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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No.: 0-22693
SYSCOMM INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-2889809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Marcus Boulevard, Hauppauge, N.Y. 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 273-3200
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 1,800,860 shares of Common Stock held by
non-affiliates of the Company as of December 4, 1997 is $10,129,837.50.
The number of shares outstanding of each of the registrant's classes of
common equity as of December 4, 1997 is as follows:
Class of Common Equity Number of Shares
Common Stock 4,555,540
par value $.01
The information required by Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive proxy statement to be filed with the
Commission on or before January 29, 1998.
PART I
Item 1. BUSINESS
General
SysComm International Corporation ("SysComm" or the "Company"), through its
wholly owned subsidiary, Information Technology Services, Inc. ("InfoTech"), is
a leading systems integrator and reseller of computer hardware, operating
software and networking applications to Fortune 1000 companies. The Company
provides its customers with cost efficient, comprehensive solutions that satisfy
their information technology requirements. Since 1985, the Company's primary
focus has been on the sale, integration and servicing of International Business
Machine Corporation ("IBM") products including personal computers, mid-range
systems based on the IBM RS/6000, servers, the IBM AS/400 and, as of October
1997, the System/390 mainframe. In addition, the Company integrates, resells and
services products from manufacturers such as Hewlett Packard, Compaq, Apple,
Microsoft, 3Com, Bay Networks and Novell.
In March 1997, the Company commenced the assembly and sale of IBM PCs
through IBM's Authorized Assembler Program ("AAP") providing the Company with
greater flexibility in meeting its customers' needs. The Company believes that
this relationship with IBM will provide it with the opportunity to enhance its
responsiveness to client specific requests and orders, and improve its operating
efficiencies.
A significant percentage of the Company's revenues are derived from sales
to customers in the financial and investment communities. However, the Company's
customer base also includes mid-size retailers, manufacturers, distributors,
colleges, universities and state and local government agencies in the
Northeastern United States. The Company's customers include:
Astra Pharmaceutical CPC International Merrill Lynch
Barnes & Noble Deutsche Bank Northeastern University
Boston College Fidelity Investments Oxford Healthcare
Boston Financial Group Harvard University PaineWebber
Brown Brothers Harriman Healthsource Pepsico
Citibank International Business Prudential Insurance Company
The City of New York Machines Corporation The Pershing Division of
The City University of J.P. Morgan Donaldson Lufkin & Jenrette
New York Liberty Mutual Smith Barney
The Stop & Shop Companies
The Company intends to pursue new business by focusing on the sale and
integration of high-end systems in the financial, commercial, governmental,
healthcare and educational areas. To this end, the Company has the following
growth strategies: (i) targeting markets, (ii) offering a complete line of IBM
products, (iii) expanding its role as an IBM Premier Business Partner, (iv)
enhancing competitiveness through the AAP, and (v) expanding into other
geographic regions through selected acquisitions and strategic alliances.
The Company currently has six operating locations. From its Hauppauge, New
York headquarters it operates a distribution center, a computer configuration,
integration and PC assembly facility and its technical support services. The
Company conducts its sales operations from offices located in Hauppauge, New
York City, and Buffalo, New York; Waltham, Massachusetts; Marlton, New Jersey;
and Fairfield, Connecticut.
Strategy
The Company strives to offer its customers high quality computer and
networking system hardware (particularly IBM products), related operating system
software and network design, system installation and testing in a timely,
cost-effective and value-added manner. The Company believes that the following
factors are significant elements to the successful implementation of this
strategy:
Targeting Markets
The Company has a ten year track record as a market leader in the
installation and integration of high-level information systems to the banking
and financial services communities. In addition, the Company focuses on other
selected, major markets, including retailers, manufacturers and distributors,
institutions of higher learning, health care and pharmaceutical companies, and
state and local government agencies. The Company's in-depth understanding of its
customers current and future needs combined with its experience and in-depth
market focus enable it to offer an optimum range of products and services that
meet each customer's requirements.
Offering a Complete Line of IBM Products
The Company has chosen to represent IBM products because it believes that
IBM is the world's premier designer and manufacturer of computer equipment,
software and networking products. The wide range of products and services
offered by the Company, include personal computers (desktop workstations, file
servers and notebook computers), mid-range computers (RS/6000 and AS/400
systems), IBM S/390 mainframe, networking products (network hubs, routers,
bridges and switches) and IBM software products, including OS/2, Netfinity,
Eduquest and Lotus Notes. The Company also offers warranty repair, systems
support and customized training programs. The Company believes that its current
mix of IBM products meets the needs of its customers and brings the Company to
its goal of becoming a total solution integrator of the complete IBM product
line.
Expanding the Company's Role as an IBM Premier Business Partner
The Company's designation as an IBM Premier Business Partner provides it
with important competitive advantages. In 1997, the Company was among a small
number of original value-added resellers selected by IBM as a Premier Business
Partner. This designation by IBM was in recognition of the Company's
long-standing relationship with IBM, combined with its overall value,
performance and contribution in value to its customers. The Company believes
that the principal advantage to being a Premier Business Partner is the
potential referral of business by the IBM sales force.
1
Enhancing Competitiveness Through the IBM AAP
Within the past eighteen months, the PC industry has experienced a
fundamental change as major PC suppliers, led by IBM, have begun shifting
responsibility for the final assembly and delivery of PC products to a select
number of companies, including the Company. The AAP allows the Company to
assemble and sell IBM PCs configured to the exact customer hardware and software
specifications in a more timely and efficient manner. In addition to permitting
the Company to offer greater product selection, the Company believes AAP affords
it future opportunities and competitive advantages, including the potential to
increase gross margins on build-to-order systems, and the ability to act as an
assembler and distributor to other resellers. The Company is also planning on
becoming an assembler of the RS/6000 product line and SSA Storage Systems.
Expanding Into Other Geographic Regions Through Acquisition and Strategic
Alliance
The Company's participation in the AAP will make it an attractive acquirer
and/or joint venture partner to companies that do not possess the expertise or
resources to attain this status. The Company believes that the systems
integration business which targets Fortune 1000 companies is both extremely
competitive and based on existing relationships.
The Company believes that the expansion of its business into growing
markets and varied geographic regions, including the possibility of acquisitions
of qualified systems integrators and resellers, will allow it to service
existing customers in these new locations, expand its customer base, expand its
product and service offerings, and obtain more competitive pricing as a result
of increased purchasing volumes of particular products. The Company intends to
focus its expansion efforts on value-added resellers that complement its
existing operations. In particular, the Company believes that IBM resellers who
do not participate in the AAP will be at a competitive disadvantage to the
Company and other AAP participants. Accordingly, the Company believes that
certain of these companies will find that an acquisition by, or a joint venture
with, the Company to be an attractive alternative.
Industry Background
Complex computer information processing systems, the foundation on which
business and organizations now function, are continuously being redesigned,
modified and upgraded as new computer and telecommunications technologies are
introduced. Until the mid-1980's, either mid-range or mainframe computer
systems, were used to manage an organization's mission-critical,
transaction-oriented commerce and business functions, such as banking, credit
transactions, retail point-of-sale transactions and airline reservations.
Client/server networks support access to these functions, either within a single
site or from numerous geographically-dispersed sites.
In the late 1980's, a new architecture for information processing called
"client/server" computing emerged, fueled by the growing intelligence in desktop
computers, expanding capabilities of software applications and growing
capabilities of networks. A client/server system typically consists of multiple
intelligent desktop client computers linked with high performance server
computers by a local and/or wide area network ("LAN" and/or "WAN") and is
characterized by the flexibility and mobility of both application and user. In
order to take advantage of their established operational staff and physical
plant, many corporations are seeking to reconfigure their existing
mainframe/mid-range computers (sometimes referred to as "legacy" systems) to
operate in parallel with client/server networks.
The Company believes that these two information system models - legacy
systems and client/server systems - will continue to coexist, each with
advantages for certain applications. Thus, organizations are faced with complex
decisions concerning the current and future configurations of their information
systems, based upon factors such as the re-engineering of aspects of legacy
systems to function more efficiently with related client/server systems, the
explosive growth of the Internet (and related World Wide Web) and stand-alone
intranets, the convergence of computer and telecommunications technologies and
the universal recognition of information systems as the medium for commerce,
finance, education and administration. Mid-range and mainframe computer systems
remain important in this changing environment, and the Company intends to
exploit opportunities in both segments of the high end computer system markets.
At the same time, manufacturers such as IBM are increasing their reliance upon
companies such as SysComm to work with mid- and large-sized businesses and
organizations to provide single-source responsibility for the design,
procurement, installation and implementation of such systems.
Principal Markets and Customers
Since 1994, the Company has sold and delivered computer systems, network
products, software, maintenance and system support services to more than 700
customers throughout the United States and in more than 20 countries worldwide.
Based on its installed customer base, the Company believes it is a leading IBM
supplier/systems integrator of mid-range and computer/network systems in the
northeast United States. In fiscal year 1995, revenues from sales to The Chase
Manhattan Bank and Deutsche Bank accounted for 23% and 14%, respectively, of the
Company's total revenues; revenues from sales to Deutsche Bank and Citibank
accounted for 19% and 16%, respectively, of the Company's total revenues in
fiscal year 1996; and no one customer accounted for more than 6% of the
Company's total revenues in fiscal year 1997. In fiscal year 1997, the Company's
top five customers (three of which were new customers) accounted for 28% of
total revenues.
Dependence on Major Customers; Risk of Industry Concentration
For the last three fiscal years, 1995, 1996 and 1997, a significant portion
(55%, 50% and 28%, respectively) of the Company's revenues were derived from
sales to five principal customers, which customers vary annually, and encompass
markets wherein the demands of any one customer may vary greatly. In addition,
the Company does not have any exclusive long-term arrangements with its
customers for the continued sales of computer systems. In fiscal year 1995 sales
to The Chase Manhattan Bank and Deutsche Bank accounted for 23% and 14%,
respectively, of the Company's total revenues; revenues from sales to Deutsche
Bank and Citibank accounted for 19% and 16%, respectively, of the Company's
total revenues in fiscal year 1996 and no customer accounted for more than 6% of
the Company's total revenues for fiscal 1997. Although the number of customers
who purchase at least $250,000 of computer systems from the Company has
increased from 29 in fiscal year 1995 to 60 in fiscal year 1997, the failure to
acquire a significant or principal customer could have a material adverse effect
on the Company's operations
In the fiscal year ended September 30, 1997, approximately 33% of the
Company's sales of computer systems were to customers in the banking, financial
and securities industry based in the Northeastern United States. Although the
Company continues to broaden its market focus to include sales to other markets,
such as educational institutions, government agencies, healthcare and insurance
companies, the Company expects that it will continue to derive a substantial
percentage of its sales of computer systems from such banking, financial and
securities businesses. Accordingly, unfavorable economic conditions or factors
that relate to these industries, particularly any such conditions that might
result in reductions in capital expenditures or changes in such company's
information processing system requirements, would have a material adverse affect
on the Company's results of operations.
