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 September 30, 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
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(Exact Name of Small Business Issuer as Specified 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, Suite 201, San Diego, California 92123
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(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:
3,162,732 shares of common stock, without par value, as of October 31, 2000.
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Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
Number
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet (unaudited)
September 30, 2000 . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Income (unaudited)
Three Months Ended September 30, 2000
and Three Months Ended September 25, 1999 . . . . . . . 4
Condensed Statements of Cash Flows (unaudited)
Three Months Ended September 30, 2000
and Three Months Ended September 25, 1999 . . . . . . . 5
Notes to Condensed Financial Statements (unaudited) . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Description of Business . . . . . . . . . . . . . . . . . . 8
Results of Operations . . . . . . . . . . . . . . . . . . . 10
Liquidity and Capital Resources . . . . . . . . . . . . . . 10
Item 2a. Factors Which May Affect Future Results . . . . . . . . . . 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 15
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYS
</TABLE>
<TABLE>
CONDENSED BALANCE SHEET
<CAPTION>
September 30,
2000
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(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash $ 18,000
Contract receivables, net 1,764,000
Other receivables 52,000
Deferred tax assets 33,000
Other current assets 87,000
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Total current assets 1,954,000
Furniture and equipment, net 338,000
Other assets 18,000
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$ 2,310,000
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank under line of credit $ 172,000
Accounts payable 116,000
Accrued payroll and related taxes 472,000
Income taxes payable 38,000
Other accrued liabilities 10,000
Current portion of other notes payable 37,000
Current portion of capital lease obligations 13,000
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Total current liabilities 858,000
Other notes payable, net of current portion 69,000
Capital lease obligations, net of current portion 24,000
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Total liabilities 951,000
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; 3,162,732 shares issued and outstanding 525,000
Unearned ESOP compensation (85,000)
Retained earnings 794,000
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Total stockholders' equity 1,359,000
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$ 2,310,000
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</TABLE>
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<PAGE>
SYS
<TABLE>
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three months ended
September 30, September 25,
2000 1999
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<S> <C> <C>
Contract revenues $ 2,234,000 $ 1,703,000
Costs and expenses:
Contract costs 1,872,000 1,415,000
General and administrative 249,000 205,000
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Totals 2,121,000 1,620,000
Income from operations 113,000 83,000
Other (income) expense:
Interest income (2,000) (2,000)
Interest expense 7,000 5,000
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Totals 5,000 3,000
Income before income taxes 108,000 80,000
Provision for income taxes 42,000 15,000
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Net income 66,000 65,000
Dividends on preferred and preference shares 3,000 3,000
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Net income applicable to common stock 63,000 62,000
Retained earnings at beginning of period 731,000 601,000
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Retained earnings at end of period $ 794,000 $ 663,000
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Basic earnings per common share $ 0.02 $ 0.02
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Diluted earnings per common share $ 0.02 $ 0.02
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Weighted average number of common shares 3,162,732 3,236,732
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</TABLE>
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SYS
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three months ended
September 30, September 25,
2000 1999
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<S> <C> <C>
Operating activities:
Net income $ 66,000 $ 65,000
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 27,000 14,000
Changes in operating assets and
liabilities:
Contract receivables (472,000) 172,000
Other receivables 0 (54,000)
Other current assets 13,000 (12,000)
Other assets (3,000) 0
Accounts payable (35,000) (228,000)
Accrued payroll and related taxes 187,000 (61,000)
Income taxes payable (87,000) (102,000)
Other accrued liabilities (11,000) (9,000)
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Net cash used in operating activities (315,000) (215,000)
Investing activities-acquisition of furniture
and equipment (130,000) (13,000)
Financing activities:
Proceeds from line of credit borrowings 2,201,000 82,000
Payments on line of credit borrowings (2,029,000) (82,000)
Proceeds from (payments on) other notes
payable or capital leases (17,000) 19,000
Payments of preference stock dividends (3,000) (3,000)
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Net cash provided by financing activities 152,000 16,000
Net decrease in cash (293,000) (212,000)
Cash at beginning of period 311,000 343,000
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Cash at end of period $ 18,000 $ 131,000
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<FN>
Supplemental disclosure of cash flow data:
Interest paid $ 7,000 $ 5,000
Income taxes paid $ 131,000 $ 128,000
</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 September 30, 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, 2000.
