<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report Under Section 13 or 15(d) of The Securities Exchange
--- Act of 1934
For the quarterly period ended March 31, 1999
---------------------
Transaction Report Under Section 13 or 15(d) of the Securities
--- Exchange Act
For the transition period from to
---------------------- ---------------------
Commission File Number 0-4169
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SYS
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(Exact Name of Small Business Issuer as Specified in Its Charter)
CALIFORNIA 95-2467354
- ---------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9620 CHESAPEAKE DRIVE, SUITE 201, SAN DIEGO, CALIFORNIA 92123
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(619) 715-5500
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(Issuer's Telephone Number, Including Area Code)
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,236,732 SHARES OF
COMMON STOCK, WITHOUT PAR VALUE, AS OF APRIL 30, 1999.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheet (unaudited)
March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . .3
Condensed Statements of Operations (unaudited)
Three Months and Nine Months Ended March 31, 1999
and Three Months and Nine Months Ended March 31, 1998. . . . . .4
Condensed Statements of Cash Flows (unaudited)
Nine Months Ended March 31, 1999
and Nine Months Ended March 31, 1998 . . . . . . . . . . . . . .5
Notes to Condensed Financial Statements (unaudited) . . . . . . . . .6
Item 1a. Factors Which May Affect Future Results . . . . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Description of Business. . . . . . . . . . . . . . . . . . . . 10
Results of Operations. . . . . . . . . . . . . . . . . . . . . 11
Liquidity and Capital Resources. . . . . . . . . . . . . . . . 12
Impact of the Year 2000. . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYS
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
3/31/99
-----------
(Unaudited)
<S> <C>
ASSETS
----------------------------------------
Current assets:
Cash $ 140,000
Contract receivables, net 1,150,000
Receivable from a related party 132,000
Other current assets 65,000
------------
Total current assets 1,487,000
Equipment, furniture and fixtures,
at cost, less accumulated
depreciation and amortization 247,000
Other assets 17,000
------------
$ 1,751,000
------------
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LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------------
Current liabilities:
Note payable to bank $ 0
Accounts payable 114,000
Accrued payroll and related taxes 244,000
Other accrued liabilities 17,000
Current portion of long-term debt 9,000
Income taxes payable 47,000
------------
Total current liabilities 431,000
------------
Long-term debt 166,000
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Stockholders' equity:
Preferred stock 55,000
Series B preference stock 71,000
Common stock 489,000
Retained earnings 539,000
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Total stockholders' equity 1,154,000
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$ 1,751,000
------------
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</TABLE>
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<PAGE>
SYS
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31 March 31
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Contract revenues $ 1,873,000 $ 1,875,000 $ 5,605,000 $5,899,000
Costs and expenses:
Contract costs 1,534,000 1,599,000 4,502,000 5,019,000
General and administrative 235,000 193,000 775,000 579,000
----------- ----------- ------------- ----------
1,769,000 1,792,000 5,277,000 5,598,000
----------- ----------- ------------- ----------
Income from operations 104,000 83,000 328,000 301,000
Other expenses:
Interest 5,000 11,000 20,000 25,000
----------- ----------- ------------- ----------
5,000 11,000 20,000 25,000
----------- ----------- ------------- ----------
Income before income taxes 99,000 72,000 308,000 276,000
Provision for income taxes 26,000 4,000 77,000 17,000
----------- ----------- ------------- ----------
Net income 73,000 68,000 231,000 259,000
Dividends on preferred shares 3,000 2,000 7,000 3,000
----------- ----------- ------------- ----------
Net income applicable to common stock 70,000 66,000 224,000 256,000
Retained earnings at beginning of period 469,000 226,000 315,000 36,000
----------- ----------- ------------- ----------
Retained earnings at end of period $ 539,000 $ 292,000 $ 539,000 $ 292,000
----------- ----------- ------------- ----------
----------- ----------- ------------- ----------
Basic earnings per common share $ 0.02 $ 0.02 $ 0.07 $ 0.08
----------- ----------- ------------- ----------
----------- ----------- ------------- ----------
Diluted earnings per common share $ 0.02 $ 0.02 $ 0.07 $ 0.08
----------- ----------- ------------- ----------
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</TABLE>
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<PAGE>
SYS
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31
-------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Operating activities:
Net income $ 231,000 $ 259,000
Adjustments to reconcile net income to
net cash used for operating activities:
Depreciation and amortization 43,000 38,000
Changes in operating assets and
liabilities:
Contract receivables 35,000 (398,000)
Receivables from related party 108,000 0
Other current assets and other
assets 70,000 (157,000)
Accounts payable (204,000) (207,000)
Accrued payroll and related
taxes (9,000) (61,000)
Income taxes payable 47,000 26,000
Other accrued liabilities (2,000) (51,000)
Net cash provided by (used for) operating
activities 319,000 (551,000)
------------ ------------
Investing activities:
Acquisition of furniture and equipment (43,000) (54,000)
------------ ------------
Net cash used in investing activities (43,000) (54,000)
------------ ------------
Financing activities:
Proceeds from note payable to bank 5,535,000 6,140,000
Payments on note payable to bank (5,654,000) (5,662,000)
Payments of long-term debt (39,000) (49,000)
Payments of preferred stock dividends (8,000) (3,000)
Proceeds from exercise of stock option 2,000 0
------------ ------------
Net cash provided by (used in) financing
activities (164,000) 426,000
------------ ------------
Increase (decrease) in cash 112,000 (179,000)
Cash at beginning of period 28,000 194,000
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Cash at end of period $ 140,000 $ 15,000
------------ ------------
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</TABLE>
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<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) In the opinion of the Registrant, the unaudited financial
information in this report reflects all adjustments, consisting only of
normal recurring accruals, which are considered necessary to a fair
presentation of the results of the periods shown. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to SEC regulations. It is suggested that these financial
statements be read in conjunction with the audited financial statements
included in the Registrant's Report on Form 10-KSB for the fiscal year ended
June 30, 1998.
