Office of the Chief Executive (OCE) of the Company. Mr. Charles H.
Werner, a director and OCE of the Company, has been a consultant to BCI and
manages the collection process for BCI. Mr. L. Randolph Knapp, a director of
the Company, is the former Chairman of UniPrise.
In October 1995, Mr. Mowry advanced funds in the amount of $165,000 to
finance certain Company trial expenses in return for possible future proceeds.
These expenses by Mr. Mowry were guaranteed by the Company to the extent that
the Company would in the future receive a portion of the funds from SEI assets
being collected by BCI.
On October 24, 1997, Mr. Mowry, as the Company's Chief Executive Officer,
authorized an advance of $60,000 of Company funds to an attorney for a possible
lawsuit in the Company's interest. The Board of Directors has decided not to
proceed with litigation at this time and has asked for the return of the
Company's funds, less expenses. About $37,000 has been repaid to the Company as
21
<PAGE>
of this filing. Mr. Mowry has guaranteed repayment of the remaining $23,000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Pursuant to
Section 16(a) of the Securities Exchange Act of 1934 and the rules issued
thereunder, the Company's executive officers and directors are required to
file with the SEC reports of ownership and changes in ownership of the Common
Stock. Based solely on its review of the copies of such reports furnished to
the Company, or written representations that no reports were required, the
Company believes that, during Fiscal year 1998, its executive officers and
directors complied with Section 16(a) requirements.
ITEM 10. EXECUTIVE COMPENSATION
The following is a table showing the remuneration paid by the Company
during its fiscal years ended June 30, 1998 and 1997 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):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Annual Compensation
Name and Principal Fiscal -------------------
Position Year Salary Other
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Lawrence L. Kavanau(1) 1998 $90,348 $6,000
Chief Financial Officer
- ---------------------------------------------------------------------------
All Executive Officers (4) as a Group 1998 $234,920 $15,000
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Lawrence L. Kavanau 1997 $90,000 $6,000
Chief Executive Officer
- ---------------------------------------------------------------------------
All Executive Officers (4) as a Group 1997 $232,092 $20,500
- ---------------------------------------------------------------------------
</TABLE>
(1) Lawrence L. Kavanau was the Company's Chief Executive Officer through
July 31, 1997; Robert D. Mowry assumed this position effective August 1, 1997
at no salary.
During the first two months Fiscal Year 1998, each Director of the
Company (excluding full time executive officers) received a fee in the amount
of $500.00 plus approved expenses per month. During the last ten months of
fiscal year 1998, each Director of the Company (excluding full time executive
officers) received a stock option for 12,000 shares of Company common stock
at $0.75 per share annually 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.
22
<PAGE>
The following is a list of common stock options given to directors and
officers as of June 30, 1998:
<TABLE>
<CAPTION>
Name and Title Grant Date # of shares Option Price Expiration Date
- --------------- ---------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Anderson, Paul - Director 5/21/97 25,000 $0.31 7/31/04
Mowry, Robert - Chairman 5/21/97 25,000 $0.47 3/21/04
Werner, Charles - Director 5/21/97 25,000 $0.09 9/30/98
Knapp, Randolph - Director 2/18/98 25,000 $0.75 9/16/04
Wood, Richard - Director 2/18/98 25,000 $0.75 11/7/04
Anderson, Paul - Director 11/19/97 10,000 $0.75 11/19/03
Carroll, Robert - Director 11/19/97 10,000 $0.75 11/19/03
Knapp, Randolph - Director 11/19/97 9,500 $0.75 11/19/03
Mowry, Robert - Chairman 11/19/97 10,000 $0.75 11/19/03
Newmin, Gerald - Director 11/19/97 10,000 $0.75 11/19/03
Werner, Charles - Director 11/19/97 10,000 $0.75 11/19/03
Wood, Richard - Director 11/19/97 7,800 $0.75 11/19/03
Vandeveer, Charles -Director 6/3/98 60,000 $0.71 6/3/03
Fink, Michael- Officer 6/3/98 50,000 $0.71 6/3/03
All other employees various 250,000 various various
Total options outstanding 552,300
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS (as of June 30,
1998) (Source of Information: Records of the Company's Transfer Agent, and
reports and information available to the Company as disclosed through the
Company's inquiries.) The following list of common stock holdings does not
include any outstanding stock options:
<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 Charles H. Werner 785,796 25.0%
Without Par P.O. Box 1966
Value Rancho Santa Fe, CA 92067
Lawrence L. Kavanau 298,189 (Direct) 14.6%
3320-140 Caminito East Bluff 162,333 (As Trustee
La Jolla, CA 92037 or Executor, With
Voting Rights)
Robert D. Mowry 102,497 (Direct) 9.5%
19 Cherry Hills Lane 196,922 (Indirectly,
Newport Beach, CA 92660 with Voting Rights,
through American
Technology Investments,
Inc.)(3),(4)
23
<PAGE>
W. Gerald Newmin 271,679 8.6%
48 Admiralty Cross
Coronado, CA 92118
Robert E. Carroll 219,078(4) 7.0%
110 Painted Cliffs Drive
Sedona, AZ 86336
Charles E. Vandeveer 119,616 3.8%
8203 Tiara Street
Ventura, CA 93004
</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 3,148,518 shares of Common Stock of the Company has been
considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) for
purposes of Item 11 of this Form 10-KSB.
