<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report Under Section 13 or 15(d) of The Securities Exchange
- ----- Act of 1934
For the quarterly period ended March 25, 2000
------------------------------
Transaction Report Under Section 13 or 15(d) of the Securities Exchange Act
For the transition period from ___________________ to _____________________
Commission File Number 0-4169
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SYS
- -------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
California 95-2467354
- -------------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9620 Chesapeake Drive, Suite 201, San Diego, California 92123
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(858) 715-5500
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,112,732 SHARES OF COMMON
STOCK, WITHOUT PAR VALUE, AS OF APRIL 30, 2000.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
<S> <C>
Item 1. Financial Statements
Report of Independent Public Accountants...............................................3
Condensed Balance Sheet (unaudited)
March 25, 2000................................................................4
Condensed Statements of Income (unaudited)
Three Months and Nine Months Ended March 25, 2000
and Three Months and Nine Months Ended March 27, 1999.........................5
Condensed Statements of Cash Flows (unaudited)
Nine Months Ended March 25, 2000
and Nine Months Ended March 27, 1999..........................................6
Notes to Condensed Financial Statements (unaudited)....................................7
Item 2. Management's Discussion and Analysis of Financial Condition
Results of Operations
Description of Business.......................................................9
Results of Operations........................................................11
Liquidity and Capital Resources..............................................11
Impact of the Year 2000......................................................12
Item 2a. Factors Which May Affect Future Results...............................................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................15
Item 2. Changes in Securities.................................................................15
Item 3. Defaults Upon Senior Securities.......................................................15
Item 4. Submission of Matters to a Vote of Security Holders...................................15
Item 5. Other Information.....................................................................16
Item 6. Exhibits and Reports on Form 8-K......................................................17
</TABLE>
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
SYS
We have reviewed the accompanying condensed balance sheet of SYS as of March
25, 2000, and the related condensed statements of income for the three and
nine months ended March 25, 2000 and cash flows for the nine months ended
March 25, 2000. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review of the condensed financial statements referred to above,
we are not aware of any material modifications that should be made to the
accompanying financial statements for them to be in conformity with generally
accepted accounting principles.
The accompanying condensed statements of income for the three and nine months
ended March 27, 1999 and cash flows for the nine months ended March 27, 1999
were not audited or reviewed by us and, accordingly, we do not express an
opinion or any other form of assurance on them.
/s/ J. H. Cohn LLP
--------------------
J.H. COHN LLP
San Diego, California
May 8, 2000
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYS
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
03/25/00
-----------
(Unaudited)
ASSETS
- --------------------------------------------------------------------
<S> <C>
Current assets:
Cash $ 5,000
Contract receivables, net 1,386,000
Deferred tax assets 50,000
Other current assets 133,000
-----------------
Total current assets 1,574,000
Furniture and equipment, net 239,000
Other assets 27,000
-----------------
$ 1,840,000
=================
LIABILITIES & STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------
Current liabilities:
Note payable to bank under line of credit $ 46,000
Accounts payable 49,000
Accrued payroll and related taxes 250,000
Income taxes payable 68,000
Other accrued liabilities 15,000
Current portion of other notes payable 57,000
Current portion of capital lease obligations 12,000
-----------------
Total current liabilities 497,000
Other notes payable, net of current portion 9,000
Capital lease obligations, net of current portion 35,000
-----------------
Total liabilities 541,000
-----------------
Stockholders' equity:
4% convertible preferred stock; 110,000 shares issued and outstanding 55,000
9% convertible preference stock; 69,781 shares issued and outstanding 70,000
Common stock; 3,112,732 shares issued and outstanding 494,000
Retained earnings 680,000
-----------------
Total stockholders' equity 1,299,000
-----------------
$ 1,840,000
=================
</TABLE>
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<PAGE>
SYS
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------------- --------------------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Contract revenues $ 1,943,000 $ 1,873,000 $ 5,371,000 $ 5,605,000
