Item 1. Financial
Statements
SYS
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts
in thousands, except par value amounts)
|
|
|
|
December
28, 2007
|
|
|
June
30,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,188
|
|
|
$
|
2,770
|
|
Accounts
receivable, net
|
|
|
18,574
|
|
|
|
16,321
|
|
Inventories,
net
|
|
|
484
|
|
|
|
599
|
|
Prepaid
expenses
|
|
|
456
|
|
|
|
603
|
|
Deferred
taxes
|
|
|
748
|
|
|
|
275
|
|
Total
current assets
|
|
|
22,450
|
|
|
|
20,568
|
|
|
|
|
|
|
|
|
|
|
Furniture,
equipment and leasehold improvements, net
|
|
|
1,997
|
|
|
|
1,951
|
|
Intangible
assets, net
|
|
|
5,601
|
|
|
|
6,111
|
|
Goodwill
|
|
|
23,107
|
|
|
|
23,477
|
|
Other
assets
|
|
|
227
|
|
|
|
276
|
|
Total
assets
|
|
$
|
53,382
|
|
|
$
|
52,383
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
1,062
|
|
|
$
|
--
|
|
Accounts
payable
|
|
|
4,261
|
|
|
|
5,270
|
|
Accrued
payroll and related expenses
|
|
|
3,231
|
|
|
|
3,887
|
|
Income
taxes payable
|
|
|
757
|
|
|
|
194
|
|
Other
accrued liabilities
|
|
|
1,153
|
|
|
|
1,474
|
|
Current
portion of note payable
|
|
|
125
|
|
|
|
--
|
|
Deferred
revenue
|
|
|
1,207
|
|
|
|
1,552
|
|
Total
current liabilities
|
|
|
11,796
|
|
|
|
12,377
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable, related party
|
|
|
975
|
|
|
|
975
|
|
Convertible
notes payable
|
|
|
2,150
|
|
|
|
2,150
|
|
Note
payable, net of current portion
|
|
|
375
|
|
|
|
500
|
|
Other
long-term liabilities
|
|
|
56
|
|
|
|
69
|
|
Deferred
revenue, net of current portion
|
|
|
330
|
|
|
|
210
|
|
Deferred
taxes
|
|
|
1,023
|
|
|
|
1,023
|
|
Total
liabilities
|
|
|
16,705
|
|
|
|
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
19,674 and 19,232 shares issued and outstanding
|
|
|
|
|
|
|
|
|
as
of December 28, 2007 and June 30, 2007, respectively
|
|
|
36,929
|
|
|
|
35,903
|
|
Accumulated
deficit
|
|
|
(252
|
)
|
|
|
(824
|
)
|
Total
stockholders’ equity
|
|
|
36,677
|
|
|
|
35,079
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
53,382
|
|
|
$
|
52,383
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
SYS
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(amounts
in thousands, except per share data)
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
December
28,
|
|
|
December
29,
|
|
|
December
28,
|
|
December
29,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
18,121
|
|
|
$
|
19,216
|
|
|
$
|
38,631
|
|
$
|
35,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of revenue
|
|
|
13,517
|
|
|
|
14,655
|
|
|
|
28,417
|
|
|
27,185
|
|
Selling,
general and administrative expenses
|
|
|
3,373
|
|
|
|
3,666
|
|
|
|
6,750
|
|
|
6,720
|
|
Research,
engineering and development expenses
|
|
|
1,126
|
|
|
|
1,110
|
|
|
|
2,214
|
|
|
1,991
|
|
Total
operating costs and expenses
|
|
|
18,016
|
|
|
|
19,431
|
|
|
|
37,381
|
|
|
35,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
105
|
|
|
|
(215
|
)
|
|
|
1,250
|
|
|
(437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
(35
|
)
|
|
|
(24
|
)
|
|
|
(74
|
)
|
|
(61
|
)
|
Interest
expense
|
|
|
72
|
|
|
|
186
|
|
|
|
200
|
|
|
383
|
|
Total
other (income) expense
|
|
|
37
|
|
|
|
162
|
|
|
|
126
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
68
|
|
|
|
(377
|
)
|
|
|
1,124
|
|
|
(759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
|
23
|
|
|
|
(35
|
)
|
|
|
552
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
45
|
|
|
$
|
(342
|
)
|
|
$
|
572
|
|
$
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,483
|
|
|
|
17,521
|
|
|
|
19,401
|
|
|
16,463
|
|
Diluted
|
|
|
19,569
|
|
|
|
17,521
|
|
|
|
19,504
|
|
|
16,463
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
SYS
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX
MONTHS ENDED DECEMBER 28, 2007 AND DECEMBER 29, 2006