Products/IBM Relationship
The Company has access to a full range of computer product lines,
networking and interconnectivity systems and operating software, from IBM,
Hewlett Packard and Compaq, as well as other selected manufacturers. However,
the Company has concentrated its efforts in developing strong relationships with
IBM because it believes that IBM offers the most comprehensive and well
established product line in the industry. The Company has had a long term
relationship with IBM whereby it has the opportunity to configure, sell and
service IBM's full line of PCs, mid-range information and mainframe processing
systems. In addition, as a member of several IBM advisory committees, the
Company maintains close communications with IBM's future plans and directions.
The Company believes its strong marketing and technical skills enabled it to
become North America's largest reseller of IBM's RS/6000 product line in 1996,
and the Company believes it will continue to have a close business relationship
with IBM. The Company's principal sales are derived from the following: (i) IBM
PC systems; (ii) IBM RS/6000 systems; (iii) IBM S/390 Mainframe; (iv) IBM AS/400
systems; and (v) communication and networking systems.
IBM PC Product Line and Participation in IBM's PC Company Authorized
Assembler Program
IBM is one of the world's leading designers and manufacturers of personal
computer systems. IBM's personal computer product line includes mobile
(notebook) and desktop workstations as well as file, application and network
servers.
IBM PC systems feature Pentium(TM)processors from Intel and are available
with a choice of operating software which allows end-users to select operating
system software, including IBM OS/2, Microsoft DOS/Windows, or
Microsoft(R)Windows 95(TM)and Microsoft Windows NT(TM). For the last five years,
due to the amount of sales volume for IBM products generated by the Company, IBM
has enabled the Company to purchase products directly from IBM for resale at the
lowest prices available. There can be no assurances that the Company will be
able to continue to purchase at these prices, and loss of this competitive
pricing could have a material adverse affect on the Company's business and
results of operations.
In fiscal year 1997, the Company's sales of IBM PC products were
approximately $35 million, or 39%, of the Company's annual sales.
In March 1997, the Company commenced operation of an IBM PC system assembly
facility under IBM's Authorized Assembler Program (the "AAP"). In order to
participate in the AAP, the Company has committed, and will continue to commit,
significant capital to hire and train a high quality work force to establish an
appropriate assembly facility and to initially increase its inventory of
components to satisfy anticipated customer demand. As a component assembler of
finished products, the Company will face operational concerns, which it has not
faced as a reseller. These operational concerns include the ability of the
Company to hire and train qualified assembly personnel and maintain an adequate
supply of component parts inventory.
The continued operation of this assembly facility is dependent upon the
Company complying with the terms of its AAP agreement (the "AAP Agreement") with
IBM, including satisfying certain minimum purchase requirements, compliance with
strict quality control provisions and maintaining trained and certified
personnel. The AAP Agreement is terminable by either IBM or the Company upon 30
days' prior notice and is immediately terminable by IBM in the event that IBM
determines, in its sole discretion, that (i) the assembled products fail to meet
required specifications, (ii) the Company materially breaches the terms and/or
conditions of the AAP Agreement, (iii) the Company engages in a course of
conduct that has injured IBM's reputation or the reputation of its products, or
(iv) the Company's status with IBM as a Business Partner is terminated for any
reason, expires or if the Company is no longer eligible to purchase IBM personal
computer components directly from IBM. In addition, the Company is required to
maintain ISO 9002 registration standards, the registered international standard
for ensuring the consistent and measurable quality of products and services.
Subject to the terms of the AAP Agreement, IBM is permitted to periodically
review the Company's performance in order to monitor and assess continued
compliance. The AAP Agreement expires on December 31, 1998 and, although the
Company plans to renew it, there can be no assurance that it will be renewed on
similar terms, if at all.
The Company currently plans to expand its participation in the AAP to
include IBM's RS/6000 computer and SSA Storage systems. The Company's ability to
successfully participate in the program with respect to such products is
contingent upon the Company moving into larger facilities to accommodate such
operations, equipping such facilities for assembly activities, hiring technical
employees and approval from IBM. The Company's planned operations and future
growth, to a significant extent, are dependent on the Company's ability to
participate in the AAP with respect to a broad range of IBM product lines. There
can be no assurance that the Company will be able to successfully operate an IBM
approved facility capable of serving an expanded product line, that IBM will
authorize the Company's participation in assembly programs beyond personal
computers, that the Company will maintain necessary industry registrations or
that the computer systems produced by such assembly programs will gain market
acceptance.
By being part of the AAP, the Company believes it may increase its
inventory turnover rate, expand the range of products available to its customers
and improve delivery time to its customers. In addition, the Company will
maintain an inventory of component parts, rather than an inventory of
fully-configured PC models.
IBM RISC System/6000
The IBM RISC System/6000 is a mid-range computer workstation and server
configuration providing industry-leading computing and graphic performance that
meets large-scale, data handling and network management demands for many types
of businesses. RS/6000 systems perform mission critical applications, such as
those found in financial trading systems, from the combination of a robust UNIX
operating system with fast 2D and 3D graphic capabilities. The RS/6000 is a
flexible and scalable system incorporating (1) symmetric multiprocessing
capabilities, a design that makes it possible for a number of processors to
share memory and other existing features more efficiently; (2) scalable parallel
processing, a technology that allows several hundred processor nodes to run in
tandem as application servers, data servers, Internet or Intranet servers; and
(3) a multi-operating system support, allowing a user to run existing programs
simultaneously.
RS/6000 systems have been used for general business and financial
applications, including billing, payroll and accounts receivable, as well as for
advanced graphics programs for mechanical and electrical design, scientific
visualization, communications and networking applications for optimum
client/server and Internet performance, and word processing and desktop
publishing applications for both scientific and commercial documents. These
applications are particularly useful for the securities, manufacturing, retail,
education and transportation industries.
As Internet and Intranet-based transactions grow, RS/6000 systems'
networking capabilities, including security and integrity features, are becoming
increasingly important.
In 1996, IBM recognized the Company (ranked by dollar value of systems
sold) as its largest "Industry Remarketer" for RS/6000 systems in North America.
For the year ended December 31, 1996 the Company's sales of the RS/6000 was
approximately $59 million, or 59%, of the Company's annual sales. For fiscal
1997, the Company's sales of the RS/6000 was approximately $40 million, or 45%,
of the Company's annual sales. The Company considers RS/6000 systems to be an
integral product for future increases in the Company's sales volume.
IBM System/390
The IBM System/390 is IBM's large scale mainframe. The System/390 is the
current generation of IBM mainframe computer systems, which were first
introduced in the early 1960's as the System/360. System/390 is the computing
platform used by a majority of Fortune 1000 corporations for "legacy" computing
applications, that assist businesses to perform core applications, such as
accounting, operations, order entry, customer service and inventory tracking.
The System/390 has evolved into the central hub of network computing strategy,
enabling businesses to provide applications on demand, secure and available 24
hours a day, 365 days a year. Industry analyst's estimate that 70% of all
mission critical data resides on a mainframe and that 75% of all real-time
transactions run on mainframe based networks. IBM is the world's largest
supplier of mainframe computer systems.
All Other Products
IBM AS/400 Product Line. Although the IBM Application System/400 (also
known as AS/400) has not been a major source of revenue to the Company, the
Company is attempting to increase its revenue in this market. The AS/400 is
designed and built as a multi-user commercial application platform integrating a
relational database and networking capabilities into the operating system of the
computer. It is designed as a general purpose business computer, optimized for
the commercial environment. Its design reflects the dominant requirements for
businesses, i.e., integration of new technology without disrupting existing
applications, large portfolio of business solutions allowing companies to
discover the most suitable application for their needs, integration of functions
including security, database, system management, communications and on-line
teleprocessing, enabling companies to manage a system with limited resources in
a demanding business climate.
The AS/400 provides businesses with a cost effective solution, allowing
them to adopt advanced technologies at their own pace, integrating high quality
PC technology and associated software to enhance the computer's speed for PC
file serving. The AS/400 is a popular business computing system due to its ease
of installation, implementation, usage (it can support up to 7,000 users) and
ability to upgrade.
Communication -- Networking Systems. The Company provides various
communications and networking products including complex data communications
equipment and software such as bridges, hubs and routers, as well as modems and
network interface cards (NIC) to connect personal computers to local and wide
area networks (LAN/WAN). Nearly every computer sold today in the commercial
marketplace is connected to a communications network.
Other. The Company is authorized to sell other manufacturers' personal
computer systems, networking, printers and software products including: Bay
Networks, Compaq, Lexmark, Hewlett Packard, Apple, MicroSoft, Novell, and 3Com.
Certain of the Company's agreements with such suppliers provide for minimum
annual purchase requirements. Although the Company, to date, has complied with
these agreements, there is no assurance that the Company will continue to meet
such minimum purchase requirements or other terms of such agreements. To the
extent that it does not comply with such terms, the Company may lose its status
as an authorized reseller for such suppliers. For fiscal year 1997, the
Company's sales of non-IBM products accounted for approximately $13 million, or
15%, of total revenue.
Dependence on IBM as a Supplier
For the fiscal years ended September 30, 1996 and 1997, in excess of 84% of
the Company's revenues resulted from the sale of personal computers, mid-range
computer systems, networking systems and operating software manufactured by
International Business Machines Corporation ("IBM"). Although the Company has
had a long standing reseller relationship with IBM, IBM may terminate this
relationship with the Company at will or upon relatively short notice. The
Company's reseller arrangements with IBM are not exclusive. Moreover, IBM is not
obligated to have product on hand for timely delivery to the Company, nor can
IBM guarantee product availability in sufficient quantities to meet the
Company's demands.
In September 1997, IBM announced new criteria which its resellers must meet
in order to be eligible to acquire personal computers directly from IBM.
Beginning on January 1, 1998, in order to directly purchase from IBM, resellers
must have purchased a minimum of $100 million worth of computer systems and
other products directly from IBM during the period between January 1, 1997 and
December 31, 1997. Beginning on January 1, 1999, resellers must have purchased a
minimum of $150 million worth of computer systems and other products directly
from IBM during the period January 1, 1998 through December 31, 1998. IBM has
stated that resellers who are approved to assemble IBM PCs under the AAP, must
meet this new criteria to continue to purchase components directly from IBM.
For the period January 1, 1997 through October 31, 1997, the Company
purchased approximately $61 million worth of computer systems and other products
directly from IBM. Although the Company has not met IBM's new criteria for
continuing to purchase PCs directly from IBM after December 31, 1997, the
Company believes that IBM will continue to allow the Company to continue to
purchase computer systems and other products directly from IBM, although there
can be no assurance that IBM will continue to allow the Company to purchase
directly from IBM without the Company meeting IBM's new purchase criteria.
