SYS
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts
in thousands, except par value amounts)
|
|
|
|
September
28, 2007
|
|
|
June
30,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,399
|
|
|
$
|
2,770
|
|
Accounts
receivable, net
|
|
|
17,518
|
|
|
|
16,321
|
|
Inventories,
net
|
|
|
562
|
|
|
|
599
|
|
Prepaid
expenses
|
|
|
475
|
|
|
|
603
|
|
Deferred
taxes
|
|
|
761
|
|
|
|
275
|
|
Total
current assets
|
|
|
21,715
|
|
|
|
20,568
|
|
|
|
|
|
|
|
|
|
|
Furniture,
equipment and leasehold improvements, net
|
|
|
2,068
|
|
|
|
1,951
|
|
Intangible
assets, net
|
|
|
5,855
|
|
|
|
6,111
|
|
Goodwill
|
|
|
23,107
|
|
|
|
23,477
|
|
Other
assets
|
|
|
250
|
|
|
|
276
|
|
Total
assets
|
|
$
|
52,995
|
|
|
$
|
52,383
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
604
|
|
|
$
|
--
|
|
Accounts
payable
|
|
|
4,806
|
|
|
|
5,270
|
|
Accrued
payroll and related expenses
|
|
|
2,656
|
|
|
|
3,887
|
|
Income
taxes payable
|
|
|
1,192
|
|
|
|
194
|
|
Other
accrued liabilities
|
|
|
1,257
|
|
|
|
1,474
|
|
Current
portion of note payable
|
|
|
63
|
|
|
|
--
|
|
Deferred
revenue
|
|
|
1,692
|
|
|
|
1,552
|
|
Total
current liabilities
|
|
|
12,270
|
|
|
|
12,377
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable, related party
|
|
|
975
|
|
|
|
975
|
|
Convertible
notes payable
|
|
|
2,150
|
|
|
|
2,150
|
|
Note
payable, net of current portion
|
|
|
437
|
|
|
|
500
|
|
Other
long-term liabilities
|
|
|
64
|
|
|
|
69
|
|
Deferred
revenue, net of current portion
|
|
|
37
|
|
|
|
210
|
|
Deferred
taxes
|
|
|
1,023
|
|
|
|
1,023
|
|
Total
liabilities
|
|
|
16,956
|
|
|
|
17,304
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
4%
convertible preferred stock, $.50 par value; 250 shares
|
|
|
|
|
|
|
|
|
authorized;
none issued or outstanding
|
|
|
--
|
|
|
|
--
|
|
9%
preference stock, $1.00 par value; 2,000 shares
|
|
|
|
|
|
|
|
|
authorized;
none issued or outstanding
|
|
|
--
|
|
|
|
--
|
|
Common
stock, no par value; 48,000 shares authorized;
|
|
|
|
|
|
|
|
|
and
19,425 and 19,232 shares issued and outstanding
|
|
|
|
|
|
|
|
|
as
of September 28, 2007 and June 30, 2007, respectively
|
|
|
36,356
|
|
|
|
35,903
|
|
Accumulated
deficit
|
|
|
(317
|
)
|
|
|
(824
|
)
|
Total
stockholders’ equity
|
|
|
36,039
|
|
|
|
35,079
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
52,995
|
|
|
$
|
52,383
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
SYS
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE
MONTHS ENDED SEPTEMBER 28, 2007 AND SEPTEMBER 29,
2006
(UNAUDITED)
(amounts
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
20,510
|
|
|
$
|
16,243
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
14,900
|
|
|
|
12,530
|
|
Selling,
general and administrative expenses
|
|
|
3,377
|
|
|
|
3,054
|
|
Research,
engineering and development expenses
|
|
|
1,089
|
|
|
|
881
|
|
Total
operating costs and expenses
|
|
|
19,366
|
|
|
|
16,465
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
1,144
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
(39
|
)
|
|
|
(37
|
)
|
Interest
expense
|
|
|
128
|
|
|
|
197
|
|
Total
other (income) expense
|
|
|
89
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
1,055
|
|
|
|
(382
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
|
529
|
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
526
|
|
|
$
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,317
|
|
|
|
15,405
|
|
Diluted
|
|
|
19,396
|
|
|
|
15,405
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
SYS
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE
MONTHS ENDED SEPTEMBER 28, 2007 AND SEPTEMBER 29,
2006
(UNAUDITED)
(amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
526
|
|
|
$
|
(115
|
)
|
Adjustments
to reconcile net income (loss) to net cash (used in) provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
474
|
|
|
|
441
|
|
Share-based
compensation expense
|
|
|
117
|
|
|
|
114
|
|
Accretion
of debt discount
|
|
|
--
|
|
|
|
14
|
|
Deferred
taxes
|
|
|
--
|
|
|
|
(267
|
)
|
Bad
debt expense
|
|
|
9
|
|
|
|
6
|
|
Stock
contributed to employee benefit plan
|
|
|
245
|
|
|
|
248
|
|
Loss
(gain) on disposition of equipment
|
|
|
1
|
|
|
|
(4
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,206
|
)
|
|
|
1,332
|
|
Inventories
|
|
|
37
|
|
|
|
52
|
|
Prepaid
expenses
|
|
|
128
|
|
|
|
10
|
|
Other
assets
|
|
|
21
|
|
|
|
--
|
|
Accounts
payable
|
|
|
(464
|
)
|
|
|
(480
|
)
|
Accrued
payroll and related expenses
|
|
|
(1,231
|
)
|
|
|
(508
|
)
|
Income
taxes payable
|
|
|
524
|
|
|
|
--
|
|
Other
accrued liabilities
|
|
|
122
|
|
|
|
(92
|
)
|
Other
long term liabilities
|
|
|
(5
|
)
|
|
|
--
|
|
Deferred
revenue
|
|
|
(33
|
)
|
|
|
43
|
|
Net
cash (used in) provided by operating activities
|
|
|
(735
|
)
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of furniture, equipment and leasehold improvements
|
|
|
(332
|
)
|
|
|
(256
|
)
|
Cash
paid for acquisitions
|
|
|
--
|
|
|
|
(19
|
)
|
Other
|
|
|
1
|
|
|
|
(29
|
)
|
Net
cash used in investing activities
|
|
|
(331
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings
from line of credit
|
|
|
5,180
|
|
|
|
9,651
|
|
Payments
on line of credit
|
|
|
(4,576
|
)
|
|
|
(10,202
|
)
|
Proceeds
from exercise of stock options and warrants
|
|
|
91
|
|
|
|
31
|
|
Net
cash provided by (used in) financing activities
|
|
|
695
|
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(371
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,770
|
|
|
|
2,106
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,399
|
|
|
$
|
2,076
|
|
SYS
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE
MONTHS ENDED SEPTEMBER 28, 2007 AND SEPTEMBER 29,
2006
(UNAUDITED)
(amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
Interest
paid
|
|
$
|
115
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
5