---------------- ----------------- ----------------- -----------------
Costs and expenses:
Contract costs 1,613,000 1,534,000 4,456,000 4,502,000
General and administrative 176,000 235,000 606,000 775,000
---------------- ----------------- ----------------- -----------------
1,789,000 1,769,000 5,062,000 5,277,000
---------------- ----------------- ----------------- -----------------
Income from operations 154,000 104,000 309,000 328,000
---------------- ----------------- ----------------- -----------------
Other (income) expenses:
Interest income 0 0 (3,000) 0
Interest expense 6,000 5,000 12,000 20,000
---------------- ----------------- ----------------- -----------------
6,000 5,000 9,000 20,000
---------------- ----------------- ----------------- -----------------
Income before income taxes 148,000 99,000 300,000 308,000
Provision for income taxes 51,000 26,000 90,000 77,000
---------------- ----------------- ----------------- -----------------
Net income 97,000 73,000 210,000 231,000
Preferred dividend requirements 3,000 3,000 7,000 7,000
---------------- ----------------- ----------------- -----------------
Net income applicable to common stock
94,000 70,000 203,000 224,000
Retained earnings at beginning of period
710,000 469,000 601,000 315,000
Effect of acquisition and retirement of
common stock (124,000) 0 (124,000) 0
---------------- ----------------- ----------------- -----------------
Retained earnings at end of period $ 680,000 $ 539,000 $ 680,000 $ 539,000
================ ================= ================= =================
Basic net earnings per common share $ 0.03 $ 0.02 $ 0.06 $ 0.07
================ ================= ================= =================
Diluted net earnings per common share $ 0.03 $ 0.02 $ 0.06 $ 0.07
================ ================= ================= =================
Weighted average number of
common shares 3,174,732 3,173,518 3,217,299 3,165,185
================ ================= ================= =================
</TABLE>
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<PAGE>
SYS
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
----------------------------------------------
March 25, March 27,
2000 1999
-------------------- -------------------
<S> <C> <C>
Operating activities:
Net income $ 210,000 $ 231,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 65,000 43,000
Changes in operating assets and liabilities:
Contract receivables 63,000 35,000
Receivables from related party 0 108,000
Other current assets (94,000) 70,000
Other assets (11,000) 0
Accounts payable (344,000) (204,000)
Accrued payroll and related taxes (80,000) (9,000)
Income taxes payable (61,000) 47,000
Other accrued liabilities (19,000) (2,000)
-------------------- -------------------
Net cash provided by (used in) operating activities (271,000) 319,000
-------------------- -------------------
Investing activities -- acquisition of furniture and equipment (63,000) (43,000)
-------------------- -------------------
Financing activities:
Proceeds from line of credit borrowings 7,122,000 5,535,000
Payments on line of credit borrowings (7,076,000) (5,654,000)
Payments on other notes payable and capital lease obligations (43,000) (40,000)
Payments of preferred stock dividends (1,000) (1,000)
Payments of preference stock dividends (6,000) (6,000)
Proceeds from issuance of shares of common stock 0 2,000
-------------------- -------------------
Net cash used in financing activities (4,000) (164,000)
-------------------- -------------------
Increase (decrease) in cash (338,000) 112,000
Cash at beginning of period 343,000 28,000
-------------------- -------------------
Cash at end of period $ 5,000 $ 140,000
==================== ===================
Supplemental disclosure of cash flow data:
Interest paid $ 12,000 $ 20,000
==================== ===================
Income taxes paid $ 51,000 $ 19,000
==================== ===================
</TABLE>
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) In the opinion of the Registrant, the unaudited financial
information in this report reflects all adjustments, consisting only of
normal recurring accruals, which are considered necessary to a fair
presentation of its financial position as of March 25, 2000 and the results
of its operations and cash flows for the periods shown. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC regulations. It is suggested that these
financial statements be read in conjunction with the audited financial
statements included in the Registrant's Report on Form 10-KSB for the fiscal
year ended June 30, 1999.
(2) Earnings per common share: Effective June 30, 1998, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 128, EARNINGS
PER SHARE ("SFAS 128"), which replaced the presentation of "primary" and
"fully-diluted" earnings per common share required under previously promulgated
accounting standards with the presentation of "basic" and "diluted" earnings per
common share.
Basic net earnings per common share is calculated by dividing net
income applicable to common stock by the weighted average number of common
shares outstanding during the period. The calculation of diluted 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 that issuable upon the conversion of preferred stock and
the exercise of stock options, were issued during the period and the
numerator is adjusted to eliminate preferred and preference stock dividend
requirements.
