<PAGE>
As filed with the Securities and Exchange Commission on June 13, 1997
Registration No. 333-25593
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 5
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------------
SYSCOMM INTERNATIONAL CORPORATION
(exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 5081 1731 11-2889809
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification Number)
</TABLE>
275 Marcus Boulevard
Hauppauge, New York 11788
(516) 273-3200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
John H. Spielberger
Chairman of the Board, President and Chief Executive Officer
275 Marcus Boulevard
Hauppauge, New York 11788
(516) 273-3200 o (516) 952-3788 (fax)
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
Raymond S. Evans, Esq. Martin Todtman, Esq.
Norman M. Friedland, Esq. Beth S. Barash, Esq.
David M. Kastin, Esq. Todtman, Young, Nachamie, Hendler & Spizz, P.C.
Ruskin, Moscou, Evans & Faltischek, P.C. 425 Park Avenue
170 Old Country Road New York, New York 10022
Mineola, New York 11501 (212) 754-9400 o (212) 754-6262 (fax)
(516) 663-6600 o (516) 663-6641 (fax)
</TABLE>
---------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
Proposed Maximum Proposed Maximum
Title of each Class of Securities to Number of Shares to Offering Price Aggregate Offering Amount of
be Registered be Registered (1) per Share (2) Price (2) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value ......... 1,725,000 $5.50 $9,487,500 $ 2,875.00
- ---------------------------------------------------------------------------------------------------------------------------
Representative's Common Stock
Purchase Warrants .................. 150,000 $.001 $150 (3)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value (4) . 150,000 $8.80 $1,320,000 $ 400.00
- ---------------------------------------------------------------------------------------------------------------------------
Total Fee ............................................................................................. $ 3,275.00*
===========================================================================================================================
</TABLE>
(1) Includes 225,000 shares to cover the Underwriter's over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) No fee due pursuant to Rule 457(g).
(4) Reserved for issuance upon exercise of the Representative's Common Stock
Purchase Warrants, together with such indeterminate number of shares which
may be issuable as a result of anti-dilution adjustments.
* Previously, paid.
---------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
<TABLE>
<CAPTION>
Item Location in Prospectus
- --------------------------------------------------------- -----------------------------------------------
<S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus ...................... Outside front cover page
2. Inside Front and Outside Back Cover Pages of
Prospectus ........................................ Inside front and outside back cover pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges ......................... Prospectus Summary; The Company;
Risk Factors; Business
4. Use of Proceeds .................................... Use of Proceeds
5. Determination of Offering Price ..................... Outside front cover page; Underwriting
6. Dilution .......................................... Dilution
7. Plan of Distribution .............................. Underwriting
8. Description of Capital Stock to be Registered ...... Description of Capital Stock
9. Interests of Named Experts and Counsel ............ Legal Matters; Experts
10. Information with Respect to the Registrant
(a) Item 101 of Regulation S-K ........................ The Company; Business
(b) Item 102 of Regulation S-K ........................ Business
(c) Item 103 of Regulation S-K ........................ Business
(d) Item 201 of Regulation S-K ........................ Dividend Policy; Underwriting; Description of
Capital Stock; Shares Eligible for Future Sale
(e) Financial Statements .............................. Summary Consolidated Financial Information;
Selected Consolidated Financial Data
(f) Item 301 of Regulation S-K ........................ Selected Consolidated Financial Data
(g) Item 302 of Regulation S-K ........................ Inapplicable
(h) Item 303 of Regulation S-K ........................ Management's Discussion and Analysis of
Financial Condition and Results of Operations
(i) Item 304 of Regulation S-K ........................ Experts
(j) Item 401 of Regulation S-K ........................ Management
(k) Item 402 of Regulation S-K ........................ Management
(l) Item 403 of Regulation S-K ........................ Principal Stockholders
(m) Item 404 of Regulation S-K ........................ Certain Transactions
(n) Item 405 of Regulation S-K ........................ Inapplicable
11. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities ........................ Management
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 13, 1997
PROSPECTUS
SYSCOMM INTERNATIONAL CORPORATION
1,500,000 Shares
Common Stock
SysComm International Corporation ("SysComm" or the "Company") is hereby
offering 1,500,000 shares of Common Stock, $.01 par value per share ("Common
Stock"). Prior to the offering (the "Offering"), there has been no public
market for the Common Stock of the Company, and there can be no assurance that
such a market will develop or be sustained. See "Underwriting."
Application has been made to have the Common Stock approved for quotation
on the NASDAQ National Market, under the symbol "SYCM." It is currently
estimated that the initial public offering price of the Common Stock will be
between $5.00 and $5.50 per share. See "Underwriting" for information relating
to the factors to be considered in the initial public offering price.