(2) 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>
Three months ended Nine months ended
March 31 March 31
------------------ -------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Numerators:
Net income (A) $73,000 $68,000 $231,000 $259,000
Deduct - preferred dividend
requirements 3,000 2,000 7,000 3,000
------- ------- -------- --------
Net income applicable to
common stock (B) $70,000 $66,000 $224,000 $256,000
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Denominators:
Weighted average shares for
basic net earnings per
common share (C)
Add effects of dilutive 3,174,629 3,147,707 3,165,671 3,142,740
securities from assumed:
Conversion of preferred
stock
Exercise of stock options 111,728 111,728 111,728 111,728
148,085 76,993 148,085 76,993
---------- ---------- ---------- ----------
Weighted average shares for
diluted net earnings per
common share (D) 3,434,442 3,336,428 3,425,484 3,331,461
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic net earnings per common
share (B/C) $ 0.02 $ 0.02 $ 0.07 $ 0.08
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net earnings per common
share (A/D) $ 0.02 $ 0.02 $ 0.07 $ 0.08
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(3) The results of operations for the quarter and Nine month period
ended March 31, 1999, are not necessarily indicative of the results to be
expected for the full year.
ITEM 1A. FACTORS WHICH MAY AFFECT FUTURE RESULTS
Information contained in this Form 10-QSB should be studied
carefully by any potential investor while considering the following risk
factors to the Company.
1. LACK OF BUSINESS DIVERSIFICATION Essentially all the Company's
business at the present time is with the U.S. Navy. Even though the level of
business with its customers is growing and the Company has negotiated
multiple-year contracts, there is no certainty that budget changes in
Congress or the Defense Department will not seriously affect the Company.
2. DEPENDENCE ON KEY PERSONNEL The Company has a few key management,
project and technical personnel that are intimately involved in their
functions and have day to day relationships with critical customers. The
Company is not able to afford extra standby staff. As a result, at its
current size, it would be affected in an uncertain way if any of these
personnel were to be lost to the Company.
3. COMPETITION The Company has many competitors who vie for the same
customers as SYS. They are competent, experienced and continuously working
to take work projects away from the Company.
4. 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, a Director of the
Company and the Company's former Chairman and Chief Executive
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<PAGE>
Officer, has entered into an agreement with the Company in which the Company
is providing collection services to BCI/UniPrise for certain receivables.
The Company could potentially benefit from these receivables over and above
the amount owed. Under this arrangement and as of April 17, 1999,
BCI/UniPrise owes the Company an aggregate of $132,000. Some of the $132,000
owed to the Company is subject to other agreements between the Company and
BCI/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 BCI/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.
5. LIMITED ASSETS OF THE COMPANY The Company has very limited assets
upon which to rely 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. While the Company's management believes that its
financial policies have been prudent, the Company's substantial reliance on a
short term bank loan with Scripps Bank and other short-term accruals imposes
certain limitations on the Company. If the Company is to grow and expand its
operations, the Company will need to raise significant amounts of additional
capital. There can be no assurance that the Company will be successful in
raising a sufficient amount of additional capital, or if it is successful,
that the Company will be able to raise capital on reasonable terms in light
of the Company's current circumstances. In the event that the Company raises
additional capital, the Company's existing stockholders may incur substantial
and immediate dilution.
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 1,646,926 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 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
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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 stocks are exempt from all
but the sole market-maker provision for (i) issuers with $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. As of April 30, 1999, Officers
and Directors of the Company own 62.9% or 2,035,502 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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
The Company provides management and technical services in systems
planning, management and analysis, systems engineering, naval architecture,
marine engineering, ordnance engineering, logistics analysis and engineering,
operations analysis, design development, reliability engineering and
analysis, hazardous materials reduction studies, computer systems analysis,
office automation, information management systems and related support
services. The Company also provides hardware integration and fabrication.
