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, 2000
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)
(858) 715-5500
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, No Par Value
Preferred Stock, $.50 Par Value
Indicate by check mark whether the issuer: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. [X]
Revenues for the fiscal year ended June 30, 2000 were $7,486,401.
APPLICABLE TO CORPORATE REGISTRANTS
As of June 30, 2000, the Issuer had outstanding 3,162,732 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, 2000 was $1,106,873 and
1,539,462, respectively. The total number of non-affiliate shares of
Common stock was multiplied by $0.719 per share (the average of the bid
and asked prices of such shares of Common stock on June 30, 2000) 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 $2,274,004.
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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<PAGE>
SYS
FOR FISCAL YEAR ENDED JUNE 30, 2000
FORM 10-KSB ANNUAL REPORT
<TABLE>
INDEX
<CAPTION>
Page
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . . 8
Factors Which May Affect Future Results . . . . . . . . . . 8
Item 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . 10
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY - HOLDERS . . . 11
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . 12
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION . 13
Selected Financial Data . . . . . . . . . . . . . . . . . . 13
Results of Operations . . . . . . .. . . . . . . . . . . . 14
Liquidity and Working Capital . . . . . . . . . . . . . . . 15
Impact of the Year 2000 . . . . . . . . . . . . . . . . . . 16
Item 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . 16
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 16
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 . . . . . . . . . . . . . . . . . . . . . . 23
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . 25
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K . . . . . . . . . . 27
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . F-1
to
F-17
</TABLE>
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
The Company provides engineering, management and technical services.
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 sold (1975) 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 engineering, management and technical consulting
services to various agencies of the United States Government and private
industry as a prime contractor and as a subcontractor. The specific services
provided are primarily in the fields of:
Systems Engineering Management and Analysis Consulting
Naval Architecture and Marine Engineering Software Development
Program Management Information Management Systems
Environmental Engineering Logistics Analysis and Engineering
Electronic Record Management Cost Analysis and Forecasting
Information Operations Theater Assessment Profiling
Effects Based Planning Total Ownership Cost
BUSINESS DEVELOPMENTS
The Company's revenue from direct labor increased by more than 19% in
FY 2000. However, revenue attributable to subcontractors and other direct
costs dropped by 83%. The net result is the Company's revenues for FY 2000
decreased over the previous fiscal year. Income before income taxes for
FY 2000 increased slightly over the previous year. But due to an increased tax
burden as a result of recognizing certain tax benefits in FY 1999, the
Company's net income for FY 2000 decreased by about 19% over the previous
fiscal year. Some factors that effect revenue are beyond the control of the
Company.
The Underway Replenishment (UNREP) Program had its second of three option
years exercised on December 1, 1999. This program accounted for about 21% of
the Company's revenue so far in fiscal year 2000. The program provides for
in-service engineering to the U.S. Navy Fleet. The decline in the number of
active fleet ships and the transfer of dedicated UNREP ships to the Military
Sealift Command has resulted in a stepped up backfit program. The fleet is
currently upgrading the AOE 3 and 4 UNREP systems. The Company is also
providing engineering design support in the development of the next generation
ACDX ship class that is scheduled to begin construction in early 2001. Efforts
are also expected to begin in this coming year to design the next generation
UNREP Heavy Lift System. Work is continuing on the Combatant Vertical
Strikedown system for consideration in the construction of the Navy Surface
Combatant DD-21 program. The Company has supported this navy program in
various roles since 1982.
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The Management, Planning and Administrative (MPA) Program had its fourth
of four option years exercised on February 1, 1999 and this contract ended on
January 31, 2000. The Company was successful in the recompetition of the MPA
contract and the new contract, named the Management, Planning, Analytical and
Administrative (MPAA) contract, became effective on February 1, 2000. This new
contract has a base year and four option years. The MPA and MPAA programs
accounted for about 54% of the Company's revenue in fiscal year 2000. 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. The Company has developed work
competencies in such areas as Management Consulting, Information Services,
Human Resource Services, Combat Systems Engineering and Facilities Engineering.
The MPA and MPAA programs have received customer recognition for their high
standards of excellence and professionalism.
The Naval Architecture and Marine Engineering (NAME) Program had its
fourth of four option years exercised on November 30, 1999. 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 is providing Logistics Engineering
Services to the Naval Facilities Engineering Command in support of the Army
Navy Literage Procurement Program and a new program for Foreign Military Sales
of equipment to the Taiwan government. The navy will not recompete the NAME
contract, however, the Company is working with their customers to move the work
onto one of the Company's GSA contracts.
The Company was awarded a three-year subcontract on August 2, 1999 from
Santa Barbara Applied Research, Inc. to continue its hazardous materials
assessment support to the Naval Air Systems Command. This program accounted
for about 3% of the Company's revenue. 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 BAE Systems), on
April 24, 1997. This program accounted for about 3% of the Company's revenue.
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 will add some
workload for similar support to the Spanish AEGIS Foreign Military Sales
program in fiscal year 2001. The Company also provides other financial
management support including case closure processing support to PMS400.
The Company currently holds an Information Technology General Services
Administration (GSA) contract which was recently modified to sell our
Electronic Records Management services on a Time and Material and Piece Part
count to the government. The contract has proved successful as a means to
develop new customers and is registered in the GSA Advantage System. The
Company also holds a Financial Management Services GSA contract which is
presently utilized in the support of the Seabee Logistics Center. The Company
is in the process of negotiating a new Professional Engineering Services
contract with GSA which is expected to be awarded in the Fall of 2000. This
new GSA contract will be utilized by the Company to develop new work in other
government agencies as well as our current customer base. The GSA contracts
accounted for about 3% of the Company's revenue.
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<PAGE>
The Company's Electronic Records Management (ERM) group continues to bring
in additional work. This program accounted for about 3% of the Company's
revenue. 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. The Company has won a five-year contract to
support the Department of the Interior and a one year contract to provide ERM
services to the Minerals Management Service. This division has just signed two
new contracts, one with the Bureau of Reclamation and the other with the Port
Hueneme Division, Naval Surface Warfare Center.
The Company started its C4I Division in July 2000. This Division is
primarily in San Diego, with a small office near Pensacola, Florida.
The C4I Division provides top-level system engineering; effects based planning
capability development; program management and business development support;
organizational management support; advanced concept development, test and
evaluation; C4ISR system architecture design; information operations
capabilities, and numerous related Special Compartmented Information (SCI)
efforts. The initial customer base includes SPAWAR Systems Center San Diego,
Boeing Phantomworks, Program Executive Office Strike Weapons and Unmanned
Aviation. The Division personnel work closely with other services and Joint
Agencies as well as with Office of Naval Research, Defense Advanced Research
Programs Agency, Assistant Secretary of the Navy for Research, Development and
Acquisition, Chief of Naval Operations, Naval Warfare Development Command,
Joint Battle Center, Battelle Labs, etc.
CONTRACT BACKLOG AND CUSTOMERS
As of June 30, 2000, the Company's contract backlog, including negotiated
contract options, was approximately $33,925,000, compared with approximately
$11,756,000 on June 30, 1999. The primary reason for the increase in
year-to-year backlog is due to the Company's win of the MPAA 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, 2000 was approximately $4,286,000, as compared with approximately
$3,207,000 on June 30, 1999. The reason the actual backlog is more in fiscal
year 2000 is due to more funded D.O.s on the MPAA contract.
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.
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EMPLOYEES
The Company had 81 full-time and 25 part-time employees on June 30, 2000,
compared to 76 full-time and 18 part-time employees on June 30, 1999
FACTORS WHICH MAY AFFECT FUTURE RESULTS
Information contained in this Form 10-KSB should be studied carefully by
any potential investor while considering the following risk factors to the
Company.
1. LACK OF BUSINESS DIVERSIFICATION. Essentially all the Company's
business at the present time is with the U.S. Navy. Even though the level of
business with its customers is growing and the Company has negotiated multiple-
year contracts, there is no certainty that budget changes in Congress or the
Defense Department will not seriously affect the Company.
2. DEPENDENCE ON KEY PERSONNEL. The Company has a few key management,
project and technical personnel that are intimately involved in their functions
and have day to day relationships with critical customers. The Company is not
able to afford extra standby staff. As a result, at its current size, it would
be affected in an uncertain way if any of these personnel were to be lost to
the Company.
3. COMPETITION. The Company has many competitors who vie for the same
customers as the Company. They are competent, experienced and continuously
working to take work projects away from the Company.