If IBM were to discontinue direct sales to the Company as a result of
insufficient purchase volumes or for any other reason, the Company would be
required to purchase IBM products from a wholesaler or other reseller, which
would likely be on terms less favorable than those currently obtained from IBM.
There can be no assurance, therefore, that all IBM products will be available in
a timely fashion as required by the Company. The loss of IBM as the Company's
prime vendor or the loss of the Company's status as an authorized reseller of
IBM products, the deterioration of the Company's relationship with IBM, or the
deterioration of the industry's perception of IBM as a leading manufacturer of
high quality computers would have a material adverse effect on the Company's
business, results of operations or financial condition.
Risk of Losing Price Protection
Prior to January 1, 1997, resellers who purchased directly from IBM were
fully protected against any reduction in prices by IBM. If, for example, the
Company purchased products from IBM, but subsequently IBM lowered its sales
price, then the Company would receive a credit in the amount of the difference
between the current sales price and the actual purchase price. Effective
November 1, 1997, resellers will only receive price reduction credits on new
products based on the previous 15 days of IBM's net shipments to the Company
from the date the product is shipped from IBM. In addition, as an inducement to
the Company to accept these new terms, IBM will rebate to the Company an amount
equal to 2.5% of its net purchases. If the Company is unable to sell its
inventory within those 15 days and IBM lowers the sales price on these items,
the Company would be unable to recoup the difference on the lowered price which
could have a material adverse effect on the Company's business, financial
condition or results of operation.
Periodic IBM Product Shortages
From time to time, including during the quarter ended September 30, 1997,
IBM has been unable to deliver its products in a timely fashion to meet the
Company's outstanding orders, which has affected the Company's quarterly results
of operations. Specifically, during the quarter ended September 30, 1997, delays
by IBM in shipment of products resulted in a backlog of approximately $2,400,000
of sales by the Company. There can be no assurance that IBM (and other
manufacturers who the Company deals with) will consistently provide an adequate
supply of products in order for the Company to fulfill all of its customers'
orders in a timely manner. The failure to obtain adequate product supplies would
have a material adverse effect on the Company's results of operations or
financial condition.
Financing Agreement
The Company's business activities are capital intensive, requiring the
Company to finance accounts receivable and inventory. The failure to obtain
adequate product financing on a timely basis could have a material adverse
affect on the Company's business, results of operations and financial condition.
Pursuant to the Company's financing agreement ("Financing Agreement") with IBM
Credit Corporation ("IBM Credit"), the Company is permitted to borrow up to
$27,500,000, based upon 85% of all eligible receivables due within 90 days and
up to 100% of all eligible inventory. As of September 30, 1997, borrowings
outstanding under the Financing Agreement were $10,164,138. Pursuant to the
Financing Agreement, the Company's credit availability is reduced by the
aggregate amount of accounts payable owed to IBM Credit which, as of September
30, 1997, was $12,035,345. The Financing Agreement, which expires on September
23, 1998, is subject to temporary increases, thereby increasing the line of
credit to $41,500,000 during certain periods. The Company is also required to
comply with certain additional financial covenants.
The amount of credit available to the Company pursuant to the Financing
Agreement at any point in time may be adversely affected by factors such as
delays in collection or deterioration in the quality of the Company's accounts
receivable, inventory obsolescence, economic trends in the computer industry and
interest rate fluctuations. Any decrease or material limitation on the amount of
capital available to the Company under the Financing Agreement would limit the
ability of the Company to fill existing sales orders, purchase inventory or
expand its sales levels and, therefore, would have a material adverse effect on
the Company's financial conditions and results of operations. As stated above,
the Financing Agreement expires on September 23, 1998. The Company has had a
credit facility with IBM Credit since 1992, and the Company believes that it
will enter into a renewal of this credit facility with IBM. There can be no
assurance that the financing to the Company under this renewal will be available
in amounts at comparable or better terms than those in effect, if at all. The
inability of the Company to have continuous access to such financing at
reasonable costs would materially and adversely impact the Company's financial
condition and results of operations.
Dependence on IBM's Volume Discount Schedules and Market Development Funds
As part of its overall reseller arrangements with IBM, IBM provides the
Company with volume discounts and market development funds on products purchased
from IBM. These discounts and funds are used to offset a portion of the
Company's cost of IBM's products sold, thereby affecting income from operations
and the Company's expenses relating to marketing and technical support resources
for IBM products. Any adverse change in the volume discount schedule available
to the Company, which the Company believes is currently at IBM's highest
discount level, or changes in the availability, structure or timing of the
receipt of development funds, would materially adversely affect the Company's
business, results of operations and financial condition.
Sales and Marketing
The Company has a broad customer base of primarily Fortune 1000 companies.
The Company's sales and marketing efforts are focused on high level decision
making executives, whose purchasing decisions are based on factors such as the
overall cost of purchasing and maintaining a system and the Company's reputation
and expertise in delivering and installing effective total information
technology solutions, which initially may not be the least expensive. The
Company relies on its marketing and sales programs, its industry-wide expertise,
its relationship with existing customers and its status as an IBM Premier
Business Partner to generate sales opportunities.
The Company currently has sales offices in six locations: New York City,
Hauppauge, and Buffalo, New York; Waltham, Massachusetts; Marlton, New Jersey;
and Fairfield, Connecticut. Currently, the Company employs approximately 35
field sales representatives and system engineers. The sales efforts are led by
the Company's senior executives, John H. Spielberger, Thomas Baehr and Norman
Gaffney, who have more than 69 years of combined experience in sales of
high-level computer systems. The Company believes that due to the complex nature
of the computer products it sells and supports, maximum marketing effectiveness
can only be achieved by sales specialization. Each sales representative is
trained in one specific product line and representatives of one product line can
call upon specialized sales and systems engineering personnel from another
product line.
The Company pursues new business opportunities by referrals from IBM or
other manufacturers, referrals from existing customers, direct solicitation by
telephone or mail of pre-qualified customers, and participation in IBM and other
industry trade shows.
The Company has developed and maintained automated sales tools intended to
improve sales productivity, quality and reliability and increased customer
satisfaction. These systems include on-line systems configuration and pricing,
real time order entry, order confirmation and electronic mail for customers
through privately leased telephone lines and through the Internet.
Customer Support and Service
The Company believes that its ability to provide effective total solutions
to meet the needs of its customers is enhanced by its internal management
information system, which combines accounting, purchasing, inventory control,
sales order processing and work order management. The Company provides a large
array of services to its customers, including warranty repair on all IBM
personal computer products; toll-free telephone number for sales and product
information and order placement; toll-free telephone number for customer service
on all products sold, including technical assistance and repair warranty; E-mail
network access for customers to receive real time price quotations, place orders
and check order status; on-site system engineers to provide technical assistance
for installations and upgrades; partnership with IBM to provide customized
services such as helpdesk, consulting, extended warranty, extended maintenance
coverage; and IBM Credit Corporation financing options on all products sold
Competition
The markets in which the Company operates are characterized by intense
competition from several types of network integrators and technical service
providers, including mainframe and mid-range computer manufacturers and
outsourcers, including, among others, Digital Equipment Corporation, Sun
Microsystems, Electronic Data Systems Corporation, Hewlett-Packard Company and
Integrated Systems Solution Corporation. Other competitors which purchase
directly from IBM, like the Company, include value added resellers, systems
integrators and third-party service companies, including AmeriData Technologies,
Inc., CompuCom Systems, Inc., Entex Information Services, InaCom Corp.,
MicroAge, Inc. and Vanstar. While the Company receives sales and marketing
assistance from IBM, including introductions and referrals to potential
customers, the Company, from time to time, faces direct competition from IBM
with respect to large contracts. The Company expects to face further competition
from new market entrants and possible alliances between competitors in the
future. Certain of the Company's current and potential competitors have greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sales of their services than the Company. No
assurance can be given that the Company will be able to compete successfully
against current and future competitors.
The Company's ability to compete successfully depends on a number of
factors such as breadth of product and service offerings, sales and marketing
efforts, pricing, quality and reliability of services and other support
capabilities. While there can be no assurance that the Company will be able to
continue to compete successfully with existing or new competition, the Company
believes that it currently competes favorably due to its focus and expertise of
network integration and its concentration on sales of IBM product lines.
Limited Backlog of Orders
Customers typically do not place recurring "long-term" orders with the
Company, resulting in a limited order backlog at any point in time. The failure
by the Company to receive orders from customers on a continuous basis would have
a material adverse effect on the Company's financial condition and results of
operations given the Company's lack of recurring orders.
Rapid Technological Change
The industry in which the Company competes is characterized by rapid
technological change and frequent introduction of new products and product
enhancements which result in relatively short product life cycles and rapid
product obsolescence. The expectation or announcement of new or enhanced
products often causes customers to delay their purchasing decisions until such
new or enhanced products are announced and available. Furthermore, the Company's
success depends in large part on IBM's ability to identify and develop products
that meet the changing requirements of the marketplace. In the event that IBM is
unable to do so, the Company's continued success will depend upon its ability to
identify and source substitute products from other vendors. There can be no
assurance that the Company will be able to identify and offer such products
necessary to remain competitive or avoid losses related to obsolete inventory
and drastic price reductions.
Management of Growth
The Company's ability to manage growth effectively and expand its AAP
operations will require it to continue to implement and improve its operational,
technical, financial, and sales systems, to develop the skills of its managers
and supervisors, and to hire, train, motivate and manage its employees. There
can be no assurance that the Company will be successful in managing growth. The
failure to do so would materially adversely affect the Company's financial
position and results of operations. The Company has recently opened sales
offices in Connecticut and New Jersey. In October 1995 it closed a sales
facility in Princeton, New Jersey after eleven months of operations. In October
1997, the Company purchased land and commenced construction of a 40,000 square
foot facility in Yaphank, New York. The Company anticipates that it will cost
approximately $2.5 million to construct and supply furniture, fixtures and
equipment for this facility. There can be no assurance that the Company will be
able to further expand its operations successfully either through acquisition or
the establishment and operation of an IBM PC assembly facility. Expansion of the
Company's operations will be dependent upon, among other things, the continued
growth of the computer industry, the Company's ability to withstand intense
price competition, its ability to obtain new customers, and retain skilled
technicians, engineers, sales and other personnel. If the Company does not have
sufficient cash resources, its growth could be limited unless it is able to
obtain additional capital through debt or equity financings. There can be no
assurance that additional financings will be available to the Company on
commercially reasonable terms, if at all.
Dependence on Key Personnel
The Company's success during the foreseeable future will depend largely
upon the continued services of its founder and Chief Executive Officer, John H.
Spielberger, and the executive team of Dennis R. Wilson, Thomas J. Baehr and
Norman Gaffney, who joined the Company in 1995, 1994 and 1994, respectively.