(UNAUDITED)
(amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
572
|
|
|
$
|
(457
|
)
|
Adjustments
to reconcile net income (loss) to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
983
|
|
|
|
968
|
|
Share-based
compensation expense
|
|
|
230
|
|
|
|
227
|
|
Accretion
of debt discount
|
|
|
--
|
|
|
|
28
|
|
Deferred
taxes
|
|
|
--
|
|
|
|
(305
|
)
|
Bad
debt expense
|
|
|
29
|
|
|
|
152
|
|
Stock
contributed to employee benefit plan
|
|
|
467
|
|
|
|
475
|
|
Loss
(gain) on disposition of equipment
|
|
|
1
|
|
|
|
(4
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,282
|
)
|
|
|
(1,115
|
)
|
Income
tax refund receivable
|
|
|
--
|
|
|
|
509
|
|
Inventories
|
|
|
115
|
|
|
|
168
|
|
Prepaid
expenses
|
|
|
147
|
|
|
|
96
|
|
Other
assets
|
|
|
39
|
|
|
|
--
|
|
Accounts
payable
|
|
|
(1,009
|
)
|
|
|
333
|
|
Accrued
payroll and related expenses
|
|
|
(656
|
)
|
|
|
(120
|
)
|
Income
taxes payable
|
|
|
90
|
|
|
|
--
|
|
Other
accrued liabilities
|
|
|
49
|
|
|
|
(401
|
)
|
Other
long term liabilities
|
|
|
(13
|
)
|
|
|
--
|
|
Deferred
revenue
|
|
|
(225
|
)
|
|
|
(116
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
(1,463
|
)
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of furniture, equipment and leasehold improvements
|
|
|
(511
|
)
|
|
|
(432
|
)
|
Cash
received from acquisitions, net
|
|
|
--
|
|
|
|
202
|
|
Other
|
|
|
1
|
|
|
|
33
|
|
Net
cash used in investing activities
|
|
|
(510
|
)
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings
from line of credit
|
|
|
12,523
|
|
|
|
15,751
|
|
Payments
on line of credit
|
|
|
(11,461
|
)
|
|
|
(15,075
|
)
|
Payments
of notes payable
|
|
|
--
|
|
|
|
(125
|
)
|
Proceeds
from issuance of stock to employee stock purchase plan
|
|
|
204
|
|
|
|
266
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
125
|
|
|
|
60
|
|
Net
cash provided by financing activities
|
|
|
1,391
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(582
|
)
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,770
|
|
|
|
2,106
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,188
|
|
|
$
|
3,224
|
|
SYS
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX
MONTHS ENDED DECEMBER 28, 2007 AND DECEMBER 29, 2006
(UNAUDITED)
(amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
134
|
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
462
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of capital leases
|
|
$
|
--
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon cashless exercise of stock options
|
|
$
|
37
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
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
audited 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 of America (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 December 28,
2007, the deferred unfavorable variance totaled $0.6 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 indirect expenses that were previously reported for the three and six
month periods ended December 29, 2006 as costs of revenue were reclassified to
selling, general and administrative expenses in the amount of $0.1 million for
both periods. The Company believes these reclassifications were
immaterial to the overall presentation of the accompanying financial
statements.
2.
New Accounting Pronouncements:
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007)
(“SFAS 141R”),
Business
Combinations
, which replaces SFAS No 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS 141R is effective for us beginning
July 1, 2009 and will apply prospectively to business combinations
completed on or after that date.
On
July 1, 2007, the Company adopted the provisions of the 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
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.