The Company currently has three principle contracts with the U. S.
Navy. These prime contracts are Underway Replenishment (UNREP); Management,
Planning and Administrative (MPA); and Naval Architecture and Marine
Engineering (NAME).
The Underway Replenishment (UNREP) Program had its first of three
option years exercised on November 26, 1998. 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 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 Administrative (MPA) Program had its
last of four option years exercised on February 1, 1999. 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, Public Affairs, Combat Systems Engineering and Facilities
Engineering. Tasking in the areas of Business Process Reengineering and
Reorganization for greater efficiencies as well as Battle Force and Battle
Group Interoperability are experiencing growth. The Company is preparing for
the recompetition of this contract, which is expected to begin this summer.
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 third of four option years exercised on November 24, 1998. 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
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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 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 has plans to apply the skills acquired in the Defense
arena into the commercial sector. 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 first contract awarded is for Information Technologies
(IT). The other contract is for Financial Management Services. The Company
has a Blanket Purchase Agreement (BPA) in place at SPAWAR headquarters in San
Diego for the IT contract. The Company anticipates expanding the business
base in the San Diego area using these contract vehicles.
The Company is pursuing mechanical engineering design and
fabrication work from Universal Studios. During the past quarter, the
Company has completed a sizable engineering feasibility study for Universal
Studios in support of their new Osaka, Japan theme park which is now under
construction. The Company is currently bidding on a design and fabrication
project and will continue to pursue other engineering support tasks from
Universal Studios.
The Company has recently set up an Electronic Records Management
(ERM) department. The Company has hired an experienced ERM manager and has
the required hardware and software to support this department. This
department will develop work with the government and commercial sectors.
RESULTS OF OPERATIONS
The Company revenue for this quarter is similar to those in the
same quarter in FY 1998. For the first nine months of FY 1999, revenue
decreased by about 5% over the prior year's same period.
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<PAGE>
The primary reason for the decline in revenue is a reduction in direct and
subcontracted work on the NAME program during the first nine months of FY
1999. This resulted in a 54% decrease in revenue on the NAME program. The
MPA program had a 11% increase in revenue and the UNREP program had a 19%
increase in revenue during the first nine months of FY 1999. Revenue in the
third quarter was slightly higher than in the first and second quarters of FY
1999.
Total contract and general and administrative expenses are 94% of
contract revenue for the nine months ended March 31, 1999 compared to 95% for
the same period in the prior year. The general and administrative expenses
were higher in FY 1999 due to an increase in business development and bid and
proposal expenses. Interest expense was lower in the first nine months of FY
1999 due to limited use of the Company's revolving credit facility. The
Company used all available tax loss carry forwards in fiscal year 1998 and
therefore income taxes are higher in the current fiscal year.
Income from operations is 6% of contract revenue for the nine
months ended March 31, 1999 compared to 5% for the same period in the prior
year. Net income for the first nine months of FY 1999 is $231,000 as
compared to $259,000 for the same period in the prior year. The reason for
the lower net income for the period is because of the provision for federal
income taxes of $77,000 in FY 1999 as compared to $17,000 for the same period
in the prior year. The negotiated contract backlog was approximately
$4,327,000 at March 31, 1999.
The outstanding balance on the Company's revolving line of credit
with Scripps Bank was zero at March 31, 1999. At the end of the same period
in FY 1998, the line of credit balance was $478,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had contract receivables (net) of $1,150,000 at the end
of the third quarter of FY 1999. For the same quarter in FY 1998, the
contract receivables (net) were $1,441,000.
The Company had accounts payable of $114,000 at the end of the
third quarter of FY 1999. For the same quarter in FY 1998 the accounts
payable were $255,000. The payment status of these accounts payable is
current.
The Company maintains a $500,000 revolving credit facility with
Scripps Bank which matures on October 15, 1999. The loan is secured by all
the Company's assets including contract receivables. Scripps advances funds
requested by the Company of up to 80% of the Company's billed contract
receivables which are less than 90 days old. Scripps charges an interest
rate of 1.5% over prime.
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 current fiscal year.
Several key factors indicating the Company's financial condition
include:
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<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Current ratio 3.45 2.02
Maximum debt to net worth 0.52 1.04
Net worth $1,154,000 $892,000
Net working capital $1,056,000 $785,000
Debt to total assets 34% 51%
Book value per common share $0.32 $0.24
</TABLE>
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.
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 has
upgraded its financial software to insure compliance with the Year 2000
issue. The Company has also run diagnostics on all computer systems in its
San Diego office to confirm Year 2000 compliance. Similar diagnostics will
be run at the Company's other locations. The Company believes that with
these software reviews and 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, the Company
has received assurances from its bank, payroll processor and 401-k
administrator that they are Year 2000 compliant. Also, since the Company is
primarily a provider of services, the Company does not believe that other
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.