Each of the executive officers entered into employment agreements in June 1997
that expire on September 30, 1999. The loss of any of the services of the
Company's key personnel could have a material adverse affect on the Company's
business, ongoing results and financial condition. These employment agreements
contain confidentiality, non-competition, and non-solicitation provisions. In
addition, the Company has attempted to mitigate the risks associated with its
dependence on John H. Spielberger and Thomas Baehr by obtaining $1,000,000 key
person life insurance policies on each of such individuals. The Company's
success also depends in part on its ability to attract and retain qualified
managerial, technical, sales and marketing personnel. The Company's results of
operations could be adversely affected if the Company were unable to attract,
hire, assimilate, and train these personnel in a timely manner.
Control by Principal Stockholder
As of September 30, 1997, John H. Spielberger, Chairman of the Board,
President and Chief Executive Officer of the Company, beneficially owned
approximately 55% of the Company's outstanding Common Stock. As a result of his
stock ownership, Mr. Spielberger has effective control of the Company and the
power to control the outcome of matters submitted to a vote of the Company's
stockholders, such as the election of at least a majority of the members of the
Company's Board of Directors and to direct the future operations of the Company.
Such concentration may have the effect of discouraging, delaying or preventing a
change in control of the Company.
Anti-Takeover Provisions
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation ("Certificate of Incorporation"), Amended and Restated By-laws
("By-Laws") and Delaware law may be deemed to have an anti-takeover effect. The
Company's Certificate of Incorporation provides that the Board of Directors may
issue additional shares of Common Stock or establish one or more classes or
series of Preferred Stock with such designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations that
the Board of Directors fixes without stockholder approval. Moreover, the
Company's Certificate of Incorporation and By-Laws provide that its Board of
Directors is divided into three classes serving staggered three year terms,
resulting in approximately one-third of the directors being elected each year
and also contain certain other provisions relating to voting and the removal of
the officers and directors. In addition, the Company is subject to the
anti-takeove provisions of Section 203 of the Delaware General Corporation Law.
In general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Each of the foregoing provisions may have the effect of
rendering more difficult, delaying, discouraging, preventing or rendering more
costly an acquisition of the Company or a change in control of the Company
Significant Fluctuations to Quarterly Results
The Company's quarterly operating results have fluctuated in the past and
will continue to do so in the future. Quarterly operating results may fluctuate
as a result of a variety of factors, including: the timing of the Company's
delivery of significant orders, the ability of IBM to deliver, in a timely
fashion, products for which the Company has received orders, the length of the
sales cycle, receipt of volume discounts by IBM, the demand for products and
services offered by the Company, the introduction or announcements by IBM and
other manufacturers relating to new products, the hiring and training of
additional personnel, problems or delays associated with the Company's assembly
of personal computer systems (under the AAP) as well as general business
conditions.
Historically, the size and timing of the Company's sales transactions have
varied substantially from quarter to quarter and the Company expects such
variations to continue in future periods, including the possibility of losses in
one or more fiscal quarters. The fluctuations may be caused by IBM's delays in
shipping certain computer systems for which the Company received orders that it
expected to deliver during that quarter. In addition, the Company's collection
periods have fluctuated due to periodic unavailability of product from IBM,
which resulted in the Company not receiving payment from certain customers until
their entire orders were shipped. Accordingly, it is likely that in one or more
future fiscal quarters, the Company's operating results may be below the
expectations of public market analysts and investors. As a result, the market
price of the Company's Common Stock would be materially adversely affected.
Potential Volatility of Stock Price
The market price of the Common Stock may be subject to significant
fluctuations in response to numerous factors, including, but not limited to,
fluctuations or uncertainties in the Company's quarterly operating results
(including losses), delays with respect to the AAP, announcements of
technological innovations of new products by IBM or other suppliers, conditions
in the markets in which the Company and its competitors compete, changes by
financial analysts in their estimates of the earnings of the Company, the
trading volume of the Company's common stock and the economy in general. From
time to time, the stock market experiences significant price and volume
volatility which may affect the market price of the Company's Common Stock for
reasons unrelated to the performance of the Company. In addition, because the
Company is closely dependent upon and associated with IBM, the Company's stock
price may be adversely affected based on the performance of IBM's operations.
Employees
As of September 30, 1997, the Company had 75 full-time employees. The
Company has no collective bargaining agreements and believes its relations with
its employees are good.
2
Disclosures Regarding Forward Looking Statements
This report on Form 10-K includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical facts included in this Form 10-K including,
but not limited to, statements contained in this "Business," "Management's
Discussion and Analysis" and "Notes to Consolidated Financial Statements,"
located elsewhere herein regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations, and industry conditions, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove correct.
Item 2. Properties
In October 1997, the Company purchased land in Yaphank, New York and
entered into a contract to construct a 40,000 square foot assembly and warehouse
facility. The total costs for this facility are estimated to be approximately
$2.5 million (excluding the cost to purchase the land). The Company expects that
the facility, which will also act as the Company's headquarters, will be
operational by late spring 1998.
The Company leases 11,200 square feet of executive office and warehouse
space in Hauppauge, New York pursuant to a five year contract which expires on
January 31, 1999. The lease provides for payments totaling $288,580 over the
course of the lease.
The Company leases 5,027 square feet of general office space in New York
City pursuant to a five year lease at an annual rental of $130,704. This lease
expires on February 28, 2002.
The Company leases 5,350 square feet of general office space in Waltham,
Massachusetts pursuant to a five year lease which expires on October 31, 1999.
The lease provides payments in the amount of $70,085 annually for the period
from December 1, 1994 through September 30, 1997 and $76,772 annually for the
period from October 1, 1997 through December 31, 1999.
The Company leases 300 square feet of general office space in Marlton, New
Jersey and North Haven, Connecticut for $7,800 per year and $8,100 per year,
expiring on January 31, 1998 and December 31, 1997, respectively.
Commencing on December 1, 1997, the Company will lease 795 square feet of
general office space in Fairfield, Connecticut for $11,130 per year. The lease
expires on November 30, 2002. This sales office will replace the North Haven,
Connecticut office, whose lease expires on December 31, 1997.
Item 3. Legal Proceedings
The Company is involved in a legal proceeding that is incidental to the
conduct of its business. This proceeding is not, in the opinion of management,
material. In the ordinary course of its business, the Company is, from time to
time, subject to litigation. The Company does not believe that any litigation to
which the Company is currently subject is likely, individually or in the
aggregate, to have a material adverse effect on the financial condition of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
3
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) The Company's Common Stock, par value $.01 per share (the "Common
Stock"), trades on the NASDAQ Stock Market under the symbol SYCM. The following
table sets forth for each period indicated the high and low sales prices for the
Common Stock for the period June 17, 1997, the date of the Company's initial
public offering, through September 30, 1997, as reported by NASDAQ:
Fiscal 1997 Sales Prices
High Low
Quarter Ended June 30, 1997 51/2 51/4
Quarter Ended September 30, 1997 6 5/8 5
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.
(b) The number of record holders of the Common Stock as of December 4, 1997
is approximately 40. The Company believes that there are a substantially greater
number of beneficial owners of shares of its Common Stock.
(c) The Company currently intends to retain all future earnings for use in
the operations of its business and, therefore, does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent, among other things, upon earnings, capital requirements, financing
agreement covenants, the financial condition of the Company and applicable law.
(d) Use of Proceeds from Registered Securities
On June 17, 1997, the Company registered 1,437,500 shares of its Common
Stock, $.01 par value (the "Common Stock") (Registration Statement No.
333-25593). The offering of the Common Stock terminated prior to the sale of all
of the securities registered, because the managing underwriter, Commonwealth
Associates, did not exercise all of its over-allotment option.
The Company registered 1,437,500 shares of Common Stock; the aggregate
price of the offering amount registered was $7,187,500; the Company sold
1,385,000 shares of Common Stock; and the aggregate offering price of the amount
sold was $6,925,000.
The following information discloses the amount of expenses incurred in
connection with the issuance of the Common Stock registered for the period June
17, 1997 through September 30, 1997:
Direct or indirect payments to
directors, officers, general partners of
the Company or their associates; to persons
owning ten percent or more of any class
of equity securities of the Company and to Direct or indirect payments
Affiliates of the Company to others
Underwriting discounts and
commissions........................ _____ $ 484,750
Finders' fees....................... _____ _
Expenses paid to or for
Underwriters....................... _____ 207,750
Other expenses...................... _____ 746,341
Total expenses...................... $1,438,841
The net offering proceeds to the issuer after the total expenses listed
above; $5,486,159.
The following lists the amount of net offering proceeds to the Company for
the period June 17, 1997 through September 17, 1997 for each of the purposes
listed below:
Direct or indirect payments to directors,
officers, general partners of the Company
pr their associates; to persons owning ten
percent or more of any class of equity
securities of the Company and to Affiliates Direct or indirect payments
of the Company to others
Construction of plant, building and facilities
_____ $ 439,300
Purchase and installation of machinery and equipment
----- -----
Purchase of real estate _____ _____
Acquisition of other business(es)
----- -----
Repayment of indebtedness _____ 5,046,859
Working capital................. _____ _____
Temporary Investment
(if any).......................... _____ _____
Other purposes (for which at least 5% of
the Company's total offering proceeds of
$100,000 (whichever is less)) ----- -----
Total _____ ________
5,486,159
===== =========
The use of proceeds described above does not represent a material change in
the use of proceeds described in the Company's Prospectus.
Item 6. Selected Financial Data
The following financial statement data as of and for the fiscal years ended
September 30, 1995, 1996 and 1997 are derived from, and are qualified by
reference to, the audited Consolidated Financial Statements included herein and
should be read in conjunction with those Consolidated Financial Statements and
the Notes thereto. The financial statement data as of and for the fiscal years
ended September 30, 1993 and 1994 are derived from audited consolidated
financial statements not included herein.