4. 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. While the Company's management believes that its
financial policies have been prudent, the Company's substantial reliance on a
short term bank loan with Scripps Bank and other short-term accruals impose
certain limitations on the Company. If the Company is to grow and expand its
operations, the Company will need to raise significant amounts of additional
capital. There can be no assurance that the Company will be successful in
raising a sufficient amount of additional capital, or if it is successful, that
the Company will be able to raise capital on reasonable terms in light of the
Company's current circumstances. In the event that the Company raises
additional capital, the Company's existing stockholders may incur substantial
and immediate dilution.
5. 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.
6. POSSIBLE RULE 144 STOCK SALES. A total of 1,359,362 shares of the
Company's outstanding Common Stock are "restricted securities" and may be sold
only in compliance with Rule 144 adopted under the Securities Act of 1933 or
other applicable exemptions from registration. Rule 144 provides that a person
holding restricted securities for a period of one year may thereafter sell, in
brokerage transactions, an amount not exceeding in any three-month period the
greater of either (i) 1% of the Company's outstanding Common Stock, or (ii) the
average weekly trading volume during a period of four calendar weeks
immediately preceding any sale. Persons who are not affiliated with the
Company and who have held their restricted securities for at least two years
are not subject to the volume limitation. Possible or actual sales of the
Company's Common Stock by present shareholders under Rule 144 may have a
depressive effect on the price of the Company's Common Stock in any market
which may develop.
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7. 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 violators of the proposed rules.
In addition, unless exempt, the rules require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule prepared by the
Commission explaining important concepts involving a penny stock market, the
nature of such market, terms used in such market, the broker/dealer's duties to
the customer, a toll-free telephone number for inquiries about the
broker/dealer's disciplinary history, and the customer's rights and remedies in
case of fraud or abuse in the sale.
Disclosure also must be made about commissions payable to both the
broker/dealer and the registered representative, current quotations for the
securities and, if the broker/dealer is the sole market maker, the
broker/dealer must disclose this fact and its control over the market.
Monthly statements must be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stocks. While many NASDAQ stocks are covered by the proposed definition
of penny stock, transactions in NASDAQ stocks are exempt from all but the sole
market-maker provision for (i) issuers with $2,000,000 in tangible assets
($5,000,000 if the issuer has not been in continuous operation for three
years), (ii) transactions in which the customer is an institutional accredited
investor and (iii) transactions that are not recommended by the broker/dealer.
In addition, transactions in a NASDAQ security directly with the NASDAQ market
maker for such securities, are subject only to the sole market-maker
disclosure, and the disclosure with regard to commissions to be paid to the
broker/dealer and the registered representatives.
Finally, all NASDAQ securities are exempt if NASDAQ raised its
requirements for continued listing so that any issuer with less than $2,000,000
in net tangible assets or stockholders' 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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8. CONTROL BY OFFICERS AND DIRECTORS. As of June 30, 2000, Officers and
Directors of the Company own 36.8% or 1,162,748 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.
9. RECEIVABLE FROM FORMER AFFILIATE. Big Canyon Investments, Inc.
(BCI), a wholly owned subsidiary of UniPrise Systems, Inc. (UniPrise), a
company partially owned by Robert D. Mowry, a former Director of the Company
and the Company's former Chairman and Chief Executive Officer (the "Former
Affiliate"), entered into an agreement with the Company in which the Company
was providing collection services to BCI/UniPrise for certain receivables (the
"Receivables"). As of June 30, 2000, the Former Affiliate owed the Company
$51,779 for these services. The Former Affiliate's debt has been converted to
a note (see Item 12) and the Company is no longer providing services to the
Former Affiliate. 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.
ITEM 2. DESCRIPTION OF PROPERTY
The business and operations of the Company are now conducted in the
following office spaces:
<TABLE>
Approx.
Location Sq. Feet Lease Term Rental
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<S> <C> <C> <C>
9620 Chesapeake Drive 8,997 Expires April 30, 2003 $10,013/mo.
San Diego, CA 92123
2451 Crystal Drive 2,968 Expires July 31, 2004 $ 7,897/mo.
Five Crystal Park
Arlington, VA 22202
1721 Pacific Avenue 9,064 Expires March 31, 2001 $10,335/mo.
Oxnard, CA 93033 (Cancelable with 6 months
prior written notice)
212 Eglin Parkway, SE 1,435 Expires July 31, 2003 $ 1,394/mo.
Fort Walton Beach, FL 32548
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On March 28, 2000, the Company was served notice that it was named in a
lawsuit filed in the United States District Court for the Central District of
California on March 2, 2000. The lawsuit was brought by associates of former
Company Chairman and Chief Executive Officer, Robert D. Mowry who had a
relationship with Mowry through Big Canyon Investments, Inc. and UniPrise.
The Plaintiffs are George M. Colin, William Czapar, Dan Birdsall and Brian
Patterson. The Defendants are William Zures, The Zures Companies Financial
and Insurance Services, a California corporation, Sante Fe Securities Corp.,
a California corporation, James Watt, Randall Moore, Reginald Broughton, Allan
Cantos, Robert Brown, Acrylis, Inc., a Delaware corporation, Joseph Perry,
Robert Mowry, UniPrise, Inc., a California corporation, Big Canyon Investments,
Inc., a California Corporation, and the Company.
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The lawsuit lists three counts, but the Company is named only in the third
count. The third count is for breach of factoring agreement contracts. The
Company believes that the factoring agreements were between the Plaintiffs and
UniPrise. While the Plaintiffs allege that the Company was represented by an
agent (Mowry) in these factoring agreements, the Company has received a
Declaration from Mowry stating, among other things, "The Factoring Agreements
were made by and between Plaintiffs and UniPrise. SYS was not a party to them,
had no knowledge of them and did not benefit from them."
The Plaintiffs claim to have suffered losses and seek damages of the
principal amounts of $980,000, plus interest, plus administrative fees, plus
additional compensation. The Company has hired counsel and will vigorously
defend the lawsuit. The Company has filed a motion to be dismissed from the
lawsuit. While the Company believes it has no liability in this matter, there
can be no assurance that the Plaintiffs will not be successful in asserting
that the Company is liable to them. The Company is not able to predict the
outcome of this litigation and there can be no assurance that the Company will
not incur substantial and protracted litigation costs.
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 2000.
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PART II
<TABLE>
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:
<CAPTION>
<S> <C> <C>
Fiscal Year 1999 BID ASK
---------------- ------ ------
First Quarter $0.646 $0.813
Second Quarter $0.625 $0.688
Third Quarter $0.625 $0.750
Fourth Quarter $0.302 $0.625
Fiscal Year 2000 BID ASK
---------------- ------ ------
First Quarter $0.417 $0.612
Second Quarter $0.438 $0.604
Third Quarter $0.771 $1.583
Fourth Quarter $0.688 $1.229
</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, 2000, there were approximately 412 holders of
record 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:
<TABLE>
AS OF AND FOR THE FISCAL YEARS ENDED JUNE 30
(thousands except per share amounts)
<CAPTION>
2000 1999 1998
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<S> <C> <C> <C>
OPERATING RESULTS:
Contract revenues $7,486 $7,899 $7,877
Costs and expenses:
Contract costs 6,295 6,578 6,653
General and administrative 758 871 868
Income from operations 433 450 356
Other (income) expense:
Interest income (15) (9) (9)
Interest expense 15 27 38
Loss on sale and disposition of equipment 1 4 0
Income before income taxes 432 428 327
Provision for income taxes 193 134 43
Net income 239 294 284
Net income applicable to common stock 231 286 275
Basic net earnings per common share 0.07 0.09 0.09
Diluted net earnings per common share 0.07 0.09 0.08
BALANCE SHEET DATA:
Total assets 2,074 2,285 1,816
Borrowings-bank line of credit 0 0 119
Long-term obligations (including current portion) 160 157 214
Stockholders' equity 1,296 1,220 892
</TABLE>
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RESULTS OF OPERATIONS
FISCAL YEAR 2000 VS. FISCAL YEAR 1999
The Company's revenues from government contracts were approximately
$7,227,000 and $7,792,000 for 2000 and 1999, respectively. Total revenues for
2000 were $7,486,000 compared to $7,899,000 for 1999, a decrease of 5%.
Although the Company's revenues from direct labor increased by more than
19% in 2000, the revenues from subcontractors and other direct costs dropped by
83%. This combination resulted in a net decrease in the Company's revenues.
The primary reason for the decreased revenue was the 34% reduction in revenue
($790,000) from the UNREP contract. This was caused by fewer material orders
on the UNREP contract.
