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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, 1999
[ ] 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.)
20 Precision Drive, Shirley, New York 11967
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 205-9000
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 2,143,176 shares of Common Stock held by
non-affiliates of the Company as of December 3, 1999 is $2,010,299.
The number of shares outstanding of each of the registrant's classes of
common equity as of December 3, 1999 is as follows:
Class of Common Equity Number of Shares
---------------------- ----------------
Common Stock 4,720,894
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 December 27, 1999.
PART I
Item 1. BUSINESS
General
SysComm International Corporation ("SysComm" or the "Company"), through its
wholly owned subsidiary, Information Technology Services, Inc. ("InfoTech"), has
been a leading systems integrator and reseller of computer hardware, operating
software and networking applications to Fortune 1000 companies. From 1985 until
recently, 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 the System/390 mainframe. In addition, the Company
integrates, resells and services products from such manufacturers as Hewlett
Packard, Compaq, Microsoft, and Novell. Because of the recognition by the
Company that margins were shrinking on its core business, and because of a
change in IBM's policies with respect to the Authorized Assembler Program
("AAP"), in the last year the Company made a strategic decision to fundamentally
change the nature of its business. The Company will continue to provide its
customers with cost efficient, comprehensive solutions that satisfy their
information technology requirements, but the product offerings will be less
focused on PC products and hardware, and more on mid-range products network
connectivity, services and consulting to develop e-solutions.
During the last year, the Company has been transitioning its workforce,
through training and specialized hires, to position itself as a total e-business
solutions provider of hardware, software and consulting services. In addition,
while maintaining its elite status as an IBM Tier II Premier Business Partner in
mid-range systems, the Company has expanded its capabilities in web design and
creation, remote access to databases via web interface, and Tivoli enterprise
systems management.
A significant percentage of the Company's revenues continues to be derived
from sales to customers in the financial and investment communities. However,
the Company's customer base also includes retailers, manufacturers, health care
providers, distributors, colleges, universities and state and local government
agencies. The Company's customers include:
Baystate Medical Center Liberty Mutual Spear, Leeds & Kellogg
Brown Brothers Harriman Mass. Financial Services Sungard
Citibank Memorial Sloan - Kettering Hospital The City of New York
CPC International Mount Sinai Medical Center The City University of New York
Deutsche Bank Northeastern University The Hartford
Dowling College Pfizer The Stop & Shop Companies
Fidelity Investments Philip Morris Unisys Corporation
Gillette Prudential Insurance Company United Healthcare
Harvard University Reuters America Witco Corporation
IBM Sony
Lawrence Public Schools
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, particularly those businesses seeking
to expand their presence on the internet, (ii) offering a more complete line of
IBM products, (iii) expanding its role as an IBM Premier Business Partner, and
(iv) targeting client-server architecture, e-commerce, enterprise network
management and website hosting.
Strategy
The Company is striving to become a leading supplier of Enterprise
Computing in e-Business solutions that enable customers to maximize return on
technology investments by providing open, integrated end-to-end solutions from
system architecture and implementation to hardware and software procurement. The
Company strives to offer its customers high quality computer and networking
system hardware, related operating system software and network design, system
implementation and support services in a timely, cost-effective manner. The
Company believes that the following factors are significant elements to the
successful implementation of this strategy:
Targeting Markets
The Company has an eleven (11) 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 has recently begun
to focus 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 primarily 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, and IBM software products, including
Lotus Domino, ADSM, HACMP and DB 2. The Company also offers enterprise network
management software from Tivoli Systems, an IBM subsidiary. The Company believes
that its current mix of products meets the needs of its customers and helps the
Company in achieving its goal of becoming a total solution integrator.
Expanding the Company's Role as an IBM Premier Business Partner
The Company's designation as an IBM and Tivoli Premier Business Partner
provides it with important competitive advantages. In 1997, 1998 and 1999, the
Company was among a small number of 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 IBM.
Targeting the Client-Server Architecture and Business Intelligence
Markets
Client-Server refers to the migration of software applications and data
from a centralized mainframe or legacy environment to a system of distributed
servers with data access via local and wide area networks. The Company is
certified by IBM to sell IBM Client Server solutions.
Business Intelligence refers to the analysis of vast quantities of
information within a corporate enterprise which is used to make business
decisions such as investments, product development and marketing programs. The
Company is certified by IBM to sell IBM Business Intelligence solutions.
E-Business refers to the conduct of business on the Internet (World Wide
Web). The Company offers turn-key e-business solutions based on its IBM
certification and skill sets acquired with new hires. This allows the Company to
perform online design and Intranet/Internet programming, combined with other
support skills, to deliver dynamic web solutions.
The Company also provides web-hosting and design services which entails
designing, implementing and maintaining customer web sites on the Company's
equipment located at its Shirley, New York location.
Enterprise network management encompasses the management of all facets of a
network from and including the desktop, cabling, servers, communications network
and host. The Company uses the Tivoli Management Environment to provide
planning, architecture, and implementation services.
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 containing
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 and Sun Microsystems 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 800
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
northeastern United States. No one customer accounted for more than 6% of the
Company's total revenues in fiscal year 1997. In fiscal year 1998, the Company's
top customer accounted for approximately 6.8% of total revenues. In fiscal year
1999, the Company's top customer accounted for approximately 8.6% of total
revenues. In fiscal year 1999, the Company's top five customers (3 of which were
new) accounted for 24.7% of total revenues.
Dependence on Major Customers; Risk of Industry Concentration
For the last three (3) fiscal years, 1997, 1998, and 1999, a significant
portion (28%, 21%, and 25% respectively) of the Company's revenues were derived
from sales to five principal customers, which customers varied 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. 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 67 in fiscal year 1999, the failure
to acquire a significant or principal customer or to maintain its relationship
with its principal customers could have a material adverse effect on the
Company's operations.
In the fiscal year ended September 30, 1999, approximately 10.3% 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, could have a material adverse affect
on the Company's results of operations.
Product Lines
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. The Company believes its strong marketing and technical skills enable
it to continue to have a strong business relationship with IBM. The Company's
principal sales revenues are derived from the following: (i) IBM PC systems;
(ii) IBM RS/6000 systems; (iii) IBM AS/400 systems; and (iv) communication and
networking systems.
IBM PC Systems
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.
For many years, the Company's sales volume of PCs enabled the Company to
purchase products directly from IBM for resale at the lowest prices available.
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 of 1997, the Company commenced operation of an IBM PC systems
assembly facility. Such a program required the commitment of significant capital
to hire and train a high quality workforce, to establish an appropriate assembly
facility and to initially increase its inventory of components. A further
requirement was the Company's need to attain and maintain ISO 9002 registration
standards, the registered international standard for ensuring the consistent and
measurable quality of products and services. Because of low margins and a change
in IBM's policies with respect to the IBM Authorized Assembler Program, the
Company ceased PC manufacturing activities. The Company, however, continues to
sell large amounts of PC products. In fiscal 1998 and 1999, PC products
accounted for 27.4% and 14.8% of total sales, respectively.
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 and 1997, IBM recognized the Company (ranked by dollar value of
systems sold) as its largest "Solution Provider" for RS/6000 systems in North
America. For fiscal 1997, 1998 and 1999, the Company's sales of the RS/6000 were
approximately $40 million, $46 million and $33 million or 45% and, 47% and 46%
of revenues, respectively. The Company considers RS/6000 systems to be an
integral product for future increases in
IBM AS/400
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.