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
Acquisition
of capital leases
|
|
$
|
--
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
SYS
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Financial Statement Preparation and Significant Accounting
Policies:
The
accompanying unaudited condensed consolidated financial information of SYS
and
its subsidiaries (SYS or the Company) should be read in conjunction with the
consolidated financial statements and notes to consolidated financial
statements contained in our Annual Report on Form 10-K for the year ended
June 30, 2007 filed with the Securities and Exchange Commission (SEC). The
accompanying unaudited condensed financial information includes all subsidiaries
on a consolidated basis and all normal recurring adjustments which are
considered necessary by the Company's management for a fair presentation of
the
financial position, results of operations and cash flows for the periods
presented. However, these results are not necessarily indicative of results
for
a full fiscal year. All of the Company’s operations are primarily conducted in
the United States.
The
Company’s fiscal year is 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.
Use
of Estimates:
The
preparation of financial statements in conformity with Generally Accepted
Accounting Principles in the United States (US GAAP) requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In the future, the Company may realize actual
results that differ from the current reported estimates. The Company’s
significant estimates include those related to revenues and customer billings,
recovery of indirect costs, allowance for doubtful accounts, valuation of
long-lived assets including identifiable intangibles and goodwill, accounting
for income taxes including any related valuation allowance, contingencies,
and
share-based compensation.
Indirect
Expense Rate Variance:
For
interim reporting purposes, SYS applies overhead and selling, general and
administrative expenses as a percentage of direct contract costs based on annual
budgeted indirect expense rates. To the extent actual expenses for an
interim period are greater than the budgeted rates (unfavorable variance),
the
variance is deferred if management believes it is probable that the variance
will be absorbed by future contract activity. This probability
assessment includes projecting whether future indirect costs will be
sufficiently less than the annual budgeted rates or can be absorbed by seeking
increased billing rates applied on cost-plus-fee contracts. At the
end of each interim reporting period, management assesses the recoverability
of
any amount deferred to determine if any portion should be charged to
expense. In assessing the recoverability of variances deferred,
management takes into consideration estimates of the amount of direct labor
and
other direct costs to be incurred in future interim periods, the feasibility
of
modifications for provisional billing rates, and the likelihood that an approved
increase in provisional billing rates can be passed along to a
customer. Variances are charged to expense in the periods in which it
is determined that such amounts are not probable of recovery. As of September
28, 2007, the deferred unfavorable variance totaled $0.2 million.
Reclassifications:
Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period financial statement presentation. In particular,
allocable overhead costs that were previously reported for the three-month
period ended September 29, 2006 as selling, general and administrative expenses
were reclassified to costs of revenues in the amount of $24,000 and to research,
engineering and development expenses in the amount of $32,000. The
Company believes these reclassifications were immaterial to the overall
presentation of the accompanying financial statements.
2.
New Accounting Pronouncements:
On
July 1, 2007, the Company adopted the provisions of the Financial
Accounting Standards Board (“FASB”) Interpretation No. 48 (“
FIN
48”),
Accounting
for Uncertainty
in Income Taxes – an interpretation of FASB Statement No. 109,
which
provides a financial statement recognition threshold and measurement attribute
for a tax position taken or expected to be taken in a tax return. Under
FIN
48,
we may recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the
tax
position will be sustained on examination by the taxing authorities, based
on
the technical merits of the position. The tax benefits recognized in the
financial statements from such a position should be measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement.
FIN
48
also
provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, and income
tax disclosures. Upon adoption, we recognized a $19,000 charge to our beginning
accumulated deficit as a cumulative effect of a change in accounting principle.
See Note 10 – Income Tax.
In
May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 Definition
of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1
provides guidance on how to determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits.
FSP
FIN 48-1 is effective for the Company beginning July 1,
2007. The implementation of this standard had no significant impact on the
Company’s condensed consolidated financial statements.
In
September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value
Measurements. SFAS 157 prescribes a single definition of fair value as the
price
that would be received to sell an asset or paid to transfer a liability in
an
orderly transaction between market participants at the measurement date. The
accounting provisions of SFAS 157 will be effective for the Company beginning
July 1, 2008. The Company is in the process of determining the impact of this
statement on its consolidated financial statements.