During 2000, the Company's income from operations was $433,000 compared to
$450,000 in 1999. During 2000, the Company had net income before taxes of
$432,000 compared to $428,000 in 1999. During 2000, the Company had net income
of $239,000 compared to $294,000 in 1999. The decrease in net income was
primarily due to the provision for income taxes of $192,700 required in 2000,
compared to $134,100 in 1999. The 1999 tax provision was less than the
expected tax provision at statutory rates due to the change in the valuation
allowance on net deferred Federal tax assets.
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 $6,295,000 in 2000
from $6,577,000 in 1999 and general and administrative expenses decreased to
$758,000 in 2000 from $871,000 in 1999. The reduced expenses are primarily due
to the reduction in revenues.
Basic net earnings per common share was $0.07 in 2000 compared to $0.09 in
1999. The related weighted average number of common shares outstanding was
3,171,743 in 2000 and 3,190,103 in 1999. Diluted net earnings per common share
was $0.07 in 2000 compared to $0.09 in 1999. The related weighted average
number of common shares outstanding was 3,213,303 in 2000 and 3,207,721 in
1999.
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.
- 14 -
===============================================================================
<PAGE>
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.
LIQUIDITY AND WORKING CAPITAL
The Company had net working capital of $1,189,000 at June 30, 2000
compared to $1,039,000 at June 30, 1999. Contract receivables decreased by
$157,000 during 2000. The Company's line of credit had a zero balance at
June 30, 2000. Accounts payable was $242,000 less in 2000 than in 1999. This
was mainly attributable to payments made on other direct costs incurred in
1999, but paid in 2000. There are two notes that make up the total of the
current and long-term notes payable. The Company's net assets increased by
$76,000 in 2000 to $1,296,000. Net furniture and equipment decreased by $5,000
in 2000.
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, 2000. 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
has entered into discussions with Scripps Bank regarding the annual extension
of the credit facility.
The Company also finances a portion of its operations through leases. At
June 30, 2000, the Company had noncancellable operating leases for its offices
which expire at various dates through April 2005. 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, 2000 totaled $52,683, of which $18,063
relates to the year ending June 30, 2001.
Annual future minimum lease payments under operating leases with initial
terms of one year or more as of June 30, 2000 totaled $1,463,123, of which
$354,425 relates to the year ending June 30, 2001.
- 15 -
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<PAGE>
<TABLE>
Several key factors indicating the Company's financial condition include:
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Current ratio 2.87 2.05
Maximum debt to net worth 0.60 0.87
Net worth $1,296,000 $1,220,000
Net working capital $1,189,000 $1,039,000
Debt to total assets 38% 47%
Book value per common share $0.37 $0.34
</TABLE>
The Company continued to demonstrate improvements in the above financial
factors during fiscal year 2000. These Company trends are positive; however,
there can be no assurance that they will continue to be positive. Certain
factors that may effect the Company's financial performance are beyond the
Company's control. 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, 2001.
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
occurred, there was concern that date-sensitive systems may recognize the year
2000 as 1900, or not at all. This inability to recognize or properly treat the
year 2000 could have caused systems to process financial and operational
information incorrectly. The Company has continually upgraded its hardware and
software and has upgraded its financial software to insure compliance with the
Year 2000 issue. The Company has not incurred any Year 2000 problems with its
internal systems. The Company has not experienced any Year 2000 problems
associated with their customers or suppliers. The Company does not expect the
Year 2000 issue to have a material effect on its financial position, results of
operations or cash flows in any given year.
ITEM 7. FINANCIAL STATEMENTS
The full text of the Company's audited financial statements for the fiscal
years ended June 30, 2000 and 1999 begins on page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
- 16 -
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<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 43, is Vice President, Finance and
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 financial and administrative functions of the Company,
including finance, accounting, SEC reporting, banking, human resources,
contracts and other management areas. He held various executive positions at
San Diego Aircraft Engineering, Inc. (SANDAIRE) before being hired by the
Company. SANDAIRE is an engineering firm specializing in the aerospace and
defense industries. Some of SANDAIRE's major customers have included the
U.S. Navy, NASA, Lockheed, McDonnell Douglas, Tracor Aviation, Teledyne Ryan
Aeronautical and Westinghouse. 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) Mr. Zoltan A. "Walt" Harasty, age 70, is a graduate of the Stanford
Law School, was legal counsel to the Company at the time of its formation and
initial public offering and was elected to the Board of Directors on
January 19, 2000 to serve the term of Lawrence L. Kavanau, who resigned his
seat on January 19, 2000. Mr. Harasty had previously served as a director of
the Company from April 14, 1994 to March 21, 1997. Mr. Harasty is a Corporate
Counsel with in-depth experience of over 40 years in securities transactions,
SEC filings, stock exchange listings, corporate financing and in almost every
area of security law. His experience was gained both as a Corporate General
Counsel and as a partner in Tremaine and Shenk and Managing Partner of
McDonald, Halsted & Laybourne. He was General Counsel and Vice President,
Expansion for Carrows Restaurants and also acted as Special Counsel to Collins
Foods International (Sizzler Restaurants and the then largest franchisee of
KFC). He was General Counsel of Malibu Grand Prix Corporation with
42 subsidiaries operating nationwide amusement centers featuring miniature
racing cars, video games and miniature golf. Prior to the time of his
retirement in 1998, Mr. Harasty was a principal in Boardroom Counselors, a
management consulting firm specializing in small business capital formation.
With his knowledge of NASD, SEC, security dealers, financing, public offerings,
private placements, bank financing and real estate matters, Mr. Harasty brings
significant legal and business expertise to the Company's Board of Directors
and helps in its growth.
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<PAGE>
(3) Kameron W. Maxwell, Ph.D., age 64, was elected to the Board of
Directors as of September 21, 1999. Dr. Maxwell is currently a consultant to
various biotechnology and contract research companies. He held various
positions at the Veterans Administration Hospital in Salt Lake City, both in
the clinical laboratory and research departments as well as having a teaching
appointment in the Microbiology department at the University of Utah College of
Medicine. After leaving Salt Lake City he took a position with Baxter
Travenol's Hyland Division in Costa Mesa, California. While at Hyland, he held
a number of positions in the Research and Development department with the most
recent being that of Director. In this position he supervised a large group of
scientists and coordinated research both within the company and with outside
academic collaborators. Dr. Maxwell left Baxter and held the position of
Director of Research and Development at Newport Pharmaceuticals. In this
capacity he was responsible for the research, development and registration of a
new chemical entity. Dr. Maxwell was president and co-founder of Americal
Pharmaceuticals Inc., a company that manufactured, imported and distributed
sterile liquid pharmaceutical products. These products were predominately used
in the treatment of cancer (generic oncology products) and ophthalmic
conditions. Following the Americal position, Dr. Maxwell held various
positions at Genta Inc. The most recent being that of Sr. Vice President of
Pharmaceuticals Operations. Dr. Maxwell has had extensive experience in the
regulatory affairs arena and is RAC certified. He has established numerous
working relationships with universities and contract service organizations, and
has researched, developed and marketed numerous products ranging from
diagnostics through prescription pharmaceuticals. He is a member of The
American Academy of Dermatology, The Regulatory Affairs Professional Society,
the American Society for Microbiology, the Drug Information Association, the
American Association of Pharmaceutical Scientists, the Controlled Release
Society and other scientific and professional organizations. Dr. Maxwell
brings to the Company his knowledge and experience in start up financing,
research and development, strategic planning and management, operations,
product and process quality and securing product regulatory approvals.
Dr. Maxwell's education consists of a Ph.D., Immunology, Minor, Histology,
University of Utah; an M.S., Microbiology, Minor, Parasitology, University of
Utah and a B.S., Bacteriology, University of Utah.
(4) Mr. W. Gerald Newmin, age 63, was elected to the Board of Directors as
of October 19, 1993. 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. On January 19, 2000, Mr. Newmin was elected
Chairman of the Board, Chief Executive Officer and Chief Financial Officer of
the Company. Mr. Newmin served as Corporate Secretary from December 10, 1993
to January 20, 1999. Mr. Newmin also serves as Chairman and Chief Executive
Officer of Exten Industries, Inc., a publicly held bio-medical company and on
the Board of two non-profit organizations, the Corporate Directors Forum and
the Corporate Governance Institute. 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 and participated in
numerous acquisitions. 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, Whittaker's Marine
Group consisting of Bertram Yacht, Columbia Yacht and Trojan Yacht
Corporations. Mr. Newmin holds a Bachelors degree in Accounting from Michigan
State University.
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<PAGE>
(5) Charles E. Vandeveer, age 59, 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
in 1963.
(6) Charles H. Werner, age 73, 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.