(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 are 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 and the numerator is
adjusted to eliminate preferred and preference stock dividend requirements.
<TABLE>
The following table summarizes the calculation of basic and diluted
earnings per common share for each period:
<CAPTION>
Three months ended
September 30, September 25,
2000 1999
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<S> <C> <C>
Numerators:
Net income (A) $ 66,000 $ 65,000
Deduct - preference dividend requirements 3,000 3,000
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Net income applicable to common stock (B) $ 63,000 $ 62,000
Denominators:
Weighted average shares for basic net
earnings per common share (C) 3,162,732 3,236,732
Add effects of dilutive securities from
assumed:
Exercise of stock options 9,155 101
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Weighted average shares for diluted net
earnings per common share (D) 3,171,887 3,236,833
Basic net earnings per common share (B/C) $ 0.02 $ 0.02
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Diluted net earnings per common share (A/D) $ 0.02 $ 0.02
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</TABLE>
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(3) The results of operations for the quarter ended September 30, 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) On March 28, 2000, the Company was served notice that it was named in
a lawsuit alleging breach of factoring contracts. The Company does not believe
it was a party to such contracts 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. See Part II, Item 1 for
further details.
(6) The Company maintains a $550,000 revolving credit facility with
Scripps Bank which matures on December 5, 2000. The loan is collateralized by
all of 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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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 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.
The Company currently 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
The Company currently has three principal contracts with the U. S. Navy.
These prime contracts are Underway Replenishment; Management, Planning,
Analytical 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 has accounted for about 15%
of the Company's revenue so far in fiscal year 2001. 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, Analytical and Administrative (MPAA) Program is
a continuation of a previous contract and its base year started on
February 1, 2000. In addition to the base year, this contract has four option
years. This program has accounted for about 48% of the Company's revenue so
far in fiscal year 2001. 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 MPAA 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 has
accounted for about 11% of the Company's revenue so far in fiscal year 2001.
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 has
accounted for about 2% of the Company's revenue so far in fiscal year 2001.
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 has accounted for about 3% of the Company's
revenue so far in fiscal year 2001. 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 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.
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<PAGE>
The Company's Electronic Records Management (ERM) group continues to bring
in additional work. This program has accounted for about 2% of the Company's
revenue so far in fiscal year 2001. 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 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. "C4I" is the military
term for Command, Control, Communication, Computer and Intelligence. This
Division is headquartered in San Diego, with a small office near Pensacola,
Florida. The new SYS C4I Division will provide top-level C4I system
engineering services; system architecture design; advanced concept development;
test and evaluation; effects-based operation planning, execution and
assessment; program management and business development support; organizational
management analysis; and information technology and information operations (IO)
support. The initial customer base includes SPAWAR Systems Center San Diego
and Program Executive Office Strike Weapons and Unmanned Aviation. Division
personnel will work closely 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, and other services and Joint
Agencies. This Division has accounted for about 15% of the Company's revenue
so far in fiscal year 2001.
RESULTS OF OPERATIONS
The Company revenue for this quarter is more than 31% more than those in
the same quarter in FY 2000. The primary reasons for the increase in revenue
are the addition of the C4I Division and increased work on the MPAA and NAME
contracts.
Total contract and general and administrative expenses were 95% as a
percentage of contract revenue for the first three months of FY 2001 and
FY 2000. Interest expense is higher due to the increased use of the Company's
credit facility. The reason for the increased use of the credit facility is
due to the cash flow demands associated with the growth of the Company.
Income from operations, as a percentage of revenue, has increased slightly
to 5.06% for the first three months of FY 2001 as compared to 4.87% for
FY 2000. Net income for the quarter is $66,000 as compared to $65,000 for this
quarter in the prior year. The negotiated contract backlog was approximately
$3,582,000 at the end of the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company had contract receivables (net) of $1,764,000 at the end of the
first quarter of FY 2001. For the same quarter in FY 2000, the contract
receivables (net) were $1,277,000. The reason for the increase in contract
receivables is due to the Company's increased revenue and slower payments from
some of the Company's prime contractors.