3. Share-Based
Compensation:
The
Company has two stock plans that provide or have provided for the grant to
employees of stock options, permit the grant of non-statutory share-based awards
to paid consultants, and provide for the automatic grant of non-statutory
share-based awards to outside directors. The plans may have options with terms
of no more than ten years. The maximum terms of the options granted under these
plans have been seven years with a maximum vesting of five years. The Company
also has an employee stock purchase plan (ESPP) for employees to purchase its
common stock at a discount. The ESPP provides for enrollment on the first day
of
a six-month period in which the employees can elect payroll deductions for
the
purchase of the Company’s common stock. The exercise date of the ESPP is the
last day of the six-month period and the purchase price is 85% of the fair
market value of a share of common stock on the enrollment or exercise date,
whichever is lower.
The
Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123R”), effective July 1, 2005
using a modified prospective application, as permitted under SFAS 123R. Under
the modified-prospective-transition method, share-based compensation expense
recognized during the three months ended September 28, 2007 and September 29,
2006 includes stock options granted prior to, but not yet vested as of
July 1, 2005, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123 and the following items based
on the grant date values estimated in accordance with the provisions of SFAS
No.
123R: (a) stock options granted after June 30, 2005, (b) ESPP with offering
periods commencing subsequent to June 30, 2005 and (c) stock issued to
employees of the Company.
The
following table summarizes certain information regarding stock options for
the
three months ended and as of September 28, 2007 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
(Yrs)
|
|
|
Value
|
|
Balance
outstanding at June 30, 2007
|
|
|
2,132
|
|
|
$
|
2.49
|
|
|
|
|
|
|
|
Granted
|
|
|
324
|
|
|
|
2.19
|
|
|
|
|
|
|
|
Exercised
|
|
|
(102
|
)
|
|
|
1.25
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(32
|
)
|
|
|
3.40
|
|
|
|
|
|
|
|
Expired
|
|
|
(50
|
)
|
|
|
1.37
|
|
|
|
|
|
|
|
Balance
outstanding at September 28, 2007
|
|
|
2,272
|
|
|
$
|
2.52
|
|
|
|
2.78
|
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September 28, 2007
|
|
|
1,324
|
|
|
$
|
2.49
|
|
|
|
2.00
|
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a summary of the share-based compensation expense recognized by the
Company for the three months ended September 28, 2007 and September 29, 2006
(in
thousands):
|
|
2007
|
|
|
2006
|
|
Stock
options
|
|
$
|
68
|
|
|
$
|
62
|
|
Employee
stock purchase plan
|
|
|
49
|
|
|
|
52
|
|
Total
|
|
$
|
117
|
|
|
$
|
114
|
|
The
following table summarizes the weighted average assumptions used to estimate
the
value of share-based awards granted for the three months ended September 28,
2007 and September 29, 2006 for the Company’s stock option plan and employee
stock purchase plan:
|
|
Stock
Options
|
|
|
ESPP
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected
volatility
|
|
|
41.0
|
%
|
|
|
38.4
|
%
|
|
|
46.2
|
%
|
|
|
40.3
|
%
|
Risk-free
interest rate
|
|
|
4.4
|
%
|
|
|
4.9
|
%
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
Expected
lives (in years)
|
|
|
3.81
|
|
|
|
3.80
|
|
|
|
0.50
|
|
|
|
0.50
|
|
4.
Accounts Receivable:
Accounts
receivable consisted of the following (in thousands):
|
|
September
28,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Amounts
billed
|
|
$
|
8,517
|
|
|
$
|
8,600
|
|
Amounts
unbilled
|
|
|
9,439
|
|
|
|
8,150
|
|
Less
allowance for doubtful accounts
|
|
|
(438
|
)
|
|
|
(429
|
)
|
Totals
|
|
$
|
17,518
|
|
|
$
|
16,321
|
|
5.
Inventories:
Inventories
consisted of the following (in thousands):
|
|
September
28,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
Raw
materials, net
|
|
$
|
493
|
|
|
$
|
473
|
|
Finished
goods, net
|
|
|
69
|
|
|
|
126
|
|
|
|
$
|
562
|
|
|
$
|
599
|
|
6.
Furniture, Equipment and Leasehold Improvements:
Furniture,
equipment and leasehold improvements consisted of the following (in
thousands):
|
|
September
28,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
Furniture
and equipment
|
|
$
|
4,552
|
|
|
$
|
4,266
|
|
Leasehold
improvements
|
|
|
455
|
|
|
|
412
|
|
|
|
|
5,007
|
|
|
|
4,678
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(2,939
|
)
|
|
|
(2,727
|
)
|
Net
|
|
$
|
2,068
|
|
|
$
|
1,951
|
|
Depreciation
and amortization expense for furniture, equipment and leasehold improvements
was
$0.2 million for both three months ended September 28, 2007 and September 29,
2006.
7.
