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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, 1999
OR
- --- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From_____________ to ______________
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, 1999 were $7,898,628.
APPLICABLE TO CORPORATE REGISTRANTS
As of June 30, 1999, the Issuer had outstanding 3,236,732 shares of Common
stock, no par value, 110,000 shares of preferred stock, $0.50 par value, and
69,781 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, 1999 was $557,358 and 1,201,203,
respectively. The total number of non-affiliate shares of Common stock was
multiplied by $0.464 per share (the average of the bid and asked prices of such
shares of Common stock on June 30, 1999) 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 $1,501,844.
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, 1999
FORM 10-KSB ANNUAL REPORT
INDEX
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PAGE
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PART I
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
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 16
ON ACCOUNTING AND FINANCIAL DISCLOSURE
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PAGE
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PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT 17
Item 10. EXECUTIVE COMPENSATION 21
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 22
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K 25
SIGNATURES 27
FINANCIAL STATEMENTS F-1
to
F-16
</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:
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
Electronic Record Management
BUSINESS DEVELOPMENTS
Company revenues for Fiscal Year 1999 increased slightly over the previous
fiscal year. Net income for Fiscal Year 1999 increased 4% over the previous
fiscal year. The Company revenue and net income trends are positive, however,
there can be no certainty that they will continue to be positive.
The Underway Replenishment (UNREP) Program had its first of three option
years exercised on December 4, 1998. This program accounted for about 30% of the
Company's revenue. This
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program provides in-service engineering support to the U.S. Navy Fleet. 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 Analysis (MPA) Program had its fourth of four
option years exercised on February 1, 1999 and the Company is preparing for this
contract's recompetition. This program accounted for about 50% of the Company's
revenue. 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 third
of four option years exercised on November 25, 1998. This program accounted for
about 11% of the Company's revenue. 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 is now supporting a new Army Navy Literage
Procurement Program providing logistics engineering services to the Naval
Facilities Engineering Command.
The Company was awarded a three-year subcontract on August 2, 1999 from
Santa Barbara Applied Research, Inc. 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 (now Marconi), 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 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
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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 its business in the San Diego area using these contract vehicles. The
Company has had initial success in placing orders on these contract vehicles in
fiscal year 1999.
The Company launched a new division in the last quarter of fiscal year 1999
that provides electronic records management. This division is expected to grow
considerably over the next year and is one of the reasons for the increased use
of the Company's GSA contracts. This new technical capability has served as an
entry into the Navy SEABEE Logistics Center providing capability to better
address combat readiness of Naval Construction Forces. This division booked its
first revenue in the first quarter of fiscal year 2000.
CONTRACT BACKLOG AND CUSTOMERS
As of June 30, 1999, the Company's contract backlog, including negotiated
contract options, was approximately $11,756,000, compared with approximately
$22,047,000 on June 30, 1998. The primary reason for the decrease in
year-to-year backlog is due to the fact that the Company had no major contract
recompetitions during Fiscal Year 1998 and was considerably under contract
ceiling on one prime contract. 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, 1999 was approximately $3,207,000, as compared
with approximately $5,024,000 on June 30, 1998. The reason the actual backlog is
less in fiscal year 1999 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 76 full-time and 18 part-time employees on June 30, 1999,
compared to 72 full-time and 21 part-time employees on June 30, 1998
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.
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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 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 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 Officer, has entered into an agreement with
the Company in which the Company is providing collection services to
BCI/UniPrise for certain receivables (the "Receivables"). The Company could
potentially benefit from the Receivables over and above the amount owed. Under
this arrangement and as of September 4, 1999, BCI/UniPrise owes the Company an
aggregate of $160,000. Some of the $160,000 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 the Receivables is greater than the debt owed to the Company, however, the
Company has no means to determine the validity of the Receivables. Subsequent to
June 30, 1999 and effective September 21, 1999, Mr. Mowry resigned from the
Company's Board of Directors. On September 24, 1999, the Board of Directors
agreed to replace the BCI/UniPrise debt with a Secured Negotiable Promissory
Note (the "Note") for $179,000 from Mowry and BCI. The Note is secured by the
Receivables, Mowry's personal guarantee and common stock of the Company held or
controlled by Mowry. While the Company believes that the Note is sufficiently
secured, 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 2,035,529 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
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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 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.
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9. CONTROL BY OFFICERS AND DIRECTORS. Officers and Directors of the
Company own 62.9% or 2,035,529 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").
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 $ 6,820/mo.
San Diego, CA 92123
2451 Crystal Drive 2,968 Expires July 31, 2004 $ 7,667/mo.
Five Crystal Park
Arlington, VA 22202
1721 Pacific Avenue 7,117 Expires March 31, 2000 $ 8,824/mo.
Oxnard, CA 93033 (Cancelable with 6 months
prior written notice)
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
None.