---------------------
Investors should carefully consider the factors set forth under "Risk Factors"
commencing on page 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Underwriting Discounts and
Price to Public Commissions(1) Proceeds to Company(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ...... $ $ $
- ------------------------------------------------------------------------------------------
Total (3) ...... $ $ $
==========================================================================================
</TABLE>
(1) Does not include additional compensation to be received by Commonwealth
Associates, as representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of: (i) a non-accountable
expense allowance in an amount equal to 1.5% of the gross proceeds derived
from the Offering; (ii) an advisory fee equal to 1.5% of the gross
proceeds derived from the Offering ("Advisory Fee"); and (iii) warrants
(the "Representative's Warrants") to purchase up to 150,000 shares of
Common Stock at a price equal to 160% of the initial public offering
price, exercisable for a period of four years commencing one year from the
date of this Prospectus. In addition, the Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, including
the non-accountable expense allowance and Advisory Fee, estimated at
$______ ($______ if the Underwriters' Over-Allotment Option is exercised
in full). See "Underwriting."
(3) The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock on the same terms and conditions as set
forth above solely to cover over-allotments, if any (the "Over-Allotment
Option"). If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$_______, $_______ and $_______, respectively. See "Underwriting."
----------------
The shares of Common Stock are being offered on a firm commitment basis by
the Underwriters named herein, subject to prior sale, when, as and if delivered
to and accepted by them, and subject to certain conditions. The Underwriters
reserve the right to withdraw, cancel or modify the Offering and to reject any
order in whole or in part. It is expected that certificates for the shares of
Common Stock offered hereby will be available for delivery on or about
__________, 1997, at the office of Commonwealth Associates, New York, New York.
---------------------
Commonwealth Associates
The date of this Prospectus is _____________, 1997
<PAGE>
[COMPANY ILLUSTRATIONS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON STOCK. SPECIFICALLY, THE
UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND
PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
------------------
Upon completion of the Offering, the Company will be subject to the
reporting requirements of the Securities Exchange Act of 1934. The Company
intends to furnish its stockholders with annual reports containing consolidated
financial statements audited by its independent auditors, and quarterly reports
for the first three quarters of each fiscal year containing unaudited
consolidated financial statements.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, all information set
forth herein (i) assumes an initial public offering price of $5.25 per share,
(ii) assumes no exercise of the Underwriters' Over-Allotment Option, and (iii)
reflects a 2-for-1 split of Common Stock, effected on March 31, 1997, and an
amendment to the Company's Certificate of Incorporation filed with the
Secretary of State of Delaware on April 21, 1997, increasing the number of
authorized shares of Common Stock and creating a new class of preferred stock.
See "Description of Capital Stock."
The Company
SysComm International Corporation ("SysComm" or the "Company"), through
its wholly owned subsidiary, Information Technology Services, Inc.
("InfoTech"), is a leading systems integrator and reseller of computer
hardware, operating software and networking applications to Fortune 1000
companies. The Company provides its customers with cost efficient,
comprehensive solutions that satisfy their information technology requirements.
Since 1985, the Company's primary focus has been on the sale, integration and
servicing of International Business Machine Corporation ("IBM") products
including personal computers, mid-range systems based on the IBM RS/6000,
servers, and the IBM AS/400. In addition, the Company integrates, resells and
services products from manufacturers such as Hewlett Packard, Compaq, Apple,
Microsoft, 3Com, Bay Networks and Novell.
In March 1997, the Company commenced the assembly and sale of IBM PCs
through IBM's Authorized Assembler Program (the "AAP") providing the Company
with greater flexibility in meeting its customers' needs. The Company believes
that this relationship with IBM will provide it with the opportunity to enhance
its responsiveness to client specific requests and orders, and improve its
operating efficiencies.
A significant percentage of the Company's revenues are derived from sales
to customers in the financial and investment communities. However, the
Company's customer base also includes mid-size retailers, manufacturers,
distributors, colleges, universities and state and local government agencies in
the Northeastern United States. The Company's customers include:
<TABLE>
<S> <C> <C>
Astra Pharmaceutical CPC International Merrill Lynch
Boston College Deutsche Bank Northeastern University
Boston Financial Group Fidelity Investments Oxford Healthcare
Brown Brothers Harriman The Gillette Company Pepsico
Cadbury-Motts GTE Services Corp. The Pershing Division of
Carrier Corporation Harvard University Donaldson Lufkin &
The Chase Manhattan Bank Healthsource Jenrette
Citibank International Business Machines Smith Barney
The City University of Corporation The Stop & Shop
New York J.P. Morgan Companies
</TABLE>
The Company intends to pursue new business by focusing on the sale and
integration of high-end systems in financial, commercial, governmental,
healthcare and educational areas. To this end, the Company has the following
growth strategies: (i) targeting vertical markets, (ii) offering a complete
line of IBM products, including IBM mainframe systems, (iii) expanding its role
as an IBM Premier Business Partner, (iv) enhancing competitiveness through the
IBM PC Authorized Assembler Program, and (v) expanding into other geographic
regions through selected acquisitions and strategic alliances.
3
<PAGE>
The Company currently has five operating locations: it operates a
distribution center, a computer configuration, integration and PC assembly
facility and technical support service center from its Hauppauge, New York
headquarters and conducts its sales operations from its headquarters and
offices located in New York City, New York, Waltham, Massachusetts, Marlton,
New Jersey, and North Haven, Connecticut.
The Company's principal executive offices are located at 275 Marcus
Boulevard, Hauppauge, New York 11788 and its telephone number is (516)
273-3200.