Year Ended September 30,
Consolidated Statement of Operations Data
1993 1994 1995 1996 1997
Net sales........................... $51,085,000 (1) $45,459,575 (1) $55,195,507 $98,446,698 $89,725,938
Cost of sales....................... 46,948,000 40,796,425 49,441,544 89,025,331 78,049,310
Gross profit........................ 4,137,000 4,663,150 5,753,963 9,421,367 11,676,628
Selling and administrative expenses 3,565,000 3,406,316 4,079,184 5,028,812 6,534,552
Income from operations............... 572,000 1,256,834 1,674,779 4,392,555 5,142,076
Interest expense (net)............... (498,000) (713,778) (1,207,316) (1,390,867) (979,185)
Other income........................ -- 39,630 37,126 63,151 2,570
Realized loss on available-for-sale securities
-- -- - (1,406,250) _________
Income from continuing operations
before income taxes 74,000 582,686 504,589 1,658,589 4,165,461
Provision for income taxes........... 31,000 242,889 223,769 735,886 1,761,855
Income from continuing operations 43,000 339,797 280,820 922,703 2,403,606
Discontinued operations.............. -- 1,485,698 -- -- --
Cumulative effect of a change in
accounting principle 78,000 -- - - __________
Net income.......................... $ 121,000 $ 1,825,495 $ 280,820 $ 922,703 $ 2,403,606
Per Share Data:
Income from continuing operations
$ .01 $ .10 $ .08 $ .25 .61
Income from discontinued
operations.......................... -- .43 -- --
Income from accounting changes .02 -- -- --
Weighted average number of shares outstanding 3,615,830 3,448,900 3,614,040 3,677,290 3,931,846
4
September 30,
1993 1994 1995 1996 1997
Consolidated Balance Sheet Data:
Working capital....................... $ 661,000 $ 1,171,764 $ 1,769,589 $ 3,342,545 10,356,416
Total assets.......................... 16,067,000 18,867,758 18,471,659 32,102,557 38,104,036
Short term debt....................... 7,677,000 6,469,072 10,797,111 12,510,017 10,658,451
Long term debt........................ -- -- -- 67,291 66,416
Stockholders' equity.................. 1,041,000 2,412,564 2,355,884 3,998,587 11,827,636
(1) Includes sales of the Company's former subsidiary, Romel Technology,
Inc. (d/b/a MSG) of $29,272,300 and $4,127,768 for the two years ended September
30, 1994, respectively, which was sold in November 1993. The profit/loss from
this subsidiary during these periods were de minimis. After adjusting for these
sales figures, the Company's revenues were $21,812,700 and $41,331,807 for the
two years ended September 30, 1994.
Item 7. Management's Discussion and Analysis
Results of Operations
Overview. The Company operates in a highly competitive industry which in
turn places constant pressures on maintaining gross profit margins. Many of the
Company's sales are high volume equipment sales which produce lower than average
gross profit margins, but are often accompanied by a service arrangement which
yields higher than average gross profit margins.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of operations.
Year Ended September 30,
1995 1996 1997
Net sales............................. 100.0% 100.0% 100.0%
Cost of sales......................... (89.6) (90.4) (87.0)
Gross profit.......................... 10.4 9.6 13.0
Selling and administrative
expenses............................ (7.4) ( 5.1) (7.3)
Income from operations 3.0 4.5 5.7
Interest expense (net) (2.1) ( 1.4) (1.1)
Realized loss on available-for-sale securities
-- ( 1.4) --
Income before income taxes .9 1.7 4.6
Income taxes.......................... ( .4) ( .7) (1.9)
Net income............................ .5 1.0 2.7
Fiscal Year 1997 Compared to Fiscal Year 1996
Sales for fiscal 1997 decreased approximately 9% or $8,720,760 to
$89,725,938 from $98,446,698 in fiscal year 1996. The decrease in sales was
anticipated in light of the fact that the Company did not have any large SP-2
sales similar to those that it had in fiscal 1996. Additionally, the Company did
not have any single customer who accounted for more than approximately 6% of the
Company's total sales.
Gross profit as a percentage of sales increased to 13.0% in fiscal 1997
from 9.6% in fiscal 1996. This increase was primarily attributable to an
increase in the Company's service business (which tripled in fiscal 1997),
including the on-site billings of systems engineers as well as income generated
from the sale of vendor leases and warranties.
Selling and administrative expenses increased by approximately 30% or
$1,505,740 to $6,534,552 in fiscal year 1997 from $5,028,812 in fiscal year
1996. Included in the increase of $1,505,740 were increases in payroll of
approximately $900,000 due to the hiring of 20 additional personnel during
fiscal 1997. In addition, the Company expanded an existing office and opened two
new offices in Marlton, New Jersey and North Haven, Connecticut.
Interest expense decreased 29% or $405,365 to $986,087 in fiscal year 1997
from $1,391,452 in fiscal 1996. This decrease is primarily attributable to a
reduction in debt as a result of the use of proceeds from the Company's recent
public offering. The Company also believes that its constant monitoring of
accounts receivable has helped to keep interest costs at a minimum. In addition,
the Company uses all available funds to reduce its outstanding loan balance on a
daily basis. Net interest expense (interest expenses less interest income) for
fiscal year 1997 and 1996 was $979,185 and $1,390,867, respectively.
Income from continuing operations before income taxes increased by 151% to
$4,165,461 in fiscal year 1997 from $1,658,589 in fiscal year 1996. This
increase resulted from a significant increase in the Company's gross profit.
The Company's effective tax rate was 42.3% in fiscal year 1997 and 44.4% in
fiscal year 1996.
The Company's net income for fiscal year 1997 increased to $2,403,606 from
$922,703 in fiscal year 1996 resulting from all the factors described above.
Fiscal Year 1996 Compared to Fiscal Year 1995
Sales for fiscal 1996 increased 78% or $43,251,191 to $98,446,698 from
$55,195,507 in fiscal year 1995. This increase in sales was primarily due to the
increase in sales in IBM's mid-range RS/6000 computer systems. The Company also
participated in major rollouts for a number of financial institutions which
produced substantial sales. In addition, two of the Company's customers
accounted for 16% and 19%, of those fiscal year 1996 sales. During fiscal year
1996, the Company also increased the amount of service and service related
billings from the prior year.
Gross profit as a percentage of sales slightly decreased in fiscal year
1996 from fiscal year 1995. This decrease was the result of pricing competition,
major customer rollouts which typically produce lower gross profit margins,
vendor pricing, and rebate policies. A reduction of cost of goods sold resulted
from rebates and other favorable pricing from many vendors. These rebates, if
cancelled or lowered, will have an effect on gross profit percentages and
profitability.
Selling and administrative expenses increased by 23% or $949,628 to
$5,028,812 in fiscal year 1996 from $4,079,184 in fiscal year 1995. Included in
the increase of $949,628 were increases in commission expenses of $456,587,
which was a direct result of the significant increase in sales during fiscal
year 1996. In addition, payroll expenses increased by approximately $350,000 due
to additional personnel, payroll increases and management incentives of
approximately $100,000, which were paid based on the profitability of the
Company.
Interest expense for fiscal year 1996 increased 15% to $1,391,452 from
$1,211,727 in fiscal year 1995, due to an increase in borrowings necessary to
fund the Company's continuing sales growth. The Company believes that its
constant monitoring of accounts receivable has helped to keep interest costs at
a minimum. In addition, the Company uses all available funds to reduce its
outstanding loan balance on a daily basis. Net interest expense (interest
expenses less interest income) for fiscal year 1996 and 1995 was $1,390,867 and
$1,207,316, respectively.
As of September 30, 1996, the Company determined that the decline in value
of its available-for-sale securities was other-than-temporary and recorded a
realized loss on these securities. The effect of this was to reduce income from
continuing operations, income taxes and net income by $1,406,250, $562,500 and
$843,750, respectively, for the year ended September 30, 1996.
Income from continuing operations before income taxes increased by 229% to
$1,658,589 in fiscal year 1996 from $504,589 in fiscal year 1995. This increase
resulted from a significant increase in sales during 1996.
The Company's effective tax rate was 44.4% for fiscal year 1996 and 44.3%
for fiscal year 1995.
The Company's net income for fiscal year 1996 increased to $922,703 from
$280,820 in fiscal year 1995 resulting from all the factors described above.
Liquidity and Capital Resources
The Company's current ratios at September 30, 1997 and 1996 were 1.40 and
1.12, respectively. Working capital at September 30, 1997 was $10,356,416, an
increase of $7,013,871 over the prior period. This increase was the result of
the Company raising approximately $5,500,000 in an initial public offering in
June 1997 along with the Company's earnings for the year.
Cash used in operating activities was $5,528,240 in fiscal year 1997 and
$1,375,934 in fiscal year 1996. Cash used in investing activities was $796,017
and $234,938 for the fiscal years 1997 and 1996, respectively, and was used to
finance capital expenditures including approximately $400,000 for land in fiscal
year 1997. The land is being used to construct a 40,000 square foot facility
which will house the Company's corporate office, warehouse and assembly
facility. Cash provided by financing activities was $3,581,171 and $1,726,603
for the fiscal years 1997 and 1996, respectively. Included in the cash provided
by financing operation for the fiscal year 1997 was the proceeds of the
Company's initial public offering.
Since 1992, the Company has had a series of credit arrangements with IBM
Credit Corporation. Pursuant to the Financing Agreement, the Company may borrow
up to 85% of its eligible receivables and 100% of eligible inventory, to a
maximum of $27,500,000. In addition to the permanent credit line, there are
various credit line uplifts during the year which can increase the line of
credit by as much as 50%. As of September 30, 1997 and 1996, interest on
outstanding borrowings was prime and prime plus 1.375%, respectively, or prime
plus 6.5%, should the Company fail to meet certain collateral requirements. As
of September 30, 1997 and 1996, borrowings outstanding under this facility were
$10,614,838 and $12,483,391, respectively. Additionally, $12,035,345 and
$12,560,441 were included in accounts payable at September 30, 1997 and 1996,
respectively, and are included against the maximum credit available.
The Company believes that its present line of credit with IBM Credit
Corporation coupled with its current earning capacity and the proceeds of its
recently completed initial public offering will be sufficient to meet its
capital and operational requirements for at least the next twelve months,
including but not limited to establishing a new corporate office, warehouse and
assembly facility. This new facility which is currently under construction is
being financed during the construction period with the Company's current credit
facility with IBM Credit. It is the Company's intention to secure a mortgage on
this facility upon its completion. Throughout fiscal year 1997, the Company has
been in a positive collateral position with IBM Credit and has had the ability
to draw down against its current line of credit whenever needed. Although fiscal
year 1997 did not show an increases in sales, net income increased 161% over the
same period last year. The number of days sales outstanding for fiscal year 1997
was 68 days down from 74 days in fiscal year 1996. This decrease in days
outstanding is a direct result of the Company's increased effort in the accounts
receivable collection area, including increased collection personnel as well as
utilizing its existing sales force in its collection effort
Seasonality and Quarterly Fluctuations
The Company has historically experienced, and expects to continue to
experience, seasonal fluctuations in its net sales, earnings from operations and
net earnings. As the Company continues to increase its percentage of sales from
business, education and government markets, management believes that the
Company's quarterly net sales will be less impacted by seasonality. The revenue
for the quarter ended June 30, 1996 reflected an unusually large sale
(approximately $10 million) of a major system to a financial institution.
Disregarding that sale, the Company's upward revenue trend would have continued
through the quarter ended September 30, 1996. Sales declined during the first
and second quarters of fiscal year 1997 due to the postponement by one of the
Company's customers of the purchase of computer equipment associated with the
completion of that customer's project and the postponement of orders by several
customers in anticipation of IBM's announcement of "upgrades/refreshers" of
certain products which the Company would otherwise have sold in that quarter.