-13-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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 as
collection agent for SEI was a party of interest on behalf of the plaintiff,
SEI. This matter has been settled with no expenses borne by the Company.
On January 26, 1998, the Company was served notice that it was
being added as a defendant in a lawsuit brought by an individual against a
Company employee. The Company's insurance firm has settled this matter.
ITEM 2. CHANGES IN SECURITIES
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. At the conclusion of the first
year of this policy (August 31, 1998), stock options were issued for 81,300
common shares to the following outside directors: Paul I. Anderson, 12,000
shares; Robert E. Carroll, 12,000 shares; L. Randolph Knapp, 11,500 shares;
Robert D. Mowry, 12,000 shares; W. Gerald Newmin, 12,000 shares; Charles H.
Werner, 12,000 shares; Richard W. Wood, 9,800 shares. Mr. Knapp's option for
11,500 shares has expired. Under the same policy, for the period from
September 1, 1998 through March 31, 1999, stock options totaling 30,645
common shares at $0.68 per share are owed to the following outside directors:
Paul I. Anderson, 5,000 shares; Robert E. Carroll, 5,000 shares; Robert D.
Mowry, 7,000 shares; W. Gerald Newmin, 1,645 shares; Charles H. Werner, 7,000
shares; Richard W. Wood, 5,000 shares.
On September 29, 1998, Mr. Charles Werner, a director of the
Company, exercised a stock option for 25,000 shares of common stock at $0.09
per share.
On February 4, 1999, the Company entered into an agreement with Mr.
Bruce W. Barren of The EMCO/Hanover Group, Inc. (Barren) to compensate Barren
with 50,000 shares of the Corporation's common stock, valued at $0.72 per
share, in exchange for financial advisory services. These shares were
registered with the Securities and Exchange Commission on Form S-8.
On April 1, 1999, the Company granted the conversion of 864 shares
of Series B 9% Cumulative Convertible Callable Non-Voting Preference Stock
into 1,728 shares of Common Stock. This transaction exhausted the remaining
shares of common stock reserved for conversion of this Preference Stock.
On April 15, 1999, Mr. Paul I. Anderson, a former Director of the
Company, exercised a stock option for 11,486 shares of common stock at $0.31
per share. Mr. Anderson then sold these shares to Michael W. Fink, an
Officer of the Company.
-14-
<PAGE>
With regards to all transactions disclosed in Item 2, the Company
did not incur any expenses, discounts, commissions or finders' fees. These
transactions were completed pursuant to Section 4(2) of the Securities Act of
1933 and are therefore exempt from Section 5 of the same Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On January 20, 1999, the Company held its 1998 Annual Meeting of
Shareholders. There were 3,173,518 shares eligible as of the record date and
2,952,858 shares were represented either in person or by proxy at the
meeting. The following matters were voted on at the meeting:
(a.) Proposal to elect the Directors pursuant to management's
nominations. This proposal was defeated with 721,504 shares voting in favor,
2,231,354 shares voting against, and 0 shares abstaining.
(b.) Proposal to elect Lawrence L. Kavanau, Robert D. Mowry, W. Gerald
Newmin, Charles E. Vandeveer and Charles H. Werner Directors pursuant to a
motion from the floor. This proposal was approved with 2,489,541 shares
voting in favor, 463,317 shares voting against, and 0 shares abstaining.
(c.) Proposal to approve the appointment of J. H. Cohn LLP as the
independent certified public accountants for the corporation for its 1999
fiscal year. This proposal was approved with 2,948,452 shares voting in
favor, 2,641 shares voting against, and 1,765 shares abstaining.
(d.) Proposal to amend the SYS 1997 Incentive Stock Option and
Restricted Stock Plan ("Plan") to increase the amount of common shares
subject to the Plan for non-employee directors and consultants from 350,000
to a total of 450,000 and for employees from 500,000 to a total of 750,000.
This proposal was approved with 2,893,136 shares voting in favor, 36,913
shares voting against, and 22,809 shares abstaining.
ITEM 5. OTHER INFORMATION
At the Annual Board of Directors meeting held on January 20, 1999,
Lawrence L. Kavanau was elected Chairman of the Board; W. Gerald Newmin was
elected Chief Executive Officer and Chief Financial Officer; Charles E.
Vandeveer was elected Executive Vice President and Michael W. Fink was
elected Vice President, Administration and Secretary.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
-15-
<PAGE>
SIGNATURES
In accordance with the requirements Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SYS
-------------------------------
(Registrant)
Date: May 7, 1999 /s/ W. Gerald Newmin
------------- ----------------------------
W. Gerald Newmin
Chief Executive Officer
-16-
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