IBM, AS/400, RS/6000, PC Server System/390, OS/2, Netfinity, Eduquest, and
Lotus Notes are registered trademarks of International Business Machines
Corporation. All other products are trademarks of their respective companies.
4
<PAGE>
The Offering
Common Stock Offered ... 1,500,000 shares
Common Stock Outstanding
Before Offering (1) ... 3,170,540 shares
Common Stock Outstanding After
Offering (1)............ 4,670,540 shares
Use of Proceeds ......... The Company intends to use the net proceeds of the
Offering (i) to establish and operate an IBM PC
assembly facility under IBM's Authorized Assembler
Program, including the lease or purchase of a
building, (ii) to reduce the Company's interest
bearing obligations to IBM Credit Corporation, (iii)
for general corporate purposes including working
capital, and (iv) for acquisitions. See "Use of
Proceeds."
Proposed NASDAQ National
Market Symbol...............................................................
Risk Factors ............ The Offering involves certain risks and immediate
substantial dilution. See "Risk Factors" and
"Dilution."
- ------------
(1) Excludes 1,000,000 shares of Common Stock reserved for issuance under the
Company's 1988 Stock Option Plan (of which 498,000 shares of Common Stock
are issuable upon exercise of the stock options outstanding as of the date
of this Prospectus) and 150,000 shares of Common Stock issuable upon
exercise of the Representative's Warrants. See "Management -- Stock Option
Plan" and "Underwriting."
5
<PAGE>
Summary Consolidated Financial Information
The Summary Consolidated Financial Information set forth below was derived
from the financial statements of the Company and should be read in conjunction
with the financial statements and related notes thereto appearing elsewhere in
this Prospectus and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Months Ended March 31,
Year Ended September 30, (unaudited)
------------------------------------------------ ------------------------------
1994(1) 1995 1996 1996 1997
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales ........................... $ 45,459,575 $ 55,195,507 $ 98,446,698 $ 38,042,823 $39,158,875
Cost of sales ........................ 40,796,425 49,441,544 89,025,331 34,159,227 33,890,028
------------ ------------ ------------ ------------ ------------
Gross profit ........................ 4,663,150 5,753,963 9,421,367 3,883,596 5,268,847
Selling and administrative expenses . 3,406,316 4,079,184 5,028,812 2,382,727 2,957,149
------------ ------------ ------------ ------------ ------------
Income from operations ............... 1,256,834 1,674,779 4,392,555 1,500,869 2,311,698
Interest expense (net) ............ (713,778) (1,207,316) (1,390,867) (633,193) (551,907)
Other income ........................ 39,630 37,126 63,151 7,964 57,324
Realized loss on available-for-sale
securities ........................ 0 0 (1,406,250) 0 0
------------ ------------ ------------ ------------ ------------
Income from continuing operations
before income taxes ............... 582,686 504,589 1,658,589 875,640 1,817,115
Provision for income taxes ......... 242,889 223,769 735,886 371,000 766,800
------------ ------------ ------------ ------------ ------------
Income from continuing operations . 339,797 280,820 922,703 504,640 1,050,315
Discontinued operations ............ 1,485,698 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income ........................... $ 1,825,495 $ 280,820 $ 922,703 $ 504,640 $ 1,050,315
============ ============ ============ ============ ============
Per Share Data:
Income from continuing
operations ........................ $ .10 $ .08 $ .25 $ .14 $ .29
Income from discontinued
operations ........................ $ .43 -- -- -- --
Weighted average number of shares
outstanding ........................ 3,448,900 3,614,040 3,677,290 3,686,040 3,668,540
</TABLE>
March 31, 1997
-------------------------------
(unaudited)
Actual As Adjusted (2)
------------ ----------------
Consolidated Balance Sheet Data:
Working capital .................. $4,217,120 $10,788,638
Total assets ..................... 24,543,969 24,543,969
Short term debt .................. 6,907,940 336,422
Long term debt .................. 85,156 85,156
Stockholders' equity ............ 5,048,992 11,620,510
- ------------
(1) Includes sales of the Company's subsidiary, Romel Technology, Inc. (d/b/a
MSG) of $4,127,768, which was sold in November 1993. The loss from this
subsidiary was de minimis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 11 to Consolidated
Financial Statements.
(2) As adjusted to give effect to the sale of 1,500,000 shares of Common Stock
and the initial application of the net proceeds. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should carefully
consider the following risk factors in addition to the other information
contained in this Prospectus or incorporated by reference. This Prospectus
contains forward-looking statements which include risks and uncertainties. The
Company's actual results, performance or achievements could differ materially
from the results expected in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in the following risk factors.
Dependence on IBM as a Supplier
For the fiscal year ended September 30, 1996 and for the six months ended
March 31, 1997, in excess of 90% of the Company's revenues resulted from the
sale of personal computers, mid-range computer systems, networking systems and
operating software manufactured by International Business Machines Corporation
("IBM"). Although the Company has had a long standing reseller relationship
with IBM, IBM may terminate this relationship with the Company at will or upon
relatively short notice. The Company's reseller arrangements with IBM are not
exclusive. Moreover, IBM is not obligated to have product on hand for timely
delivery to the Company, nor can IBM guarantee product availability in
sufficient quantities to meet the Company's demands.