All Other Products
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, Microsoft, and Novell. The Company's
agreements with such suppliers allow for volume discounts if certain quotas are
met. Although the Company, to date, has complied with these agreements, there is
no assurance that the Company will continue to meet such quotas. 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 1999, the Company's
sales of non-IBM products accounted for approximately $18.9 million, or 27%, of
total revenue.
Dependence on IBM as a Supplier
For the fiscal years ended September 30, 1997, 1998 and 1999, 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 IBM. Although the Company has had a long standing reseller
relationship with IBM, IBM may terminate this relationship with the Company at
will and 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 purchase components directly from IBM.
The Company has not satisfied the volume requirements under the AAP and
does not expect future purchases to do so. The Company terminated its
involvement in the AAP in April 1999. The Company currently purchases many
components from third-party distributors such as Pinacor and Ingram Micro on
terms more favorable than the Company was receiving from IBM direct.
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, 1998 and 1999, borrowings
outstanding under the Financing Agreement were $3,020,234 and zero,
respectively. 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, 1998 and 1999 was $9,855,736 and $3,282,454,
respectively. The Financing Agreement is subject to temporary increases, thereby
increasing the line of credit to $41,250,000 during certain periods. The Company
is also required to comply with certain 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 orders, purchase inventory or expand it sales levels
and, therefore, would have a material adverse effect on the Company's financial
conditions and results of operations. The Company has had a credit facility with
IBM Credit since 1992 and was renewed until September, 2000. However, there can
be no assurance that the credit facility will be renewed, or that if renewed,
the financing to the Company under this renewal will be available in amounts at
comparable or better terms than those in effect. 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.
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,
Shirley, and Buffalo, New York; Waltham, Massachusetts; Marlton, New Jersey; and
Fairfield, Connecticut. Currently, the Company employs approximately 50 field
sales representatives and system engineers. The sales efforts are led by the
Company's senior executives, John H. Spielberger, Jeff Rettinger and Lowell
Shulman, who have more than 60 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
manufacturers, referrals from existing customers, direct solicitation by
telephone or mail of pre-qualified customers, and participation in 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, Sun Microsystems, Electronic Data Systems
Corporation, Hewlett-Packard Company, Andersen Consulting, IBM Global Services
and UNISYS. Other competitors which purchase directly from IBM, like the
Company, include value-added resellers, systems integrators and third-party
service companies, including CompuCom Systems, Inc., InaCom Corp., MicroAge,
Inc., EnPoint Technologies and GE ITS. 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 mid-range infrastructure services.
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.
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. The loss of any of the services of the Company's key executive
could have a material adverse affect on the Company's business, ongoing results
and financial condition. In addition, the Company has attempted to mitigate the
risks associated with its dependence on John H. Spielberger by obtaining
$1,000,000 key person life insurance policy on his life. 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, 1999, John H. Spielberger, Chairman of the Board,
President and Chief Executive Officer of the Company, beneficially owned
approximately 53% 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-takeover 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
Employees
As of September 30, 1999, the Company had 72 full-time employees. The
Company has no collective bargaining agreements and believes its relations with
its employees are good.
Significant Fluctuations in Quarterly Results
The Company's quarterly operating results have fluctuated in the past and
may 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 manufacturers to deliver, in a
timely fashion, products for which the Company has received orders, the length
of the sales cycle, receipt of volume discounts, 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, 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 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, 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.
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 May 1998, the Company's new 40,000 square foot assembly, warehouse and
headquarters facility located in Shirley, New York became operational. The total
cost to construct and equip this facility was approximately $2.325 million,
exclusive of land. Construction costs were reduced by $100,000, after
application of a $100,000 grant from The Empire State Development Corporation in
1999.
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 with an initial term which expired
on October 31, 1999. The lease provided for rental 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 October 31,
1999. Effective November 1, 1999, the Company amended this lease to reduce the
leased area to 2,850 square feet and extended the term through January 31, 2002
at a base annual rental of $62,700 subject to escalation.
The Company leases 340 square feet of general office space in Marlton, New
Jersey for $13,200 per year, expiring on January 31, 2000.
The Company leases 795 square feet of general office space in Fairfield,
Connecticut for $17,180 per year. The lease expires on November 30, 2002.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 SmallCap 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 through September 30, 1998 and 1999, as reported by
Nasdaq:
Sales Prices
------------
High Low
---- ---
Fiscal 1998
-----------
Quarter Ended December 31, 1997 6 1/4 5
Quarter Ended March 31, 1998 5 1/4 4 1/4
Quarter Ended June 30, 1998 4 19/32 1 3/4
Quarter Ended September 30, 1998 3 1 1/8
Fiscal 1999
-----------
Quarter Ended December 31, 1998 1 3/4 1 1/16
Quarter Ended March 31, 1999 3 1 1/8
Quarter Ended June 30, 1999 2 1 1/4
Quarter Ended September 30, 1999 2 1/2 1 3/16
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.
On or about September 16, 1998, the Company received notification from
Nasdaq that because its market value of public float (MVAF) had fallen below the
$5,000,000 threshold set forth in Marketplace Rule 4450(A)(2) for a period of
ten (10) consecutive trade days, its stock could be subject to possible
delisting action from the Nasdaq National Market. The Company attended a hearing
before Nasdaq officials in early 1999 to explain why its stock should continue
to be listed on the Nasdaq National Market. Nasdaq officials ruled to delist the
Company from the National Market. As a result, the Company's stock is currently
traded on the Nasdaq SmallCap Market.
(b) The number of recordholders of the Common Stock as of December 3, 1999
is approximately 53. 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.
Item 6. Selected Financial Data
The following financial statement data as of and for the fiscal years ended
September 30, 1997, 1998 and 1999 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, 1995 and 1996 are derived from audited consolidated
financial statements not included herein.
Consolidated Statement of Operations
Data 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Net sales ......................... $ 55,195,507 $ 98,446,698 $ 89,725,938 $ 98,302,636 $ 69,683,295
Cost of sales ..................... 49,441,544 89,025,331 78,049,310 89,047,731 62,731,687
Inventory write-down .............. -- -- -- 657,491 --
------------ ------------ ------------ ------------ ------------
Gross Profit ...................... 5,753,963 9,421,367 11,676,628 8,597,414 6,951,608
Selling and administrative
expenses .......................... 4,079,184 5,028,812 6,534,552 8,193,905 7,249,568
------------ ------------ ------------ ------------ ------------
Income/(loss) from operations ..... 1,674,779 4,392,555 5,142,076 403,509 (297,960)
Interest expense (net) ............ (1,207,316) (1,390,867) (979,185) (881,781) (216,521)
Other income ...................... 37,126 63,151 2,570 (35,000) 2,553
Realized loss on available-for-sale
securities ........................ -- (1,406,250) -- (206,250) --
------------ ------------ ------------ ------------ ------------
Income/(loss) from continuing
operations before income taxes .... 504,589 1,658,589 4,165,461 (719,522) (511,928)
(Provision) benefit for income
taxes ............................. (223,769) (735,886) (1,761,855) 272,160 111,603
------------ ------------ ------------ ------------ ------------
Net income/(loss) ................. $ 280,820 $ 922,703 $ 2,403,606 $ (447,362) $ (400,325)
============ ============ ============ ============ ============
Per Share Data:
Income from continuing operations
$ .08 $ .25 $ .61 $ (.10) $ (.08)
Diluted weighted average number of
shares outstanding ................ 3,614,040 3,677,290 3,931,846 4,613,750 $ 4,771,364
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Consolidated Balance Sheet Data:
Working capital..................... $1,769,589 $3,342,545 $10,356,416 $9,314,237 $9,077,650
Total assets........................ 18,471,659 32,102,557 38,104,036 27,857,265 19,301,700
Short term debt..................... 10,797,111 12,510,017 10,658,451 3,114,998 96,461
Long term debt...................... -- 67,291 66,416 1,611,355 1,610,338
Stockholders' equity................ 2,355,884 3,998,587 11,827,636 11,551,919 11,206,868
Item 7. Management's Discussion and Analysis of 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
-----------------------
1999 1998 1997
---- ---- ----
Net sales.......................................... 100% 100.0% 100.0%
Cost of sales......................................(90.0) (90.6) (87.0)
Writedown of inventory............................. --- (.7) ---
---------------------------------
Gross profit........................................10.0 8.7 13.0
Selling and administrative expenses.................(10.4) (8.3) (7.3)
----------------------------------
Income/(loss) from operations....................... (.4) .4 5.7
Interest expense (net)..............................(.3) (.9) (1.1)
Realized loss on available-for-sale securities...... --- (.2) ---
----------------------------------
(Loss)/income before income taxes....................(.7) (.7) 4.6
Benefit/(provision) for income taxes................. .2 .3 (1.9)
----------------------------------
Net (loss)/income................................... (.5) (.4) 2.7
----------------------------------
Fiscal Year 1999 Compared to Fiscal Year 1998
Sales for fiscal year 1999 decreased approximately 29% or $28,619,341 to
$69,683,295 from $98,302,636 in fiscal year 1998. The decrease in sales was a
result of customer reluctance to spend on new programs before the effects of the
new millennium are understood and the Company transitioning its business from a
PC assembler to a reseller of mid-range systems.