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<PAGE>
(8) Kenneth D. Regan, age 58, assumed the position of Executive Vice
President, C4I Division in May 2000. Prior to joining SYS, Mr. Regan was
Corporate VP for Mergers and Acquisitions of Advanced Communication Systems,
Inc., following two years as President of Advanced Communication Systems
Services (ACSS) Division. As President of ACSS, he directed and organized the
growth of ACSS from a 238 person, $37M annual revenue communications and IT
services company to over 1,050 people with an annual revenue of $114M. Prior
to becoming President, he served three months as ACS Corporate Vice President
for International Development after retiring as a member of the Senior
Executive Service (SES) from the Navy. During his 32 year career in the Navy
RDT&E community, his roles ranged from hands-on engineering to managing a 600
person, $300M Navy R&D technical department. While President of ACS Services,
Mr. Regan played a key role in ACS' largest single acquisition, and other
strategic acquisitions, which lead to assuming Corporate M&A responsibilities.
As VP for International Development, he successfully established multiple
international business relationships. As a Department Head in Navy R&D
community for seven years, he successfully directed and expanded a technically
excellent, productive organization during a time of reduced budgets and
directed mission purification and base closures. Mr. Regan received his
Bachelors Degree in Electronic Engineering from Colorado State University in
1965.
(9) William P. Wilund, age 54, is currently a Senior Program Manager in
the Oxnard office. Mr. Wilund joined SYS in 1996 and has held various
management, supervisory and project positions, including Program Manager for
the Naval Architecture and Marine Engineering contract. He retired from the
United States Navy in 1993 as a Supply Corps Captain and prior to joining the
Company held senior management positions in two medium-sized companies.
Mr. Wilund served as Supply Officer of three Navy ships including the USS New
Jersey (BB 62) and served in a variety of Program Management and staff
positions ashore, including several tours in Washington, D.C. Headquarters
Commands. Mr. Wilund holds a Bachelors Degree in Accounting from the
University of Idaho and a Masters Degree in Business Administration from the
Naval Postgraduate School. He is also a graduate of the Naval War College, the
Industrial College of the Armed Forces and the Carnegie Mellon Program for
Executives.
OFFICERS OR DIRECTORS RESIGNING OR TERM ENDING IN 2000:
Mr. Robert D. Mowry resigned from his position as Director of the Company
on September 21, 1999.
Mr. Lawrence L. Kavanau resigned from his position as Director of the
Company on January 19, 2000.
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 (9) above is
affiliated with the Company.
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 2000, its executive officers and directors
complied with Section 16(a) requirements.
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<PAGE>
<TABLE>
ITEM 10. EXECUTIVE COMPENSATION
The following is a table showing the remuneration paid by the Company
during its fiscal years ended June 30, 2000 and 1999 for services in all
capacities to the CEO and each officer, the sum of whose cash and
cash-equivalent forms of remuneration during such years exceeded $100,000,
and the remuneration paid during such years to all executive officers as a
group (number):
<CAPTION>
Annual Compensation
Name and Principal Fiscal
Position Year Salary Other
------------------------- ------ -------- --------
<S> <C> <C> <C>
Lawrence L. Kavanau (1) 2000 $ 54,740 $ 3,500
Chairman
W. Gerald Newmin (2) 2000 $ 60,008 NONE
Chairman, CEO, CFO
Charles E. Vandeveer 2000 $ 95,871 $ 6,000
Executive Vice President
-------- --------
All Executive Officers (4) as
a Group 2000 $292,747 $ 12,500
======== ========
Lawrence L. Kavanau 1999 $ 86,588 $ 6,000
Chairman
-------- --------
All Executive Officers (4) as
a Group 1999 $265,100 $ 15,000
======== ========
<FN>
(1) Lawrence L. Kavanau was the Company's Chairman from July 1, 1999
through January 19, 2000.
(2) W. Gerald Newmin assumed the duties of Chairman on January 19, 2000
in addition to the CEO and CFO duties.
</TABLE>
During Fiscal Year 2000, each Director of the Company (excluding full time
executive officers) received a stock option for 12,000 shares of Company common
stock (see below for stock option prices) plus approved expenses per month.
During the last year, the Board of Directors of the Company held seven Board of
Director meetings. 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.
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<PAGE>
<TABLE>
The following is a list of common stock options given to directors and
officers as of June 30, 2000:
<CAPTION>
Grant # of Option Expiration
Name and Title Date shares Price Date
---------------------------- -------- ------- ------ ----------
<S> <C> <C> <C> <C>
Mowry - Former Director 05/21/97 12,513 $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 - Former 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 - Former Director 09/01/98 12,000 $0.68 09/01/04
Newmin - Director 09/01/98 1,645 $0.68 09/01/04
Werner - Director 09/01/98 12,000 $0.68 09/01/04
Wood - Former Director 09/01/98 5,000 $0.68 09/01/04
Harasty - Director 09/01/99 5,387 $0.625 09/01/05
Maxwell - Director 09/01/99 9,300 $0.625 09/01/05
Mowry - Former Director 09/01/99 700 $0.625 09/01/05
Werner - Director 09/01/99 10,000 $0.625 09/01/05
Maxwell -Director 09/21/99 25,000 $1.00 09/21/06
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 246,000 various various
-------
Total options outstanding 653,345
=======
</TABLE>
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<PAGE>
<TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS (as of
June 30, 2000)(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 include
outstanding stock options:
<CAPTION>
Amount and Nature Percent
Title Name and Address of of Beneficial of Class
of Class Beneficial Owner Owner (1) (2)
------------ ---------------------------- ------------------- --------
<S> <C> <C> <C>
Common Stock Charles H. Werner 731,566 (3) 22.9%
Without Par P.O. Box 1966
Value Rancho Santa Fe, CA 92067
Lawrence L. Kavanau 298,189 (Direct) 14.6%
3320-140 Caminito East Bluff 162,333 (As Trustee
La Jolla, CA 92037 or Executor, With
Voting Rights)
W. Gerald Newmin 285,324 (4) 9.0%
48 Admiralty Cross
Coronado, CA 92118
Charles E. Vandeveer 179,616 (5) 5.6%
8203 Tiara Street
Ventura, CA 93004
<FN>
(1) To the best knowledge of the Company, each of the beneficial owners
listed herein has direct ownership of and sole voting power and sole
investment power with respect to the shares of the Company's
Common Stock, except as set forth herein.
(2) A total of 3,162,732 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. For each Beneficial Owner above, any
options exercisable within 60 days have been included in the denominator.
(3) The following stock options of Mr. Werner are included in the stock total:
(1) granted 11/19/97, 12,000 shares, option price of $0.75 per share;
(2) granted 9/1/98, 12,000 shares, option price of $0.68 per share and
(3) granted 9/1/99, 10,000 shares, option price of $0.625 per share.
Mr. Werner has a total of 34,000 shares that may be purchased through
stock options. The total shown here includes these stock options.
(4) The following stock options of Mr. Newmin are included in the stock total:
(1) granted 11/19/97, 12,000 shares, option price of $0.75 per share and
(2) granted 9/1/98, 1,645 shares, option price of $0.68 per share.
Mr. Newmin has a total of 13,645 shares that may be purchased through
stock options. The total shown here includes these stock options.
(5) The following stock option of Mr. Vandeveer is included in the stock
total: (1) granted 6/3/98, 60,000 shares, option price of
$0.71 per share. The total shown here includes these stock options.
</TABLE>
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<PAGE>
<TABLE>
(b) Security Ownership of Management (as of June 30, 2000) (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 include
outstanding stock options:
<CAPTION>
Amount and Nature Percent
Title Name and Address of of Beneficial of Class
of Class Beneficial Owner Owner (1) (2)
------------ ---------------------------- ------------------- --------
<S> <C> <C> <C>
Common Stock Charles H. Werner 731,566 (3) 22.9%
Without Par (Director)
Value
W. Gerald Newmin 285,324 (4) 9.0%
(Chairman, CEO, CFO)
Charles E. Vandeveer 179,616 (5) 5.6%
(Director,
Executive Vice President)
Michael W. Fink 96,980 (6) 3.0%
(Vice President, Finance
and Administration)
Kameron W. Maxwell 34,000 (7) 1.1%
(Director)
Zoltan A. Harasty 32,294 (8) 1.0%
(Director)
All Directors and 1,359,780 (9) 40.5%
Officers as a Group
<FN>
(1) To the best knowledge of the Company, each of the beneficial owners
listed herein has direct ownership of and sole voting power and sole
investment power with respect to the shares of the Company's Common Stock,
except as set forth herein.
(2) A total of 3,162,732 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. For each Beneficial Owner above, any
options exercisable within 60 days have been included in the denominator.