If IBM were to discontinue direct sales to the Company as a result of
insufficient purchase volumes or for any other reason, the Company would be
required to purchase IBM products from a wholesaler or other reseller, which
would likely be on terms less favorable than those currently obtained from IBM.
There can be no assurance, therefore, that all IBM products will be available
in a timely fashion as required by the Company. The loss of IBM as the
Company's prime vendor or the loss of the Company's status as an authorized
reseller of IBM products, the deterioration of the Company's relationship with
IBM, the loss of the Company's status as a Premier Business Partner or the
deterioration of the industry's perception of IBM as a leading manufacturer of
high quality computers would have a material adverse effect on the Company's
business, results of operations or financial condition. See "Business --
Products/IBM Relationship."
Periodic IBM Product Shortages
From time to time, including during the quarter ended March 31, 1997, IBM
has been unable to deliver its products in a timely fashion to meet the
Company's outstanding orders, which has affected the Company's quarterly
results of operations. Specifically, during the quarter ended March 31, 1997,
delays by IBM in shipment of products resulted in a backlog of approximately
$4,000,000 of sales by the Company. For example, with respect to IBM PCs, IBM
allocates a significant portion of IBM PC's to dealers who then resell them to
customers in IBM's Large Account Initiative Program ("LAI"). IBM's allocation
of products for these large account customers, at times, has resulted in
delayed product shipments to the Company, which, in turn, delays the Company
from filling its customer orders. Accordingly, there can be no assurance that
IBM (and other manufacturers who the Company deals with) will consistently
provide an adequate supply of products in order for the Company to fulfill all
of its customers' orders in a timely manner. The failure to obtain adequate
product supplies would have a material adverse effect on the Company's results
of operations or financial condition.
Significant Fluctuations to Quarterly Results
The Company's quarterly operating results have fluctuated in the past and
will continue to do so in the future. Quarterly operating results may fluctuate
as a result of a variety of factors, including: the timing of the Company's
delivery of significant orders, the ability of IBM to deliver, in a timely
fashion, products for which the Company has received orders, the length of the
sales cycle, receipt of volume discounts by IBM, the demand for products and
services offered by the Company, the introduction or announcements by IBM and
other manufacturers relating to new products, the hiring and training of
additional personnel, problems or delays associated with the Company's assembly
of personal computer systems (under the AAP) as well as general business
conditions.
7
<PAGE>
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 Company's revenue for the past three
quarters have declined from approximately $33,644,000 in the quarter ended June
30, 1996 to approximately $17,876,000 in the quarter ended March 31, 1997.
Additionally, in its second quarter of fiscal year 1995, the Company did not
achieve its expected revenue, yielding a loss. This was caused by IBM's delays
in shipping certain computer systems for which the Company received orders that
it expected to deliver during that quarter. In addition, the Company's
collection periods have fluctuated due to periodic unavailability of product
from IBM, which resulted in the Company not receiving payment from certain
customers until their entire orders were shipped. In contrast, in the second
quarter of fiscal year 1996, in the absence of significant delays by IBM in
shipping computer systems, the Company's revenue increased, generating a
profit. 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. See "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations."
Participation in IBM's Authorized Assembler Program
In March 1997, the Company commenced operation of an IBM PC system
assembly facility under IBM's Authorized Assembler Program (the "AAP"). In
order to participate in the AAP, the Company intends to commit, in the near
future, significant capital to hire and train a high quality work force to
establish an appropriate assembly facility and to initially increase its
inventory of components to satisfy anticipated customer demand. The Company
anticipates that any initial cost associated with the establishment and
operation of the PC assembly facility will be satisfied by the proceeds of this
Offering. As a component assembler of finished products, the Company will face
operational concerns, which it has not faced as a reseller. These operational
concerns include the ability of the Company to hire and train qualified
assembly personnel and maintain an adequate supply of component parts
inventory. The continued operation of this assembly facility is dependent upon
the Company complying with the terms of its AAP agreement (the "AAP Agreement")
with IBM, including satisfying certain minimum purchase requirements,
compliance with strict quality control provisions and maintaining trained and
certified personnel. The AAP Agreement is terminable by either IBM or the
Company upon 30 days' prior notice and is immediately terminable by IBM in the
event that IBM determines, in its sole discretion, that (i) the assembled
products fail to meet required specifications, (ii) the Company materially
breaches the terms and/or conditions of the AAP Agreement, (iii) the Company
engages in a course of conduct that has injured IBM's reputation or the
reputation of its products, or (iv) the Company's status with IBM as a Business
Partner is terminated for any reason, expires or if the Company is no longer
eligible to purchase IBM personal computer components directly from IBM. In
addition, the Company is required to maintain ISO 9002 registration standards,
the registered international standard for ensuring the consistent and
measurable quality of products and services. Subject to the terms of the AAP
Agreement, IBM is permitted to periodically review the Company's performance in
order to monitor and assess continued compliance. The AAP Agreement expires on
December 31, 1997 and, although the Company plans to renew it, there can be no
assurance that it will be renewed on similar terms, if at all. See "Use of
Proceeds."