The following table summarizes the calculation of basic and diluted
earnings per common share for each period:
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------------- -------------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Numerators:
Net income (A) $ 97,000 $ 73,000 $ 210,000 $ 231,000
Deduct - preferred and
preference dividend requirements
3,000 3,000 7,000 7,000
--------------- -------------- ------------- --------------
Net income applicable to
common stock (B) $ 94,000 $ 70,000 $ 203,000 $ 224,000
=============== ============== ============= ==============
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<PAGE>
Denominators:
Weighted average shares for
basic net earnings per common
share (C) 3,174,732 3,173,518 3,217,299 3,165,185
Add effects of dilutive
securities from assumed:
Conversion of preference stock 0 1,729 0 1,729
Exercise of stock options 78,038 9,270 55,199 9,225
--------------- -------------- ------------- --------------
Weighted average shares for
diluted net earnings per common
share (D) 3,252,770 3,184,517 3,272,498 3,176,139
=============== ============== ============= ==============
Basic net earnings per common
share (B/C) $ 0.03 $ 0.02 $ 0.06 $ 0.07
=============== ============== ============= ==============
Diluted net earnings per common
share (A/D) $ 0.03 $ 0.02 $ 0.06 $ 0.07
=============== ============== ============= ==============
</TABLE>
(3) The results of operations for the quarter ended March 25, 2000, are not
necessarily indicative of the results to be expected for the full year.
(4) The Company's fiscal year runs from July 1 through June 30. The Company
uses the 5-4-4 weeks per period method for each quarter; periods one (July) and
twelve (June) may vary slightly in the actual number of days due to the
beginning and end of each fiscal year.
(5) During the quarter ended March 25, 2000, the Company acquired
124,000 shares of its common stock in partial settlement of an outstanding
receivable from a former Board member. The shares were then retired
resulting in a nominal charge to common stock and a charge of $124,000 to
retained earnings during the quarter ended March 25, 2000.
(6) On March 28, 2000, the Company was served notice that it was named
in a lawsuit alleging breach of a factoring contract. The Company does not
believe it was a party to such contract and, accordingly, believes it has no
liability in this matter. However, at this time, the Company is not able to
predict the outcome of this litigation and can provide no assurance that the
Company will not incur substantial and protracted litigation costs.
(7) The Company maintains a $500,000 revolving credit facility with
Scripps Bank which matures on October 15, 2000. The loan is secured by all
the Company's assets including contract receivables. Scripps advances funds
requested by the Company of up to 80% of the Company's billed contract
receivables which are less than 90 days old. Scripps charges an interest rate
of 1.5% over prime.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH DESCRIBE
RISKS AND UNCERTAINTIES INVOLVING THE COMPANY. SUCH FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS REGARDING FUTURE
EVENTS AND THE COMPANY'S PLANS AND EXPECTATIONS. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS INCLUDING, BUT NOT LIMITED TO,
THOSE DISCUSSED HEREIN.
DESCRIPTION OF BUSINESS
The Company provides management and technical services in systems planning,
management and analysis, systems engineering, naval architecture, marine
engineering, ordnance engineering, logistics analysis and engineering,
operations analysis, design development, reliability engineering and analysis,
hazardous materials reduction studies, computer systems analysis, office
automation, information management systems and related support services. The
Company also provides hardware integration and fabrication.
The Company was formed and incorporated in the State of California in 1966
as Systems Associates, Inc. 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. It became a public corporation in 1968, and engaged in systems
analysis, systems engineering, computer services and software for Government and
industry. In addition to providing these services, the Company conducted other
business activities in computer network operations and software applications,
water resources development and management, and in engineering services for
sanitary waste development and construction management, which it subsequently
(1975) sold to other companies. The Company corporate offices were moved to San
Diego, California in February 19, 1984, from Long Beach, California.
The Company currently has three principal contracts with the U. S.
Navy. These prime contracts are Underway Replenishment; Management, Planning and
Administrative; and Naval Architecture and Marine Engineering.
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. This program provides in-service
engineering support to the U.S. Navy Fleet. The Company is continuing its
support for the research and development project to design and build a full size
ship mock-up of a missile rearming system. An Aegis Cruiser Vertical Launch Test
System was fitted with a full scale mock-up capable of demonstrating the
rearming and strikedown system feasibility for replenishing the Navy Standard
Missile and the shipboard Tomahawk missile system while underway at sea. This
project continues to refine the detail design. Shipboard technical assistance
continues to gain strength and is the basis for continued business confidence in
the coming year. Due to the declining number of Underway Replenishment Ships in
the active U.S. Navy fleet and the transfer of many of these assets to the
Military Sealift Command (MSC), a significant upgrade or backfit program has
developed to extend the serviceable life of these ships. The Company is playing
a major role in this program including design, asset procurement, shipboard
installation and the subsequent changes to the technical documentation. The
Company also has a key role in developing the UNREP depot repair capability for
selected equipments.