(3) The following stock options of Mr. Werner are included in the stock total:
(1) granted 11/19/97, 12,000 shares, option price of $0.75 per share;
(2) granted 9/1/98, 12,000 shares, option price of $0.68 per share and
(3) granted 9/1/99, 10,000 shares, option price of $0.625 per share.
Mr. Werner has a total of 34,000 shares that may be purchased through
stock options. The total shown here includes these stock options.
(4) The following stock options of Mr. Newmin are included in the stock total:
(1) granted 11/19/97, 12,000 shares, option price of $0.75 per share and
(2) granted 9/1/98, 1,645 shares, option price of $0.68 per share.
Mr. Newmin has a total of 13,645 shares that may be purchased through
stock options. The total shown here includes these stock options.
(5) The following stock option of Mr. Vandeveer is included in the stock
total: (1) granted 6/3/98, 60,000 shares, option price of $0.71 per share.
The total shown here includes these stock options.
(6) The following stock option of Mr. Fink is included in the stock total:
(1) granted 6/3/98, 50,000 shares, option price of $0.71 per share.
The total shown here includes these stock options.
(7) The following stock options of Mr. Maxwell are included in the stock
total: (1) granted 9/1/99, 9,300 shares, option price of $0.625 per share
and (2) granted 9/21/99, 25,000 shares, option price of $1.00 per share.
Mr. Maxwell has a total of 34,300 shares that may be purchased through
stock options. The total shown here includes these stock options.
(8) The following stock option of Mr. Harasty is included in the stock total:
(1) granted 9/1/99, 5,387 shares, option price of $0.625 per share.
The total shown here includes these stock options.
(9) Current officers and directors hold a total of 197,332 stock options.
The total shown here includes these stock options.
</TABLE>
- 24 -
===============================================================================
<PAGE>
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. None
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the year ended June 30, 2000, the Board of Directors granted stock
purchase options to four outside directors exercisable at $0.625 per share.
One new director, Mr. Kameron Maxwell, also received a stock option for 25,000
shares at $1.00 per share with vesting over five years. Some of these purchase
options contain certain buyback 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. There are outstanding stock options for
69,800 common shares for the period of September 1, 1997 to August 31, 1998.
Under the same policy, for the period from September 1, 1998 through
August 31, 1999, stock options for 40,645 common shares at $0.68 per share are
owed to outside directors. Under the same policy, for the period from
September 1, 1999 through June 30, 2000, stock options for 25,387 common shares
at $0.625 per share are owed to outside directors.
Effective September 21, 1999, the Board of Directors elected Mr. Kameron
W. Maxwell to fill the Board of Directors vacancy created by Mr. Robert D.
Mowry's resignation. Also effective September 21, 1999, the Company entered
into a Consulting Agreement and Amendment to Prior Understanding (the
"Agreement") with Mowry.
Effective September 24, 1999, the Board of Directors agreed to replace the
Big Canyon Investments, Inc. (BCI)/UniPrise debt with a Secured Negotiable
Promissory Note (the "Note") for $179,000 from Mowry and BCI. The Note was
secured by certain third party receivables, Mowry's personal guarantee and
common stock of the Company held or controlled by Mowry. The Note accrued
interest at 10% per annum and principal and interest were due on
December 31, 1999. As of January 1, 2000, the Note was in default and the
Company foreclosed on February 23, 2000 on the 124,000 shares of Company common
stock held as collateral. Pursuant to the Agreement, Mowry has an option to
purchase 124,000 shares of common stock for one dollar per share through
June 30, 2001.
- 25 -
===============================================================================
<PAGE>
Effective January 1, 2000, the Company entered into a new Secured
Negotiable Promissory Note (the "New Note") with Mowry and BCI for $55,000.
The New Note is for the remaining balance of the Note ($179,000 - $124,000 =
$55,000). The New Note is secured by the SEI receivables and Mowry's personal
guarantee. The New Note accrues interest at 10% per annum and principal and
interest was due on June 30, 2000. The Company and Mowry have extended the New
Note through June 30, 2001. Mowry is no longer an affiliate of the Company.The
Company added an employee stock ownership plan to its existing 401(k) plan,
thus creating the SYS 401(k) Employee Stock Ownership Plan and Trust Agreement
(the "Plan"). Effective January 1, 2000, instead of the matching cash
contribution the Company had been giving to the employees through the 401(k),
the Company will now contribute Company stock to the employees through the
Plan.
At the Annual Board of Directors Meeting on January 19, 2000, which was
held subsequent to the Annual Shareholders Meeting, Mr. Lawrence L. Kavanau
resigned his seat on the Board of Directors effective at the conclusion of the
meeting. The Board of Directors elected Mr. Zoltan A. Harasty to fill the
Board of Directors vacancy created by Mr. Kavanau's resignation.
On February 4, 2000, the Company signed a Joint Venture Agreement with
LaRRK Digital, Inc. (LaRRK). LaRRK assists its customers to identify, develop,
internally deploy and/or sell their intellectual property through the creation
of knowledge management strategies and sales programs. LaRRK uses software and
internet technologies to accomplish these goals. The Company agreed to loan
LaRRK $60,000. The Company has certain rights, which includes trading the
LaRRK note receivable for a one third interest in LaRRK. The Company and LaRRK
have entered into discussions on a more definitive agreement.
The Company reported on form 8-K on March 14 and July 28, 2000 about the
Company's intent to purchase all of the shares of Systems Integration &
Research, Inc. The Company has been informed by the counsel for Systems
Integration & Research, Inc., an Arlington, Virginia based defense contractor,
that they are no longer interested in being acquired by the Company.
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.
- 26 -
===============================================================================
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) EXHIBITS
1.1 Copy of Certificate of Determination of Preferences of
Preferred Shares of Systems Associates, Inc., filed by the
Company with the California Secretary of State on
July 28, 1968, filed as Exhibit 3.2 to the Company's
Form 10-K for the fiscal year ended June 30, 1981, and
incorporated by this reference.
1.2 Copy of Certificate of Determination of Preferences of
Preference Shares of Systems Associates, Inc., filed by
the Company with the California Secretary of State on
December 27, 1968, filed as Exhibit 3.3 to the Company's
Form 10-K for the fiscal year ended June 30, 1981, and
incorporated by this reference.
1.3 Copy of Certificate of Ownership filed with the California
Secretary of State on November 28, 1979, filed as
Exhibit 2.1 to the Company's Form 10-K for the fiscal year
ended June 30, 1979, and incorporated by this reference.
1.4 Copy of Bylaws of Systems Associates, Inc., filed as
Exhibit 3.5 to the Company's Form 10-K for the fiscal year
ended June 30, 1981, and incorporated by this reference.
1.5 Copy of Certificate of Ownership filed with the California
Secretary of State on March 18, 1985, incident to change
of name of the Company, filed as Exhibit 3.6 to this
Company's Form 10-K for the fiscal year ended
June 30, 1985, and incorporated by this reference.
1.6 Certificate of Determination of Series B 9% Cumulative
Convertible Callable Non-Voting Preference Stock was
filed by the Company with the California Secretary of
State on August 15, 1996, and incorporated by this
reference.
1.7 A Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 was filed on
February 21, 1997, and incorporated by this reference.
1.8 A copy of the SYS 1997 Incentive Stock Option and
Restricted Stock Plan was filed as Attachment 1 to the
Company's Proxy Statement, filed on February 21, 1997, and
is incorporated by this reference.
1.9 Election of Chairman of the Board and Acting Chief
Executive Officer filed on Form 8-K on August 1, 1997, and
is incorporated by this reference.
1.10 An Action of the Holders of a Majority of the Shares
Outstanding by Written Consent in Lieu of a Meeting of
SYS to approve an amendment to the Company's Articles of
Incorporation filed on Form 8-K on October 28, 1997, and
is incorporated by this reference.
1.11 Announcement to terminate prior discussions and
understandings to the proposed formation of a new service
business filed on Form 8-K on May 28, 1998, and is
incorporated by this reference.
1.12 Announcement of the Signing of a Letter of Intent to
acquire all of the shares of Systems Integration &
Research, Inc. (SIR) filed on Form 8-K on March 14, 2000,
and is incorporated by this reference.
1.13 Further disclosure on the proposed acquisition of
SIR filed on Form 8-K on July 28, 2000, and is
incorporated by this reference.
(b) Exhibits to this Form 10-KSB are listed in subsection (1) above.