Intangible Assets and Goodwill:
Intangible
assets consisted of the following (in thousands):
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
(Yrs)
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
September
28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
9
|
|
|
$
|
2,550
|
|
|
$
|
(541
|
)
|
|
$
|
2,009
|
|
Trade
name
|
|
|
7
|
|
|
|
1,727
|
|
|
|
(480
|
)
|
|
|
1,247
|
|
Customer
relationships
|
|
|
9
|
|
|
|
3,254
|
|
|
|
(669
|
)
|
|
|
2,585
|
|
Patents
|
|
|
-
|
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
--
|
|
Other
intangibles
|
|
|
1
|
|
|
|
697
|
|
|
|
(683
|
)
|
|
|
14
|
|
Total
|
|
|
|
|
|
$
|
8,257
|
|
|
$
|
(2,402
|
)
|
|
$
|
5,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
9
|
|
|
$
|
2,550
|
|
|
$
|
(464
|
)
|
|
$
|
2,086
|
|
Trade
name
|
|
|
7
|
|
|
|
1,727
|
|
|
|
(407
|
)
|
|
|
1,320
|
|
Customer
relationships
|
|
|
9
|
|
|
|
3,254
|
|
|
|
(569
|
)
|
|
|
2,685
|
|
Patents
|
|
|
-
|
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
--
|
|
Other
intangibles
|
|
|
1
|
|
|
|
697
|
|
|
|
(677
|
)
|
|
|
20
|
|
Total
|
|
|
|
|
|
$
|
8,257
|
|
|
$
|
(2,146
|
)
|
|
$
|
6,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense for intangible assets was $0.3 million for both three months ended
September 28, 2007 and September 29, 2006.
Estimated
aggregate future amortization expense for acquisition-related intangible assets
in future fiscal years is as follows:
Fiscal
Year
|
|
|
|
Nine
months ending June 30, 2008
|
|
$
|
759
|
|
2009
|
|
|
920
|
|
2010
|
|
|
752
|
|
2011
|
|
|
662
|
|
2012
|
|
|
628
|
|
Thereafter
|
|
|
2,134
|
|
Total
|
|
$
|
5,855
|
|
Goodwill
The
changes in the carrying amount of goodwill during the three months ended
September 28, 2007 were as follows (in thousands):
|
|
DSG
|
|
|
PSSIG
|
|
|
Total
|
|
Balance
June 30, 2007
|
|
$
|
11,344
|
|
|
$
|
12,133
|
|
|
$
|
23,477
|
|
Miscellaneous
purchase price allocation adjustments
|
|
|
--
|
|
|
|
(370
|
)
|
|
|
(370
|
)
|
Balance
September 28, 2007
|
|
$
|
11,344
|
|
|
$
|
11,763
|
|
|
$
|
23,107
|
|
8.
Convertible Notes Payable and Other Debt:
As
of
September 28, 2007 and June 30, 2007, the Company had outstanding convertible
notes payable totaling $3.1 million, of which $1.0 was payable to a related
party. The convertible notes payable are unsecured and subordinate to the
Company’s bank debt, bear interest at 10% per annum payable quarterly, principal
is due February 14, 2009 and are convertible at any time into shares of common
stock at a conversion rate of $3.60 per share.
Related
parties consist of directors, officers and employees of the Company and their
affiliates that are holders of the notes payable.
The
Company has a bank line of credit facility which provides for borrowings of
up
to $4.0 million. This facility expires on December 28, 2008.
This
credit facility, as it relates to any balances outstanding on the line of
credit, contains financial and other covenants, and is collateralized by
substantially all of the assets of the Company. Borrowings pursuant to the
line
of credit bear interest at the bank’s prime rate plus 0.25% (8.0% as of
September 28, 2007). As of September 28, 2007, the Company had approximately
$0.6 million of borrowings outstanding under this line of credit and none as
of
June 30, 2007. On September 27, 2006, the Company and the lender amended the
terms of the credit facility to eliminate the minimum quarterly net income
covenant and the ratio of Senior debt to EBITDA covenant, and modified the
tangible effective net worth covenant and cash flow coverage ratio covenant.
As
of September 28, 2007, the Company was in compliance with the covenants of
the
credit facility.
The
credit facility allows the Company to use, under a Sub Facility, up to $2.0
million of the credit facility for permitted acquisition purposes and $750,000
for minority investment purposes. Borrowings under the Sub Facility bear
interest at the bank’s prime rate plus 0.50% (8.25% as of September 28, 2007).
The Company is subject to certain restrictions on the permitted acquisitions
and
minority investments and in some cases must receive the lender’s consent prior
to using the facility for such purposes.
If
the
Sub Facility is used for permitted acquisitions or minority investments, such
borrowings must be repaid over 48 months. During fiscal 2006, in connection
with
the purchase of RBIS, the Company utilized $1.0 million of the line of credit
for payment of a portion of the purchase consideration. In accordance with
the
terms of the credit facility, the $1.0 million was converted to a term note
effective June 10, 2006. The term note is payable in monthly installments of
$21,000 plus interest for the fiscal years 2007 through 2010, with payments
beginning in October 2006. As of September 28, 2007, approximately $0.5 million
was outstanding under the term note, of which $0.1 million was classified as
a
current liability as a result of the Company’s $250,000 prepayment on June 30,
2007 of the principal payments required through June 30, 2008. Principal amounts
of $250,000 on this note are due annually in fiscal years 2009 and 2010. The
outstanding balance related to the Sub Facility reduces the maximum borrowings
available under the line of credit. As a result, as of September 28, 2007,
the
maximum borrowing capacity under the line of credit was $3.5 million and the
remaining available borrowing capacity was $2.9 million.
9.
Net Income (Loss) Per Share:
Basic
net
income (loss) per common share is calculated by dividing net income (loss)
applicable to common stock by the weighted average number of common shares
outstanding during the period. The calculation of diluted net income (loss)
per
common share is similar to that of basic net income (loss) 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 notes payable
and the exercise of stock options and warrants, were issued during the
period.