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
1999.
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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 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
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Fiscal Year 1999 BID ASK
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<S> <C> <C>
First Quarter $0.646 $0.813
Second Quarter $0.625 $0.688
Third Quarter $0.625 $0.750
Fourth Quarter $0.302 $0.625
</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, 1999, there were approximately 419 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)
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<CAPTION>
1999 1998 1997
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OPERATING RESULTS:
Contract revenues $7,899 $7,877 $7,649
Costs and expenses:
Contract costs 6,578 6,653 6,596
General and administrative 871 868 783
Income from operations 450 356 270
Other (income) expense:
Interest income (9) (9) 0
Interest expense 27 38 40
Loss on sale and disposition of equipment 4 0 0
Income before income taxes 428 327 230
Provision for income taxes 134 43 1
Net income 294 284 229
Net income applicable to common stock 286 275 220
Basic net earnings per common share 0.09 0.09 0.07
Diluted net earnings per common share 0.09 0.08 0.07
BALANCE SHEET DATA:
Total assets 2,285 1,816 1,615
Borrowings-bank line of credit 0 119 0
Long-term obligations (including
current portion) 157 214 239
Stockholders' equity 1,220 892 612
</TABLE>
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RESULTS OF OPERATIONS
FISCAL YEAR 1999 VS. FISCAL YEAR 1998
The Company's revenues from government contracts were approximately
$7,792,000 and $7,811,000 for 1999 and 1998, respectively. Total revenues for
1999 were $7,899,000 compared to $7,877,000 for 1998.
The improvement in the Company's revenues was primarily related to
approximately $411,000 in increased sales on the MPA contract and $662,000 in
sales on the UNREP contract. The increase in sales occurred despite reduced
sales on the NAME contract of about $911,000 and in the Washington, D.C.
operations of $109,000.
During 1999, the Company's income from operations was $450,000 compared to
$356,000 in 1998. During 1999, the Company had net income of $294,000 compared
to $284,000 in 1998. The increase in net income occurred despite the provision
for income taxes of $134,100 required in 1999, compared to $43,700 in 1998.
Substantially all of 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 decreased to $6,577,000 in 1999 from
$6,653,000 in 1998 and general and administrative expenses increased to $871,000
in 1999 from $868,000 in 1998 primarily as a result of the increase in sales.
Basic net earnings per common share was $0.09 in 1999 compared to $0.09 in
1998. The related weighted average number of common shares outstanding was
3,190,103 in 1999 and 3,144,171 in 1998. Diluted net earnings per common share
was $0.09 in 1999 compared to $0.08 in 1998. The related weighted average number
of common shares outstanding was 3,317,721 in 1999 and 3,296,376 in 1998.
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
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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 net 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 net earnings per common share
was $0.08 in 1998 compared to $0.07 in 1997.
LIQUIDITY AND WORKING CAPITAL
The Company had net working capital of $1,039,000 at June 30, 1999 compared
to $786,000 at June 30, 1998. Contract receivables increased by $264,000 during
1999. The Company's line of credit borrowings was reduced to a zero balance
during 1999. Accounts payable was $75,000 higher in 1999 than in 1998. This was
mainly attributable to an increase in other direct costs on the Company's
contracts in 1999. There are three notes that make up the total of the current
and long-term notes payable. The Company's net assets increased by $328,000 in
1999 to $1,220,000. Net furniture and equipment decreased by $6,000 in 1999.
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, 1999. 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, 1999, the Company had noncancellable operating leases for its offices
which expire at various dates through July 2004. The Company also leases certain
computer and office equipment under capital leases 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, 1999 totaled $70,746, of which $18,063
relates to the year ending June 30, 2000.
Annual future minimum lease payments under operating leases with initial
terms of one year or more as of June 30, 1999 totaled $901,324, of which
$250,062 relates to the year ending June 30, 2000.
14
<PAGE>
Several key factors indicating the Company's financial condition include:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Current ratio 2.05 2.03
Maximum debt to net worth 0.87 1.03
Net worth $1,220,000 $892,000
Net working capital $1,039,000 $786,000
Debt to total assets 47% 51%
Book value per common share $0.34 $0.24
</TABLE>
The Company continued to demonstrate improvements in the above financial
factors during fiscal year 1999. These Company trends are positive, however,
there can be no certainty that they will continue to be positive. 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, 2000.
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 hardware and software and has upgraded its
financial software to insure compliance with the Year 2000 issue. The Company
believes that with these hardware and software upgrades, the Year 2000 issue
will not pose significant operational problems for its internal computer
systems. The Company has confirmed that its systems are Year 2000 compliant
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 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.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The full text of the Company's audited financial statements for the fiscal
years ended June 30, 1999 and 1998 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) Michael W. Fink, age 42, is Vice President - Administration at the
Corporate offices and was elected Corporate Secretary on January 20, 1999. Mr.