(c) None
- 27 -
===============================================================================
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SYS
By: /s/ W. Gerald Newmin Date: 10/6/00
---------------- -------
W. GERALD NEWMIN
Chief Executive Officer and
Chief Financial Officer
By: /s/ Michael W. Fink Date: 10/6/00
---------------- -------
Michael W. Fink
Vice President, Finance and
Administration
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/ W. Gerald Newmin Date: 10/6/00
---------------- -------
W. GERALD NEWMIN
Chairman
By: /s/ Zoltan A. Harasty Date: 10/6/00
---------------- -------
ZOLTAN A. HARASTY
Director
By: /s/ Kameron W. Maxwell Date: 10/6/00
---------------- -------
KAMERON W. MAXWELL
Director
By: /s/ Charles E. Vandeveer Date: 10/6/00
---------------- -------
CHARLES E. VANDEVEER
Director
By: /s/ Charles H. Werner Date: 10/6/00
---------------- -------
CHARLES H. WERNER
Director
- 28 -
===============================================================================
<PAGE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . F- 2
BALANCE SHEETS
JUNE 30, 2000 AND 1999 . . . . . . . . . . . . . . . . . . . . F- 3
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000 AND 1999 . . . . . . . . . . . . . . F- 4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999 . . . . . . . . . . . . . . F- 5
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999 . . . . . . . . . . . . . . F- 6
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . F- 7/17
</TABLE>
* * *
F- 1
===============================================================================
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
SYS
We have audited the accompanying balance sheets of SYS as of June 30, 2000 and
1999, 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, 2000 and
1999, and its results of operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ J.H. Cohn LLP
-----------------
J.H. Cohn LLP
San Diego, California
September 15, 2000
F- 2
===============================================================================
<PAGE>
<TABLE>
SYS
BALANCE SHEETS
JUNE 30, 2000 AND 1999
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 310,644 $ 343,205
Contract receivables, net of allowance
for doubtful accounts of $26,000 1,292,040 1,449,204
Other receivables 51,779 124,924
Deferred tax assets 69,000 72,000
Other current assets 100,265 38,817
------------ ------------
Total current assets 1,823,728 2,028,150
Furniture and equipment, less accumulated
depreciation and amortization of
$494,653 and $408,095 235,126 240,606
Other assets 14,944 16,532
------------ ------------
Totals $ 2,073,798 $ 2,285,288
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 150,375 $ 392,767
Accrued payroll and related taxes 285,268 330,212
Income taxes payable 125,292 128,682
Other accrued liabilities 21,398 35,112
Current portion of notes payable 38,799 90,391
Current portion of capital lease obligations 13,296 11,738
------------ ------------
Total current liabilities 634,428 988,902
Notes payable, net of current portion 76,743 10,900
Capital lease obligations, net of current portion 30,941 43,921
Deferred tax liabilities 36,000 22,000
------------ ------------
Total liabilities 778,112 1,065,723
------------ ------------
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 Series B shares issued and outstanding 69,781 69,781
Common stock, no par value; 12,000,000 shares
authorized; 3,162,732 and 3,236,732 shares
issued and outstanding 524,732 493,644
Unearned ESOP compensation (84,923) -
Retained earnings 731,096 601,140
------------ ------------
Total stockholders' equity 1,295,686 1,219,565
------------ ------------
Totals $ 2,073,798 $ 2,285,288
============ ============
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F- 3
===============================================================================
<PAGE>
<TABLE>
SYS
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000 AND 1999
2000 1999
------------ ------------
<S> <C> <C>
Contract revenues $ 7,486,401 $ 7,898,628
------------ ------------
Costs and expenses:
Contract costs 6,295,528 6,577,434
General and administrative expenses 758,224 871,199
------------ ------------
Totals 7,053,752 7,448,633
------------ ------------
Income from operations 432,649 449,995
------------ ------------
Other (income) expense:
Interest income (15,040) (9,152)
Interest expense 15,336 26,501
Loss on sale and disposition of equipment 358 4,554
------------ ------------
Totals 654 21,903
------------ ------------
Income before income taxes 431,995 428,092
Provision for income taxes 192,700 134,100
------------ ------------
Net income 239,295 293,992
Preferred dividends requirements 8,480 8,480
------------ ------------
Net income applicable to common stock $ 230,815 $ 285,512
============ ============
Basic net earnings per common share $ .07 $ .09
============ ============
Diluted net earnings per common share $ .07 $ .09
============ ============
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F- 4
===============================================================================
<PAGE>
<TABLE>
SYS
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999
<CAPTION>
Convertible
Convertible Series B
Preferred Stock Preference Stock Common Stock Unearned
----------------- ---------------- -------------------- ESOP Retained
Shares Amount Shares Amount Shares Amount Compensation Earnings Total
------- ------- ------ ------- --------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> C> <C> <C> <C> <C>
Balance, July 1, 1998 110,000 $55,000 70,645 $70,645 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 (2,200) (2,200)
Cash dividends on 9%
convertible Series B
preference stock (6,403) (6,403)
Conversion of 9% convertible
Series B preference stock
into common stock (864) (864) 1,728 864
Net income 293,992 293,992
------- ------- ------ ------- --------- -------- --------- -------- ----------
Balance, June 30, 1999 110,000 55,000 69,781 69,781 3,236,732 493,644 601,140 1,219,565
Issuance of common stock
for cash 50,000 50,000 50,000
Cash dividends on 4%
convertible preferred stock (2,200) (2,200)
Cash dividends on 9%
convertible Series B
preference stock (15,691) (15,691)
Purchase of 130,060 unearned
ESOP shares $(130,060) (130,060)
Release of 45,137 ESOP
shares for compensation 45,137 45,137
Shares returned in exchange
for cancellation of
receivable and issuance of
stock options (124,000) (18,912) (91,448) (110,360)
Net income 239,295 239,295
------- ------- ------ ------- --------- -------- --------- -------- ----------
Balance, June 30, 2000 110,000 $55,000 69,781 $69,781 3,162,732 $524,732 $ (84,923) $731,096 $1,295,686
======= ======= ====== ======= ========= ======== ========= ======== ==========
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F- 5
===============================================================================
<PAGE>
<TABLE>
SYS
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 239,295 $ 293,992
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 87,193 69,554
Loss on sale and disposition of equipment 358 4,554
Issuance of common stock and options
for services and compensation 13,640 36,000
Release of ESOP shares for compensation 45,137 -
Deferred tax provision (credit) 17,000 (50,000)
Changes in operating assets
and liabilities:
Contract receivables 157,164 (263,926)
Other receivables (50,855) 114,385
Other current assets (61,448) 60,821
Other assets 1,588 -
Accounts payable (242,392) 74,841
Accrued payroll and related taxes (44,944) 77,108
Income taxes payable (3,390) 128,682
Other accrued liabilities (13,714) 15,954
------------ ------------
Net cash provided by
operating activities 144,632 561,965
------------ ------------
Investing activities:
Acquisition of furniture and equipment (85,864) (68,145)
Proceeds from sale of equipment 3,793 300
Purchase of unearned ESOP shares (130,060) -
------------ ------------
Net cash used in investing activities (212,131) (67,845)
------------ ------------
Financing activities:
Net line of credit borrowings - (118,798)
Proceeds from notes payable 107,000 -
Payments of notes payable (92,749) (48,362)
Payments of capital lease obligations (11,422) (9,094)
Payments of dividends (17,891) (8,603)
Proceeds from exercise of stock options - 5,811
Proceeds from issuance of common stock 50,000 -
------------ ------------
Net cash provided by (used in)
financing activities 34,938 (179,046)
------------ ------------
Net increase (decrease) in cash (32,561) 315,074
Cash, beginning of year 343,205 28,131
------------ ------------
Cash, end of year $ 310,644 $ 343,205
============ ============
Supplemental disclosure of cash flow data:
Interest paid $ 15,336 $ 36,176
============ ============
Income taxes paid $ 178,800 $ 21,084
============ ============
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F- 6
===============================================================================
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
SYS (the "Company") was incorporated in 1966 in the State of
California. The Company provides management and technical services
in systems planning, management and analysis, systems engineering,
naval architecture, marine engineering, ordnance engineering,
logistics analysis and engineering, operations analysis, hazardous
materials reduction studies, computer systems analysis, office
automation, information management systems and related support
services. The Company also provides hardware integration and
fabrication services.
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 agencies
of the U.S. 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. Contract
costs, including indirect costs, on certain U.S. Government
contracts are subject to audit by the Defense Contract Audit Agency
(the "DCAA") before final acceptance. Revenues have been recorded
at amounts expected to be realized upon final settlement.
Anticipated contract losses are recognized in the period in which
they are identified.
FURNITURE AND EQUIPMENT:
Furniture and equipment are carried at cost. Depreciation is
provided using the straight-line method over the estimated useful
lives of the related assets, which range from 3 to 10 years.