The Company currently plans to expand its participation in the AAP to
include the workstation elements of IBM's RS/6000 computer systems. The
Company's ability to participate in the program with respect to such products
is contingent upon the Company moving into larger facilities to accommodate
such operations, equipping such facilities for assembly activities, hiring
technical employees and approval from IBM. The Company's planned operations and
future growth, to a significant extent, are dependent on the Company's ability
to participate in the AAP with respect to a broad range of IBM product lines.
There can be no assurance that the Company will be able to successfully operate
an IBM approved facility capable of serving an expanded product line, that IBM
will authorize the Company's participation in assembly programs beyond personal
computers, that the Company will maintain necessary industry registrations or
that the computer systems produced by such assembly programs will gain market
acceptance. See "Business -- Products/IBM Relationship."
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
8
<PAGE>
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
March 31, 1997, borrowings outstanding under the Financing Agreement were
$6,867,271. 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 March 31, 1997, was $10,082,368. The Financing Agreement,
which expires on September 30, 1997, 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 additional financial covenants.
The amount of credit available to the Company pursuant to the Financing
Agreement at any point in time may be adversely affected by factors such as
delays in collection or deterioration in the quality of the Company's accounts
receivable, inventory obsolescence, economic trends in the computer industry
and interest rate fluctuations. Any decrease or material limitation on the
amount of capital available to the Company under the Financing Agreement would
limit the ability of the Company to fill existing sales orders, purchase
inventory or expand its sales levels and, therefore, would have a material
adverse effect on the Company's financial conditions and results of operations.
The Financing Agreement expires on September 30, 1997. The Company has had a
credit facility with IBM Credit since 1992, and the Company believes that it
will enter into a renewal of this credit facility with IBM. There can be no
assurance that the financing to the Company under this renewal will be
available in amounts at comparable or better terms than those in effect, if at
all. The inability of the Company to have continuous access to such financing
at reasonable costs would materially and adversely impact the Company's
financial condition and results of operations. See "Use of Proceeds,"
"Management's Discussion And Analysis of Financial Condition and Results of
Operations."
Dependence on IBM's Volume Discount Schedules and Market Development Funds
As part of its overall reseller arrangements with IBM, IBM provides the
Company with volume discounts and market development funds on products
purchased from IBM. These discounts and funds are used to offset a portion of
the Company's cost of IBM's products sold, thereby affecting income from
operations and the Company's expenses relating to marketing and technical
support resources for IBM products. Any adverse change in the volume discount
schedule available to the Company, which the Company believes is currently at
IBM's highest discount level, or changes in the availability, structure or
timing of the receipt of development funds, would materially adversely affect
the Company's business, results of operations and financial condition.
Dependence on Major Customers; Risk of Industry Concentration
For the last three fiscal years, 1994, 1995 and 1996, a significant
portion (47%, 55% and 50%, respectively) of the Company's revenues were derived
from sales to five principal customers, which customers vary annually, and
encompass markets wherein the demands of any one customer may vary greatly. In
addition, the Company does not have any exclusive long-term arrangements with
its customers for the continued sales of computer systems. In fiscal year 1994,
sales to The Chase Manhattan Bank accounted for 22% of the Company's total
revenues; revenues from sales to The Chase Manhattan Bank and Deutsche Bank
accounted for 23% and 14%, respectively, of the Company's total revenues in
fiscal year 1995; and revenues from sales to Deutsche Bank and Citibank
accounted for 19% and 16%, respectively, of the Company's total revenues in
fiscal year 1996. Although the number of customers who purchase at least
$250,000 of computer systems from the Company has increased from 25 in fiscal
year 1994 to 41 in fiscal year 1996, the failure to acquire a significant or
principal customer could have a material adverse effect on the Company's
operations. See "Business -- Principal Markets and Customers."
In the fiscal year ended September 30, 1996, approximately 58% 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 vertical 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
9
<PAGE>
and securities businesses. Accordingly, unfavorable economic conditions or
factors that relate to these industries, particularly any such conditions that
might result in reductions in capital expenditures or changes in such company's
information processing system requirements, would have a material adverse
affect on the Company's results of operations.
Rapid Technological Change
The industry in which the Company competes is characterized by rapid
technological change and frequent introduction of new products and product
enhancements which result in relatively short product life cycles and rapid
product obsolescence. The expectation, or announcement of new or enhanced
products often causes customers to delay their purchasing decisions until such
new or enhanced products are announced and available. Furthermore, the
Company's success depends in large part on IBM's ability to identify and
develop products that meet the changing requirements of the marketplace. In the
event that IBM is unable to do so, the Company's continued success will depend
upon its ability to identify and source substitute products from other vendors.