The
following table summarizes the calculation of basic and diluted net income
(loss) per common share for the three months ended September 28, 2007 and
September 29, 2006 (in thousands except per share data):
|
|
2007
|
|
|
2006
|
|
Numerators:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
526
|
|
|
$
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
Weighted
average shares for basic net income (loss) per share
|
|
|
19,317
|
|
|
|
15,405
|
|
Add
dilutive effect of assumed exercise of stock options using the treasury
stock method
|
|
|
53
|
|
|
|
--
|
|
Add
dilutive effect of shares related to employee stock purchase
plan
|
|
|
26
|
|
|
|
--
|
|
Weighted
average shares for basic and diluted net income per common
share
|
|
|
19,396
|
|
|
|
15,405
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
Diluted
net income (loss) per common share
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
For
the
three months ended September 28, 2007, 0.9 million shares related to convertible
notes were excluded from the calculation of diluted EPS because they were
anti-dilutive. For the three months ended September 29, 2006, a total of
1.9 million shares related to stock options, warrants and convertible notes
were
excluded from the calculation of diluted EPS because they were
anti-dilutive.
10.
Income Tax:
The
Company files income tax returns in the U.S. federal jurisdiction and various
states jurisdictions. With few exceptions, the Company is no longer subject
to
U.S. federal, state and local income tax examinations by tax authorities for
fiscal years before 2004. The Internal Revenue Service (IRS) commenced an
examination of the Company’s U.S. income tax returns for fiscal year ended June
30, 2004 in the second quarter of fiscal 2007 that is anticipated to be
completed by the end of fiscal 2008. As of September 28, 2007, the IRS has
proposed certain adjustments to the Company’s tax position regarding the
acceleration of the deduction of certain expenses incurred in a subsequent
year.
Management is currently evaluating the proposed adjustments to determine if
it
agrees, but if accepted, the Company does not anticipate the adjustments would
result in a material change to its financial position. However, the Company
anticipates that it is reasonably possible that an additional payment in the
range of $0.2 million to $1.0 million will be made by the end of fiscal
2008.
11.
Legal Matters:
We
are
involved in legal actions in the normal course of business, including audits
and
investigations by various governmental agencies that result from our work as
a
governmental contractor. We are named as defendants in legal proceedings from
time to time and we may assert claims from time to time. Management is of the
opinion that any liability or loss associated with such matters, either
individually or in the aggregate, will not have a material adverse effect on
the
Company’s operations and liquidity.
12.
Segment Information:
The
Company reports operating results and financial data for two reporting segments:
Defense Solutions Group (DSG) and Public Safety, Security and Industrial Systems
Group (PSSIG). DSG provides engineering, technical, and financial and management
services primarily to U.S. Government customers. Revenues in the PSSIG include
products and equipment sales, software, engineering and installation services
for industrial and commercial customers as well as government
customers.
For
the
three months ended September 28, 2007, the Company’s revenues were derived
primarily from engineering and technical services, but also included product
sales that represented approximately 12.1% of consolidated revenues. For the
three months ended September 29, 2006, the Company’s revenues were derived
primarily from engineering and technical services with approximately 7.3% from
product sales. The Company’s operations are primarily located in the
U.S.
Sales
to
the government agencies, including both defense and non-defense agencies, and
sales as a subcontractor as well as direct sales, aggregated approximately
$18.6
million, or 90.8% of consolidated revenues in the three months ended September
28, 2007. No single contract or individual customer accounted for more than
10%
of total revenue for the three months ended September 28, 2007 and September
29,
2006, respectively.
Selected
financial data by segment for the three months ended September 28, 2007 and
September 29, 2006 were as follows (in thousands):
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
DSG
|
|
$
|
12,233
|
|
|
$
|
12,360
|
|
PSSIG
|
|
|
8,277
|
|
|
|
3,883
|
|
Totals
|
|
$
|
20,510
|
|
|
$
|
16,243
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations:
|
|
|
|
|
|
|
|
|
DSG
|
|
$
|
570
|
|
|
$
|
545
|
|
PSSIG
|
|
|
574
|
|
|
|
(767
|
)
|
Totals
|
|
$
|
1,144
|
|
|
$
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
To
the extent that the information presented in this Quarterly Report on Form
10-Q
discusses financial projections, information or expectations about our business
plans, results of operations, products or markets, or otherwise makes statements
about future events, such statements are forward-looking. Such
forward-looking statements can be identified by the use of words such as
“intends”, “anticipates”, “believes”, “estimates”, “projects”, “forecasts”,
“expects”, “plans” and “proposes”.
Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we, nor any other person, assume
responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of this Quarterly Report on Form 10-Q to conform
such statements to actual results or to changes in our
expectations.
The
following discussion should be read in conjunction with our unaudited condensed
consolidated financial statements and the related notes and other financial
information appearing elsewhere in this Form 10-Q. Readers are also urged to
review and consider the various disclosures made by us which advise interested
parties of the factors which affect our business, including without limitation
the disclosures made under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” under the caption “Risks Related
to Our Business,” and in the audited consolidated financial statements and
related notes included in our Annual Report filed on Form 10-K for the year
ended June 30, 2007 and other reports and filings made with the Securities
and
Exchange Commission.
Overview
Revenues
and profits for the first quarter ended September 28, 2007 were significantly
impacted by three major themes. First, our mix of revenues has continued to
change as a result of products based revenues growing from 7% of revenues in
2006 to 12% in 2007 which has directly resulted in our overall gross margins
growing from 22.8% in 2006 to 27.4% in 2007. Second, while our services based
revenues have been impacted by both funding delays and program reductions,
we
have had year over year growth in our services business. Third, our operating
costs and expenses have increased on a quarter over quarter basis due to
increased selling, general and administrative expenses (S,G&A), primarily
the expansion of sales and marketing efforts to support the Company’s growth and
investments in research, engineering and development to further develop and
expand our product offerings. However, on a sequential quarterly
basis our S,G&A has decreased by approximately $1.1 million from the
preceding quarter, which together with increased gross margins has resulted
in
improved profitability.