(3) American Technology Investments, Inc. (ATI), is an entity solely
controlled by Mr. Mowry, and of which Mr. Mowry is the sole
shareholder.
(4) Robert E. Carroll granted to ATI, an option to purchase a total of
123,078 common shares; at this time Mr. Carroll retains beneficial
ownership of these shares.
(b) SECURITY OWNERSHIP OF MANAGEMENT (as of June 30, 1998) (Source
of Information: Records of the Company's Transfer Agent, and reports and
information available to the Company as disclosed through the Company's
inquiries.) The following list of common stock holdings does not include any
outstanding stock options:
<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 Charles H. Werner 785,796 25.0%
Without Par (Director)
Value
Lawrence L. Kavanau 298,189 (Direct) 14.6%
(Chief Financial Officer, 162,333 (As Trustee
Director) or Executor, with
Voting Rights)
Robert D. Mowry 102,497 (Direct) 9.5%
(Chairman, Chief Executive 196,922 (Indirect,
Officer)(5) with Voting Rights,
through American
Technology Investments,
Inc.)(3),(4)
24
<PAGE>
W. Gerald Newmin 271,679 8.6%
Director)
Robert E. Carroll 219,078(4) 7.0%
(Director)
Charles E. Vandeveer 119,616 3.8%
(Director, Executive Vice President)
Michael W. Fink 35,494 1.1%
(Vice-President, Administration)
All Directors and 2,191,604 69.6%
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.
(2) A total of 3,148,518 shares of Common Stock of the Company has been
considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) for
purposes of Item 11 of this Form 10-KSB.
(3) American Technology Investments, Inc. (ATI), is an entity solely
controlled by Mr. Mowry, and of which Mr. Mowry is the sole
shareholder.
(4) Robert E. Carroll granted to ATI an option to purchase a total of
123,078 common shares; at this time Mr. Carroll retains beneficial
ownership to these shares.
(5) Lawrence L. Kavanau was the Company's Chief Executive Officer through
July 31, 1997; Robert D. Mowry assumed this position effective August
1, 1997. Effective August 26, 1998, The SYS Board of Directors
established an Office of the Chief Executive (OCE). The OCE is
comprised of Lawrence L. Kavanau, Robert D. Mowry and Charles H.
Werner.
No director or officer of the Company is the beneficial owner of any
shares of the Company's Preferred Stock, $0.50 par value, or Series B 9%
Cumulative Convertible Callable Non-Voting Preference Stock, $1.00 par value.
(c) Changes in Control. As of June 30, 1998, Mr. Mowry and Mr.
Werner had an informal agreement, disclosed in Form 13D and amendments
thereto, to vote their aggregate 1,208,293 common shares in a manner to
achieve the purpose of changing the Board of Directors and gaining control
over the management and policies of SYS. On September 23, 1998, this
informal agreement was terminated with a filing of a Form 13D by Mr. Werner.
Mr. Mowry was elected by the Board of Directors to the positions of Chairman
of the Board and Acting Chief Executive Officer effective August 1, 1997.
The Company's Board of Directors established an Office of the Chief Executive
(OCE) effective August 26, 1998. The OCE is comprised of Lawrence L.