Fink joined the Company in July of 1995. He is responsible for the
administrative functions of the Company, including finance, accounting, human
resources, contracts and other management areas. He was President of SANDAIRE
before being hired by the Company. SANDAIRE is an engineering firm specializing
in the aerospace industry. Mr. Fink received a Bachelor of Science degree in
Business Administration (Accounting) from San Diego State University (SDSU). He
has also attended Graduate School at SDSU where he studied mechanical
engineering.
(2) Dr. Lawrence L. Kavanau, age 72, is the Founder and was elected
Chairman of the Board on January 20, 1999. He 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. On August 26, 1998, the Company's Board of Directors established
an Office of the Chief Executive (OCE), Dr. Kavanau was one of three Principal
Executives of this office, which was discontinued on October 21, 1998. 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.
(3) Mr. Robert D. Mowry, age 43, 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. On August 26, 1998, the Company's
Board of Directors established an Office of the Chief Executive (OCE), Mr. Mowry
was one of three Principal Executives of this office,
17
<PAGE>
which was discontinued on October 21, 1998. 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. (BCI), which was formed for investment and management of investments and
entered into an agreement to sell BCI to UniPrise Systems, Inc. in December,
1996. 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.
(4) Mr. W. Gerald Newmin, age 62, was elected to the Board of Directors as
of October 19, 1993 and served as Corporate Secretary from December 10, 1993 to
January 20, 1999. On October 21, 1998, Mr. Newmin was elected as interim
Chairman of the Board and Chief Executive Officer of the Company. On January 20,
1999, Mr. Newmin was elected Chief Executive Officer and Chief Financial Officer
of the Company. 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. Mr. Newmin also serves
on the Board of the Corporate Directors Forum, 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.
(5) Charles E. Vandeveer, age 58, was elected to the Board of Directors on
March 21, 1997, and is the Company's Executive Vice President. 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 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
18
<PAGE>
in 1963.
(6) Charles H. Werner, age 72, 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. On August
26, 1998, the Company's Board of Directors established an Office of the Chief
Executive (OCE), Mr. Werner was one of three Principal Executives of this
office, which was discontinued on October 21, 1998. 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.
CERTAIN SIGNIFICANT EMPLOYEES
(7) Larry W. Moe, age 46, 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.
OFFICERS OR DIRECTORS RESIGNING OR TERM ENDING IN 1999:
Mr. L. Randolph Knapp resigned from his position as Director of the Company
on October 21, 1998.
On January 20, 1999, Messrs. Paul I. Anderson, Robert E. Carroll and
Richard W. Wood had their terms on the Board of Directors end.
Subsequent to June 30, 1999 and effective September 21, 1999, Mr. Mowry
resigned from the Company's Board of Directors.
19
<PAGE>
FAMILY RELATIONSHIPS AND AFFILIATES:
There are no family relationships 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 (7) above is
affiliated with the Company with the following exceptions: At June 30, 1999, a
Company Director, Mr. Robert D. Mowry, 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 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. These two employees were terminated on August 31, 1999.
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,
BCI/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 BCI/UniPrise as soon as possible. As of June 30, 1999,
BCI/UniPrise owed the Company approximately $125,000. Subsequent to year end,
the Company has incurred an additional $35,000 in collection costs, which brings
the total amount owed to the Company at September 4, 1999 to about $160,000. Mr.
Charles H. Werner, a director of the Company, has been a consultant to BCI and
manages the collection process for BCI. Subsequent to June 30, 1999 and
effective September 21, 1999, Mr. Mowry resigned from the Company's Board of
Directors. On September 24, 1999, the Board of Directors agreed to replace the
BCI/UniPrise debt with a Secured Negotiable Promissory Note (the "Note") for
$179,000 from Mowry and BCI. The Note is secured by the SEI receivables, Mowry's
personal guarantee and common stock of the Company held or controlled by Mowry.
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.
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.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following is a table showing the remuneration paid by the Company
during its fiscal years ended June 30, 1999 and 1998 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 1999 $86,588 $6,000
Chairman
- --------------------------------------------------------------------------------------------------------------------
All Executive Officers (4) as a Group 1999 $265,100 $15,000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Lawrence L. Kavanau 1 1998 $90,348 $6,000
Chief Executive Officer
- --------------------------------------------------------------------------------------------------------------------
All Executive Officers (4) as a Group 1998 $234,920 $15,000
- --------------------------------------------------------------------------------------------------------------------
</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 Fiscal Year 1999, 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.