Gross profit as a percentage of sales increased to 10.0% in fiscal year 1999
from 8.7% in fiscal year 1998. This increase was primarily attributable to the
inclusion of a $657,491 writedown of inventory in fiscal 1998 or .7% of sales.
Selling and Administrative expenses decreased by approximately 11.5% or $944,337
to $7,249,568 in fiscal year 1999 from $8,193,905 in fiscal year 1998. The
reduction in expense is primarily due to cost control programs, reduced
commissions on lower sales and staff reductions associated with redirecting
marketing efforts.
Interest expense decreased 70.7% or $628,075 to $260,140 in fiscal year 1999
from $888,215 in fiscal year 1998. 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 supplier credit facility on a daily basis. Net interest expense
(interest expense less interest income) for fiscal year 1999 and 1998 was
$216,521 and $881,781, respectively.
Loss from continuing operations before income taxes decreased by 28.9% to
$511,928 in fiscal year 1999 from $719,522 in fiscal year 1998. This decrease
resulted primarily from improved gross margin percentage and reduced interest
expense referred to above.
The Company's effective tax rate was a negative 21.8% in fiscal year 1999 and a
negative 37.8% in fiscal year 1998.
The Company's net loss for fiscal year 1999 decreased to $400,325 from $447,362
in fiscal year 1998 primarily due to the lost gross profit in fiscal 1999 being
more than offset by the inventory write-off, increased operating expenses and
interest expense in 1998.
Fiscal Year 1998 Compared to Fiscal Year 1997
Sales for fiscal year 1998 increased approximately 10% or $8,576,698 to
$98,302,636 from $89,725,938 in fiscal year 1997. The entire increase in sales
relates to improved results from the Company's locations in Connecticut and
Buffalo, New York which began operations in January 1997 and October 1997,
respectively.
Gross Profit as a percentage of sales decreased to 8.7% in fiscal year 1998 from
13.0% in fiscal year 1997. Included in this decrease is the Company's writedown
of inventory in the amount of $657,491 during fiscal year 1998. Excluding this
writedown, gross profit percentage would have been 9.4% for fiscal year 1998.
The decrease in gross profit percentage was the result of increased competition
and lower selling prices, most notably in the personal computer segment of the
market. In addition, the Company attempted to increase its sales volume by
taking some orders at relatively low margins. As pricing pressures in the
computer market remain intense, the Company is becoming more selective in its
participation in programs that cannot meet profitability requirements.
Selling and Administrative expenses increased by $1,659,353 or 25% to $8,193,905
for fiscal year 1998 from $6,534,552 in fiscal year 1997. Approximately $700,000
of the increase relates to costs associated with the commencement and growth of
operations in the Company's Connecticut, New Jersey, and Buffalo, New York
offices. Professional services and insurance increased by approximately $250,000
for expenses incurred as a result of the transition to a public company. The
balance relates to payroll and payroll related expenses incurred as a result of
the hiring of systems engineers and additional sales personnel, along with an
increase in commissions paid as a result of the increased sales volume.
Interest expense decreased $97,872 or 9.9% to $888,215 in fiscal year 1998 from
$986,087 in fiscal year 1997. This decrease is a result of a reduction in debt
due to the decrease in inventory during fiscal year 1998. The full impact of
this reduction in inventory on interest expense will be realized during the
first quarter of fiscal year 1999. Additionally, the Company uses all available
funds to reduce its outstanding loan balance on a daily basis. Net interest
expense (interest expense less interest income) for fiscal year 1998 and 1997
was $881,781 and $979,185, respectively.
Losses from operations before income taxes was $719,522 for fiscal year 1998
compared to income from operations before income taxes of $4,165,461 in fiscal
year 1997. This absolute decrease of $4,884,983 is the result of the significant
decline in gross profits along with the Company's writedown of inventory and the
increase in selling and administrative expenses.
As a result of the loss, the Company had a tax benefit for fiscal year 1998 of
$272,160. The effective tax rate for fiscal year 1998 was (37.83%). This
compared to a tax provision of $1,761,855 for fiscal year 1997. The effective
tax rate for fiscal year 1997 was 42.3%.
The Company's net loss for fiscal year 1998 was $447,362 or $.10 per diluted
share compared to net income of $2,403,606 or $.61 per diluted share for fiscal
year 1997. The decrease is the result primarily of a lower gross profit percent
in fiscal 1998 and significantly higher operating expenses versus fiscal 1997.
Liquidity and Capital Resources
The Company's current ratios at September 30, 1999 and 1998 were 2.40 and 1.63,
respectively. Working capital at September 30, 1999 was $9,077,650, a decrease
of $236,587 from September 30, 1998.
Cash provided by operating activities was $4,569,649 in fiscal year 1999 and
cash provided by operating activities was $9,342,275 in fiscal year 1998. The
cash provided by operating activities during fiscal year 1999 and 1998 was the
result of significant reductions in both inventory and accounts receivable. Cash
used in investing activities was $109,357 and $2,607,070 for the fiscal years
1999 and 1998, respectively, and was used to finance capital expenditures. A
40,000 square foot facility was completed and occupied in May 1998 and houses
the Company's corporate office, warehouse and assembly facility. Net cash used
in financing activities was $3,111,280 in fiscal year 1999 and net cash used by
financing activities was $6,258,290 in fiscal year 1998. The net cash used in
financing activities during fiscal years 1998 and 1999 related to payments made
under the Company's supplier credit facility.
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, 1999, 1998 and 1997, interest on the outstanding
borrowings is payable monthly at the prime rate, or prime rate plus 6.5% should
the Company fail to meet certain collateral requirements. As of September 30,
1999 and 1998, borrowings outstanding under this facility were zero and
$3,020,234, respectively. Additionally, $3,282,454 and $9,855,736 were included
in accounts payable at September 30, 1999 and 1998, respectively, and are
included against the maximum credit available.