Kavanau, Robert D. Mowry and Charles H. Werner.
25
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the year ended June 30, 1998 the Board of Directors granted
stock purchase options to four key employees and seven outside directors
exercisable at various prices per share. Some of these purchase options contain
certain buy-back provisions which become effective in the event of termination
of employment or directorship.
During the year ended June 30, 1997, the Board of Directors authorized
non-qualified stock purchase options of 25,000 common shares each to outside
directors Paul I. Anderson, Charles H. Werner and Robert D. Mowry, which could
be exercised at $0.31, $0.09 and $0.47 per share, respectively. Exercise of
the Mowry and Werner options was subject to the approval of the shareholders to
increase the number of shares allocated under the 1997 SYS Incentive Stock
Option and Restricted Stock Plan for non-employee directors and consultants by
250,000 shares. The shareholders did approve an increase at the 1997 annual
meeting.
On September 3, 1997, a Director of New Business Development was hired
by the Company. As part of her compensation package, she was granted qualified
options on 50,000 shares of the Company's common stock. Subsequent to June 30,
1998, she left the employment of SYS and all stock options were terminated.
At the November 19, 1997 Board of Directors meeting, the board
approved stock options for all outside directors in lieu of cash compensation
for board meeting attendance. Effective September 1, 1997, outside directors
were to receive stock options for 12,000 shares of the Company's common stock as
annual compensation at $0.75 per share. As of June 30, 1998, there were 67,300
common shares owed to the following outside directors: Paul Anderson, 10,000
shares; Robert Carroll, 10,000 shares; Randy Knapp, 9,500 shares; Robert Mowry,
10,000 shares; Jerry Newmin, 10,000 shares; Chuck Werner, 10,000 shares; Richard
Wood, 7,800 shares.
Effective February 1, 1998, Mr. Larry Moe was granted stock options
for 60,000 shares of the Company's common stock by the Board of Directors. The
option is exercisable at 20,000 shares annually at $0.87 per share.
On February 18, 1998, the Board of Directors authorized non-qualified
stock purchase options of 25,000 common shares each to outside directors L.
Randolph Knapp and Richard W. Wood, which may be exercised at $0.75 per share.
At the June 3, 1998 Board of Directors meeting, stock options totaling
300,000 common shares were approved for key employees at $0.71 per share. The
stock options vest annually on a 20%, 20%, 30%and 30% basis over four years.
Included in this award were two officers, Charles E. Vandeveer and Michael W.
Fink, who received stock options of 60,000 and 50,000 shares, respectively.
See the Family Relationships and Affiliates section of Item 9 for
disclosures relating to Robert D. Mowry, Charles H. Werner and L. Randolph
Knapp.
26
<PAGE>
ITEM 13. EXHIBITS, LISTS 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.
1.6 Certificate of Determination of Series B 9% Cumulative
Convertible Callable Non-Voting Preference Stock was filed by
the Company with the California Secretary of State on August 15,
1996, and incorporated by this reference.
1.7 A Proxy Statement pursuant to Section 14(a) of the Securities
Exchange Act of 1934 was filed on February 21, 1997, and
incorporated by this reference.
1.8 A copy of the SYS 1997 Incentive Stock Option and Restricted
Stock Plan was filed as Attachment 1 to the Company's Proxy
Statement, filed on February 21, 1997, and is incorporated by
this reference.
(b) Exhibits to this Form 10-KSB are listed in subsection (1) above.
(c) 1. Form 8-K was filed on August 1, 1997, reporting the Mr. Robert D.