The Management, Planning and 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 53% of the Company's revenue so far in fiscal year 2000.
This program supports the U.S.
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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 program has received
customer recognition for its 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's largest customer on this contract is the Ship Self Defense
Department of PHD NSWC. Along with our Associate Subcontractor, John J. McMullen
Associates, Inc. (JJMA), the Company provides extensive support for Ship Self
Defense Systems in the areas of weapon systems installation design, planning and
coordination. The Company is now supporting a new Army Navy Literage Procurement
Program providing logistics engineering services to the Naval Facilities
Engineering Command.
The Company was awarded a three-year subcontract on August 2, 1999 from
Santa Barbara Applied Research, Inc. to continue its 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 also provides other financial
management support including case closure processing support to PMS400.
The General Services Administration (GSA) has awarded the Company two
contracts. The first contract awarded is for Information Technologies (IT). The
other contract is for Financial Management Services. The Company has a Blanket
Purchase Agreement (BPA) in place at SPAWAR headquarters in San Diego for the IT
contract. The Company has been successful in developing new customers and is
currently supporting the NAWFAC Information Technology Center and the Navy
SEABEE Logistics Center using the GSA contracts.
The Company launched an Electronic Records Management (ERM) Division in the
last quarter of fiscal year 1999. This division is expected to grow considerably
over the next year and is one of the reasons for the increased use of the
Company's GSA contracts. This 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 booked its first
revenue in the first quarter of fiscal year 2000.
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RESULTS OF OPERATIONS
The Company revenue for this quarter is about 4% more than those in the
same quarter in FY 1999. For the first nine months of FY 2000, revenue decreased
by approximately 4% over the prior year's same period. The primary reason for
the decline in revenue is a reduction in work from our subcontractors. The
decline in revenue has occurred despite the Company's 19% increase in direct
labor. Revenue in the third quarter of FY 2000 was 14% and 13% higher than in
the first and second quarters of the year, respectively.
Total contract and general and administrative expenses were 94% as a
percentage of contract revenue for the first nine months of FY 2000 and FY 1999,
respectively. Interest expense is lower in FY 2000 due to decreased borrowing
from the credit facility.
Income from operations has slightly declined to 5.75% from 5.85% for
the first nine months of FY 2000 and FY 1999, respectively. Net income for the
first nine months of FY 2000 is $210,000 as compared to $231,000 for the same
period in the prior year. The reason for the lower net income for the first six
months is mainly attributable to unallowable costs. The negotiated contract
backlog was approximately $4,970,000 at the end of the third quarter.
The outstanding balance on the Company's revolving line of credit with
Scripps Bank was $46,000 at March 25, 2000. At the end of the same period in FY
1999, the line of credit balance was at zero.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital resources are used to provide for the
Company's ongoing operations, which include, but are not limited to,
operating activities and purchases of fixed assets.
The Company had contract receivables (net) of $1,386,000 at the end of
the third quarter of FY 2000. For the same quarter in FY 1999, the contract
receivables (net) were $1,150,000.
The Company had accounts payable of $49,000 at the end of the third
quarter of FY 2000. For the same quarter in FY 1999 the accounts payable were
$114,000. The payment status of these accounts payable is current.
The Company maintains a $500,000 revolving credit facility with Scripps
Bank which matures on October 15, 2000. The loan is secured by all the Company's
assets including contract receivables. Scripps advances funds requested by the
Company of up to 80% of the Company's billed contract receivables which are less
than 90 days old. Scripps charges an interest rate of 1.5% over prime.
Although the Company had a cash balance of only $5,000 at March 25,
2000, management believes that the Company will have sufficient cash flow
from operations and funds available under the revolving credit agreement with
Scripps Bank to finance its operating and capital requirements through at
least the current fiscal year.