Our
business areas that encompass engineering and program management services have
been in a continuous slow decline for the past five years while during this
same
period our C4ISR (Command, Control, Communications, Computing, Intelligence,
Surveillance and Reconnaissance) business has steadily grown. We anticipate
that
this trend of decreases in engineering and program management will continue
as
the Department of Defense continues to implement their information
transformation strategy focusing on enhanced information technology and
communications systems, data acquisition and real time situational
awareness.
Our
cost
of revenues is affected by the mix of contract types (cost reimbursement,
fixed-price or time and materials) as well as the mix of prime contracts versus
subcontracts and the mix of product sales revenue versus services revenue.
Significant portions of our contracts are time and materials and cost
reimbursement contracts. We are reimbursed for labor hours at negotiated hourly
billing rates and other direct expenses under time and materials contracts
and
reimbursed for all actual costs, plus a fee, or profit, under cost reimbursement
contracts. The financial risks under these contracts are generally lower than
those associated with other types of contracts, and margins are also typically
lower than those on fixed-price contracts. The U.S. Government also has awarded
us fixed-price contracts. Such contracts carry higher financial risks because
we
must deliver the products, systems or contract services at a cost below the
fixed contract value in order to earn a profit.
The
following table shows our revenues from each of these types of contracts as
a
percentage of our total revenues for the three months ended September 28, 2007
and September 29, 2006:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Cost
reimbursement
|
|
|
77
|
%
|
|
|
75
|
%
|
Time
and materials
|
|
|
17
|
%
|
|
|
14
|
%
|
Fixed
price
|
|
|
6
|
%
|
|
|
11
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
Total
backlog as of September 28, 2007 was $49.5 million, of which $27.6 million
was
funded and $21.9 million had been ordered, but not yet funded. Total backlog
as
of September 29, 2006 was $52.1 million, of which $30.2 million was funded
and
$21.9 million had been ordered, but not yet funded.
Results
of Operations
The
following table sets forth selected items, including consolidated revenues
for
the three months ended September 28, 2007 and September 29,
2006:
|
|
2007
|
|
|
Percent
|
|
|
2006
|
|
|
Percent
|
|
Revenues
|
|
$
|
20,510
|
|
|
|
100.0
|
%
|
|
$
|
16,243
|
|
|
|
100.0
|
%
|
Costs
of revenues
|
|
|
14,900
|
|
|
|
72.6
|
%
|
|
|
12,530
|
|
|
|
77.1
|
%
|
Selling,
general & administrative
|
|
|
3,377
|
|
|
|
16.5
|
%
|
|
|
3,054
|
|
|
|
18.8
|
%
|
Research,
engineering and development
|
|
|
1,089
|
|
|
|
5.3
|
%
|
|
|
881
|
|
|
|
5.4
|
%
|
Income
(loss) from operations
|
|
|
1,144
|
|
|
|
5.6
|
%
|
|
|
(222
|
)
|
|
|
(1.4
|
)%
|
Other
expense (income)
|
|
|
89
|
|
|
|
0.4
|
%
|
|
|
160
|
|
|
|
0.9
|
%
|
Income
tax provision (benefit)
|
|
|
529
|
|
|
|
2.6
|
%
|
|
|
(267
|
)
|
|
|
(1.6
|
)%
|
Revenues
.
For the three months ended September 28, 2007, revenues were $20.5 million,
up
$4.3 million or 26% compared to the same period in fiscal 2007. The increase
in
revenues was attributable to $2.5 million of revenues from Ai Metrix, which
was
acquired in October 2006 and $1.8 million of net increases in other products
and
services.
Revenues
by reportable segment for the three months ended September 28, 2007 and
September 29, 2006 were as follows (in thousands):
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
|
|
DSG
|
|
$
|
12,233
|
|
|
$
|
12,360
|
|
|
$
|
(127
|
)
|
|
|
(1.0
|
)%
|
PSSIG
|
|
|
8,773
|
|
|
|
3,883
|
|
|
|
4,394
|
|
|
|
113.2
|
%
|
Total
revenues
|
|
$
|
20,510
|
|
|
$
|
16,243
|
|
|
$
|
4,267
|
|
|
|
26.3
|
%
|
The
decline in the DSG segment revenue is primarily attributable to a decrease
of
$1.9 million in certain engineering services and software development
programs. This decrease was offset by increases totaling $1.8 million
in training, program management and systems engineering activities.
The
growth in the PSSIG segment revenue is attributable to the acquisition of Ai
Metrix which added approximately $2.5 million of revenues and growth in
training-related services of $1.8 million.
Costs
of revenue.
Costs of revenue for services includes all direct costs
such as labor, materials and subcontractor costs. Costs of revenue for
services also includes indirect overhead costs such as facilities, indirect
labor, fringe benefits and other discretionary costs which are pooled and
allocated to contracts on a pro rata basis. Generally, changes in direct costs
for services are correlated to changes in revenue as resources are consumed
in
the production of that revenue. Costs of revenue for products includes the
direct costs and manufacturing indirect expenses associated with manufacturing
our products.
As
a
percentage of revenue, costs of revenue were 72.6% for the first quarter of
fiscal 2008 and 77.1% for the same period in fiscal 2007 resulting in gross
margins of 27.4% and 22.9%, respectively. The increase in gross margins was
the
result of increased product sales that carry a higher gross margin
than do our services.