5
The following table sets forth certain quarterly information for the
periods indicated:
Fiscal Year 1997
(in thousands)
Dec. 31, 1996 Mar. 31, 1997 June 30, 1997 Sept. 30, 1997
Net sales...................... $21,283 $17,876 $24,719 $25,848
Gross profit................... 2,640 2,629 2,617 3,791
Income from continuing
operations before income taxes 962 855 868 1,481
Net income..................... 560 490 502 851
Fiscal Year 1996 Fiscal Year 1995
(in thousands) (in thousands)
Dec. 31, Mar.31, June 30, Sept.30, Dec. 31, Mar.31, June 30, Sept.30,
1995 1996 1996 1996 1994 1995 1995 1995
Net sales......................... $14,556 $23,487 $33,644 $26,760 $10,135 $13,723 $15,840 $15,497
Gross profit...................... 1,490 2,393 2,497 3,041 1,333 1,059 1,376 1,986
Income (loss) from continuing
operations before income taxes 198 678 1,022 (239) 198 (306) 73 539
Net income (loss)................. 114 390 547 (128) 116 (223) 73 315
- ---------------------
(1) Taxes are computed based on effective tax rates for the respective
fiscal years.
Recent Pronouncement of the Financial Accounting Standards Board
A recent pronouncement of the Financial Accounting Standards Board
("FASB"), which is not required to be adopted at this date, is Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," issued in
February 1997. This statement establishes standards for computing and presenting
earnings per share and is effective for periods ending after December 15, 1997.
This standard requires the Company to present basic earnings per share and
diluted earnings per share. The impact of adopting this standard is shown in
Note 1 to the Consolidated Financial Statements included herein.
Disclosures Regarding Forward Looking Statements
This report on Form 10-K includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical facts included in this Form 10-K including,
but not limited to, statements contained in this "Management's Discussion and
Analysis," "Business" and "Notes to Consolidated Financial Statements," located
elsewhere herein regarding the Company's financial position, business strategy,
plans and objectives of management of the Company for future operations, and
industry conditions, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove correct.
6
Inflation
In the opinion of management, inflation has not had a material effect on
the operations of the Company.
Item 8. Consolidated Financial Statements
The information is contained on Pages F-1 through F-18 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
7
PART IV
Item 14. Exhibits, Financial Statement Schedule and reports on Form 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
Index to Consolidated Financial Statements........................................................F-1
Independent Auditors' Report......................................................................F-2
Consolidated Balance Sheets as of September 30, 1997 and 1996 F-3
Consolidated Statements of Income for the years ended
September 30, 1997, 1996 and 1995...............................................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1997, 1996 and 1995.........................................................F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995...............................................................F-6
Notes to Consolidated Financial Statements.................................................F-7 - F-18
(a)(2) FINANCIAL STATEMENT SCHEDULE
Combined Consent and Report of Independent Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts...................................................S-2
(a)(3) EXHIBITS
* 3.1 Form of Amended and Restated Certificate of Incorporation
* 3.2 Form of Amended and Restated By-Laws
* 4.1 Form of Common Stock Certificate
*10.1 1988 Incentive Stock Option Plan
*10.2 Inventory and Working Capital Financing Agreement, dated September
26, 1996, and amendment thereto, dated October 31, 1996
*10.3 Form of Employment Agreement between the Company and John H.
Spielberger
*10.4 Form of Employment Agreement between the Company and Thomas J. Baehr
*10.5 Form of Employment Agreement between the Company and Dennis R. Wilson
*10.6 Form of Employment Agreement between the Company and Norman Gaffney
*10.7 Agreement for participation in the IBM Business Partner-PC,
Authorized Assembler Program (certain portions of this exhibit have been
omitted. Confidential treatment has been granted with respect to the omitted
portions)
*22.1 List of Subsidiaries
23 Consent of Albrecht, Viggiano, Zureck & Company, P.C.
27 Financial Data Schedule
---------------
*Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration Number 333-25593.
(b)(1) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last quarter
of its fiscal year ended September 30, 1997.
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYSCOMM INTERNATIONAL CORPORATION
Registrant
By:/s/John H. Spielberger
--------------------------------
John H. Spielberger , President
Dated: December 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/John H. Spielberger Chairman of the Board,
- ----------------------- President and Chief Executive
John H. Spielberger Officer (Principal Operating Officer) December 24, 1997
/s/Thomas J. Baehr Vice President and Director December 24, 1997
- -----------------------
Thomas J. Baehr
/s/Dennis R. Wilson Chief Financial Officer,
- ----------------------- Vice President, Secretary and
Dennis R. Wilson Director December 24, 1997
/s/Norman M. Gaffney Director December 24, 1997
- -----------------------
Norman M. Gaffney
/s/John C. Spielberger Director December 24, 1997
- -----------------------
John C. Spielberger
/s/Cornelia Eldridge Director December 24, 1997
- -----------------------
Cornelia Eldridge
/s/Lee Adams Director December 24, 1997
- -----------------------
Lee Adams
9
SYSCOMM INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page No.
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
SysComm International Corporation and Subsidiary
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of SysComm
International Corporation and Subsidiary as of September 30, 1997 and 1996 and
the related consolidated statements of income, stockholders equity, and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly in all material respects, the consolidated financial position of
SysComm International Corporation and Subsidiary as of September 30, 1997 and
1996 and the results of its operations and its cash flows for each of the years
in the three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
A L B R E C H T , V I G G I A N O , Z U R E C K & C O M P A N Y, P.C.
Hauppauge, New York
November 4, 1997
F-2
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
1997 1996
ASSETS
Current Assets
Cash and cash equivalents $ 437,594 $ 1,180,680
Accounts and note receivable, net 23,209,156 21,012,242
Inventory 12,644,343 8,936,845
Prepaid expenses 103,672 43,207
Investments 84,375 206,250
Deferred income taxes 87,260 -0-
----------- ----------
Total Current Assets 36,566,400 31,379,224
Property, Plant and Equipment, Net 1,201,549 539,174
Other Assets 336,087 184,159
----------- ---------
Total Assets $ 38,104,036 $ 32,102,557
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Supplier credit facility $ 10,614,838 $ 12,483,391
Accounts payable and accrued liabilities 15,052,319 14,440,421
Current portion of long-term liabilities 43,613 26,626
Income taxes payable 499,214 1,069,197
Deferred income taxes -0- 17,044
----------- ----------
Total Current Liabilities 26,209,984 28,036,679
----------- ----------
Long-Term Liabilities 66,416 67,291
----------- ----------
Total Liabilities 26,276,400 28,103,970
Commitments and Contingencies
Stockholders' Equity
Preferred stock; no par value; 1,000,000
shares authorized; none issued -0- -0-
Common stock; $.01 par value; 5,000,000
shares authorized in 1996; 40,000,000
shares authorized in 1997; 3,632,200
shares issued in 1996; 5,017,200 shares
issued in 1997; 3,170,540 shares outstanding
in 1996; 4,555,540 shares outstanding
in 1997 50,172 36,322
Additional paid-in capital 5,610,452 138,143
Unrealized loss on available-for-sale
securities (60,716) -0-
Retained earnings 6,369,898 3,966,292
----------- ----------
11,969,806 4,140,757
Less: Treasury stock (at cost)
461,660 shares (142,170) (142,170)
----------- ----------
Total Stockholders' Equity 11,827,636 3,998,587
----------- ----------
Total Liabilities and
Stockholders Equity $ 38,104,036 $ 32,102,557
=========== ==========
See accompanying notes to consolidated financial statements.
F-3
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
Sales $ 89,725,938 $ 98,446,698 $ 55,195,507
Cost of Sales 78,049,310 89,025,331 49,441,544
Gross Profit 11,676,628 9,421,367 5,753,963
Selling and Administrative Expenses 6,534,552 5,028,812 4,079,184
Income from Operations 5,142,076 4,392,555 1,674,779
Other Income (Expense)
Interest expense (986,087) (1,391,452) (1,211,727)
Interest income 6,902 585 4,411
Other income 2,570 63,151 37,126
Realized loss on available-for-sale
securities -0- (1,406,250) -0-
Total Other Expense (976,615) (2,733,966) (1,170,190)
Income Before Provision for Income Taxes 4,165,461 1,658,589 504,589
Provision for Income Taxes 1,761,855 735,886 223,769
Net Income $ 2,403,606 $ 922,703 $ 280,820
Earnings Per Common and Common
Equivalent Share $ .61 $ .25 $ .08
Number of Common and
Common Equivalent Shares 3,931,846 3,677,290 3,614,040
See accompanying notes to consolidated financial statements.
F-4
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years ended September 30, 1997, 1996 and 1995
Additional Unrealized Total
Common Stock Paid-In Treasury Stock Loss Retained Stockholders
Shares Amount Capital Shares Amount on Securities Earnings Equity
Balance as of September 30, 1994 3,170,540 $36,322 $ 138,143 461,660 $(142,170) $(382,500) $2,762,769 $2,412,564
Net Income 280,820 280,820
Unrealized Loss on Available-for-
Sale Securities (337,500) (337,500)
--------- ------- -------- -------- -------- --------- --------- ----------
Balance as of September 30, 1995 3,170,540 36,322 138,143 461,660 (142,170) (720,000) 3,043,589 2,355,884
Net Income 922,703 922,703
Unrealized Loss on Available-for-
Sale Securities (123,750) (123,750)
Realized Loss on Available-for-Sale
Securities 843,750 843,750
--------- ------- -------- ------- ------- --------- --------- ---------
Balance as of September 30, 1996 3,170,540 36,322 138,143 461,660 (142,170) -0- 3,966,292 3,998,587
Common Stock Sold in Public Offerings
Net of Offering Costs 1,385,000 13,850 5,472,309 5,486,159
Net Income 2,403,606 2,403,606
Unrealized Loss on Available-for-
Sale Securities (60,716) (60,716)
--------- ------- ---------- -------- --------- -------- --------- ----------
Balance as of September 30, 1997 4,555,540 $ 50,172 $ 5,610,452 461,660 $(142,170) $ (60,716) $ 6,369,898 $ 11,827,636
========= ======= ========== ======== ========= ======== ========= ==========
See accompanying notes to consolidated financial statements.