Several key factors indicating the Company's financial condition
include:
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<TABLE>
<CAPTION>
March 25, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Current ratio 3.17 2.05
Maximum debt to net worth 0.42 0.87
Net worth $1,299,000 $1,220,000
Net working capital $1,077,000 $1,039,000
Debt to total assets 29% 47%
Book value per common share $0.36 $0.34
</TABLE>
The Company continued to demonstrate improvements in the above
financial factors during the first three quarters of fiscal year 2000. These
Company trends are positive, however, there can be no certainty that they will
continue to be positive. The current ratio is derived by dividing total current
assets by total current liabilities. Maximum debt to net worth is calculated by
dividing total liabilities (total current liabilities plus other liabilities) by
net worth. Net worth is total stockholders' equity. Net working capital is total
current assets less total current liabilities. Debt to total assets is total
liabilities divided by total assets. Book value per common share is
stockholders' equity related to common shares divided by the weighted average
number of common shares outstanding.
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 2a. FACTORS WHICH MAY AFFECT FUTURE RESULTS
Information contained in this Form 10-QSB should be studied carefully
by any potential investor while considering the following risk factors to the
Company.
1. LACK OF BUSINESS DIVERSIFICATION Essentially all the Company's
business at the present time is with the U.S. Navy. Even though the level of
business with its customers is growing and the Company has negotiated
multiple-year contracts, there is no certainty that budget changes in Congress
or the Defense Department will not seriously affect the Company.
2. DEPENDENCE ON KEY PERSONNEL The Company has a few key management,
project and technical personnel that are intimately involved in their functions
and have day to day relationships with critical customers. The Company is not
able to afford extra standby staff. As a result, at its current size, it would
be affected in an uncertain way if any of these personnel were to be lost to the
Company.
3. COMPETITION The Company has many competitors who vie for the same
customers as 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
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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 1,367,878 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.
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 penny stock to be any NASDAQ or non-NASDAQ equity security that has a market
price or exercise price of less than $5.00 per share and allow for the
enforcement against violators of the proposed rules.
In addition, unless exempt, the rules require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule prepared by the
Commission explaining important concepts
-13-
<PAGE>
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.
8. CONTROL BY OFFICERS AND DIRECTORS. As of March 25, 2000, Officers and
Directors of the Company own 41.0% or 1,275,978 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.
-14-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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.
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 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. While the Company believes it has no liability in this
matter, there can be no assurance that the Plaintiff 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 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On January 19, 2000, the Company held its 1999 Annual Meeting of
Shareholders. There were 3,236,732 shares eligible as of the record date and
2,624,148 shares were represented either in person or by proxy at the meeting.
The following matters were voted on at the meeting:
(a.) Proposal to elect the Directors pursuant to management's nominations.
This proposal was approved with 2,618,546 shares voting in favor, 5,602 shares
voting against, and 0 shares abstaining.
-15-
<PAGE>
(b.) Proposal to approve the appointment of J. H. Cohn LLP as the
independent public accountants for the corporation for its 2000 fiscal year.
This proposal was approved with 2,620,137 shares voting in favor, 300 shares
voting against, and 3,711 shares abstaining.
ITEM 5. OTHER INFORMATION
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
March 31, 2000, stock options for 16,387 common shares at $0.625 per share are
owed to outside directors.
Effective September 21, 1999, the Board of Directors elected Mr. Kameron
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 is
secured by the SEI receivables, Mowry's personal guarantee and common stock of
the Company held or controlled by Mowry. The Note accrues interest at 10% per
annum and principal and interest were due on December 31, 1999. As of January 1,
2000, the Note was in default and the Company foreclosed 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.
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 Note
accrues interest at 10% per annum and principal and interest are due on June 30,
2000. 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.
Subsequent to March 25, 2000, the Company made its first contribution to 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.
-16-
<PAGE>
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 will receive a
one-third interest in LARRK and possible licensing and/or assignment of LARRK
technology rights. The Company will provide to LARRK $60,000 (paid at the rate
of $10,000 per month for six months), 100,000 shares of Company common stock,
office space and administrative support. LARRK must generate $200,000 in net
operating profit in the first 36 months to make the Company shares unrevocable.
If LARRK has met the $200,000 net operating profit goal in the first 36 months,
they will earn additional shares of Company common stock for net operating
profit over $200,000. The Company and LARRK have entered into discussions on a
more definitive agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On March 14, 2000, the Company filed an 8-K announcing that the Company
had signed a Letter of Intent with Mr. Guadolupe Torres, the Chairman and
principal shareholder of Systems Integration & Research, Inc. (SIR), to acquire
all shares in SIR.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYS
----------------------------
(Registrant)
Date: May 10, 2000 /s/ W. Gerald Newmin
------------------------------ -----------------------------
W. Gerald Newmin
Chief Executive Officer
-17-
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