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 and six months ended December 28, 2007 and December
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 during
the six months ended and as of December 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
|
|
|
344
|
|
|
|
2.19
|
|
|
|
|
|
|
|
Exercised
|
|
|
(129
|
)
|
|
|
1.25
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(89
|
)
|
|
|
3.56
|
|
|
|
|
|
|
|
Expired
|
|
|
(81
|
)
|
|
|
2.05
|
|
|
|
|
|
|
|
Balance
outstanding at December 28, 2007
|
|
|
2,177
|
|
|
$
|
2.49
|
|
|
|
2.56
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 28, 2007
|
|
|
1,305
|
|
|
$
|
2.51
|
|
|
|
1.80
|
|
|
$
|
26
|
|
The
following is a summary of the share-based compensation expense recognized by the
Company for the three and six months ended December 28, 2007 and December 29,
2006 (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
December
28,
|
|
|
December
29,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$
|
44
|
|
|
$
|
50
|
|
|
$
|
112
|
|
|
$
|
112
|
|
Employee
stock purchase plan
|
|
|
59
|
|
|
|
62
|
|
|
|
108
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103
|
|
|
$
|
112
|
|
|
$
|
220
|
|
|
$
|
227
|
|
The
following table summarizes the weighted average assumptions used to estimate the
value of share-based awards granted for the six months ended December 28, 2007
and December 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
|
|
|
41.2
|
%
|
|
|
38.6
|
%
|
|
|
46.3
|
%
|
|
|
38.4
|
%
|
Risk-free
interest rate
|
|
|
4.4
|
%
|
|
|
4.8
|
%
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
Expected
lives (in years)
|
|
|
3.77
|
|
|
|
3.85
|
|
|
|
0.50
|
|
|
|
0.50
|
|
During
the six months ended December 28, 2007, the Company issued warrants to a
consultant for services to purchase 15,000 shares of the Company’s stock at an
exercise price of $2.25 per share. The warrants fully vested on
December 31, 2007 and expire on September 18, 2012. The Company
recorded $10,000 of share based compensation expense related to these
warrants.
4.
Accounts Receivable:
Accounts
receivable consisted of the following (in thousands):
|
|
December
28,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
Amounts
billed
|
|
$
|
9,985
|
|
|
$
|
8,600
|
|
Amounts
unbilled
|
|
|
9,014
|
|
|
|
8,150
|
|
Less
allowance for doubtful accounts
|
|
|
(425
|
)
|
|
|
(429
|
)
|
Totals
|
|
$
|
18,574
|
|
|
$
|
16,321
|
|
5.
Inventories:
Inventories
consisted of the following (in thousands):
|
|
December
28,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
Raw
materials, net
|
|
$
|
415
|
|
|
$
|
473
|
|
Finished
goods, net
|
|
|
69
|
|
|
|
126
|
|
|
|
$
|
484
|
|
|
$
|
599
|
|
6.
Furniture, Equipment and Leasehold Improvements:
Furniture,
equipment and leasehold improvements consisted of the following (in
thousands):
|
|
December
28,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2007
|
|
Furniture
and equipment
|
|
$
|
4,726
|
|
|
$
|
4,266
|
|
Leasehold
improvements
|
|
|
460
|
|
|
|
412
|
|
|
|
|
5,186
|
|
|
|
4,678
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(3,189
|
)
|
|
|
(2,727
|
)
|
Net
|
|
$
|
1,997
|
|
|
$
|
1,951
|
|
Depreciation
and amortization expense for furniture, equipment and leasehold improvements was
$0.2 million for both three months ended December 28, 2007 and December 29,
2006, respectively, and $0.5 million and $0.4 million for the six
months ended December 28, 2007 and December 29, 2006, respectively.
7.
Intangible Assets and Goodwill:
Intangible
assets consisted of the following (in thousands):
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
(Yrs)
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
December 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
9
|
|
|
$
|
2,550
|
|
|
$
|
(617
|
)
|
|
$
|
1,933
|
|
Trade
name
|
|
|
7
|
|
|
|
1,727
|
|
|
|
(553
|
)
|
|
|
1,174
|
|
Customer
relationships
|
|
|
9
|
|
|
|
3,254
|
|
|
|
(769
|
)
|
|
|
2,485
|
|
Patents
|
|
|
-
|
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
--
|
|
Other
intangibles
|
|
|
1
|
|
|
|
697
|
|
|
|
(688
|
)
|
|
|
9
|
|
Total
|
|
|
|
|
|
$
|
8,257
|
|
|
$
|
(2,656
|
)
|
|
$
|
5,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
December 28, 2007 and December 29, 2006, respectively, and $0.5 million and $0.6
million for the six months ended December 28, 2007 and December 29, 2006,
respectively.