F-5
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
Cash Flows From Operating Activities
Net income $ 2,403,606 $ 922,703 $ 280,820
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 188,759 149,090 134,139
Deferred tax benefit (43,145) (1,614) (5,442)
(Gain) loss on disposition of fixed assets (2,570) (23) 114
Realized loss on available-for-sale securities -0- 843,750 -0-
Changes in assets and liabilities:
Accounts and note receivable (2,255,884) (10,647,117) (543,905)
Inventory (3,707,498) (2,960,653) 93,808
Prepaid expenses and other assets (153,423) 25,819 (55,666)
Accounts payable and accrued liabilities 611,898 9,245,967 (287,525)
Income taxes payable (569,983) 1,046,144 (164,451)
----------- ----------- ----------
Net Cash Used in Operating Activities (3,528,240) (1,375,934) (548,108)
----------- ----------- ----------
Cash Flows From Investing Activities
Purchase of fixed assets (803,317) (235,388) (92,697)
Proceeds from disposition of fixed assets 7,300 450 400
----------- ----------- ----------
Net Cash Used in Investing Activities (796,017) (234,938) (92,297)
----------- ----------- ----------
Cash Flows From Financing Activities
Net proceeds from (payments under) supplier
credit facility (1,868,553) 1,686,280 343,000
Net proceeds from long-term debt -0- 58,229 -0-
Payments of long-term liabilities (36,435) (17,906) -0-
Net proceeds from issuance of common stock 5,486,159 -0- -0-
---------- ----------- ---------
Net Cash Provided by Financing Activities 3,581,171 1,726,603 343,000
---------- ----------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents (743,086) 115,731 (297,405)
Cash and Cash Equivalents at Beginning of Year 1,180,680 1,064,949 1,362,354
---------- ---------- ---------
Cash and Cash Equivalents at End of Year $ 437,594 $ 1,180,680 $ 1,064,949
========== ========== =========
Supplemental Disclosures of Cash Flow Information Cash
paid during the year for:
Income taxes $ 2,386,580 $ 248,606 $ 219,543
Interest 986,087 1,391,452 1,211,727
Supplemental Schedules of Noncash Investing
and Financing Activities
Acquisition of equipment:
Cost of equipment $ 52,547 $ 53,594 $ -0-
Less: Equipment financed (52,547) (53,594) -0-
---------- ----------- --------
Cash Paid for Capital Expenditures $ -0- $ -0- $ -0-
========== ============ ========
See accompanying notes to consolidated financial statements.
F-6
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Business Organization and Basis of Presentation
SysComm International Corporation (the "Company"), incorporated on
September 30, 1987, is a Delaware corporation with one active subsidiary:
Information Technology Services, Inc. (doing business as InfoTech, a New York
Corporation since 1980).
The Company, through its subsidiary, is authorized to conduct business in
New York, New Jersey, Connecticut and Massachusetts. The Company is a supplier
and systems integrator of a broad range of computer and related products.
On March 31, 1997, the Company effected a two-for-one split of common
stock. All references in the accompanying consolidated financial statements and
notes thereto relating to common stock and additional paid-in capital, stock
options, per share and share data have been retroactively adjusted to reflect
the two-for-one stock split.
On April 21, 1997, a special meeting of the stockholders was held to amend
the Certificate of Incorporation to increase the aggregate of authorized shares
of common stock from 5,000,000 shares of common stock to 40,000,000 shares of
common stock and to authorize 1,000,000 shares of preferred stock. The preferred
stock is not expected to be issued at any time in the near future. The preferred
stocks rights, preferences and characteristics will be determined by the Board
of Directors at such time as the preferred stock is issued.
On June 17, 1997, the Company consummated an initial public offering of
common stock (the Offering). The Company sold 1,250,000 shares at $5.00 per
share. On July 21, 1997, the underwriters exercised their over-allotment option
to purchase an additional 135,000 shares. In connection with the Offering,
125,000 warrants were granted to the Companys representative underwriter. The
fair value was estimated at $.52 per warrant using the Black-Scholes pricing
model. The fair value of these warrants were offset against the Offering
proceeds.
Basis of Consolidation
The consolidated financial statements include the accounts of SysComm
International Corporation and its wholly-owned subsidiary. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
F-7
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for stock options as prescribed by Accounting
Principles Board Opinion No. 25 and includes pro forma information in the stock
option plan footnote, as permitted by Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation (FASB 123).
Accounts and Note Receivable
Accounts and note receivable are presented net of allowances for doubtful
accounts and for sales returns. The allowances are based on prior experience and
managements evaluation of the collectibility of accounts receivable and returned
merchandise credits. Authorized sales returns from the supplier are classified
as receivables. Management believes that the allowances are adequate. However,
further additions to the allowances may be necessary based on changes in
economic conditions.
The allowance for doubtful accounts was $108,343 and $63,846 as of
September 30, 1997 and 1996, respectively.
The allowance for sales returns was $37,389 as of September 30, 1997 and
1996.
Inventory
Inventory consists principally of computer hardware and software, and is
valued at the lower of cost (first-in, first-out) or market. Substantially all
inventory items are finished goods.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are charged against
operations as incurred. Upon retirement or sale, the assets disposed are removed
from the accounts and any resulting gain or loss is reflected in the results of
operations. Capitalized values of property under leases are amortized over the
life of the lease or the estimated life of the asset, whichever is less.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives: Estimated Useful Lives Vehicles 1-5
years Computer equipment 5 years Furniture and fixtures 7 years Leasehold
improvements 5 years Building 40 years
F-8
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities.
Investments
The Company evaluates its investment policies consistent with Financial
Accounting Standards Board Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities (FASB 115). Accordingly, investment securities are
classified as available-for-sale securities and carried at fair value, with
temporary unrealized gains and losses reported as a separate component of
stockholders equity. Realized losses are recorded for any decline in value
determined to be other-than-temporary on available-for-sale securities.
Revenue Recognition
Revenue related to the sales of computer equipment is recorded at the time
of shipment. Service revenue and costs are recognized when services are
provided.
Earnings Per Common Share
Earnings per common share are computed using the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding during
the period. Dilutive common stock equivalents include stock options. There is no
difference between primary and fully diluted earnings per common share for all
periods presented.
In February 1997, Financial Accounting Standards Board Statement No. 128,
Earnings per Share, (FASB 128) was issued. FASB 128 alters the computation and
presentation of reported earnings per share. The Statement is required to be
adopted for the periods ending after December 15, 1997. Earlier application is
not permitted. Had earnings per share been determined consistent with FASB 128,
earnings per common share would be increased to the pro forma amounts indicated
below:
1997 1996 1995
Earnings per share
As reported .61 .25 .08
Pro forma:
Basic .67 .29 .09
Diluted .61 .25 .08
F-9
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all liquid instruments purchased with a maturity of
three months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, prepaid expenses, accounts payable and accrued
liabilities, approximate fair value due to the relatively short maturity of
these instruments The fair value of investments is estimated based on quoted
market price. The carrying value of the supplier credit facility and long-term
debt, including the current portion, approximates fair value based on the
incremental borrowing rates currently available to the Company for financing
with similar terms and maturities.
Note 2 - Investments
Investments consist of the following:
1997 1996
Ameriquest Technologies,Inc.
(Formerly CMS Enhancements, Inc.)
Number of Shares 300,000 300,000
Fair Value $ 84,375 $ 206,250
Cost $ 1,612,500 $ 1,612,500
At September 30, 1997 and 1996, marketable equity securities have been
categorized as available-for-sale and are stated at fair value. At September 30,
1997, an unrealized holding loss of $60,716 is shown as a separate component of
stockholders equity until realized. The increase in the net unrealized loss for
the years ended September 30, 1997, 1996, and 1995 totaled $60,716, $123,750,
and $337,500, respectively. The Company recorded a realized loss on
available-for-sale securities of $1,406,250, which net of deferred taxes
amounted to $843,750, for the year ended September 30, 1996, since the decline
in value was determined to be other-than-temporary as of that date.
F-10
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Property, Plant and Equipment
Property, plant and equipment is set forth below:
1997 1996
Land $ 437,660 $ -0-
Building 26,740 -0-
Vehicles 119,159 93,412
Computer equipment 698,911 733,297
Furniture and fixtures 327,627 360,106
Leasehold improvements 117,691 93,243
1,727,788 1,280,058
Accumulated depreciation (526,239) (740,884)
--------- ----------
Property, plant and
equipment, net $ 1,201,549 $ 539,174
========= ==========
Note 4 Other Assets
The Company is the owner and beneficiary of a $1,000,000 whole life policy
covering the life of the principal stockholder/officer. The cash surrender value
of life insurance included in Other Assets as of September 30, 1997 and 1996
amounted to $176,350 and $145,046, respectively.
Note 5 - Financing Arrangements
The Company entered into a formal credit agreement with the financing
subsidiary of its major supplier. Under the credit facility, the Company may
borrow up to 85% of receivables due within 90 days and up to 100% of eligible
inventory, to a maximum of $27,500,000. The agreement, which expires September
23, 1998, is subject to temporary increases, thereby increasing the line of
credit to $41,500,000 during certain periods. As of September 30, 1997 and 1996,
borrowings outstanding under this facility were $10,614,838 and $12,483,391,
respectively. As of September 30, 1997 and 1996, interest on the outstanding
borrowings is payable monthly at prime and prime plus 1.375%, respectively, or
prime plus 6.5%, should the Company fail to meet certain collateral
requirements. Interest costs included in interest expense for the years ended
September 30, 1997, 1996 and 1995 totaled $970,912, $1,381,373 and $1,188,525,
respectively. Additionally, $12,035,345 and $12,560,441 were included in
accounts payable at September 30, 1997 and 1996, respectively, and are included
against the maximum credit available.
F-11
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Long-Term Liabilities
Long-term liabilities consist of the following:
1997 1996
FORD MOTOR CREDIT CORP.
Collateralized by a lien
on a Company automobile;
payable in 36 monthly installments
of $815 including interest of 9.0%
per annum; final payment due
October 1999. $ 18,517 $ -0-
Collateralized by a lien on a
Company automobile; payable in 36
monthly installments of $1,194 including
interest of 9.9% per annum; final payment due
December 1998. 16,781 27,832
Collateralized by a lien on a Company
automobile; payable in 36 monthly
installments of $678 including interest
of 9.0% per annum; final payment
due November 1998. 8,978 16,480
AT&T CREDIT CORP.
Capital lease collateralized by a
lien on the Companys phone system;
payable in monthly installments of
$708 including interest of 14.446%
per annum; final payment due May 2001. 24,069 29,497
Capital lease collateralized by a lien
on the Companys phone system; payable
in monthly installments of $542 including
interest of 15.089% per annum;
final payment due January 2001. 17,158 20,108
Capital lease collateralized by a lien
on the Companys phone system; payable in
monthly installments of $560 including
interest of 9.5% per annum; final
payment due March 2002. 24,526 -0-
-------- ---------
110,029 93,917
Less: Current maturities (43,613) (26,626)
-------- ---------
$ 66,416 $ 67,291
======== =========
F-12
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 Long Term Liabilities (continued)
Maturities of long-term liabilities are as follows:
September 30, 1998 $ 43,613
1999 30,335
2000 19,245
2001 13,566
2002 3,270
-------
$ 110,029
=======
Note 7 - Capital Leases
As further described in Note 6, the Company began leasing telephone
equipment during December 1995. As of September 30, 1997 and 1996, the gross
assets capitalized under telephone equipment leases totaled $80,745 and $54,486,
respectively, and the accumulated amortization totaled $13,851 and $3,892,
respectively. The amortization expense for the years ended September 30, 1997
and 1996 of $9,959 and $3,892, respectively, is included in depreciation
expense.