There can be no assurance that the Company will be able to identify and offer
such products necessary to remain competitive or avoid losses related to
obsolete inventory and drastic price reductions. For the year ended September
30, 1996, approximately 59% of the Company's revenues were generated from the
sale of IBM's RS/6000 mid-range business computer systems. The failure of these
systems to continue to command a significant market share or IBM's
discontinuing this computer system without a suitable substitute would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Management of Growth
The Company's ability to manage growth effectively and expand its AAP
operations will require it to continue to implement and improve its
operational, technical, financial, and sales systems, to develop the skills of
its managers and supervisors, and to hire, train, motivate and manage its
employees. There can be no assurance that the Company will be successful in
managing growth. The failure to do so would materially adversely affect the
Company's financial position and results of operations. The Company has
recently opened sales offices in Marlton, New Jersey and North Haven,
Connecticut. In October 1995 it closed a sales facility in Princeton, New
Jersey after eleven months of operations. Within the next twelve months, the
Company intends to relocate its headquarters, including its distribution
operations and assembly facilities, in the Long Island region. The Company
anticipates that it will incur substantial costs in connection with these
plans, including expenditures for construction, furniture, fixtures, and
equipment. The Company anticipates that any costs associated with the
relocation of its headquarters, distribution and assembly facility will be
funded by the proceeds from this Offering. There can be no assurance that the
Company will be able to further expand its operations successfully either
through acquisition or the establishment and operation of an IBM PC assembly
facility. Expansion of the Company's operations will be dependent upon, among
other things, the continued growth of the computer industry, the Company's
ability to withstand intense price competition, its ability to obtain new
customers, and retain skilled technicians, engineers, sales and other
personnel. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity financings. There can be no assurance that additional financings will be
available to the Company on commercially reasonable terms, if at all. See "Use
of Proceeds" and "Business -- Strategy."
Acquisition and Acquisition Financing
In addition to expanding its operations through internal growth, the
Company intends to grow through the acquisition of selected regional resellers.
Management believes that increased competition for acquisition candidates
exists and may continue in the future, in which event there may be fewer
acquisition opportunities available to the Company as well as higher
acquisition prices. There can be no assurance that the Company will be able to
identify, acquire, manage or successfully integrate acquired businesses into
the Company without substantial costs, delays, operational, or financial
problems. To date, the Company has no understandings, commitments or agreements
with respect to any such acquisition. The Company may finance future
acquisitions by using cash and/or shares of its Common Stock for the
consideration to be paid. In the event that the Common Stock does not maintain
a sufficient market value or potential acquisition candidates are otherwise
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to initiate and maintain its acquisition
program. If the
10
<PAGE>
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity
financings. There can be no assurance that the additional financing will be
available to the Company on commercially reasonable terms, if at all.
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.
Competition; Pricing Competition
Many established computer manufacturers, system integrators and other
resellers of personal computers or networking products compete with the Company
in the configuration, integration and distribution of computer systems and
equipment. In the highly fragmented computer services area, the Company
competes with several larger competitors, other corporate resellers pursuing
high-end services opportunities, as well as several smaller computer services
companies. In addition, the Company competes directly with IBM for the sale of
several computer systems, including those systems manufactured by IBM,
including the RS/6000 computer system. The Company believes that the principal
competitive factors in the business in which it operates are price and
performance, product availability, technical expertise, adherence to industry
standards, financial stability, service support and reputation. There can be no
assurance that the Company will be able to compete successfully with existing
or new competition. Some of these competitors, including IBM, have financial,
technical, manufacturing, sales, marketing and other resources which are
substantially greater than those of the Company. As a result, they may be
better able to respond more quickly to new or emerging technologies or changes
in customer requirements, benefit from greater purchasing economies, offer more
aggressive hardware and service pricing or devote greater resources to the
promotion of their products and services. There can be no assurance that the
Company will be able to continue to compete successfully with existing or new
competitors.
The Company and other U.S. based system integrators and resellers
currently face price and gross profit margin pressures. In recent years, all
major information system manufacturers have instituted extremely aggressive
price reductions in response to lower component costs, discount pricing by
certain competitors and increased competition from non-U.S. based information
systems manufacturers. The increased price competition among computer
manufacturers has resulted in declining gross margins for many computer
resellers and may result in a reduction in existing vendor subsidies and
reduced profitability for the Company. There can be no assurance that the
Company will be able to continue to compete effectively in the marketplace
given the continual price reductions and intense competition currently existing
in the information processing and value-added reseller industry. See "Business
- -- Competition."
Dependence on Key Personnel
The Company's success during the foreseeable future will depend largely
upon the continued services of its founder and Chief Executive Officer, John H.
Spielberger, and the executive team of Dennis R. Wilson, Thomas J. Baehr and
Norman Gaffney, who joined the Company in 1995, 1994 and 1994, respectively.
Each of the executive officers will enter into employment agreements upon the
consummation of the Offering that expire on September 30, 1999. The loss of any
of the services of the Company's key personnel could have a material adverse
affect on the Company's business, ongoing results and financial condition.
These employment agreements contain confidentiality, non-compete, and
non-solicitation provisions. In addition, the Company has attempted to mitigate
the risks associated with its dependence on John H. Spielberger and Thomas
Baehr by obtaining $1,000,000 key person life insurance policies on each of
such individuals. The Company's success also depends in part on its ability to
attract and retain qualified managerial, technical, sales and marketing
personnel. The Company's results of operations could be adversely affected if
the Company were unable to attract, hire, assimilate, and train these personnel
in a timely manner. See "Management."
Control by Principal Stockholder
Upon completion of the Offering, John H. Spielberger, Chairman of the
Board, President and Chief Executive Officer of the Company, will continue to
beneficially own approximately 50% of the Company's outstand-
11
<PAGE>
ing Common Stock. As a result of his stock ownership, Mr. Spielberger will have
effective control of the Company and will continue to have 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. See "Principal Stockholders."