The Company also received a grant of $100,000 and a loan of $100,000 from The
Empire State Development Corporation to assist in the financing of the new
facility in Shirley, New York.
The Company believes that its present line of credit with IBM Credit Corporation
coupled with its projected earnings capacity will be sufficient to fund its
operations and capital expenditures for at least 12 months. In addition, the
Company secured a mortgage during fiscal year 1998 with Chase Manhattan Bank on
its new facility in the amount of $1,650,000. The proceeds of this mortgage were
used to pay down its debt with IBM Credit Corporation. Throughout fiscal years
1999 and 1998, the Company has been in a positive collateral position with IBM
Credit Corporation resulting in the ability to draw down against its current
line of credit whenever needed. The number of days sales outstanding for each of
fiscal years 1999 and 1998 was 60 and 68 days, respectively. The Company is
increasing its efforts in the accounts receivable area and is expecting to
reduce its days sales outstanding in the coming fiscal year.
Seasonality and Quarterly Fluctuations
The Company has historically experienced and expects to continue to experience
fluctuations in its net sales, income from operations and net income due to the
size and timing of system sales transactions. Due to the fact that a significant
portion of the Company's overhead is fixed, the Company's results of operations
may be adversely affected if revenues were to fall below Company expectations.
The Company can typically deliver systems within a short period of time and
therefore does not have a significant long-term backlog in orders.
The following table sets forth certain quarterly information for the periods
indicated:
Fiscal Year 1999
----------------
Sept. 30 June 30 March 31 Dec. 31
(in thousands) 1999 1999 1999 1998
- ----------------------------------------------------------------------------------------
Net sales .............................. $ 13,982 $ 14,018 $ 14,355 $ 27,329
Gross profit .......................... 973 1,218 1,921 2,839
(Loss)/income from continuing operations
before income taxes ............... (827) (777) 368 938
Net (Loss)/income(1) ................... (605) (478) 172 511
Fiscal Year 1998 Fiscal Year 1997
---------------- ----------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
(in thousands) 1998 1998 1998 1997 1997 1997 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales ..................... $ 21,596 $ 26,417 $ 22,228 $ 28,062 $ 25,848 $ 24,719 $ 17,876 $ 21,283
Gross profit .................. 1,410 2,500 1,873 2,814 3,791 2,617 2,629 2,640
Income (loss) from
continuing operations
before income taxes (1,080) 152 (355) 564 1,481 868 855 962
Net income (loss)(1) .......... (657) 89 (196) 317 851 502 490 560
(1) Taxes are computed based on effective tax rates for the respective fiscal
years.
Disclosures Regarding Forward Looking Statements
Management's discussion and analysis of financial conditions and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto appearing elsewhere in
this Report. Except for the historical statements and discussions contained in
this Report, statements contained herein constitute forward looking statements
within the meanings of the Securities Act of 1933 as amended, and Section 21E of
the Securities and Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from the results anticipated in such statements. These risks
and uncertainties include, but are not limited to those set forth herein and the
risk factors described in the Company's prospectus dated June 17, 1997, its Form
10-K for the year ended September 30, 1998 and from time to time in the
Company's other filings with the Securities and Exchange Commission.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment, software and devices with embedded technology that are time-sensitive
may recognize a date using "00" as the year 1900, rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose, the term "computer equipment and
software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing and scanning
equipment.
Based upon its identification and assessment, the Company has replaced or
modified some of its computer equipment and software that it had identified as
not year 2000 ready. In addition, in the ordinary course of replacing computer
equipment and software, the Company attempts to obtain replacements that it
believes are Year 2000 compliant. Utilizing internal resources to identify and
assess needed Year 2000 remediation, the Company began its Year 2000
identification, assessment, remediation, and testing efforts in October 1997. As
of June 4, 1999, The Company completed final testing and is now 100% year 2000
ready.
The Company believes that the cost of its Year 2000 identification, assessment,
remediation, and testing efforts, as well as the anticipated costs to be
incurred by the Company with respect to Year 2000 issues of third parties, will
not be material. The Company presently believes that the Year 2000 issue will
not pose significant operational problems for the Company. However, if all Year
2000 issues are not properly identified, or assessment, remediation, and testing
are not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company" results of operations or adversely affect the Company's
relationships with customers, vendors or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.
The Company has not fully developed a comprehensive contingency plan to address
situations that may result from the year 2000. If Year 2000 compliance issues
are discovered, the Company will evaluate the need for contingency plans
relating to such issues.
The costs of the Company's Year 2000 identification, assessment, remediation,
and testing efforts are based upon management's good-faith estimates, which were
derived using numerous assumptions regarding future events, including the
continued availability of certain resources, possible third-party remediation
plans, and other factors. There can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in Year 2000 issues, the ability to identify, assess,
remediate, and test all relevant computer codes and imbedded technology, and
similar uncertainties. In addition, variability of definitions of "Year 2000
Compliant" and the myriad of different products and services, and combinations
thereof, sold by the Company may lead to claims whose impact on the Company is
not currently estimateable. No assurance can be given that the aggregate cost of
defending and resolving such claims, if any, will not materially adversely
affect the Company's results of operations. Although some of the Company's
agreements with manufacturers and others from whom it purchases products for
resale contain provisions requiring such parties to indemnify the Company under
such circumstances, there can be no assurance that such indemnification
arrangements will cover all of the Company's liabilities and costs related to
claims by third parties related to Year 2000 issue.
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-19 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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, 1999 and 1998.....................................F-3
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997...............................................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1999, 1998 and 1997.........................................................F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997...............................................................F-6
Notes to Consolidated Financial Statements.................................................F-7 - F-19
(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 1998 Incentive Stock Option Plan
***10.3 1999 Employee Stock Purchase Plan
*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.
** Incorporated by reference from the Registrant's definitive proxy statement
filed with the Securities and Exchange Commission on January 29, 1998.
*** Incorporated by reference from the Registrant's definitive proxy statement
filed with the Securities and Exchange Commission on December 29, 1998.
(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, 1999.
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, President
----------------------------------
Dated: December 10, 1999 John H. Spielberger , President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following
Signature Title Date
/s/ John H. Spielberger Chairman of the Board, President and Chief December 10, 1999
- ----------------------- Executive Officer (Principal Operating Officer)
John H. Spielberger
/s/ Thomas F. Belleau Vice President Finance, Secretary, Chief Financial December 10, 1999
- --------------------- Officer and Director
Thomas F. Belleau
/s/ Lowell Shulman Vice President General Manager Consulting Services December 10, 1999
- ------------------ and Director
Lowell Shulman
/s/ John C. Spielberger Director December 10, 1999
- -----------------------
John C. Spielberger
/s/ Cornelia Eldridge Director December 10, 1999
- ---------------------
Cornelia Eldridge
/s/ Lee Adams Director December 10, 1999
- -------------
Lee Adams
/s/ Lawrence S. Brochin Director December 10, 1999
- -----------------------
Lawrence S. Brochin
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 Operations............................................................... F-4
Consolidated Statements of Stockholders' Equity..................................................... F-5
Consolidated Statements of Cash Flows............................................................... F-6
Notes to Consolidated Financial Statements.......................................................... F-7
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 .