The following is a list of common stock options given to directors and
officers as of June 30, 1999:
<TABLE>
<CAPTION>
Name and Title Grant Date # of Shares Option Price Expiration Date
- -------------- ---------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Mowry - Director 05/21/97 25,000 $0.47 03/21/04
Anderson - Former Director 11/19/97 12,000 $0.75 11/19/03
Carroll - Former Director 11/19/97 12,000 $0.75 11/19/03
Mowry - Director 11/19/97 12,000 $0.75 11/19/03
Newmin - Director 11/19/97 12,000 $0.75 11/19/03
Werner - Director 11/19/97 12,000 $0.75 11/19/03
Wood - Former Director 11/19/97 9,800 $0.75 11/19/03
Anderson - Former Director 09/01/98 5,000 $0.68 09/01/04
Carroll - Former Director 09/01/98 5,000 $0.68 09/01/04
Mowry - Director 09/01/98 10,000 $0.68 09/01/04
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Newmin - Director 09/01/98 1,645 $0.68 09/01/04
Werner - Director 09/01/98 10,000 $0.68 09/01/04
Wood - Former Director 09/01/98 5,000 $0.68 09/01/04
Vandeveer -Director 06/03/98 60,000 $0.71 06/03/03
Fink- Officer 06/03/98 50,000 $0.71 06/03/03
All other employees various 251,000 various various
Total options outstanding 492,445
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS (as of June 30, 1999)
(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 810,796 25.0%
Without Par P.O. Box 1966
Value Rancho Santa Fe, CA 92067
Lawrence L. Kavanau 298,189 (Direct) 14.2%
3320-140 Caminito East Bluff 162,333 (As Trustee
La Jolla, CA 92037 or Executor, With
Voting Rights)
Robert D. Mowry 87,988 (Direct) 10.1%
19 Cherry Hills Lane 237,948 (Indirectly,
Newport Beach, CA 92660 with Voting Rights,
through American
Technology Investments,
Inc.) 3
W. Gerald Newmin 271,679 8.4%
48 Admiralty Cross
Coronado, CA 92118
Charles E. Vandeveer 119,616 3.7%
8203 Tiara Street
Ventura, CA 93004
</TABLE>
1 To the best knowledge of the Company, each of the beneficial owners listed
herein has
22
<PAGE>
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 3,236,732 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.
(b) SECURITY OWNERSHIP OF MANAGEMENT (as of June 30, 1999) (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 Title of of Beneficial Percent of
Title of Class Beneficial Owner Owner 1 Class 2
- -------------- -------------------- ----------------------- ----------------
<S> <C> <C> <C>
Common Stock Charles H. Werner 810,796 25.0%
Without Par (Director)
Value
Lawrence L. Kavanau 298,189 (Direct) 14.2%
(Chairman) 162,333 (As Trustee
or Executor, with
Voting Rights)
Robert D. Mowry 87,988 (Direct) 10.1%
(Director) 237,948 (Indirect,
with Voting Rights,
through American
Technology Investments,
Inc.) 3
W. Gerald Newmin 271,679 8.4%
(Director, CEO, CFO)
Charles E. Vandeveer 119,616 3.7%
(Director, Executive Vice President)
Michael W. Fink 46,980 1.5%
(Vice-President, Administration)
All Directors and 2,035,529 62.9%
Officers as a Group
</TABLE>
1 To the best knowledge of the Company, each of the beneficial owners listed
herein has direct
23
<PAGE>
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 3,236,732 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.
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. 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 on August
1, 1997. The Company's Board of Directors established an Office of the Chief
Executive (OCE) effective August 26, 1998 which was discontinued on October 21,
1998. The OCE was comprised of Lawrence L. Kavanau, Robert D. Mowry and Charles
H. Werner. On October 21, 1998, Mr. Newmin was elected as interim Chairman of
the Board and Chief Executive Officer. On January 20, 1999, Mr. Newmin was
elected Chief Executive Officer and Chief Financial Officer and Mr. Kavanau was
elected Chairman of the Board of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the year ended June 30, 1999, the Board of Directors granted stock
purchase options to six outside directors exercisable at $0.68 per share. Some
of these purchase options contain certain buy-back provisions which become
effective in the event of termination of directorship.
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
June 30, 1999, stock options totaling 36,645 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, 10,000 shares; W. Gerald
Newmin, 1,645 shares; Charles H. Werner, 10,000 shares; Richard W. Wood, 5,000
shares.
On September 29, 1998, Mr. Charles Werner, a director of the Company,
exercised a stock
24
<PAGE>
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.
Subsequent to June 30, 1999 and effective September 21, 1999, the Board of
Directors elected Mr. Kameron Maxwell to fill the Board of Directors vacancy
created by Mr. Mowry's resignation. Also effective September 21, 1999, the
Company entered into a Consulting Agreement and Amendment to Prior Understanding
with Mr. Mowry.