Mowry had been elected as Chairman of the Board and Chief
Executive Officer of the Company.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYS
By: /s/ Robert D. Mowry Date: 10/13/98
---------------------------- ----------------------------
ROBERT D. MOWRY
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Paul I. Anderson Date: 10/13/98
----------------------------------- -----------------------
PAUL I. ANDERSON
Director
By: /s/ Robert E. Carroll Date: 10/13/98
----------------------------------- -----------------------
ROBERT E. CARROLL
Director
By: /s/ Lawrence L. Kavanau Date: 10/13/98
----------------------------------- -----------------------
LAWRENCE L. KAVANAU
Director and Chief Financial Officer
By: /s/ L. Randolph Knapp Date: 10/13/98
----------------------------------- -----------------------
L. RANDOLPH KNAPP
Director
By: /s/ Robert D. Mowry Date: 10/13/98
----------------------------------- -----------------------
ROBERT D. MOWRY
Director
By: /s/ W. Gerald Newmin Date: 10/13/98
----------------------------------- -----------------------
W. GERALD NEWMIN
Director and Corporate Secretary
By: /s/ Charles E. Vandeveer Date: 10/13/98
----------------------------------- -----------------------
CHARLES E. VANDEVEER
Director
By: /s/ Charles H. Werner Date: 10/13/98
----------------------------------- -----------------------
CHARLES H. WERNER
Director
By: /s/ Richard W. Wood Date: 10/13/98
----------------------------------- -----------------------
RICHARD W. WOOD
Director
28
<PAGE>
SYS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEETS
JUNE 30, 1998 AND 1997 F-3
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998 AND 1997 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997 F-5
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997 F-6
NOTES TO FINANCIAL STATEMENTS F-7/17
</TABLE>
* * *
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
SYS
We have audited the accompanying balance sheets of SYS as of June 30, 1998 and
1997, and the related statements of income, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SYS as of June 30, 1998 and
1997, and its results of operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
J.H. COHN LLP
San Diego, California
September 3, 1998
F-2
<PAGE>
SYS
BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 28,131 $ 194,462
Contract receivables, net of allowance for doubtful
accounts of $26,000 1,185,278 1,042,520
Receivables from related parties 239,774 79,439
Other current assets 99,173 135,194
------------ -----------
Total current assets 1,552,356 1,451,615
Furniture and equipment, less accumulated depreciation and
amortization of $339,537 and $279,300 246,869 148,375
Other assets 16,532 15,220
------------ -----------
Totals $ 1,815,757 $ 1,615,210
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank under line of credit $ 118,798
Accounts payable 317,926 $ 461,988
Accrued payroll and related taxes 253,104 237,407
Other accrued liabilities 19,158 64,762
Current portion of other notes payable 48,167 90,195
Current portion of capital lease obligations 9,368 23,174
------------ -----------
Total current liabilities 766,521 877,526
Other notes payable, net of current portion 101,486 125,420
Capital lease obligations, net of current portion 55,385
------------ -----------
Total liabilities 923,392 1,002,946
------------ -----------
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 preference stock, $1.00 par value; 2,000,000
shares authorized; 70,645 and 78,195 Series B shares
issued and outstanding 70,645 78,195
Common stock, no par value; 6,000,000 shares authorized;
3,148,518 and 3,133,418 shares issued and outstanding 450,969 443,419
Retained earnings 315,751 35,650
------------ -----------
Total stockholders' equity 892,365 612,264
------------ -----------
Totals $ 1,815,757 $ 1,615,210
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
SYS
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Contract revenues $7,876,861 $7,648,578
---------- ----------
Costs and expenses:
Contract costs 6,652,502 6,596,240
General and administrative expenses 867,922 782,568
---------- ----------
Totals 7,520,424 7,378,808
---------- ----------
Income from operations 356,437 269,770
---------- ----------
Other (income) expense:
Interest income (9,214)
Interest expense 38,245 39,962
---------- ----------
Totals 29,031 39,962
---------- ----------
Income before income taxes 327,406 229,808
Provision for income taxes 43,700 800
---------- ----------
Net income 283,706 229,008
Preferred dividends 8,558 9,238
---------- ----------
Net income applicable to common stock $ 275,148 $ 219,770
---------- ----------
---------- ----------
Basic earnings per common share $ .09 $ .07
---------- ----------
---------- ----------
Diluted earnings per common share $ .08 $ .07
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
SYS
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Convertible Retained
Convertible Series B Earnings
Preferred Stock Preference Stock Common Stock (Accumu-
----------------- ------------------ ------------------- lated
Shares Amount Shares Amount Shares Amount Deficit) Total