Estimated
aggregate future amortization expense for acquisition-related intangible assets
in future fiscal years is as follows:
Fiscal Year
|
|
|
|
Six
months ending June 30, 2008
|
|
$
|
505
|
|
2009
|
|
|
920
|
|
2010
|
|
|
752
|
|
2011
|
|
|
662
|
|
2012
|
|
|
628
|
|
Thereafter
|
|
|
2,134
|
|
Total
|
|
$
|
5,601
|
|
Goodwill
The
changes in the carrying amount of goodwill during the six months ended December
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
December 28, 2007
|
|
$
|
11,344
|
|
|
$
|
11,763
|
|
|
$
|
23,107
|
|
8.
Convertible Notes Payable and Other Debt:
As of
December 28, 2007 and June 30, 2007, the Company had outstanding convertible
notes payable totaling $3.1 million, of which $1.0 was payable to related
parties. 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% (7.5% as of December
28, 2007). As of December 28, 2007, the Company had approximately $1.1 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 December 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% (7.75% as of December 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 December 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 December 28, 2007, the
maximum borrowing capacity under the line of credit was $3.5 million and the
remaining available borrowing capacity was $2.4 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 each period (in thousands except per share
data):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
December
28,
|
|
|
December
29,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
45
|
|
|
$
|
(342
|
)
|
|
$
|
572
|
|
|
$
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares for basic net income (loss) per common
share
|
|
|
19,483
|
|
|
|
17,521
|
|
|
|
19,401
|
|
|
|
16,463
|
|
Add
dilutive effect of assumed exercise of stock options using the treasury
stock method
|
|
|
--
|
|
|
|
--
|
|
|
|
47
|
|
|
|
--
|
|
Add
dilutive effect of shares related to employee stock purchase
plan
|
|
|
86
|
|
|
|
--
|
|
|
|
56
|
|
|
|
--
|
|
Weighted
average shares for diluted net income (loss) per common
share
|
|
|
19,569
|
|
|
|
17,521
|
|
|
|
19,504
|
|
|
|
16,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
Diluted
net income (loss) per common share
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
For the
three and six months ended December 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 and six months ended December 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:
On
July 1, 2007, we adopted the provisions of
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.
Adopting
FIN
48 had the following impact on
our financial statements: increased current deferred tax assets by $0.5 million
and the current income tax payable by $0.5 million. As of July 1, 2007 and
as of December 28, 2007, we had $1.1 million of unrecognized tax benefits, none
of which if recognized, would affect our effective tax rate. The Company
recognizes interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expenses. As of July 1, 2007 and
December 28, 2007, the balance sheet included $0.1 million of accrued interest
related to uncertain tax positions.
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. In January 2008, the Internal Revenue Service (IRS)
completed its examination of the Company’s U.S. income tax returns for fiscal
years ended June 30, 2004 through June 30, 2006. The Company has
agreed to IRS adjustments to reverse the acceleration of the deduction of
certain expenses incurred in a subsequent year for the tax years under audit
resulting in a payment in January 2008 for taxes of $483,000. This
amount was included in the income taxes payable as of June 30, 2007 and December
28, 2007.
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.
The
Company’s revenues are derived primarily from engineering and technical
services, but also included product sales. For the three and six
months ended December 28, 2007, the product revenues represented 7.8% and 10.1%,
respectively of total revenues, compared to 9.3% and 8.4%, respectively, of the
comparable periods in fiscal 2007.
Sales to
government agencies, including both defense and non-defense agencies, and sales
as a subcontractor as well as direct sales, aggregated approximately $16.1
million (89%) and $34.7 million (90%) of consolidated revenues in the
three and six months ended December 28, 2007, respectively. No single
contract or individual customer accounted for more than 10% of total revenue for
the three and six months ended December 28, 2007 and December 29, 2006,
respectively.
Selected
financial data by segment is as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
December
28,
|
|
|
December
29,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
DSG
|
|
$
|
9,846
|
|
|
$
|
12,508
|
|
|
$
|
22,079
|
|
|
$
|
24,868
|
|
PSSIG
|
|
|
8,275
|
|
|
|
6,708
|
|
|
|
16,552
|
|
|
|
10,591
|
|
Totals
|
|
$
|
18,121
|
|
|
$
|
19,216
|
|
|
$
|
38,631
|
|
|
$
|
35,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSG
|
|
$
|
96
|
|
|
$
|
373
|
|
|
$
|
668
|
|
|
$
|
918
|
|
PSSIG
|
|
|
9
|
|
|
|
(588
|
)
|
|
|
582
|
|
|
|
(1,355
|
)
|
Totals
|
|
$
|
105
|
|
|
$
|
(215
|
)
|
|
$
|
1,250
|
|
|
$
|
(437
|
)
|
Item
2
.