The Company had accounts payable of $116,000 at the end of the first
quarter of FY 2001. For the same quarter in FY 2000 the accounts payable were
$165,000. The payment status of these accounts payable is current.
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The outstanding balance on the Company's revolving line of credit with
Scripps Bank was $172,000 at the end of the first quarter of FY 2001. At the
end of the same period in FY 2000, the line of credit balance was at zero.
The reason for the increased usage of the credit facility was discussed above.
The Company's primary source of liquidity has been its $500,000 revolving
credit facility under a loan agreement with Scripps Bank that was due to mature
on October 15, 2000. Scripps extended the revolving credit facility to
December 5, 2000 and increased it to $550,000. The loan is collateralized by
all of 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. The Company has entered into discussions with Scripps Bank
regarding the annual extension of the credit facility.
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. Long term liquidity depends on the Company's ability
to maintain and grow its current business base.
<TABLE>
Several key factors indicating the Company's financial condition include:
<CAPTION>
September 30, 2000 June 30, 2000
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<S> <C> <C>
Current ratio 2.28 2.87
Maximum debt to net worth 0.70 0.60
Net worth $1,359,000 $1,296,000
Net working capital $1,096,000 $1,189,000
Debt to total assets 41% 38%
Book value per common share $ 0.39 $ 0.37
</TABLE>
These Company trends may be 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.
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.
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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.
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.
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The Commission has recently adopted regulations under such Act which
define a penny stock to be any NASDAQ or non-NASDAQ equity security that has a
market price or exercise price of less than $5.00 per share and allow for the
enforcement against violators of the proposed rules.
In addition, unless exempt, the rules require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule prepared by the
Commission explaining important concepts involving a penny stock market, the
nature of such market, terms used in such market, the broker/dealer's duties to
the customer, a toll-free telephone number for inquiries about the
broker/dealer's disciplinary history, and the customer's rights and remedies in
case of fraud or abuse in the sale.
Disclosure also must be made about commissions payable to both the
broker/dealer and the registered representative, current quotations for the
securities and, if the broker/dealer is the sole market maker, the
broker/dealer must disclose this fact and its control over the market.
Monthly statements must be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stocks. While many NASDAQ stocks are covered by the proposed definition
of penny stock, transactions in NASDAQ stocks are exempt from all but the sole
market-maker provision for (i) issuers with $2,000,000 in tangible assets
($5,000,000 if the issuer has not been in continuous operation for three
years), (ii) transactions in which the customer is an institutional accredited
investor and (iii) transactions that are not recommended by the broker/dealer.
In addition, transactions in a NASDAQ security directly with the NASDAQ market
maker for such securities, are subject only to the sole market-maker
disclosure, and the disclosure with regard to commissions to be paid to the
broker/dealer and the registered representatives.
Finally, all NASDAQ securities are exempt if NASDAQ raised its
requirements for continued listing so that any issuer with less than $2,000,000
in net tangible assets or 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 September 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 September 30, 2000, the Former Affiliate owed the
Company approximately $52,000 for these services. The Former Affiliate's debt
has been converted to a note 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.
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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 (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 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
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 June 30, 2000, stock options for 25,387 common shares
at $0.625 per share are owed to outside directors.
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Effective July 1, 2000, the Board of Directors approved a new compensation
plan for the outside directors of the Company. Under the new compensation
plan, each outside director will receive $1,000 per Board of Director meeting,
in cash or common stock at the discretion of the Company. In addition, each
outside director will receive stock options for 1,000 shares of common stock
for each Board of Directors meeting attended by the director. For the
Company's first quarter (July through September) the stock option price is
$0.88 per share. The stock option price will be reviewed quarterly.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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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: November 10, 2000 /s/ W. Gerald Newmin
----------------- ----------------------------------------
W. Gerald Newmin
Chief Executive Officer
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