Tax Audits
The Internal Revenue Service commenced an audit of the Company's Federal
Income Tax return for the fiscal year ended September 30, 1995. In addition,
New York State commenced a sales tax audit for the period June 1, 1994 to
February 28, 1997. Although management believes that both these audits are
within the ordinary course of business and will not have a material adverse
effect on the Company, there can be no assurance that such is the case.
No Prior Market for the Common Stock; Determination of Offering Price;
Potential Volatility of Stock Price
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained or that the Common Stock will be resold at or above the
initial public offering price. The initial public offering price of the Common
Stock offered hereby will be determined by negotiations between the Company and
the Representative. Among the factors to be considered in determining the
initial public offering price will be the history of, and the prospects for,
the Company's business and the industry in which it competes, an assessment of
the Company's management, its past and present operations, the prospects for
earnings of the Company, the general condition of the securities market at the
time of the Offering and the market prices and earnings of similar securities
of comparable companies at the time of the Offering and prevailing market and
economic conditions. See "Underwriting."
After the Offering, the market price of the Common Stock may be subject to
significant fluctuations in response to numerous factors, including, but not
limited to, fluctuations or uncertainties in the Company's quarterly operating
results (including losses), delays with respect to the AAP, announcements of
technological innovations of new products by IBM or other suppliers, conditions
in the markets in which the Company and its competitors compete, changes by
financial analysts in their estimates of the earnings of the Company, and the
economy in general. From time to time, the stock market experiences significant
price and volume volatility which may affect the market price of the Company's
Common Stock for reasons unrelated to the performance of the Company. Because
the Company is closely dependent upon and associated with IBM, the Company's
stock price may be adversely affected based on the performance of IBM's
operations.
Common Stock Eligible for Future Sale
Immediately after completion of the Offering, the Company will have
4,670,540 shares of Common Stock outstanding, of which the 1,500,000 shares
(1,725,000 shares if the Underwriter's Over-Allotment Option is exercised in
full) sold pursuant to the Offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended ("Securities Act"), by persons other than "affiliates" of the Company,
as defined under the Securities Act. The remaining 3,170,540 shares of Common
Stock are deemed "restricted securities" as defined by Rule 144 under the
Securities Act and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
the exemption provided by Rule 144. All of the restricted shares of Common
Stock will be eligible for trading under Rule 144, subject to certain
limitations and other restrictions prescribed by such rule, and to the
contractual restrictions described below, commencing 90 days following the date
of this Prospectus. The Company, its officers, directors, current stockholders,
and option holders have agreed to enter into agreements (the "Lock-Up
Agreements") under which they will agree not to sell or otherwise dispose of
any of their shares of Common Stock of the Company for a period of one year
commencing upon the date of this Prospectus, without the prior written consent
of the Representative. See "Underwriting." Sales of substantial amounts of
Common Stock, or the perception that these sales could occur, could adversely
affect the prevailing market price for the Common Stock and could impair the
ability of the Company to raise additional capital through the sale of its
securities or through debt financing.
12
<PAGE>
In addition, upon completion of the Offering, the Company has agreed to
issue to the Representatives, warrants to purchase an aggregate of 150,000
shares of Common Stock exercisable for a four year period commencing one year
from the date of the Offering, at an exercise price equal to 160% of the
initial public offering price. The exercise of the Representative's Warrants
may dilute the book value per share of Common Stock. The holders of such
warrants may exercise them at a time when the Company would otherwise be able
to obtain additional equity capital on terms more favorable to the Company and
have the opportunity to benefit from increases in the price of the Common Stock
without risk of an equity investment. The Company has agreed to grant certain
demand and piggyback registration rights to the holders of these warrants. Such
registration rights could involve substantial expenses to the Company and may
adversely affect the terms upon which the Company may obtain additional
financing. See "Shares Eligible for Future Sale" and "Underwriting."
Sale of substantial amounts of Common Stock in the public market may
adversely affect the market price of the Common Stock and may also adversely
affect the Company's ability to raise additional capital in the future. See
"Shares Eligible for Future Sale" and "Underwriting."
Dilution
Investors purchasing shares of the Common Stock in the Offering will incur
immediate and substantial dilution of approximately $2.77 per share in net
tangible book value from the assumed $5.25 per share initial public offering
price. Additional dilution may occur as a result of the exercise of options and
warrants to purchase shares of Common Stock or future acquisitions by the
Company in exchange for stock. See "Dilution."
Absence of Dividends
To date, the Company has not paid any cash dividends and does not
presently intend to pay cash dividends in the foreseeable future. As a holding
company, the ability of the Company to pay dividends is dependent upon its
receipt of dividends or other payments from its subsidiaries. Currently
InfoTech is the Company's only subsidiary. See "Dividend Policy."
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. See
"Description of Capital Stock -- Anti-Takeover Provisions; Section 203 of the
Delaware Corporation Law."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$6,570,000 assuming an initial public offering price of $5.25 per share and
after deducting the estimated underwriting discounts and offering expenses
payable by the Company. The net proceeds will be used for (i) the establishment
and operation of an IBM assembly facility under IBM's Authorized Assembler
Program, including the lease or purchase of a building, (ii) the reduction of
the Company's interest bearing obligations to IBM Credit Corporation, (iii) for
general corporate purposes, including working capital, and (iv) acquisitions.