Selling,
general and administrative expenses
. Selling, general and
administrative expenses (SG&A) include labor, fringe benefits, sales and
marketing, bid and proposal (B&P) and other indirect costs. SG&A
expenses increased approximately $0.3 million or 10.6%, to $3.4 million in
the
first quarter of fiscal 2008 as compared to the same period in fiscal 2007.
The
increase in SG&A is primarily attributable to the acquisition of Ai Metrix
in October 2006.
Research,
engineering and
development expenses
.
Research, engineering and development (R&D) expenses include burdened labor
and material costs to develop new products as well as maintaining and enhancing
our existing product capabilities. R&D expenses increased approximately $0.2
million or 23.6%, to approximately $1.1 million in the first quarter of fiscal
2008 as compared to the same period in fiscal 2007. The increase in these
expenses is primarily attributable to research and development as well as
sustaining engineering related to our network security and management product
lines.
Income
(loss) from operations.
The Company incurred income from operations
of approximately $1.1 million in the first quarter of fiscal 2008 as compared
to
a loss from operations of approximately ($0.2) million in the same period in
fiscal 2007. The increase in income from operations is primarily due to the
increase in gross margins from our product sales.
Income
(loss) from operations includes share-based compensation expense of
approximately $0.1 million, respectively, for each of these same periods. These
expenses include non-cash expenses associated with stock options granted to
employees, the employee stock purchase plan. The recognition of these
share-based compensation expenses is in accordance with SFAS 123R, which was
adopted as of the beginning of the fiscal 2006.
Other
(income) expense
. Other (income) expense includes interest expense on our
outstanding convertible notes and borrowings made under our credit facility
and
interest and other income. Other expense was approximately $0.1 million in
the
first quarter of fiscal 2008 as compared to $0.2 million in the same period
in
fiscal 2007. The decrease in other expense is due primarily to a decrease in
interest expense related to a reduction of approximately $2.1 million in
convertible notes that matured and were converted to stock or paid down in
cash
during the prior fiscal year.
Income
tax provision (benefit).
The income tax provision (benefit) was
approximately $0.5 million in the first quarter of fiscal 2008 and approximately
($0.3) million for the same period in fiscal 2007. Our effective tax rates
were
50.1% and 69.9% for these same periods. Our effective tax rate is directly
affected by share-based compensation expenses related to SFAS 123R, which are
not deductible for tax purposes, but which are considered in estimating the
annual effective tax rate as well as our forecast of annual income before taxes.
These factors can lead to large fluctuations in the estimated effective tax
rate
from quarter to quarter.
Historically,
we have financed our operations and met our capital expenditure requirements
through cash flows provided from operations, long-term borrowings (including
the
sale of convertible notes), sales of equity securities and the use of our line
of credit. The significant components of our working capital are liquid assets
such as cash, trade accounts receivable, inventories and income taxes
receivable, reduced by accounts payable, accrued expenses, line of credit,
the
current portion of our term note, the current portion of our convertible notes
payable, the current portion of our deferred tax liabilities and deferred
revenue. Working capital was $9.4 million at September 28, 2007 compared to
$8.2
million at June 30, 2007.
Cash
flows from operating activities
. Cash flows used in operating
activities were approximately $0.7 million in the first quarter of fiscal 2008
as compared to cash flows provided of $0.8 million for the same period in fiscal
2007. The increased use of cash in the current period was
attributable to a significant amount of subcontractor and other payables
received at the end of the fiscal year and incentive compensation that were
paid
during the first quarter.
Cash
flows from investing activities
. Cash flows used in investing
activities were approximately $0.3 million in both periods primarily associated
with capital expenditures.
Cash
flows from financing activities
. Cash flows provided by (used
in) financing activities were approximately $0.7 million in the first quarter
of
fiscal 2008 as compared to ($0.5) million in the same period in fiscal 2007.
The
increase was due primarily to borrowings exceeding payments on our credit
facility in the current period.
One
of
our regular sources of liquidity is our revolving line of credit facility with
Comerica for $4.0 million, which expires on December 28, 2008.
The
outstanding balance on our revolving $4.0 million line of credit at September
28, 2007 was $0.6 million. The Company’s $4.0 million revolving line
of credit facility allows SYS to use (i) the full $4.0 million for working
capital purposes or (ii) under a Sub Facility, up to $2.0 million of the credit
facility for permitted acquisition purposes and $750,000 for minority investment
purposes. The line of credit is subject to certain restrictions on permitted
acquisitions and minority investments, and in some cases, we must receive the
lender’s consent prior to using the facility for such purposes. If used for
permitted acquisitions or minority investments, these advances must be repaid
over 48 months.
During
fiscal 2006, in connection with the purchase of RBIS, we utilized $1.0 million
of this line for payment of a portion of the purchase consideration. In
accordance with the terms of the credit facility, the $1.0 million was converted
to a term note effective June 10, 2006. The term note is payable in monthly
installments of $20,833 plus interest for fiscal years 2007 through 2010, with
payments beginning October, 2006. In June 2007, the Company elected to pre-pay
principal of $0.25 million which represented the amount of principal due for
the
next twelve months. The balance of the term note as of September 28, 2007 was
$0.5 million, of which $0.1 million is classified as a current liability. A
total of $0.25 million of principal amounts of this note are due annually in
fiscal years 2009 and 2010. The outstanding balance related to the Sub Facility
reduces the maximum borrowings available under the line of credit. As a result,
as of September 28, 2007, the maximum borrowing under the line of credit was
$3.5 million and the remaining available borrowing capacity on the line of
credit was approximately $2.9 million.