------- -------- ------- -------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 110,000 $55,000 139,561 $139,561 2,827,186 $372,878 $(187,858) $379,581
Cash dividends on
4% convertible preferred
stock at $.05 per share (5,500) (5,500)
Issuance of common stock
as compensation 3,500 175 175
Proceeds from exercise
of stock options 180,000 9,000 9,000
Conversion of 9% convertible
Series B preference stock
into common stock (61,366) (61,366) 122,732 61,366
Net income 229,008 229,008
------- -------- ------- -------- --------- --------- ----------- --------
Balance, June 30, 1997 110,000 55,000 78,195 78,195 3,133,418 443,419 35,650 612,264
Cash dividends on
4% convertible preferred
stock at $.02 per share (2,200) (2,200)
Cash dividends on
9% convertible Series B
preference stock at
$.02 per share (1,405) (1,405)
Conversion of 9% convertible
Series B preference stock
into common stock (7,550) (7,550) 15,100 7,550
Net inco 283,706 283,706
------- -------- ------- -------- --------- --------- ----------- --------
Balance, June 30, 1998 110,000 $ 55,000 70,645 $ 70,645 3,148,518 $450,969 $ 315,751 $892,365
------- -------- ------- -------- --------- --------- ----------- --------
------- -------- ------- -------- --------- --------- ----------- --------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
SYS
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 283,706 $ 229,008
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 60,237 52,528
Loss on disposition and write-down of equipment 13,829
Provision for doubtful accounts 51,000
Issuance of capital stock as compensation 175
Changes in operating assets and liabilities:
Contract receivables (142,758) (106,492)
Receivables from related parties (160,335) (22,515)
Other current assets 36,021 (51,177)
Other assets (1,312) 475
Accounts payable (144,062) 259,714
Accrued payroll and related taxes 15,697 11,853
Other accrued liabilities (45,604) (166,546)
------------ ------------
Net cash provided by (used in) operating activities (98,410) 271,852
------------ ------------
Investing activities - acquisition of furniture and equipment (91,901) (79,636)
------------ ------------
Financing activities:
Proceeds from line of credit borrowings 8,332,000 7,240,000
Payments of line of credit borrowings (8,213,202) (7,338,050)
Proceeds from other notes payable 24,000 160,000
Payments of other notes payable (89,962) (44,773)
Payments of capital lease obligations (25,251) (43,207)
Payments of preferred stock dividends (3,605) (5,500)
Proceeds from issuance of common stock 9,000
------------ ------------
Net cash provided by (used in) financing activities 23,980 (22,530)
------------ ------------
Net increase (decrease) in cash (166,331) 169,686
Cash, beginning of year 194,462 24,776
------------ ------------
Cash, end of year $ 28,131 $ 194,462
------------ ------------
------------ ------------
Supplemental disclosure of cash flow data:
Interest paid $ 38,245 $ 39,962
------------ ------------
------------ ------------
Income taxes paid $ 62,800
------------
------------
Supplemental disclosure of noncash investing and financing
activities:
Capital lease obligations incurred for furniture and
equipment $ 66,830
------------
------------
Conversion of 9% convertible Series B preference stock
into common stock $ 7,550 $ 61,366
------------ ------------
------------ ------------
Conversion of accounts payable into other notes payable $ 100,388
------------
------------
</TABLE>
See Notes to Financial Statements.
F-6
<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, ordnance engineering, logistics
analysis and engineering, operations 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 $136,882 and $139,559 and
accumulated amortization of $71,508 and $97,106 at June 30, 1998 and
1997, respectively.
Impairment of long-lived assets:
Impairment losses on long-lived assets are recognized when events or
changes in circumstances indicate that the undiscounted cash flows
estimated to be generated by such assets are less than their carrying
value and, accordingly, all or a portion of such carrying value may
not be recoverable. Impairment losses are then measured by comparing
the fair value of assets to their carrying amounts.
F-7
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(continued):
Earnings per common share:
Effective June 30, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, EARNINGS PER
SHARE ("SFAS 128"), which replaced the presentation of "primary" and
"fully-diluted" earnings per common share required under previously
promulgated accounting standards with the presentation of "basic" and
"diluted" earnings per common share.
Basic earnings per common share is calculated by dividing net income
applicable to common stock by the weighted average number of common
shares outstanding during the period. The calculation of diluted
earnings per common share is similar to that of basic earnings per
common share, except that the denominator is increased to include the
number of additional common shares that would have been outstanding if
all potentially dilutive common shares, principally those issuable
upon the conversion of preferred stock and the exercise of stock
options, were issued during the period.