CERTIFIED PUBLIC ACCOUNTANTS
25 SUFFOLK COURT
HAUPPAUGE, NY 11788
(516) 434-9500
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
SysComm International Corporation and Subsidiary
Shirley, New York
We have audited the accompanying consolidated balance sheets of SysComm
International Corporation and Subsidiary as of September 30, 1999 and 1998 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1999. 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, 1999 and 1998 and
the results of its operations and its cash flows for each of the years in the
three-year period ended September 30, 1999, in conformity with generally
accepted accounting principles.
/s/ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
November 10, 1999
F-2
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
1999 1998
------------------ ------------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,263,521 $ 914,509
Accounts receivable, net 11,400,892 19,612,934
Inventory 741,561 2,586,236
Recoverable income taxes 725,900 280,976
Prepaid expenses 106,740 83,780
Deferred income taxes 323,530 529,793
------------------ ------------------
Total Current Assets 15,562,144 24,008,228
Property, Plant and Equipment, Net 3,315,187 3,509,345
Other Assets 424,369 339,692
------------------ ------------------
Total Assets $ 19,301,700 $ 27,857,265
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Supplier credit facility $ -0- $ 3,020,234
Accounts payable and accrued liabilities 6,378,033 11,578,993
Current portion of long-term debt 96,461 94,764
Income taxes payable 10,000 -0-
------------------ ------------------
Total Current Liabilities 6,484,494 14,693,991
Long-Term Debt 1,610,338 1,611,355
------------------ ------------------
Total Liabilities 8,094,832 16,305,346
------------------ ------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock; no par value; 1,000,000
shares authorized; none issued
Common stock; $.01 par value; 40,000,000 shares authorized;
5,523,589 sharesissued at September 30, 1999;
5,515,200 shares issued at September 30, 1998 55,236 55,152
Additional paid-in capital 6,473,892 6,317,617
Retained earnings 5,522,211 5,922,536
------------------ ------------------
12,051,339 12,295,305
Treasury stock (at cost) (844,471) (743,386)
------------------ ------------------
Total Stockholders' Equity 11,206,868 11,551,919
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 19,301,700 $ 27,857,265
================== ==================
See accompanying notes to consolidated financial statements.
F-3
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Sales .................................................... $ 69,683,295 $ 98,302,636 $89,725,938
Cost of Sales ............................................ 62,731,687 89,047,731 78,049,310
Writedown of Inventory ................................... -0- 657,491 -0-
------------ ------------ ------------
62,731,687 89,705,222 78,049,310
------------ ------------ ------------
Gross Profit 6,951,608 8,597,414 11,676,628
Selling and Administrative Expenses ...................... 7,249,568 8,193,905 6,534,552
------------ ------------ ------------
(Loss) Income from Operations (297,960) 403,509 5,142,076
------------ ------------ ------------
Other Income (Expense)
Interest expense ..................................... (260,140) (888,215) (986,087)
Interest income ...................................... 43,619 6,434 6,902
Other ................................................ 2,553 (35,000) 2,570
Realized loss on available-for-sale
securities ......................................... -0- (206,250) -0-
------------ ------------ ------------
Total Other Expense (213,968) (1,123,031) (976,615)
------------ ------------ ------------
(Loss) Income Before Income Taxes (511,928) (719,522) 4,165,461
Benefit (Provision) for Income Taxes ..................... 111,603 272,160 (1,761,855)
------------ ------------ ------------
Net (Loss) Income $ (400,325) $ (447,362) $ 2,403,606
============ ============ ============
Per Share Data
Basic ................................................ $ (0.08) $ (0.10) $ 0.67
Diluted .............................................. (0.08) (0.10) 0.61
Weighted Average Shares
Basic ................................................ 4,749,519 4,593,065 3,562,033
Diluted .............................................. 4,771,364 4,613,750 3,931,846
See accompanying notes to consolidated financial statements.
F-4
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1999, 1998
and 1997
Additional
Common Stock Paid-In
-------------------------
Shares Amount Capital
----------- ----------- ------------
Balance as of September 30, 1996 .... 3,170,540 $ 36,322 $ 138,143
Common Stock Sold in Public Offerings
Net of Offering Costs ............. 1,385,000 13,850 5,472,309
Comprehensive Income:
Net Income ..........................
Unrealized Loss on Available-for-
Sale Securities ...................
Total Comprehensive Income ..........
----------- ----------- ------------
Balance as of September 30, 1997 .... 4,555,540 50,172 5,610,452
Comprehensive Loss:
Net Loss ............................
Unrealized Loss on Available-for-
Sale Securities ...................
Realized Loss on Available-for-Sale
Securities ........................
Total Comprehensive Loss ............
Compensatory Stock Options
Issued to Non-employees ........... 75,225
Exercise of Stock Options ........... 498,000 4,980 631,940
Purchase of Treasury Shares ......... (279,635)
----------- ----------- ------------
Balance as of September 30, 1998 .... 4,773,905 55,152 6,317,617
Net Loss ............................
Compensatory Stock Options
Issued to Non-employees ........... 147,000
Common Stock Issued Pursuant
to Stock Purchase Plan ............ 8,389 84 9,275
Purchase of Treasury Shares ......... (61,400)
----------- ----------- ------------
Balance as of September 30, 1999 .... 4,720,894 $ 55,236 $ 6,473,892
=========== =========== =============
Accumulated
Other Total
Treasury Stock Comprehensive Retained Stockholders'
------------------------- ---------------------------------
Shares Amount Income Earnings Equity
----------- ----------- ------------ ----------------- ------------------
Balance as of September 30, 1996 .... 461,660 $(142,170) -0- $3,966,292 $ 3,998,587
Common Stock Sold in Public Offerings
Net of Offering Costs ............. 5,486,159
Comprehensive Income:
Net Income .......................... 2,403,606 2,403,606
Unrealized Loss on Available-for-
Sale Securities ................... (60,716) (60,716)
-----------
Total Comprehensive Income 2,342,890
---------- ---------- -------- ---------- -----------
Balance as of September 30, 1997 .... 461,660 (142,170) (60,716) 6,369,898 11,827,636
-----------
Comprehensive Loss:
Net Loss ............................ (447,362) (447,362)
Unrealized Loss on Available-for-
Sale Securities ................... (60,034) (60,034)
Realized Loss on Available-for-Sale
Securities ........................ 123,750 123,750
-----------
Total Comprehensive Loss ............ (386,646)
Compensatory Stock Options
Issued to Non-employees ........... 75,225
Exercise of Stock Options ........... 636,920
Purchase of Treasury Shares ......... 279,635 (601,216) (601,216)
---------- ---------- -------- ---------- -----------
Balance as of September 30, 1998 .... 741,295 (743,386) -0- 5,922,536 11,551,919
Net Loss ............................ (400,325) (400,325)
Compensatory Stock Options
Issued to Non-employees ........... 147,000
Common Stock Issued Pursuant
to Stock Purchase Plan ............ 9,359
Purchase of Treasury Shares ......... 61,400 (101,085) (101,085)
---------- --------- -------- ---------- -----------
Balance as of September 30, 1999 .... 802,695 $(844,471) -0- 5,522,211 11,206,868
========== ========= ======== ========== ===========
See accompanying notes to consolidated financial
statements.