Management’s Discussion and
Analysis o
f
Financial Condition and Results of Operations
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 three and six months ended December 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 during the six month
period growing from 8% of revenues in 2006 to 10% in 2007 which has directly
resulted in our overall gross margins growing from 23.3% in 2006 to 26.4% 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, primarily selling,
general and administrative expenses (S,G&A), on a sequential quarterly
basis, has decreased by approximately $1.1 million in the first and
second quarters of the current fiscal year compared to the fourth quarter of
fiscal 2007. The decreases in these expenses combined 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 contracts based revenues for the three and six months
ended December 28, 2007 and December 29, 2006:
|
|
Three
Months Ended
|
|
|
Six
months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cost
reimbursable
|
|
|
75
|
%
|
|
|
79
|
%
|
|
|
76
|
%
|
|
|
77
|
%
|
Time
and materials
|
|
|
16
|
%
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
18
|
%
|
Fixed
price
|
|
|
9
|
%
|
|
|
6
|
%
|
|
|
8
|
%
|
|
|
5
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Total
backlog as of December 28, 2007 was $40.2 million, of which $24.0 million was
funded and $16.2 million had been ordered, but not yet funded. Total backlog as
of December 29, 2006 was $43.5 million, of which $30.0 million was funded and
$13.5 million had been ordered, but not yet funded.
Results
of Operations
The
following table sets forth selected items, including consolidated revenues for
the three and six months ended December 28, 2007 and December 29,
2006:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
2007
|
|
|
Percent
|
|
|
2006
|
|
|
Percent
|
|
|
2007
|
|
|
Percent
|
|
|
2006
|
|
|
Percent
|
|
Revenues
|
|
$
|
18,121
|
|
|
|
100.0
|
%
|
|
$
|
19,216
|
|
|
|
100.0
|
%
|
|
$
|
38,631
|
|
|
|
100.0
|
%
|
|
$
|
35,459
|
|
|
|
100.0
|
%
|
Costs
of revenues
|
|
|
13,517
|
|
|
|
74.6
|
%
|
|
|
14,655
|
|
|
|
76.3
|
%
|
|
|
28,417
|
|
|
|
73.6
|
%
|
|
|
27,185
|
|
|
|
76.7
|
%
|
Selling,
general & administrative
|
|
|
3,373
|
|
|
|
18.6
|
%
|
|
|
3,666
|
|
|
|
19.1
|
%
|
|
|
6,750
|
|
|
|
17.5
|
%
|
|
|
6,720
|
|
|
|
19.0
|
%
|
Research,
engineering and development
|
|
|
1,126
|
|
|
|
6.2
|
%
|
|
|
1,110
|
|
|
|
5.8
|
%
|
|
|
2,214
|
|
|
|
5.7
|
%
|
|
|
1,991
|
|
|
|
5.6
|
%
|
Income
(loss) from operations
|
|
|
105
|
|
|
|
0.6
|
%
|
|
|
(215
|
)
|
|
|
(1.1
|
)%
|
|
|
1,250
|
|
|
|
3.2
|
%
|
|
|
(437
|
)
|
|
|
(1.2
|
)%
|
Other
expense (income)
|
|
|
37
|
|
|
|
0.2
|
%
|
|
|
162
|
|
|
|
0.8
|
%
|
|
|
126
|
|
|
|
0.3
|
%
|
|
|
322
|
|
|
|
0.9
|
%
|
Income
tax provision (benefit)
|
|
|
23
|
|
|
|
0.1
|
%
|
|
|
(35
|
)
|
|
|
(0.2
|
)%
|
|
|
552
|
|
|
|
1.4
|
%
|
|
|
(302
|
)
|
|
|
(0.9
|
)%
|
Revenues
. For the three
months ended December 28, 2007, revenues were $18.1 million, a decrease of $1.1
million or 5.7% compared to the same period in fiscal 2007. The decrease in
revenues consisted of a $0.9 million decrease in service related revenues and a
$0.4 million decrease in product related revenues, which were partially offset
by an increase of $0.2 million of acquisition revenues related to Ai Metrix
(acquired in October 2006). The decrease in services related revenues was
primarily attributable to decreases in certain software engineering and IT
support programs that were partially offset by growth in learning and
performance training solutions and in public safety solutions. For
the six months ended December 28, 2007, revenues were $38.6 million, an increase
of $3.2 million or 8.9% compared to the same period in fiscal
2007. The increase in revenues was attributable to $2.6 million of
acquisition revenues related to Ai Metrix and $0.6 million of net increases in
other products and services.