Leasehold improvements are amortized over the shorter of the useful
lives of the assets or the lease term. Furniture and equipment
include assets under capital leases with a cost of $136,882 and
accumulated amortization of $98,240 and $84,874 at June 30, 2000
and 1999, 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>
STOCK OPTIONS:
In accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), the Company will only recognize compensation costs as a
result of the issuance of stock options to employees based on the
excess, if any, of the fair value of the underlying stock at the
date of grant or award (or at an appropriate subsequent measurement
date) over the amount the employee must pay to acquire the stock.
Therefore, the Company will not be required to recognize
compensation expense as a result of any grants of stock options to
employees at an exercise price that is equivalent to or greater
than fair value. The Company will also make pro forma disclosures,
as required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), of net
income or loss as if a fair value based method of accounting for
stock options had been applied instead if such amounts differ
materially from the historical amounts.
EARNINGS PER COMMON SHARE:
Basic earnings per common share is calculated by dividing net
income applicable to common stock by the weighted average number of
common shares outstanding during the period. The calculation of
diluted earnings per common share is similar to that of basic
earnings per common share, except that the denominator is increased
to include the number of additional common shares that would have
been outstanding if all potentially dilutive common shares,
principally those issuable upon the conversion of preferred stock
and the exercise of stock options, were issued during the period.
<TABLE>
The following table summarizes the calculation of basic and diluted
earnings per common share for each period:
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Numerators:
Net income (A) $ 239,295 $ 293,992
Deduct - preferred dividend requirements 8,480 8,480
---------- ----------
Net income applicable to common stock (B) $ 230,815 $ 285,512
========== ==========
Denominators:
Weighted average shares for basic net
earnings per common share (C) 3,171,743 3,190,103
Add effects of dilutive securities from
assumed:
Conversion of preference stock - 1,303
Exercise of stock options and application
of treasury stock method 41,560 16,315
---------- ----------
Weighted average shares for diluted net
earnings per common share (D) 3,213,303 3,207,721
========== ==========
Basic net earnings per common share (B / C) $ .07 $ .09
========== ==========
Diluted net earnings per common share (A / D) $ .07 $ .09
========== ==========
</TABLE>
F- 8
===============================================================================
<PAGE>
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, 2000 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 the years ended June 30, 2000
and 1999 or that they will have a significant affect at the
time they become effective.
RECLASSIFICATIONS:
Certain accounts in the 1999 financial statements have been
reclassified to conform to the 2000 presentation.
NOTE 2 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:
The Company grants credit to customers. Its primary customers are
agencies of the U.S. Government. Management believes that the
exposure to credit risk from agencies of the U.S. Government is
insignificant.
The Company maintains its cash balances primarily in one financial
institution. As of June 30, 2000, cash balances exceeded the Federal
Deposit Insurance Corporation limitation for coverage of $100,000 by
$207,334. Exposure to credit risk is reduced by placing such
deposits with a major financial institution and monitoring its credit
rating.
F- 9
===============================================================================
<PAGE>
NOTE 3 - CONTRACT RECEIVABLES:
<TABLE>
Contract receivables consist of the following at June 30, 2000 and 1999:
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Amounts billed, less allowance for doubtful
accounts of $7,000 $ 284,721 $ 930,751
Recoverable costs and accrued profit on
progress completed - not billed 314,799 129,534
Retentions, due upon completion of contracts 157,653 110,899
Recoverable costs subject to closure of
contracts - not billed, less allowance
for doubtful accounts of $19,000 534,867 278,020
---------- ----------
Totals $1,292,040 $1,449,204
========== ==========
</TABLE>
At June 30, 2000 recoverable costs and accrued profit on progress
completed - not billed consisted of amounts billed in July 2000. 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, 2000 are expected to be
collected in fiscal 2001 and 2002.
Recoverable costs subject to closure of contracts - not billed
consisted primarily of revenues recognized on specific delivery
orders as a result of actual indirect expense rates exceeding the
DCAA approved billing rates. These receivables will be due upon
closure of the specific delivery orders or the contracts. The Company
does not recognize revenues in excess of the allowable funding
limitations on each delivery order or contract.
NOTE 4 - OTHER RECEIVABLES AND RELATED PARTY TRANSACTIONS:
As of June 30, 1999, the Company had noninterest bearing receivables
totaling $124,924 from a company (the "Former Affiliate") in which
one of the Company's former directors held an ownership interest. The
receivable arose primarily from loans to the Former Affiliate and
expenses incurred on behalf of the Former Affiliate in connection
with the Former Affiliate's efforts to collect certain accounts
receivable.
During the period from July 1, 1999 to September 21, 1999, the
balance of the receivable from the Former Affiliate had increased to
approximately $179,000. On that date, the Company, the Former
Affiliate and the former director entered into certain agreements
resulting in the resignation of the former director and the issuance
of a promissory note by the Former Affiliate and the former director
with respect to the payment of the $179,000 balance due to the
Company. The note, which had a stated interest rate of 10%, was
originally scheduled to mature on December 31, 1999, was guaranteed
by the former director and was secured by certain of the Former
Affiliate's accounts receivable and 124,000 shares of the Company's
common stock owned by the former director.
F- 10
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<PAGE>
The note was not repaid on the date due and the Company foreclosed on
the 124,000 shares. The shares had a fair value of approximately
$124,000 at the time of the foreclosure and, accordingly, the balance
due from the Former Affiliate was reduced by that amount. In
addition, the Company, the Former Affiliate and the former director
entered into certain other agreements resulting in the issuance of a
promissory note by the Former Affiliate and the former director with
respect to the payment of the remaining $55,000 balance due to the
Company and the issuance by the Company of an option for the purchase
of 124,000 shares of its common stock by the former director at $1.00
per share (see Note 8). The new note, which also bears interest at
10% and is guaranteed by the former director and secured by certain
of the Former Affiliate's accounts receivable, was initially due on
June 30, 2000. As of June 30, 2000, the new note had a balance of
$51,779 and its due date had been extended to June 30, 2001.
NOTE 5 - LINE OF CREDIT:
At June 30, 2000, the Company had no outstanding borrowings under a
$500,000 revolving line of credit provided by a bank which expires on
October 15, 2000. Any borrowings under the line of credit will be
limited to 80% of qualifying contract receivables, will be
collateralized by substantially all of the assets of the Company and
will 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.
NOTE 6 - NOTES PAYABLE:
As of June 30, 2000, the Company had notes payable to a bank with an
aggregate principal balance of $115,542. These notes bear interest
at effective rates ranging from 10.25% to 10.50%. The terms of the
notes require the Company to maintain certain financial ratios.
Principal amounts due under these obligations in years subsequent to
June 30, 2000 are as follows:
<TABLE>
Fiscal Year
Ending Amount
----------- --------
<S> <C>
2001 $ 38,799
2002 40,447
2003 36,296
</TABLE>
NOTE 7 - LEASES:
The Company has noncancelable operating leases for its offices which
expire at various dates through April 2005. Certain leases provide
for increases in the minimum lease payments based on fluctuations in
various price indices. Rent expense under all operating leases
totaled $242,226 and $203,111 in 2000 and 1999, respectively.
The Company also leased certain computer equipment under capital
leases which expire in May 2003.
F- 11
===============================================================================
<PAGE>
<TABLE>
Annual future minimum lease payments under noncancelable operating
and capital leases with initial terms of one year or more as of
June 30, 2000 are as follows:
<CAPTION>
Operating Capital
Leases Leases
----------- --------
<S> <C> <C>
2001 $ 354,425 $ 18,063
2002 382,483 18,063
2003 357,594 16,557
2004 241,869 -
2005 126,752 -
----------- --------
Totals $ 1,463,123 52,683
===========
Less amounts representing interest 8,446
--------
Present value of minimum lease payments 44,237
Less current portion 13,296
--------
Long-term portion $ 30,941
========
</TABLE>
NOTE 8 - 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, 2000.
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, 2000, 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 2000
and 1999.
F- 12
===============================================================================
<PAGE>
CONVERTIBLE PREFERENCE STOCK:
The Company has been authorized to issue up to 2,000,000 shares of
preference stock, of which 139,561 shares were designated as Series
B 9% cumulative convertible callable nonvoting preference stock
($1.00 par value) and issued in 1996. Payments of dividends on the
preference stock are subordinate to the payment of dividends on the
4% preferred stock. Each share of preference stock, without any
cumulative dividends, had been convertible into two shares of
common stock until a maximum of 139,561 common shares had been
issued upon conversion of 69,781 shares of preference stock.