On
September 27, 2006, SYS and the lender agreed to amend the terms of the line
of
credit to eliminate the minimum quarterly net income covenant and the ratio
of
senior debt to EBITDA covenant and modify the tangible effective net worth
covenant and cash flow coverage ratio covenant.
We
have
the option of being charged prime plus 0.25% or LIBOR plus 300 basis points
on
the credit facility and prime plus 0.50% or LIBOR plus 325 basis points on
the
sub facility subject to minimum advance amounts and duration under the LIBOR
option. The loan is collateralized by all of our assets including accounts
receivable. Borrowings are limited to 80% of our billed accounts receivable
that
are less than 90 days old.
Management
believes that SYS will have sufficient cash flow from operations and funds
available under the revolving credit agreement to finance its operating and
capital requirements for at least the next twelve months.
Long-term
liquidity and continued acquisition related growth will depend on our ability
to
manage cash, raise cash through debt and equity financing transactions and
maintain profitability. We may seek to raise additional capital from time to
time as market conditions permit and subject to Board approval. Our losses
in
the two prior fiscal years may impact our ability to raise capital.
The
Internal Revenue Service (IRS) is currently examining the Company’s federal
income tax return for the year ended June 30, 2004. The Company expects the
IRS
examination to be completed in fiscal 2008. The Company has
reclassified an amount from deferred taxes to income taxes payable and accrued
a
provision for interest which it believes is adequate in relation to any
potential adjustments. These amounts may be adjusted when there is
more information available or an event occurs that indicates a change is
required.
Commitments
(amounts in thousands)
|
|
Total
|
|
|
2008
(2)
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
Convertible
notes (1)
|
|
$
|
3,554
|
|
|
$
|
234
|
|
|
$
|
3,320
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
Note
payable (1)
|
|
|
577
|
|
|
|
33
|
|
|
|
283
|
|
|
|
261
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Capital
leases (1)
|
|
|
73
|
|
|
|
16
|
|
|
|
22
|
|
|
|
22
|
|
|
|
13
|
|
|
|
--
|
|
|
|
--
|
|
Operating
leases
|
|
|
4,237
|
|
|
|
1,506
|
|
|
|
1,351
|
|
|
|
545
|
|
|
|
460
|
|
|
|
350
|
|
|
|
25
|
|
Total
|
|
$
|
8,441
|
|
|
$
|
1,789
|
|
|
$
|
4,976
|
|
|
$
|
828
|
|
|
$
|
473
|
|
|
$
|
350
|
|
|
$
|
25
|
|
(1)
Includes principal and interest
|
(2)
Nine months ending June 30, 2008.
|
Off-Balance
Sheet Arrangements
On
July 1, 2007, we adopted the provisions of the Financial Accounting
Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,
which provides a financial statement recognition threshold and measurement
attribute for a tax position taken or expected to be taken in a tax return.
Under FIN 48, we may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained
on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such
a
position should be measured based on the largest benefit that has a greater
than
50% likelihood of being realized upon ultimate settlement. FIN 48 also provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, and income tax
disclosures. Upon adoption, we recognized a $19,000 charge to our beginning
retained deficit as a cumulative effect of a change in accounting principle.
See
Note 10 – Income Tax (Part I, Item 1).
In
May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 Definition
of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1
provides guidance on how to determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits.
FSP
FIN 48-1 is effective for the Company beginning July 1, 2007. The
implementation of this standard had no significant impact on the Company’s
condensed consolidated financial statements.
In
September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value
Measurements. SFAS 157 prescribes a single definition of fair value as the
price
that would be received to sell an asset or paid to transfer a liability in
an
orderly transaction between market participants at the measurement date. The
accounting provisions of SFAS 157 will be effective for the Company beginning
July 1, 2008. The Company is in the process of determining the impact of this
statement on its consolidated financial statements.
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS 159 will be effective
for
the Company beginning July 1, 2008. The Company is in the process of
determining the impact of this statement on its consolidated financial
statements.
Critical
Accounting Policies and Estimates
The
foregoing discussion of our financial condition and results of operations is
based on the consolidated financial statements included in this Form 10-Q,
which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses, and the related disclosures of contingencies.
We base these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
During
the three months ended September 28, 2007, there were no significant changes
to
the critical accounting policies we disclosed in Management’s Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the year ended June 30, 2007.
For
interim reporting purposes, SYS applies overhead and selling, general and
administrative expenses as a percentage of direct contract costs based on annual
budgeted indirect expense rates. To the extent actual expenses for an
interim period are greater than the budgeted rates (unfavorable variance),
the
variance is deferred if management believes it is probable that the variance
will be absorbed by future contract activity. This probability
assessment includes projecting whether future indirect costs will be
sufficiently less than the annual budgeted rates or can be absorbed by seeking
increased billing rates applied on cost-plus-fee contracts. At the
end of each interim reporting period, management assesses the recoverability
of
any amount deferred to determine if any portion should be charged to
expense. In assessing the recoverability of variances deferred,
management takes into consideration estimates of the amount of direct labor
and
other direct costs to be incurred in future interim periods, the feasibility
of
modifications for provisional billing rates, and the likelihood that an approved
increase in provisional billing rates can be passed along to a
customer. Variances are charged to expense in the periods in which it
is determined that such amounts are not probable of recovery. As of September
28, 2007, the deferred unfavorable variance totaled $0.2 million.