The following table summarizes the calculation of basic and diluted
earnings per common share for each period:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Numerators:
Net income (A) $ 283,706 $ 229,008
Deduct - preferred dividend requirements 8,558 9,238
----------- -----------
Net income applicable to common stock (B) $ 275,148 $ 219,770
----------- -----------
----------- -----------
Denominators:
Weighted average shares for basic net
earnings per common share (C) 3,144,171 2,946,054
Add effects of dilutive securities from
assumed:
Conversion of preferred stock 255,637 351,462
Exercise of stock options 40,476 1,215
----------- -----------
Weighted average shares for diluted net
earnings per common share (D) 3,440,284 3,298,731
----------- -----------
----------- -----------
Basic net earnings per common share (BDIVIDED BYC) $ .09 $ .07
----------- -----------
----------- -----------
Diluted net earnings per common share (ADIVIDED BYD) $ .08 $ .07
----------- -----------
----------- -----------
</TABLE>
F-8
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(concluded):
Earnings per common share (concluded):
Prior to the retroactive adoption of SFAS 128, the Company reported
primary earnings per common share of $.07 and was not required to
report fully-diluted earnings per share for the year ended June 30,
1997.
Recent accounting pronouncements:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME ("SFAS 130"), and Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION ("SFAS 131"), which could require
the Company to make additional disclosures in its financial statements
no later than for the year ending June 30, 1999. SFAS 130 defines
comprehensive income, which includes items in addition to those
reported in the statement of operations, and requires disclosures
about its components. Management believes that the adoption of SFAS
130 will not require the Company to make any additional disclosures.
SFAS 131 requires disclosures for each segment of a business and the
determination of segments based on its internal management structure.
Management is in the process of evaluating whether SFAS 131 will
require the Company to make any additional disclosures.
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.
Reclassifications:
Certain accounts in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
F-9
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 2 - Contract receivables:
Contract receivables consist of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Amounts billed, less allowance for doubtful
accounts of $7,000 $ 688,064 $ 177,083
Recoverable costs and accrued profit on
progress completed - not billed 62,895 610,970
Retentions, due upon completion of contracts 123,655 74,947
Recoverable costs subject to closure of
contracts - not billed, less allowance
for doubtful accounts of $19,000 310,664 179,520
-------------- -------------
Totals $ 1,185,278 $ 1,042,520
-------------- -------------
-------------- -------------
</TABLE>
At June 30, 1998 recoverable costs and accrued profit on progress completed
- not billed consisted of amounts billed in July 1998. 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, 1998 are expected to be collected in fiscal 1999 and 2000.
Recoverable costs subject to closure of contracts - not billed consist
primarily of revenues recognized on specific delivery orders as a result of
actual indirect expense rates exceeding the Defense Contract Audit Agency
approved billing rates. The Company does not recognize revenues in excess
of the allowable funding limitations on each delivery order. These
receivables will be due upon closure of the specific delivery orders or the
contracts.
Note 3 - Receivables from related parties:
Receivables from related parties consisted of the following at June 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Receivable from company owned by officer
of the Company $189,774 $ 79,439
Receivable from officer of the Company 50,000
--------- ----------
Totals $239,774 $ 79,439
--------- ----------
--------- ----------
</TABLE>
The balances are due on demand and are noninterest bearing.
F-10
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 4 - Note payable to bank under line of credit:
At June 30, 1998, the Company had outstanding borrowings of $118,798 under
a $500,000 revolving line of credit provided by a bank which expires on
October 15, 1998. Interest on outstanding borrowings was payable at 1.5%
above a specified prime rate (an effective rate of 10% at June 30, 1998).
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. Among other things, the terms of the line of credit
agreement require the Company to maintain certain financial ratios.
Note 5 - Other notes payable:
As of June 30, 1998, other notes payable had an aggregate principal balance
of $149,653. These notes bear interest at rates ranging from 9.28% to
10.25%. One note (which had a principal balance of $122,910) is payable to
a bank and has terms that require the Company to maintain certain financial
ratios. Principal amounts due under these obligations for each of the
years subsequent to June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ending Amount
------------ ----------
<S> <C>
1999 $ 48,167
2000 90,838
2001 6,507
2002 4,141
</TABLE>
Note 6 - Leases:
The Company has noncancelable operating leases for its offices which expire
at various dates through April 2003. Certain leases provide for increases
in the minimum lease payments based on fluctuations in various price
indices. Rent expense under all operating leases totaled $178,006 and
$187,547 in 1998 and 1997, respectively.