Subsequent to June 30, 1999 and effective September 24, 1999, the Board of
Directors agreed to replace the BCI/UniPrise debt with a Secured Negotiable
Promissory Note (the "Note") for $179,000 from Mowry and BCI. The Note is
secured by the SEI receivables, Mowry's personal guarantee and common stock of
the Company held or controlled by Mowry. The Note accrues interest at 10% per
annum and principal and interest are due on December 31, 1999.
With regards to all transactions disclosed in this section, 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.
See the Family Relationships and Affiliates section of Item 9 for
disclosures relating to Robert D. Mowry and Charles H. Werner.
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
25
<PAGE>
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) None
26
<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/ W. Gerald Newmin Date: 9/30/99
-------------------------------- ----------------------
W. GERALD NEWMIN
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/ Lawrence L. Kavanau Date: 9/30/99
-------------------------------- ----------------------
LAWRENCE L. KAVANAU
Chairman
By: /s/ Robert D. Mowry Date: 9/30/99
-------------------------------- ----------------------
ROBERT D. MOWRY
Director
By: /s/ W. Gerald Newmin Date: 9/30/99
-------------------------------- ----------------------
W. GERALD NEWMIN
Director and Chief Financial Officer
By: /s/ Charles E. Vandeveer Date: 9/30/99
-------------------------------- ----------------------
CHARLES E. VANDEVEER
Director
By: /s/ Charles H. Werner Date: 9/30/99
-------------------------------- ----------------------
CHARLES H. WERNER
Director
27
<PAGE>
SYS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEETS
JUNE 30, 1999 AND 1998 F-3
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999 AND 1998 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998 F-5
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998 F-6
NOTES TO FINANCIAL STATEMENTS F7/16
</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, 1999 and
1998, 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, 1999 and
1998, 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
August 19, 1999
F-2
<PAGE>
SYS
BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 343,205 $ 28,131
Contract receivables, net of allowance for doubtful
accounts of $26,000 1,449,204 1,185,278
Receivables from related parties 124,924 239,774
Deferred tax assets 72,000
Other current assets 38,817 99,173
---------- ----------
Total current assets 2,028,150 1,552,356
Furniture and equipment, less accumulated depreciation and
amortization of $408,095 and $339,537 240,606 246,869
Other assets 16,532 16,532
---------- ---------
Totals $2,285,288 $1,815,757
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank under line of credit $ 118,798
Accounts payable $ 392,767 317,926
Accrued payroll and related taxes 330,212 253,104
Income taxes payable 128,682
Other accrued liabilities 35,112 19,158
Current portion of other notes payable 90,391 48,167
Current portion of capital lease obligations 11,738 9,368
---------- ----------
Total current liabilities 988,902 766,521
Other notes payable, net of current portion 10,900 101,486
Capital lease obligations, net of current portion 43,921 55,385
Deferred tax liabilities 22,000
---------- ----------
Total liabilities 1,065,723 923,392
---------- ----------
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; 69,781 and 70,645 Series B shares issued
and outstanding 69,781 70,645
Common stock, no par value; 12,000,000 shares authorized;
3,236,732 and 3,148,518 shares issued and outstanding 493,644 450,969
Retained earnings 601,140 315,751
---------- ----------
Total stockholders' equity 1,219,565 892,365
---------- ----------
Totals $2,285,288 $1,815,757
========== ==========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
SYS
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Contract revenues $ 7,898,628 $ 7,876,861
----------- -----------
Costs and expenses:
Contract costs 6,577,434 6,652,502
General and administrative expenses 871,199 867,922
----------- -----------
Totals 7,448,633 7,520,424
----------- -----------
Income from operations 449,995 356,437
----------- -----------
Other (income) expense:
Interest income (9,152) (9,214)
Interest expense 26,501 38,245
Loss on sale and disposition of equipment 4,554
----------- -----------
Totals 21,903 29,031
----------- -----------
Income before income taxes 428,092 327,406
Provision for income taxes 134,100 43,700
----------- -----------
Net income 293,992 283,706
Preferred dividend requirements 8,480 8,558
----------- -----------
Net income applicable to common stock $ 285,512 $ 275,148
=========== ===========
Basic net earnings per common share $ .09 $ .09
=========== ===========
Diluted net earnings per common share $ .09 $ .08
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
SYS
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Convertible
Convertible Series B
Preferred Stock Preference Stock
-------------------------- ------------------------
Shares Amount Shares Amount
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Balance, July 1, 1997 110,000 $ 55,000 78,195 $ 78,195
Cash dividends on 4% convertible
preferred stock at $.02 per share
Cash dividends on 9% convertible Series B
preference stock at $.02 per share