Revenues
by reportable segment for the three and six months ended December 28, 2007 and
December 29, 2006 were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
|
|
DSG
|
|
$
|
9,846
|
|
|
$
|
12,508
|
|
|
$
|
(2,662
|
)
|
|
|
(21.3
|
)%
|
|
$
|
22,079
|
|
|
$
|
24,868
|
|
|
$
|
(2,789
|
)
|
|
|
(11.2
|
)%
|
PSSIG
|
|
|
8,275
|
|
|
|
6,708
|
|
|
|
1,567
|
|
|
|
23.4
|
%
|
|
|
16,552
|
|
|
|
10,591
|
|
|
|
5,961
|
|
|
|
56.3
|
%
|
Total
revenues
|
|
$
|
18,121
|
|
|
$
|
19,216
|
|
|
$
|
(1,095
|
)
|
|
|
(5.7
|
)%
|
|
$
|
38,631
|
|
|
$
|
35,459
|
|
|
$
|
3,172
|
|
|
|
8.9
|
%
|
The
decline in the DSG segment revenue of $2.7 million and $2.8 million in the three
and six month periods, respectively, is primarily attributable to decreases in
certain engineering services and IT support programs that were partially offset
by growth in enterprise solutions services.
The
growth in the PSSIG segment revenue of $1.6 million and $6.0 million for the
three and six month periods, respectively, is attributable to the acquisition of
Ai Metrix which added $0.2 million and $2.6 million of revenues in the three and
six month periods respectively, and growth in network management services,
learning and performance training solutions, and public safety solutions, which
combined contributed increased revenues of $1.4 million and $3.4 million in the
three and six month periods, respectively.
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 74.6% for the three months ended
December 28, 2007 compared to 76.3% for the same period in fiscal 2007 resulting
in gross margins of 25.4% and 23.7%, respectively. For the six months ended
December 28, 2007 costs of revenue were 73.6% compared to 76.7% for the same
period in fiscal 2007 resulting in gross margins of 26.4% and 23.3%,
respectively. During the three months ended December 28, 2007, the
growth in the gross margin resulted from higher margins from services revenues
which were 23.0% as compared to 19.5% in the prior year as a result of an
increase in the gross margins on certain time and material
contracts. During the six months ended December 28, 2007 the increase
in gross margins was the result of increased product sales that carry a higher
gross margin than do our services together with the increased services margins
previously discussed.
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 decreased approximately $0.3 million
or 8.0%, to $3.4 million in the three months ended December 28, 2007 compared to
the same period in fiscal 2007. For the six months ended December 28, 2007,
there was essentially no change to SG&A expenses compared to the same period
in fiscal 2007. The decrease in SG&A during the three month
period is primarily attributable to personnel reductions that were implemented
at the end of FY07.
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.
During the three months ended December 28, 2007, there was essentially no change
to R&D expenses compared to the same period in fiscal 2007. During the six
months ended December 28, 2007, R&D expenses increased approximately $.2
million or 11.2% 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 that were partially offset by decreases in our IP video and data
distribution product lines.
Income (loss) from operations.
The Company had income from operations of approximately $0.1
million in the three months ended December 28, 2007 compared to a loss from
operations of approximately $0.2 million in the same period in fiscal
2007. For the six months ended December 28, 2007, the Company had
income from operations of approximately $1.2 million compared to a loss of
approximately $0.4 million for 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 and $0.2 million for the three and six month periods
ended December 28, 2007, respectively and the same amounts for each of these
same periods in fiscal 2007. 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 three months ended December
28, 2007 compared to $0.2 million in the same period in fiscal 2007 and $0.1
million for the six months ended December 28, 2007 compared to $0.3 million for
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).