The Company also leased certain computer equipment under capital leases
which expire in May 2003.
F-11
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 6 - Leases (concluded):
Annual future minimum lease payments under noncancelable operating and
capital leases with initial terms of one year or more as of June 30, 1998
are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
----------- -----------
<S> <C> <C>
1999 $200,856 $16,245
2000 129,196 18,062
2001 134,689 18,062
2002 94,722 18,062
2003 78,430 16,078
----------- -----------
Totals $637,893 86,509
-----------
-----------
Less amounts representing interest 21,756
-----------
Present value of minimum lease payments 64,753
Less current portion 9,368
-----------
Long-term portion $55,385
-----------
-----------
</TABLE>
Note 7 - Stockholders' equity:
Convertible preferred stock:
The Company has been authorized to issue up to 250,000 shares of
nonvoting convertible preferred stock with a par value of $.50 per
share, of which 110,000 shares had been issued at June 30, 1998.
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, 1998, there were
16,923 shares of common stock reserved for issuance upon conversion of
outstanding preferred stock. In the event of the Company's
liquidation, the holders of the preferred stock are entitled to $.50
per share plus all accumulated and unpaid dividends.
Cash dividends paid on the preferred stock totaled $2,200 and $5,500
in 1998 and 1997, respectively. The payments in 1997 included $3,300
for dividends in arrears.
F-12
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stockholders' equity (continued):
Convertible preference stock:
In June 1996, the Company issued to employees 139,561 of the 2,000,000
authorized shares of preference stock, which were designated as Series
B 9% cumulative convertible callable nonvoting preference stock ($1.00
par value), along with 5,100 shares of common stock and charged
$139,816 as compensation. Payments of dividends on the preference
stock are subordinate to the payment of dividends on the 4% preferred
stock. Each share of preference stock, without any cumulative
dividends, is convertible into two shares of common stock until the
Company has issued a maximum of 139,561 common shares. During 1998
and 1997, a total of 7,550 and 61,366 shares of preference stock were
converted into 15,100 and 122,732 shares of common stock,
respectively. Accordingly, 70,645 and 78,195 shares of preference
stock remained outstanding as of June 30, 1998 and 1997. At June 30,
1998, there were 70,645 shares of common stock reserved for issuance
upon conversion of outstanding preference stock. Cash dividends paid
on the preference stock totaled $1,405 in 1998. There were no cash
dividends paid in 1997. At June 30, 1998 and 1997, cumulative
dividends in arrears on the preference stock totaled $11,375 and
$7,038, respectively. In the event of the Company's liquidation, the
holders of the preference stock are entitled to $1.00 per share plus
all accumulated and unpaid dividends.
Nonqualified stock options:
During 1997, the Company entered into agreements for grants of
nonqualified stock options to three key employees. Under these
agreements, the Company granted options to purchase 105,000 shares of
common stock at $.05 per share (the fair market value at the date of
grant). These options were exercised immediately. However, the right
of the employees to retain these shares is contingent upon their
future employment by the Company. The right of retention vests
ratably over the three year period that commenced with the date of the
grant. The Company has the right to purchase unvested shares upon
termination of employment at the original purchase price.
Incentive stock option and restricted stock plan:
On August 20, 1996, the Company's Board of Directors adopted the SYS
1997 Incentive Stock Option and Restricted Stock Plan (the "Plan"),
which was modified and ratified by the Company's stockholders during
1998. The Plan provides for grants by the Board of Directors of
incentive stock options to purchase up to 500,000 shares of common
stock to employees and grants of restricted stock options to purchase
up to 350,000 shares of common stock to directors and consultants.
Restricted stock options for the purchase of 117,300 and 150,000
shares were granted in 1998 and 1997, respectively. Incentive stock
options for the purchase of 410,000 shares were granted in 1998.
Options cannot be granted under the Plan at less than 100% of the fair
market value on the date of grant. Options vest at such time and
under such conditions as determined by the Board of Directors at the
time of grant.