During 1999, a total of 864 shares of preference stock were
converted into 1,728 shares of common stock, and the maximum number
of shares had been converted. Accordingly, 69,781 shares of
preference stock remained outstanding as of June 30, 2000 and 1999.
Cash dividends paid on the preference stock totaled $15,691 and
$6,403, including dividends in arrears of $9,429 and $139 in 2000
and 1999, respectively. At June 30, 2000 and 1999, cumulative
dividends in arrears on the preference stock totaled $1,807 and
$11,236, 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.
INCENTIVE STOCK OPTION AND RESTRICTED STOCK PLAN:
On August 20, 1996, the Company's Board of Directors adopted the
SYS 1997 Incentive Stock Option and Restricted Stock Plan (the
"Plan"), which was modified and ratified by the Company's
stockholders during 1998. The Plan provides for grants by the
Board of Directors of incentive stock options to purchase up to
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. Restricted stock options for
the purchase of 54,387 and 50,645 shares were granted in 2000 and
1999, respectively. Incentive stock options for the purchase of
5,000 and 41,000 shares were granted in 2000 and 1999,
respectively. 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.
OTHER STOCK OPTIONS:
As explained in Note 4, during the year ended June 30, 2000, the
Company granted an option that is not covered under the Plan for
the purchase of 124,000 shares of its common stock to a former
director in connection with the restructuring of the Company's
short-term note receivable from the Former Affiliate and the former
director. The option is exercisable at $1.00 per share and expires
on June 30, 2001. The Company has included a noncash charge of
$13,640 in general and administrative expenses based on the
estimated fair value of the option at the date of grant. The fair
value of the option was determined based on the provisions of SFAS
123 using the Black-Scholes option-pricing model.
F- 13
===============================================================================
<PAGE>
ADDITIONAL REQUIRED DISCLOSURES RELATED TO STOCK OPTIONS:
<TABLE>
The following table summarizes certain information regarding stock
options at June 30, 2000 and 1999:
<CAPTION>
2000 1999
-------------------- --------------------
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 492,445 $.71 552,300 $.68
Options granted 183,387 $.94 91,645 $.66
Options cancelled (22,487) $.56 (115,014) $.71
Options exercised (36,486) $.16
-------- --------
Options outstanding at
end of year 653,345 $.78 492,445 $.71
======== ========
Option price range at end of year $.47 $.47
to $1.00 to $.87
Weighted average fair value of
options granted during the year $.62 $.50
======== ========
</TABLE>
<TABLE>
The following table summarizes information about stock options
outstanding at June 30, 2000, all of which were at fixed prices:
<CAPTION>
Weighted
Remaining
Number Contractual Exercise Options
Outstanding Life Price Exercisable
----------- ----------- ----------- -----------
<S> <C> <C> <C>
12,513 3.9 Years $ .47 12,513
61,387 4.1 Years .63 32,587
40,645 3.2 Years .68 40,645
255,000 3.0 Years .71 102,000
69,800 2.5 Years .75 69,800
60,000 2.6 Years .87 40,000
154,000 4.5 Years 1.00 127,874
</TABLE>
At June 30, 2000, the Company was authorized to grant incentive
stock options and restricted stock options for the purchase of
394,000 and 165,169 shares of common stock, respectively.
F- 14
===============================================================================
<PAGE>
Since the Company has adopted the disclosure-only provisions of
SFAS 123 and all of the stock options granted to its employees were
granted at the fair market value on the date of grant, no earned or
unearned compensatioin cost was recognized in the accompanying
financial statements for those stock options. Had compensation
cost been determined based on the fair value at the grant date for
all awards to employees 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>
2000 1999
---------- ----------
<S> <C> <C>
Net income - as reported $ 239,295 $ 293,992
Net income - pro forma 170,584 219,816
Basic and diluted earnings per common share -
as reported $ .07 $ .09
Basic and diluted earnings per common share -
pro forma $ .05 $ .07
</TABLE>
<TABLE>
The fair value of each option granted was estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 96% 94%
Risk-free interest rate 6.5% 6.0%
Expected lives 5 years 5 years
</TABLE>
NOTE 9 - INCOME TAXES:
<TABLE>
The provision for income taxes in 2000 and 1999 consists of the
following:
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Current:
Federal $ 135,700 $ 145,300
State 40,000 38,800
---------- ----------
175,700 184,100
---------- ----------
Deferred:
Federal 14,200 (40,200)
State 2,800 (9,800)
---------- ----------
17,000 (50,000)
---------- ----------
Totals $ 192,700 $ 134,100
========== ==========
</TABLE>
F- 15
===============================================================================
<PAGE>
<TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of June 30, 2000 and 1999 are shown below:
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Deferred tax assets due to accrued vacation
expense and allowance for doubtful accounts $ 69,000 $ 72,000
Deferred tax liabilities due to book and tax
depreciation expense differences (36,000) (22,000)
---------- ----------
Net deferred tax assets $ 33,000 $ 50,000
========== ==========
</TABLE>
<TABLE>
The expected Federal income tax provision, computed based on the
Company's pre-tax income in 2000 and 1999 and the statutory Federal
income tax rate, is reconciled to the actual tax provision reflected
in the accompanying financial statements as follows:
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Expected tax provision at statutory rates $ 146,900 $ 145,500
Decrease resulting from change in valuation
allowance on net deferred Federal tax assets (40,000)
Other 3,000 (400)
---------- ----------
Totals $ 149,900 $ 105,100
========== ==========
</TABLE>
NOTE 10- DEFINED CONTRIBUTION PLANS:
The Company sponsors defined contribution plans for the benefit of
those employees that meet the eligibility requirements. During 2000
and 1999, the Company sponsored a deferred savings and profit sharing
plan (the "401(k) Plan") under Section 401(k) of the Internal Revenue
Code (the "Code"). Participating employees make voluntary
contributions to the 401(k) Plan. The Company also makes
discretionary contributions to the 401(k) Plan. All contributions
are subject to certain limits set forth in the Code. The Company had
agreed to match 50% of each employee's annual contributions, provided
the matching amount did not exceed 3% of the employee's annual
compensation. Contributions to the 401(k) Plan by the Company
totaled $40,968 and $73,099 in 2000 and 1999, respectively.
On July 1, 1999, the Board of Directors restructured the Company's
defined contribution plans and, among other things, established an
Employee Stock Ownership Plan (the "ESOP") for the benefit of those
employees that meet the eligibility requirements. In addition, the
Board of Directors authorized the elimination of the matching
contributions to the 401(k) Plan effective as of January 1, 2000.
F- 16
===============================================================================
<PAGE>
During 2000, the Board of Directors authorized the Trustee of the
ESOP to purchase 130,060 shares of the Company's outstanding common
stock (including the purchase of 107,000 shares from one of the
Company's directors) for $130,060 or $1.00 per share. The purchase
price was based on the estimated fair value of the shares as
determined through an independent appraisal. The ESOP financed the
purchase of the common stock through loans from the Company bearing
interest at 10% that have no specific due dates. The common stock
held by the ESOP is released for allocation to the participating
employees as contributions are made at the discretion of the Company.
The Company accounts for the contributions to the ESOP based on the
fair value of the common stock at the time the shares are released
and reflects the cost of the unreleased shares as unearned ESOP
compensation, which is shown separately as a reduction of
stockholders' equity in the balance sheet. The Company charged
$45,137 to compensation expense for the fair value of 45,137 shares
of common stock released to the ESOP on a discretionary basis for
allocation to employees during 2000, and it has reflected the cost of
$84,923 for the 84,923 unallocated shares as unearned ESOP
compensation in the accompanying balance sheet as of June 30, 2000.
NOTE 11- CONTINGENCIES:
The Company is a party to a legal proceeding. In the opinion of
management, this action is routine in nature and will not have any
material adverse effect on the Company's financial statements in
subsequent years.
NOTE 12- FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's material financial instruments at June 30, 2000 for
which disclosure of estimated fair value is required by certain
accounting standards consisted of cash, contract and other
receivables, accounts payable and notes payable. In the opinion of
management, (i) cash, contract and other receivables and accounts
payable were carried at values that approximated their fair values
because of their liquidity and/or their short-term maturities and
(ii) notes payable were carried at values that approximated their
fair values because they had interest rates equivalent to those
currently prevailing for financial instruments with similar
characteristics.
NOTE 13- SUBSEQUENT EVENTS:
During July 2000, the Board of Directors agreed to grant options,
effective as of June 30, 2001, to purchase 589,707 shares of common
stock to specific employees subject to their ability to meet certain
performance standards during the year ending June 30, 2001. These
options will not be covered under the Plan (see Note 8).
* * *
F- 17
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<PAGE>