. Our effective tax rates were 33.8% and 49.1% for
three and six month periods ended December 28, 2007, respectively, compared to
9.3% and 39.8% for the comparable periods in fiscal 2007, respectively. 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. The 33.8% effective
tax rate for the three month period ended December 28, 2007 was the result of
revising the estimated annual effective tax rate to 49.1% from the 50.1% rate
used at September 28, 2007. The 9.3% effective tax rate for the three
month period ended December 29, 2006 was the result of revising our estimated
annual effective tax rate used for fiscal 2007 from the 69.9% rate estimated at
September 29, 2006 to the 39.8% rate estimated at December 29,
2006.
Liquidity and Capital
Resources
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 $10.7 million at December 28, 2007 compared to $8.2
million at June 30, 2007.
Cash flows from operating
activities
. Cash flows used in operating activities were
approximately $1.5 million for the six months ended December 28, 2007 compared
to cash flows provided from operating activities of $0.4 million for the same
period in fiscal 2007. The increased use of cash in the current
fiscal year was attributable to: (i) a significant amount of liabilities for
subcontractor and other trade payables and incentive compensation accrued at the
end of fiscal 2007 that were paid during the first quarter of fiscal 2008 and
(ii) an increase in the percentage of our accounts receivable in the 60 to 90
day category which drove our DSO’s from an average of 75 days to 90 days during
the second quarter. A significant portion of those receivables were collected
subsequent to the end of the quarter.
Cash flows from investing
activities
. Cash flows used in investing activities were
approximately $0.5 million in the six months ended December 28, 2007 compared to
$0.2 million for the same fiscal period in 2007. The primary reason
for the increase of cash related to financing activities in the current fiscal
year relates to approximately $0.2 million of cash from Ai Metrix that exceeded
acquisition costs when acquired in October 2007, which partially offset other
cash used in investing activities in the prior fiscal year.
Cash flows from financing
activities
. Cash flows provided by financing activities were
approximately $1.4 million in the six months ended December 28, 2007 compared to
$0.9 million in the same period in fiscal 2007. The increase was due primarily
to borrowings exceeding payments on our credit facility in the current fiscal
year.
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 December 28,
2007 was $1.1 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 December 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 December 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 $2.4 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.
In
January 2008, the Internal Revenue Service (IRS) completed its examination of
the Company’s U.S. income tax returns for fiscal years ended June 30, 2004
through June 30, 2006. The Company has agreed to IRS adjustments to
reverse the acceleration of the deduction of certain expenses incurred in a
subsequent year for the tax years under audit resulting in a payment in January
2008 for taxes of $483,000. This amount was included in the income
taxes payable as of June 30, 2007 and December 28, 2007.
Commitments
(amounts in thousands)
|
|
Total
|
|
|
2008
(2)
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
Convertible
notes (1)
|
|
$
|
3,476
|
|
|
$
|
156
|
|
|
$
|
3,320
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
Note
payable (1)
|
|
|
560
|
|
|
|
20
|
|
|
|
280
|
|
|
|
260
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Capital
leases (1)
|
|
|
68
|
|
|
|
11
|
|
|
|
22
|
|
|
|
22
|
|
|
|
13
|
|
|
|
--
|
|
|
|
--
|
|
Operating
leases
|
|
|
3,738
|
|
|
|
1,007
|
|
|
|
1,351
|
|
|
|
545
|
|
|
|
460
|
|
|
|
350
|
|
|
|
25
|
|
Total
|
|
$
|
7,842
|
|
|
$
|
1,194
|
|
|
$
|
4,973
|
|
|
$
|
827
|
|
|
$
|
473
|
|
|
$
|
350
|
|
|
$
|
25
|
|
(1) Includes
principal and interest.
(2) Six months ending
June 30, 2008.
Off-Balance
Sheet Arrangements
SYS does
not have any
off balance sheet arrangements, investments in special
purpose entities or undisclosed borrowings or debt. In addition, SYS has not
entered into any derivative contracts.
Recent Accounting
Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007),
Business
Combinations
, which replaces SFAS No 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective for us
beginning July 1, 2009 and will apply prospectively to business
combinations completed on or after that date.
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
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.
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.
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 six months ended December 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 December 28,
2007, the deferred unfavorable variance totaled $0.6 million.