F-13
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stockholders' equity (continued):
Additional required disclosures related to stock options:
The following table summarizes certain information regarding stock
options at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Weighted Weighted
Shares Average Shares Average
or Price Exercise or Price Exercise
Per Share Price Per Share Price
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 75,000 $.29
Options granted 527,300 $.74 255,000 $.11
Options cancelled (50,000) $.69
Options exercised (180,000) $.05
------- --------
Options outstanding at
end of year 552,300 $.68 75,000 $.29
------- --------
------- --------
Option price range at end of year $.09 to $.87 $.09 to $.47
Weighted average fair value of
options granted during the year $.48 $.11
---- ----
---- ----
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1998, all of which are at fixed-prices:
<TABLE>
<CAPTION>
Weighted
Remaining
Number Contractual Exercise Options
Outstanding Life Price Exercisable
----------- ----------- -------- -----------
<S> <C> <C> <C>
25,000 5.9 Years $.09 5,544
25,000 5.9 Years .31 5,544
25,000 5.9 Years .47 5,544
300,000 5.0 Years .71
117,300 4.8 Years .75 70,914
60,000 4.6 Years .87
</TABLE>
At June 30, 1998, incentive stock options and restricted stock options
were available for grant for the purchase of 140,000 and 82,700 shares
of common stock, respectively.
F-14
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stockholders' equity (concluded):
Additional required disclosures related to stock options (concluded):
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). Since all of the options were granted at
the fair market value on the date of grant, no earned or unearned
compensation cost was recognized in the accompanying financial
statements for stock options granted in 1998 and 1997. Had
compensation cost been determined based on the fair value at the grant
date for all awards in 1998 and 1997 consistent with the provisions of
SFAS 123, the Company's net income and net earnings per common share
would have been reduced to the pro forma amounts set forth below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income - as reported $283,706 $229,008
Net income - pro forma 240,517 217,458
Basic earnings per common share - as reported $.09 $. 07
Basic earnings per common share - pro forma $.08 $. 07
Diluted earnings per common share - as reported $.08 $. 07
Diluted earnings per common share - pro forma $.07 $. 06
</TABLE>
The fair value of each option granted in 1998 and 1997 was estimated
on the date of grant using the Black-Sholes option-pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997
------------ ------------------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 69% 200%
Risk-free interest rate 7% 7%
Expected lives 5 to 7 years 1 month to 7 years
</TABLE>
F-15
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 8 - Income taxes:
The provision for income taxes in 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Federal $18,000
State 25,700 $ 800
------- ------
Totals $43,700 $ 800
------- ------
------- ------
</TABLE>
As of June 30, 1997, the Company had a net operating loss carryforward for
Federal income tax purposes of approximately $190,000 that was utilized in
1998.
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, 1998 and 1997 are shown below:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 65,000
Other $ 56,000 57,000
-------- ---------
Total deferred tax assets 56,000 122,000
Valuation allowance for deferred
tax assets (56,000) (122,000)
-------- ---------
Net deferred tax assets $ - $ -
-------- ---------
-------- ---------
</TABLE>
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, computed based on the Company's
pre-tax income in 1998 and 1997 and the statutory Federal income tax rate,
is reconciled to the actual tax provision reflected in the accompanying
financial statements as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Expected tax provision at statutory rates $ 96,460 $ 77,863
Decrease resulting primarily from utilization
and/or availability of net operating loss
carryforwards (78,460) (77,863)
-------- ---------
Totals $ 18,000 $ -
-------- ---------
-------- ---------
</TABLE>
F-16
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 9 - 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 $69,833 and $66,761 in 1998 and 1997, respectively.
Note 10 - Contingencies:
The Company is 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.
* * *
F-17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 28,131
<SECURITIES> 0
<RECEIVABLES> 1,211,278
<ALLOWANCES> 26,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,552,356
<PP&E> 586,406
<DEPRECIATION> 339,537
<TOTAL-ASSETS> 1,815,757
<CURRENT-LIABILITIES> 766,521
<BONDS> 0
0
125,645
<COMMON> 450,969
<OTHER-SE> 315,751
<TOTAL-LIABILITY-AND-EQUITY> 1,815,757
<SALES> 0
<TOTAL-REVENUES> 7,876,861
<CGS> 0
<TOTAL-COSTS> 7,520,424
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,245
<INCOME-PRETAX> 327,406
<INCOME-TAX> 43,700
<INCOME-CONTINUING> 283,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 283,706
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