Conversion of 9% convertible Series B
preference stock into common stock (7,550) (7,550)
Net income
---------- ---------- --------- -----------
Balance, June 30, 1998 110,000 55,000 70,645 70,645
Issuance of common stock for services
Issuance of common stock upon exercise
of stock options
Cash dividends on 4% convertible
preferred stock at $.02 per share
Cash dividends on 9% convertible Series B
preference stock at $.09 per share
Conversion of 9% convertible Series B
preference stock into common stock (864) (864)
Net income
---------- ---------- --------- -----------
Balance, June 30, 1999 110,000 $ 55,000 69,781 $ 69,781
========== ========== ========== ==========
<CAPTION>
Common Stock
----------------------- Retained
Shares Amount Earnings Total
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, July 1, 1997 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 15,100 7,550
Net income 283,706 283,706
---------- ----------- ----------- ------------
Balance, June 30, 1998 3,148,518 450,969 315,751 892,365
Issuance of common stock for services 50,000 36,000 36,000
Issuance of common stock upon exercise
of stock options 36,486 5,811 5,811
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 $.09 per share (6,403) (6,403)
Conversion of 9% convertible Series B
preference stock into common stock 1,728 864
Net income 293,992 293,992
---------- ----------- ----------- ------------
Balance, June 30, 1999 3,236,732 $ 493,644 $ 601,140 $1,219,565
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
SYS
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 293,992 $ 283,706
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 69,554 60,237
Issuance of common stock for services 36,000
Loss on sale and disposition of equipment 4,554
Deferred tax credit (50,000)
Changes in operating assets and liabilities:
Contract receivables (263,926) (142,758)
Receivables from related parties 114,850 (160,335)
Other current assets 60,356 36,021
Other assets (1,312)
Accounts payable 74,841 (144,062)
Accrued payroll and related taxes 77,108 15,697
Income taxes payable 128,682
Other accrued liabilities 15,954 (45,604)
----------- -----------
Net cash provided by (used in) operating activities 561,965 (98,410)
----------- -----------
Investing activities:
Acquisition of furniture and equipment (68,145) (91,901)
Proceeds from sale of equipment 300
----------- -----------
Net cash used in investing activities (67,845) (91,901)
----------- -----------
Financing activities:
Proceeds from line of credit borrowings 720,000 8,332,000
Payments of line of credit borrowings (838,798) (8,213,202)
Proceeds from other notes payable 24,000
Payments of other notes payable (48,362) (89,962)
Payments of capital lease obligations (9,094) (25,251)
Payments of preferred stock dividends (2,200) (2,200)
Payments of preference stock dividends (6,403) (1,405)
Proceeds from exercise of stock options 5,811
----------- -----------
Net cash provided by (used in) financing activities (179,046) 23,980
----------- -----------
Net increase (decrease) in cash 315,074 (166,331)
Cash, beginning of year 28,131 194,462
----------- -----------
Cash, end of year $ 343,205 $ 28,131
=========== ===========
Supplemental disclosure of cash flow data:
Interest paid $ 36,176 $ 38,245
=========== ===========
Income taxes paid $ 21,084 $ 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 $ 864 $ 7,550
=========== ===========
</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, 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. Management considers all of the
services provided by the Company to be within the same business
segment.
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 at both June 30, 1999 and 1998 and accumulated
amortization of $84,874 and $71,508 at June 30, 1999 and 1998,
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:
Basic net 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 net earnings per common share is similar to that of
basic net earnings per common share, except that (i) 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 and preference stock and the exercise of
stock options, were issued during the period, and (ii) the
numerator is adjusted to eliminate preferred and preference
dividend requirements.
The following table summarizes the calculation of basic and
diluted net earnings per common share for each period:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Numerators:
Net income (A) $ 293,992 $ 283,706
Deduct - preferred and preference
dividend requirements 8,480 8,558
------------ -----------
Net income applicable to common stock (B) $ 285,512 $ 275,148
============ ===========
Denominators:
Weighted average shares for basic net
earnings per common share (C) 3,190,103 3,144,171
Add effects of dilutive securities from
assumed:
Conversion of preferred and
preference stock 111,303 111,729
Exercise of stock options 16,315 40,476
------------ -----------
Weighted average shares for diluted net
earnings per common share (D) 3,317,721 3,296,376
============ ===========
Basic net earnings per common share
(B divided by C) $ .09 $ .09
============ ===========
Diluted net earnings per common share
(A divided by D) $ .09 $ .08
============ ===========
</TABLE>
F-8
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(concluded):
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.