F-5
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
--------------- --------------- ----------------
Cash Flows From Operating Activities
Net (loss) income $ (400,325) $ (447,362) $ 2,403,606
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 292,144 299,274 188,759
Compensatory stock options issued to non-employees 147,000 75,225 -0-
Deferred tax provision (benefit) 206,263 (208,212) (43,145)
Loss (gain) on disposition of equipment 11,371 -0- (2,570)
Realized loss on available-for-sale securities -0- 206,250 -0-
Changes in assets and liabilities:
Accounts and note receivable 8,212,042 3,655,192 (2,255,884)
Inventory 1,844,675 10,058,107 (3,707,498)
Recoverable income taxes (444,924) (280,976) -0-
Prepaid expenses and other assets (107,637) (42,683) (153,423)
Accounts payable and accrued liabilities (5,200,960) (3,473,326) 611,898
Income taxes payable 10,000 (499,214) (569,983)
--------------- --------------- ----------------
Net Cash Provided by (Used in) Operating Activities 4,569,649 9,342,275 (3,528,240)
--------------- --------------- ----------------
Cash Flows From Investing Activities
Purchase of property, plant and equipment (209,357) (2,607,070) (803,317)
Proceeds from disposition of equipment -0- -0- 7,300
Proceeds from state grant 100,000 -0- -0-
Net Cash Used in Investing Activities (109,357) (2,607,070) (796,017)
--------------- --------------- ----------------
Cash Flows From Financing Activities
Net payments under supplier
credit facility (3,020,234) (7,594,604) (1,868,553)
Net proceeds from long-term debt 100,000 1,650,000 -0-
Payments of long-term debt (99,320) (53,910) (36,435)
Net proceeds from issuance of common stock 9,359 -0- 5,486,159
Purchase of treasury stock (101,085) (259,776) -0-
--------------- --------------- ----------------
Net Cash (Used in) Provided by Financing Activities (3,111,280) (6,258,290) 3,581,171
--------------- --------------- ----------------
Net Increase (Decrease) in Cash and
Cash Equivalents 1,349,012 476,915 (743,086)
Cash and Cash Equivalents at Beginning of Year 914,509 437,594 1,180,680
--------------- --------------- ----------------
Cash and Cash Equivalents at End of Year $ 2,263,521 $ 914,509 $ 437,594
=============== =============== ================
Supplemental Disclosures of Cash Flow Information Cash paid during the year for:
Income taxes $ 241,935 $ 809,910 $ 2,386,580
Interest 252,727 888,215 986,087
Supplemental Schedules of Noncash Investing
and Financing Activities
Purchase of treasury stock:
Proceeds from sale of stock options $ -0- $ 341,440 $ -0-
Purchase of treasury stock -0- (601,216) -0-
--------------- --------------- ----------------
Cash Paid for Treasury Stock $ -0- $ (259,776) $ -0-
=============== =============== ================
Acquisition of equipment:
Cost of equipment $ -0- $ -0- $ 52,547
Equipment financed -0- -0- (52,547)
--------------- --------------- ----------------
Cash Paid for Equipment $ -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
stock's 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 Company's 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 and employees' purchase rights as
prescribed by Accounting Principles Board Opinion No. 25 and includes pro forma
information in the stock-based compensation footnote, as permitted by Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). Accordingly, no compensation cost is recognized for
employees' purchase rights and stock options granted to employees. Compensation
cost is recognized for stock options granted to non-employees based upon the
fair market value of the options granted.
Accounts Receivable
Accounts receivable are presented net of allowances for doubtful accounts and
for sales returns. The allowances are based on prior experience and management's
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 $169,050 and $116,606 as of September
30, 1999 and 1998, respectively.
The allowance for sales returns was $110,000 and $37,389 as of September 30,
1999 and 1998, respectively.
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.
With regard to the Company's assessment of the realizability of inventory, the
Company periodically conducts a complete physical inventory, and reviews the
movement of inventory on an item by item basis to determine the value of items
which are slow moving. After considering the potential for near term product
engineering changes and/or technological obsolescence and current realizability
due to changes in returns and price protection policies, the Company determines
the current need for valuation allowances. After applying the above noted
measurement criteria at September 30, 1999 and 1998, the Company determined that
an allowance of $164,420 and $284,000, respectively, was adequate.
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.
F-8
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment (continued)
Depreciation and amortization are computed using the straight-line method over
the following estimated useful lives:
Estimated
Useful Life
-----------
Building 39 years
Vehicles 1-5 years
Computer equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements 5 years
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. A valuation allowance against deferred tax assets is not
considered necessary because it is more likely than not that the deferred tax
asset will be fully realized.
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 ("SFAS 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
accumulated other comprehensive income within stockholders' equity. Realized
losses are recorded for any decline in value determined to be
other-than-temporary on available-for-sale securities.
Comprehensive Income
In 1999, the Company adopted Financial Accounting Standards Board Statement No.
130 ("SFAS No. 130"), Reporting Comprehensive Income. Comprehensive income
consists of net income and other comprehensive income; the latter includes
unrealized gains and losses on available-for-sale securities and is presented in
the Consolidated Statements of Stockholders' Equity. The adoption of SFAS No.
130 had no effect on stockholders' equity. Prior year financial statements have
been reclassified to conform to the SFAS No. 130 requirements.
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.
F-9
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Earnings (Loss) Per Common Share
In February 1997, the Financial Accounting Standard Board issued SFAS No. 128,
Earnings per Share. This pronouncement requires the reporting of two net income
(loss) per share figures: basic net income (loss) per share and diluted net
income (loss) per share. Basic net income (loss) is calculated by dividing net
income (loss) by the weighted-average number of common shares outstanding during
the period. Diluted net income (loss) per share is computed by dividing net
income (loss) by the sum of the weighted-average number of common shares
outstanding during the period plus the dilutive effect of shares issuable
through stock options and warrants. All prior period net income (loss) per share
figures presented herein have been restated in accordance with the provisions of
SFAS No. 128.
A reconciliation of the weighted-average number of common shares outstanding
used in the calculations of basic and diluted earnings (loss) per share follows.
Year Ended Year Ended Year Ended
September 30, 1999 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------
Basic Dilutive Basic Dilutive Basic Dilutive
----- -------- ----- -------- ----- --------
Weighted-average number
of common shares outstanding 4,749,519 4,749,519 4,593,065 4,593,065 3,562,033 3,562,033
============== ============= =============
Dilutive options to
purchase common shares 21,845 20,685 369,813
----------- ------------- ------------
4,771,364 4,613,750 3,931,846
=========== ============= ============
The dilutive effect of 57,000 options granted in 1997 at exercise prices ranging
from $5.56 to $6.12 were not included in the computation of diluted loss per
share for the years ended September 30, 1999 and 1998 because they are
anti-dilutive. In addition, the dilutive effect of 40,000 options granted in
1998 at an exercise price of $1.88 and 115,000 options granted in 1999 at
exercise prices ranging from $2.69 to $2.85 were not included in the computation
of diluted loss per share for the year ended September 30, 1999 because they are
anti-dilutive.
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.
F-10
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Investments
Investments at September 30, 1999 and 1998 consist of the following:
Ameriquest Technologies, Inc.
(Formerly CMS Enhancements, Inc.)
Number of Shares 300,000
Fair Value $ -0-
Cost $ 1,612,500
At September 30, 1999 and 1998, marketable equity securities have been
categorized as available-for-sale and are stated at fair value. The Company
recorded a realized loss on available-for-sale securities of $-0- and $206,250,
which net of deferred taxes amounted to $-0- and $123,750 for the years ended
September 30, 1999 and 1998, respectively, since the decline in value was
determined to be other-than-temporary as of those dates. The increase in the net
unrealized loss recognized in other comprehensive income (loss) for the years
ended September 30, 1999, 1998, and 1997 totaled $-0-, $63,034 and $60,716,
respectively.