Note 8 - Income Taxes
The provision (benefit) for income taxes consists of the following:
Years Ended September 30,
1997 1996 1995
Current:
Federal $ 1,285,000 $ 956,000 $ 148,504
State 520,000 344,000 80,707
--------- ---------- ---------
Total Current 1,805,000 1,300,000 229,211
--------- ---------- ---------
Deferred:
Federal (32,440) (479,642) (4,626)
State (10,705) (84,472) (816)
---------- ----------- ---------
Total Deferred (43,145) (564,114) (5,442)
---------- ----------- ---------
Provision for
Income Taxes $ 1,761,855 $ 735,886 $ 223,769
========== =========== =========
F-13
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Income Taxes (continued)
The difference between the provision for income taxes at the Companys
effective income tax rate and the federal statutory rate of 34% is as follows:
Years Ended September 30,
1997 1996 1995
Income taxes at statutory rate $ 1,416,258 $ 563,920 $ 171,560
State taxes, net of federal benefit 333,237 132,687 52,728
Other 12,360 39,279 (519)
Provision for Income Taxes $ 1,761,855 $ 735,886 $ 223,769
The tax effects of temporary differences giving rise to significant
portions of deferred taxes are as follows:
September 30,
1997 1996
Allowance for doubtful accounts $ 45,504 $ 25,538
Inventory capitalization 40,701 15,742
Investments (17,342) (78,500)
Depreciation 508 5,840
Other 17,889 14,336
Net Deferred Tax Asset (Liability) $ 87,260 $ (17,044)
Note 9 - Stock Option Plan
On July 29, 1988, the stockholders approved a stock option plan (the Plan).
In connection therewith, 1,000,000 shares of common stock are reserved for
issuance pursuant to options that may be granted under the Plan through May 5,
1998. In the case of options granted to an employee of the Company who is a 10%
or more stockholder, the option price is an amount per share of not less than
110% of the fair market value per share on the date the option is granted. The
option price for options granted to all other employees is an amount per share
of not less than the fair market value on the date the option is granted. The
options granted in 1995 vest over a three-year period following the date of
grant and expire on September 1, 1998. The options granted in 1997 vest over a
four-year period following the date of grant and expire within five years or
September 1, 2001, whichever comes first.
F-14
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock Option Plan (continued)
A summary of stock option activity related to the Companys plan is as
follows:
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Period Period Period Outstanding Exercisable
Year ended September 30, 1995
Number of shares 302,000 768,000 0 502,000 568,000 0
Weighted average exercise price
per share $ 0.95 $ 0.72 0 $ 0.90 $ 0.69 0
Year ended September 30, 1996
Number of shares 568,000 0 0 70,000 498,000 164,340
Weighted average exercise price
per share $ 0.69 0 0 $ 0.68 $ 0.69 $ 0.69
Year ended September 30, 1997
Number of shares 498,000 69,500 0 3,000 564,500 328,680
Weighted average exercise price
per share $ 0.69 $ 5.59 0 $ 5.56 $ 1.26 $ 0.69
The weighted average per share fair value of the options granted during the
years ended September 30, 1997 and 1995 was estimated as $2.89 and $.20,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
1997 1995
Risk-free interest rates 5.698% 5.92-7.84%
Expected option lives 4.57 years 3.17-3.75 years
Expected volatilities 60% 22.03-23.87%
Expected dividend yields 0% 0%
The weighted-average remaining contractual life of the options outstanding
at September 30, 1997 is as follows:
Weighted-Average Remaining
Range of Exercise Price Contractual Life
$ 0.68 - $ 0.75 0.85 years
5.56 - 6.12 4.57 years
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for the stock option plans.
Accordingly, no compensation expense was recognized in 1997 for the stock option
awards made in 1997, since the exercise price of the stock options granted under
the Stock Option Plan was not less than the fair market value of the Common
Stock at the date the option was granted.
F-15
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock Option Plan (continued)
Had compensation expense for stock option awards granted in 1997 been
determined consistent with FASB 123, net income and earnings per share would be
reduced to the pro forma amounts indicated below:
1997
Net income
As reported $ 2,403,606
Pro forma 2,375,739
Net income
As reported $ .61
Pro forma .60
Note 10 - 401(k) Plan
On January 1, 1994, the Company adopted a 401(k) Savings Plan (the Plan)
for the benefit of all eligible employees. All employees as of the effective
date of the Plan became eligible. An employee who became employed after January
1, 1994, would become a participant after the completion of a half-year of
service and the attainment of 20 years of age.
Participants may elect to contribute from their compensation any amount up
to the maximum deferral allowed by the Internal Revenue Code. Employer
contributions are a discretionary percentage match. The Company may make
optional contributions for any plan year at its discretion.
During the years ended September 30, 1997, 1996, and 1995, the Company
incurred 401(k) costs totaling $42,986, $31,738, and $19,148, respectively.
Note 11 - Concentration of Credit Risk
Cash
The Company places most of its temporary cash investments with one
financial institution and normally exceeds the Federal Deposit Insurance
Corporation limit. The Company has not experienced any loss to date as a result
of this policy.
Major Customers
Computer sales encompass markets wherein the demands of any one customer
may vary greatly due to changes in technology. No single customer comprised more
than 10% of sales or accounts receivable as of and for the year ended September
30, 1997. In comparison, two customers comprised 16% and 19%, respectively, of
sales for the year ended September 30, 1996. One of these customers accounted
for 33% of accounts receivable as of September 30, 1996. Two customers of the
Company accounted for 23% and 14%, respectively, of sales for the year ended
September 30, 1995.
F-16
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Commitments and Contingencies
Purchases
As further discussed in Note 5, the Company purchases a majority of its
products from International Business Machines Corporation, whose subsidiary
represents the Company's major lending source. The loss of this supplier could
materially affect the Company. Purchases from this supplier represented
approximately 90% of total purchases for the each of the years ended September
30, 1997, 1996 and 1995.
Leases
The Company has operating leases on real property and equipment expiring
through the year 2002. In addition to fixed rentals, the real property leases
have escalation clauses that require the Company to pay a percentage of common
area maintenance, real estate taxes, and insurance.
Rent expense and other charges totaled $309,861, $253,412, and $255,307 for
the years ended September 30, 1997, 1996, and 1995, respectively.
The future minimum rental commitments for the Companys years ending
September 30 are as follows:
1998 $ 356,473
1999 280,171
2000 175,870
2001 147,499
2002 57,730
---------
$ 1,017,743
=========
Employment Agreements
Effective June 17, 1997, the Company entered into two-year employment
agreements with four senior executives. The employment agreements include
compensation plans for fiscal 1997 as follows: John H. Spielberger will receive
a base salary of $140,000 plus a bonus of 3% of all pre-tax earnings of the
Company; Thomas J. Baehr will receive $150,000 plus a bonus of 3.5% of all
pre-tax earnings of Information Technology Services, Inc. (InfoTech), the
Companys wholly-owned subsidiary; Dennis R. Wilson will receive $120,000 plus a
discretionary bonus determined by the Compensation Committee; and Norman M.
Gaffney will receive $125,000 plus a bonus of 1.5% of the gross profit dollars
of InfoTech. These annual performance incentive plans will be reviewed during
each fiscal year and new incentive plans will be implemented by the Companys
Compensation Committee for the fiscal year 1998, and thereafter as applicable.
F-17
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Commitments and Contingencies (continued)
Purchase Commitment
In March 1997, the Company commenced operation of an IBM PC assembly
facility under IBMs Authorized Assembler Program (the AAP). Under the terms of
the AAP Agreement with IBM, the Company will use its best efforts to purchase a
sufficient number of Base System Units and Approved Components to enable it to
assemble at least 20% of the Companys actual sales volume of PCs.
Litigation
The Company is a defendant in a lawsuit which alleges wrongful termination
of employment. The action has been in the discovery stage since 1992. While the
results of litigation cannot be predicted with any certainty, management
believes that the final outcome of such litigation will not have a material
adverse effect on the Companys consolidated financial position, results of
operations or cash flows. Changes in assumptions, as well as actual experience,
could cause the estimates made by management to be altered.
Note 13 Quarterly Financial Data (unaudited)
Quarterly financial data for the years ended September 30, 1997 and 1996
follow:
First Second Third Fourth
Quarter Quarter Quarter Quarter
For the year ended September 30, 1997:
Net sales $ 21,282,537 $ 17,876,338 $ 24,718,664 $ 25,848,399
Gross profit 2,639,498 2,629,349 2,617,138 3,790,643
Income from operations 1,275,495 1,036,205 1,072,381 1,757,995
Net income 559,642 490,673 502,347 850,944
Net income per share 0.16 0.14 0.14 0.17
For the year ended September 30, 1996:
Net sales $ 14,555,620 $ 23,487,203 $ 33,644,269 $ 26,759,606
Gross profit 1,490,660 2,392,934 2,496,850 3,040,923
Income from operations 497,195 1,003,673 1,373,325 1,518,362
Net income (loss) 114,214 389,489 547,000 (128,000)
Net income (loss) per share 0.03 0.11 0.15 (0.04)
Note 14 Subsequent Event
In October 1997, the Company entered into a contract to construct a new
facility in Yaphank, New York for approximately $1,982,000.
F-18
COMBINED CONSENT AND REPORT OF
INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Board of Directors
SysComm International Corporation and Subsidiary
Hauppauge, New York
The audits referred to in our report on page F-2 included the related
financial statement schedule on page S-2 as of September 30, 1997, and for each
of the years in the three-year period ended September 30, 1997, included in this
Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in this Form 10-K.
ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
December 15, 1997
S-1
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at (1) Charged (2) Charged Balance
Beginning to Costs and to Other at End
Deducted from Assets of Period Expenses Accounts Deductions of Period
Allowance for Doubtful Accounts:
Year ended September 30, 1995 $ -0- $ 50,000 $ -0- $ -0- $ 50,000
Year ended September 30, 1996 50,000 107,273 -0- 93,427(a) 63,846
Year ended September 30, 1997 63,846 125,000 -0- 80,503(a) 108,343
Allowance for Sales Returns:
Year ended September 30, 1995 $ -0- $ 125,000 $ -0- $ -0- $ 125,000
Year ended September 30, 1996 125,000 -0- -0- 87,611(a) 37,389
Year ended September 30, 1997 37,389 -0- -0- -0- 37,389
Allowance for Net Unrealized Losses
on Marketable Equity Securities:
Year ended September 30, 1995 $ 382,500 $ -0- $ 337,500(b) $ -0- $ 720,000
Year ended September 30, 1996 720,000 -0- 123,750(b) 843,750(c) -0-
Year ended September 30, 1997 -0- -0- 60,716(b) -0- 60,716
(a) Amounts written off, net of recoveries.
(b) Net unrealized loss on marketable equity securities recorded in
stockholders' equity.
(c) Net realized loss on marketable equity securities.
S-2