Recent accounting pronouncements:
The Financial Accounting Standards Board and the Accounting
Standards Executive Committee of the American Institute of
Certified Public Accountants had issued certain accounting
pronouncements as of June 30, 1999 that will become effective in
subsequent periods; however, management of the Company does not
believe that any of those pronouncements would have significantly
affected the Company's financial accounting measurements or
disclosures had they been in effect during 1999 and 1998.
Significant concentrations of cash:
The Company maintains its cash balances in one financial
institution. As of June 30, 1999, the balance exceeded the
Federal Deposit Insurance Corporation limitation coverage of
$100,000 by $239,904. The Company has not experienced any losses
from its deposit accounts and management believes it is not
exposed to any significant credit risk in cash.
Reclassifications:
Certain accounts in the 1998 financial statements have been
reclassified to conform to 1999 presentations.
Note 2 - Contract receivables:
Contract receivables consist of the following at June 30, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Amounts billed, less allowance for doubtful
accounts of $7,000 $ 930,751 $ 688,064
Recoverable costs and accrued profit on
progress completed - not billed 129,534 62,895
Retentions, due upon completion of contracts 110,899 123,655
Recoverable costs subject to closure of
contracts - not billed, less allowance
for doubtful accounts of $19,000 278,020 310,664
---------- ----------
Totals $1,449,204 $1,185,278
========== ==========
</TABLE>
F-9
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 2 - Contract receivables (concluded):
At June 30, 1999, recoverable costs and accrued profit on
progress completed - not billed consisted of amounts billed in
July 1999. 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,
1999 are expected to be collected in fiscal 2000 and 2001.
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Receivable from company in which an officer
of the Company has an interest $124,924 $189,774
Receivable from officer of the Company 50,000
--------- --------
Totals $124,924 $239,774
======== ========
</TABLE>
The balances are due on demand and are noninterest bearing.
Note 4 - Note payable to bank under line of credit:
At June 30, 1999, the Company had no outstanding borrowings under
a $500,000 revolving line of credit provided by a bank which
expires on October 15, 1999. Any borrowings under the line of
credit would be limited to 80% of qualifying contract
receivables, would be collateralized by substantially all of the
assets of the Company and would bear interest at 1.5% above a
specified prime rate. Among other things, the terms of the line
of credit agreement require the Company to maintain certain
financial ratios.
F-10
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 5 - Other notes payable:
As of June 30, 1999, other notes payable had an aggregate
principal balance of $101,291. These notes bear interest at an
effective rate of 10.25%. One note (which had a principal balance
of $84,888) 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, 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ending Amount
----------- --------
<S> <C>
2000 $90,391
2001 6,507
2002 4,393
</TABLE>
Note 6 - Leases:
The Company has noncancelable operating leases for its offices
which expire at various dates through July 2004. Certain leases
provide for increases in the minimum lease payments based on
fluctuations in various price indices. Rent expense under all
operating leases totaled $203,111 and $178,006 in 1999 and 1998,
respectively.
The Company also leased certain computer equipment under capital
leases which expire in May 2003.
Annual future minimum lease payments under noncancelable
operating and capital leases with initial terms of one year or
more as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- --------
<S> <C> <C>
2000 $ 250,062 $ 18,063
2001 181,152 18,063
2002 188,080 18,063
2003 178,726 16,557
2004 103,304
--------- --------
Totals $ 901,324 70,746
=========
Less amounts representing interest 15,087
---------
Present value of minimum lease payments 55,659
Less current portion 11,738
---------
Long-term portion $ 43,921
========
</TABLE>
F-11
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
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,
1999. 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, 1999, there were 110,000 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 in 1999
and 1998.
Convertible preference stock:
In June 1996, the Company issued 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). Payments of dividends on the preference
stock are subordinate to the payment of dividends on the 4%
preferred stock. Each share of preference stock was convertible
into two shares of common stock until the Company had issued a
maximum of 139,560 common shares. During 1999 and 1998, a total
of 864 and 7,550 shares of preference stock were converted into
1,728 and 15,100 shares of common stock, respectively. A total of
69,781 and 70,645 shares of preference stock remained outstanding
as of June 30, 1999 and 1998, respectively. However, the maximum
number of shares of preference stock had been converted to common
stock as of June 30, 1999. Cash dividends paid on the preference
stock totaled $6,403 and $1,405 in 1999 and 1998, respectively.
At June 30, 1999 and 1998, cumulative dividends in arrears on the
preference stock totaled $11,236 and $11,375, 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:
On August 20, 1996, 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. As of June 30, 1999, a total of
25,000 unvested shares remained outstanding.
F-12
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stockholders' equity (continued):
Incentive stock option and restricted stock plan:
The SYS 1997 Incentive Stock Option and Restricted Stock Plan
(the "Plan") provides for grants by the Board of Directors of
incentive stock options to purchase up to 750,000 shares of
common stock to employees and grants of restricted stock options
to purchase up to 450,000 shares of common stock to directors and
consultants. 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.