Note 3 - Property, Plant and Equipment
Property, plant and equipment is set forth below:
1999 1998
----------------- -----------------
Land $ 437,660 $ 437,660
Building 2,225,480 2,325,480
Vehicles 81,251 119,159
Computer equipment 1,026,084 833,767
Furniture and fixtures 518,141 501,101
Leasehold improvements 117,691 117,691
----------------- -----------------
4,406,307 4,334,858
Accumulated depreciation (1,091,120) (825,513)
----------------- -----------------
Property, plant and equipment, net $ 3,315,187 $ 3,509,345
================= =================
The Company received a grant of $100,000 from the Empire State Development
Corporation in 1999 that reduced the cost of the building in Shirley, New York.
F-11
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998
amounted to $240,652 and $208,267, respectively.
Note 5 - Financing Arrangements
The Company entered into a formal credit agreement with the financing subsidiary
of IBM. 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 is subject to renewal each
September, is also subject to temporary increases, thereby increasing the line
of credit to $41,500,000 during certain periods. As of September 30, 1999 and
1998, interest on the outstanding borrowings is payable monthly at prime, 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, 1999, 1998 and 1997 totaled $130,173, $851,708 and $970,912,
respectively. Additionally, $3,282,454 and $9,855,736 were included in accounts
payable at September 30, 1999 and 1998, respectively, and are included against
the maximum credit available.
Note 6 - Long-Term Debt
Long-term debt consists of the following:
1999 1998
--------------- ---------------
CHASE MANHATTAN BANK
Mortgage loan in the amount of $1,650,000 collateralized by the land and
building in Shirley, New York; payable in monthly installments of $14,979
including interest of 7.16% per annum; final payment due December 2012. $ 1,575,274 $ 1,639,702
EMPIRE STATE DEVELOPMENT CORPORATION
Loan in the amount of $100,000 to finance improvements to the facility in
Shirley, New York; payable in 119 monthly installments of $1,012, beginning
May 1, 1999 and ending April 1, 2009, including principal and a base interest
rate of 4.0% per annum; interest rate is subject to change each March 1 to
prime plus 2.0% if the number of full-time employees in Shirley, New York
declines below 85% of certain annual base numbers. 95,892 -0-
------ ---
(carried forward) 1,671,166 1,639,702
F-12
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Long Term Debt (continued)
1999 1998
--------------- ---------------
(brought forward) $ 1,671,166 $ 1,639,702
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. 809 10,060
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 was December 1998. -0- 3,529
Collateralized by a lien on a Company automobile; payable in 36 monthly
installments of $678 including interest of 9.0%
per annum; final payment was November 1998. -0- 1,341
AT&T CREDIT CORP.
Capital lease collateralized by a lien on the Company's phone system; payable
in monthly installments of $708 including
interest of 14.446% per annum; final payment due May 2001. 12,515 18,706
Capital lease collateralized by a lien on the Company's phone system; payable
in monthly installments of $542 including
interest of 15.089% per annum; final payment due January 2001. 7,406 12,838
Capital lease collateralized by a lien on the Company's phone system; payable
in monthly installments of $560 including
interest of 9.5% per annum; final payment due March 2002. 14,903 19,943
--------------- ---------------
1,706,799 1,706,119
Current maturities (96,461) (94,764)
--------------- ----------------
$ 1,610,338 $ 1,611,355
============ ============
Maturities of long-term debt are as follows:
September 30, 2000 $ 96,461
2001 96,695
2002 92,257
2003 95,267
2004 101,999
Thereafter 1,224,120
$ 1,706,799
===============
F-13
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Capital Leases
As further described in Note 6, the Company began leasing telephone equipment
during December 1995. As of September 30, 1999 and 1998, the gross assets
capitalized under telephone equipment leases totaled $80,745 and the accumulated
amortization totaled $37,519 and $25,685, respectively. The amortization expense
for the years ended September 30, 1999 and 1998 of $11,834 and $11,834,
respectively, is included in depreciation expense.
Note 8 - Income Taxes
The provision (benefit) for income taxes consists of the following:
Years Ended September 30,
-------------------------
1999 1998 1997
---- ---- ----
Current:
Federal $ (362,184) $ (63,948) $ 1,285,000
State 44,318 -0- 520,000
--------------- ---------------- ----------------
Total Current (317,866) (63,948) 1,805,000
--------------- ---------------- ----------------
Deferred:
Federal 167,073 (168,652) (32,440)
State 39,190 (39,560) (10,705)
--------------- ---------------- ----------------
Total Deferred 206,263 (208,212) (43,145)
--------------- ---------------- ----------------
Provision (Benefit) for Income Taxes $ (111,603) $ (272,160) $ 1,761,855
=============== ================ ================
The difference between the provision (benefit) for income taxes at the Company's
effective income tax rate and the federal statutory rate of 34% is as follows:
Years Ended September 30,
1999 1998 1997
Income taxes at statutory rate $ (174,056) $ (244,637) $ 1,416,258
State taxes, net of federal benefit 62,453 -0- 333,237
Other -0- (27,523) 12,360
--------------- ---------------- ----------------
Provision (Benefit) for Income Taxes $ (111,603) $ (272,160) $ 1,761,855
=============== ================ ================
The tax effects of temporary differences giving rise to significant portions of
deferred taxes are as follows:
September 30,
-------------
1999 1998
---- ----
Allowance for doubtful accounts $ 71,001 $ 48,975
Allowance for sales returns 46,200 -0-
Inventory 71,891 126,792
Investments 18,096 18,096
Depreciation (21,742) (24,636)
Vacation accrual 39,078 33,491
Stock options 93,335 327,075
Other 5,671 -0-
--------------- ----------------
Net Deferred Tax Asset $ 323,530 $ 529,793
=============== ================
F-14
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock-Based Compensation
Stock Option Plans
The 1988 stock option plan expired on May 5, 1998. In February 1998, a new stock
option plan (the "1998 Plan") was approved by the stockholders, whereby 500,000
shares of common stock are reserved for issuance upon the exercise of options
designated as either incentive stock options or non-qualified stock options. The
1998 Plan will terminate in February 2008; however, options granted under the
1998 Plan will expire not more than ten years from the date of grant.
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 and non-employees of the
Company is an amount per share of not less than the fair market value per share
on the date the option is granted.
During 1999 and 1998, 115,000 and 40,000 options, respectively, were granted to
investment bankers and directors of the Company with immediate vesting. All
other options granted vest over a four-year period following the date of grant.
The options granted in 1997 expire on September 1, 2001. All other options
expire five years from the date of the grant.
A summary of stock option activity related to the Company's stock option plans
is as follows:
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Period Period Period Outstanding Exercisable
----------- ------ ------ ------ ----------- -----------
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
Year ended September 30, 1998
Number of shares 564,500 40,000 498,000 9,500 97,000 54,250
Weighted average exercise price
per share $ 1.26 $ 1.875 $ 0.69 $ 5.56 $ 4.06 $ 2.85
Year ended September 30, 1999
Number of shares 97,000 327,000 -0- 21,000 403,000 173,000
Weighted average exercise price
per share $ 4.06 $ 2.02 $ -0- $ 5.56 $ 2.32 $ 2.90
The weighted average per share fair value of the options granted during the
years ended September 30, 1999 and 1998 was estimated as $1.34 and $1.70,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
1999 1998
------------------- ----------------------
Risk-free interest rates 5.62% - 5.86% 4.23%
Expected option lives 4.48 - 5 years 4.92 years
Expected volatilities 110% 147%
Expected dividend yields 0% 0%
F-15
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock-Based Compensation (continued)
Stock Option Plan (continued)
The following table summarizes information about the options outstanding at
September 30, 1999:
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercisable Number Exercisable
Exercise Price Outstanding Life Price Exercisable Price
- ----------------------------- -------------- ----------- ----------- ------------------- ---------------
$5.56 - $6.12 36,000 1.92 years $ 5.61 18,000 $ 5.61
$2.69 - $2.85 115,000 4.48 years 2.83 115,000 2.83
$1.56 - $1.88 252,000 4.62 years 1.61 40,000 1.88
Employee Stock Purchase Plan
On December 17, 1998, the Company adopted the 1999 Employee Stock Purchase Plan
(the "1999 Plan") whereby 200,000 shares of common stock are reserved for
issuance to eligible employees. A participant may have up to 10% of their
earnings withheld during a period of approximately six months commencing on the
first trading day on or after April 1 and terminating on the last trading day
ending the following September 30, or commencing on the first trading day on or
after October 1 and terminating on the last trading day ending the following
March 31. The purchase price shall be an amount equal to 85% of the fair market
value of a share of common stock on the enrollment date or on the exercise date,
whichever is lower.
At September 30, 1999, the six participating employees in the 1999 Plan
exercised their rights to purchase 8,389 shares of common stock at 85% of the
fair market value on September 30, 1999. No purchase rights remain outstanding
or exercisable at September 30, 1999.
The fair market value of each stock purchase plan grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions: no
estimated dividends; expected volatility of 110%; risk free interest rate of
5.88%; and an expected life of 0.5 years. The weighted-average fair value of
these purchase rights granted in 1999 was $0.49.
Had compensation expense for the Company's stock-based compensation plans been
determined consistent with SFAS 123, net loss and loss per share would be
increased to the pro forma amounts indicated below:
1999 1998
--------------- ----------------
Net loss
As reported $ (400,325) $ (447,362)
Pro forma (480,008) (467,057)
Loss per share - basic
As reported $ (0.08) $ (0.10)
Pro forma (0.10) (0.10)
Loss per share - diluted
As reported $ (0.08) $ (0.10)
Pro forma (0.10) (0.10)
F-16
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, 1998 and 1997, the Company incurred
401(k) costs totaling $21,411, $19,945 and $42,986, 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 for the years ended September 30, 1999, 1998 and 1997. Three
customers comprised 19%, 18% and 14%, respectively, of accounts receivable as of
September 30, 1999. In comparison, no single customer comprised more than 10% of
accounts receivable as of September 30, 1998.
Note 12 - Commitments and Contingencies
Purchases
In 1998 and 1997, the Company purchased a majority of its products from
International Business Machines Corporation (IBM), whose subsidiary represents
the Company's major lending source, as further discussed in Note 5. In 1999, the
Company began purchasing more products from other vendors and less from IBM.
Purchases from IBM represented approximately 9%, 85% and 90% of total purchases
for each of the years ended September 30, 1999, 1998 and 1997, respectively.
Four other vendors became major suppliers in 1999. Purchases from these
suppliers represented approximately 40%, 22%, 17% and 8% of total purchases for
the year ended September 30, 1999 and 52%, 1%, 7% and 39%, respectively, of
accounts payable at September 30, 1999.
F-17
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Commitments and Contingencies (continued)
Leases
The Company has operating leases on real property and equipment expiring through
the year 2003. 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 $201,655, $387,837 and $309,861 for the
years ended September 30, 1999, 1998 and 1997, respectively.
The future minimum rental commitments are as follows:
September 30, 2000 $ 223,832
2001 204,534
2002 76,040
2003 1,855
----------------
$ 506,261
================
Employment Agreements
Effective June 17, 1997, the Company entered into two-year employment agreements
with four senior executives. The employment agreements expired in 1999 and were
not renewed. No other long-term employment agreements exist as of September 30,
1999.
Purchase Commitment
In March 1997, the Company commenced operation of an IBM PC assembly facility
under IBM's Authorized Assembler Program (the "AAP"). Under the terms of the AAP
Agreement with IBM, the Company would 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 Company's actual sales volume of PCs. In March
1999, the Company was de-authorized. No other purchase commitments exist as of
September 30, 1999.
Litigation
The Company was a defendant in a lawsuit which alleged wrongful termination of
employment. The action had been in the discovery stage since 1992. Effective
April 14, 1998, the Company entered into a Confidential Settlement Agreement and
General Release with the plaintiff. Neither the execution of the Agreement nor
the Agreement itself is an admission of liability or wrongdoing by the Company.
In consideration of the obligations of the plaintiff and in full and complete
settlement and final satisfaction of any claims which plaintiff may have against
the Company, the Company agreed to pay plaintiff $35,000 as full and complete
settlement of the Action. The Company has no other legal actions pending.
F-18
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Quarterly Financial Data (unaudited)
Quarterly financial data for the years ended September 30, 1999, 1998 and 1997
follow:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
For the year ended September 30, 1999:
Net sales $ 27,329,070 $ 14,354,827 $ 14,017,525 $ 13,981,873
Gross profit 2,839,112 1,921,102 1,217,899 973,495
Income (loss) from operations 937,662 367,847 (776,604) (826,865)
Net income (loss) 510,599 171,897 (478,094) (604,727)
Net income (loss) per share:
Basic 0.11 0.04 (0.10) (0.13)
Diluted 0.11 0.04 (0.10) (0.13)
For the year ended September 30, 1998:
Net sales $ 28,062,283 $ 22,227,999 $ 26,416,609 $ 21,595,745
Gross profit 2,814,257 1,873,150 2,499,527 1,410,480
Income (loss) from operations 809,056 (150,853) 432,074 (686,768)
Net income (loss) 316,768 (196,140) 89,088 (657,078)
Net income (loss) per share:
Basic 0.07 (0.04) 0.02 (0.15)
Diluted 0.06 (0.04) 0.02 (0.14)
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:
Basic 0.18 0.15 0.15 0.19
Diluted 0.16 0.14 0.14 0.17
F-19
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, 1999, and for each of the
years in the three-year period ended September 30, 1999, included in this Form
S-1. 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 the prospectus.
/s/ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
November 10, 1999
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, 1997 $ 63,846 $ 125,000 $ -0- $ 80,503 (a) $ 108,343
Year ended September 30, 1998 108,343 151,000 -0- 142,737 (a) 116,606
Year ended September 30, 1999 116,606 78,000 -0- 25,556 (a) 169,050
Allowance for Sales Returns:
Year ended September 30, 1997 $ 37,389 $ -0- $ -0- $ -0- $ 37,389
Year ended September 30, 1998 37,389 -0- -0- -0- 37,389
Year ended September 30, 1999 37,389 72,611 -0- -0- 110,000
Allowance for Net Unrealized Losses
on Marketable Equity Securities:
Year ended September 30, 1997 $ -0- $ -0- $60,716 (b) $ -0- $ 60,716
Year ended September 30, 1998 60,716 -0- 63,034 (b) 123,750 (c) -0-
Year ended September 30, 1999 -0- -0- -0- -0- -0-
Allowance for Inventory
Obsolescence:
Year ended September 30, 1997 $ -0- $ -0- $ -0- $ -0- $ -0-
Year ended September 30, 1998 -0- 657,491 -0- 373,491 (d) 284,000
Year ended September 30, 1999 284,000 -0- -0- 119,580 (d) 164,420
(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.
(d) Realized loss on sale of inventory.
S-2