Additional required disclosures related to stock options:
The following table summarizes certain information regarding
stock options at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------- --------------------------
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 552,300 $.68 75,000 $.29
Options granted 91,645 $.66 527,300 $.74
Options cancelled (115,014) $.71 (50,000) $.69
Options exercised (36,486) $.16
------------ ------------
Options outstanding at
end of year 492,445 $.71 552,300 $.68
============ ============
Option price range at end of year $.47 to $.87 $.09 to $.87
Weighted average fair value of
options granted during the year $.50 $.48
============ ============
</TABLE>
F-13
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stockholders' equity (concluded):
Additional required disclosures related to stock options
(concluded):
The following table summarizes information about stock options
outstanding at June 30, 1999, all of which are at fixed prices:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Number Contractual Exercise Number
Outstanding Life Price Exercisable
------------ ----------- --------- ------------
<S> <C> <C> <C>
25,000 4.9 Years $ .47 11,376
41,000 4.9 Years .63
36,645 4.2 Years .68 36,645
260,000 4.0 Years .71 52,000
69,800 3.5 Years .75 69,800
60,000 3.6 Years .87 20,000
</TABLE>
At June 30, 1999, incentive stock options and restricted stock
options were available for grant for the purchase of 402,514 and
207,069 shares of common stock, respectively.
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 to employees at exercise prices equal to 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 1999 and 1998. Had
compensation cost been determined based on the fair value of the
options at the grant date for all awards 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>
1999 1998
-------- --------
<S> <C> <C>
Net income - as reported $293,992 $283,706
Net income - pro forma 219,816 240,517
Basic net earnings per common share - as reported $ .09 $ .09
Basic net earnings per common share - pro forma $ .07 $ .07
Diluted net earnings per common share - as reported $ .09 $ .08
Diluted net earnings per common share - pro forma $ .07 $ .07
</TABLE>
The fair value of each option granted in 1999 and 1998 was
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 94% 69%
Risk-free interest rate 6% 7%
Expected lives 5 years 5 to 7 years
</TABLE>
F-14
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 8 - Income taxes:
The provision (credit) for income taxes in 1999 and 1998 consists
of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current:
Federal $ 145,300 $ 18,000
State 38,800 25,700
--------- ---------
184,100 43,700
--------- ---------
Deferred:
Federal (40,200)
State (9,800)
---------
(50,000)
Totals $ 134,100 $ 43,700
========= =========
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities and a related valuation allowance as of June 30, 1999
and 1998 are shown below:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax assets attributable to accrued vacation
expense and allowance for doubtful accounts $ 72,000 $ 61,000
Deferred tax liabilities attributable to
depreciation expense (22,000) (5,000)
Valuation allowance for net deferred
tax assets (56,000)
----------- ------------
Net deferred tax assets $ 50,000 $ -
=========== ============
</TABLE>
During 1998, the Company offset the net deferred tax assets by an
equivalent valuation allowance due to the uncertainties related
to the extent and timing of its future taxable income. During
1999, the valuation allowance was reversed.
F-15
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 8 - Income taxes (concluded):
The expected Federal income tax provision, computed based on the
Company's pre-tax income in 1999 and 1998 and the statutory
Federal income tax rate, is reconciled to the actual tax
provision reflected in the accompanying financial statements as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Expected Federal tax provision at statutory rates $145,500 $ 111,300
Decrease resulting from change in valuation
allowance on net deferred Federal tax assets (40,000)
Decrease resulting from effects of state
income tax deduction (7,800)
Other 7,400
Decrease resulting primarily from utilization
and/or availability of net operating loss
carryforwards (93,300)
---------- -----------
Federal tax provision $105,100 $ 18,000
========== ===========
</TABLE>
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 $73,099 and $69,833 in 1999 and 1998,
respectively.
* * *
F-16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 343,205
<SECURITIES> 0
<RECEIVABLES> 1,475,204
<ALLOWANCES> 26,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,028,150
<PP&E> 648,701
<DEPRECIATION> 408,095
<TOTAL-ASSETS> 2,285,288
<CURRENT-LIABILITIES> 988,902
<BONDS> 0
0
124,781
<COMMON> 493,644
<OTHER-SE> 601,140
<TOTAL-LIABILITY-AND-EQUITY> 2,285,288
<SALES> 0
<TOTAL-REVENUES> 7,898,628
<CGS> 0
<TOTAL-COSTS> 7,448,633
<OTHER-EXPENSES> 4,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,501
<INCOME-PRETAX> 428,092
<INCOME-TAX> 134,100
<INCOME-CONTINUING> 293,992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293,992
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