The Company intends to use approximately $2,500,000 of the proceeds of the
Offering to establish and operate an IBM PC assembly facility under the AAP. In
connection with the establishment of an IBM PC assembly facility, the Company
anticipates leasing or purchasing a 25,000 to 30,000 square foot building. In
connection with the operation of this assembly facility, the Company intends on
increasing component parts inventory.
The Company intends to use the balance of the proceeds of the Offering for
working capital and acquisitions. Until such funds are required for these
purposes, these proceeds will be used to temporarily reduce the Company's
interest bearing obligations to IBM Credit Corporation under the Financing
Agreement. Pursuant to the Financing Agreement, which became effective on
September 30, 1996, the Company may 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 March 31, 1997, borrowings outstanding under the Financing
Agreement were $6,867,271. The Company's credit availability is reduced by the
aggregate amount of accounts payable owed to IBM Credit which, as of March 31,
1997, was $10,082,368. The Financing Agreement, which expires on September 30,
1997, is subject to temporary increases, increasing the amount of credit to
$41,250,000 during certain periods. Effective September 30, 1996, interest on
the outstanding borrowings is payable monthly at prime plus 1.375%, or prime
plus 6.5% should the Company fail to meet certain collateral requirements. See
"Risk Factors -- Financing Agreement."
The Company believes that there are numerous opportunities available to
acquire comparable and established regional system integrators. The Company
plans to actively seek out and evaluate potential acquisitions of such
businesses. As of the date of this Prospectus, however, the Company has no
agreements, understandings or commitments and is not engaged in any
negotiations relating to any potential acquisitions.
DIVIDEND POLICY
The Company intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. As a holding company,
the ability of the Company to pay dividends is dependent upon its receipt of
dividends or other payments from its subsidiaries. Currently InfoTech is the
Company's only subsidiary. 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, including the
Financing Agreement, the financial condition of the Company and applicable law.
14
<PAGE>
DILUTION
As of March 31, 1997, the Company had a net tangible book value of
$5,003,359 or $1.58 per share of Common Stock outstanding. Net tangible book
value equals the tangible net worth of the Company (tangible assets less total
liabilities) divided by the aggregate number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 1,500,000 shares
of Common Stock offered hereby at an assumed initial public offering price of
$5.25 per share and the application of the net proceeds therefrom, the pro
forma net tangible book value of the Company as of March 31, 1997, would be
$11,574,877 or $2.48 per share. This represents an immediate increase in pro
forma net tangible book value of $.90 per share to current stockholders and an
immediate dilution of $2.77 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price ..................... $5.25
Net tangible book value before the Offering ............ $1.58
Increase attributable to new investors .................. .90
------
Pro forma net tangible book value after the Offering ...... 2.48
------
Dilution to new investors ................................. $2.77
======
</TABLE>
The following table sets forth the difference between the existing
stockholders of the Company and the new investors with respect to the aggregate
number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average cash price per share paid. The calculation
below is based upon an assumed initial public offering price of $5.25 per share
(before deducting underwriting discounts and commissions and other estimated
expenses of the Offering payable by the Company):
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration Paid Per Share
-------------------------- -------------------------- --------------
Number Percentage Amount Percentage
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (1) ...... 3,170,540 67.9% $ 152,290 1.9% $ .05
New Investors .................. 1,500,000 32.1% 7,875,000 98.1% $5.25
---------- ------- ----------- -------
Total ........................ 4,670,540 100.0% $8,027,290 100.0%
========== ======= =========== =======
</TABLE>
- ------------
(1) Excludes 498,000 shares of Common Stock issuable upon exercise of
outstanding options and 150,000 shares of Common Stock issuable upon
exercise of the Representative's Warrants. See "Underwriting."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to give effect to the sale by the Company of
1,500,000 shares of Common Stock at an assumed initial public offering price of
$5.25 per share, and the application by the Company of the net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements, including the Notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1997
-------------------------
(unaudited, in thousands)
Actual As Adjusted
---------- ------------
<S> <C> <C>
Debt:
Short Term debt:
Credit facility .......................................... $ 6,867 $ 295
Current maturities of long-term debt ..................... 41 41
--------- ---------
Total short term debt .................................... 6,908 336
--------- ---------
Long-term debt, less current maturities .................. 85 85
--------- ---------
Stockholders' equity: (1)(2)
Common Stock, $.01 par value, 5,000,000 shares authorized,
3,170,540 shares outstanding, actual and 4,670,540 shares
outstanding, as adjusted (3) ........................... 36 51
Additional paid-in-capital .............................. 138 6,695
Retained earnings ....................................... 5,017 5,017
Treasury stock .......................................... (142) (142)
--------- ---------
Total stockholders' equity .............................. 5,049 11,621
--------- ---------
Total capitalization .................................... $ 12,042 $ 12,042
========= =========
</TABLE>
- ------------
(1) See "Description of Capital Stock" for description of the relative rights
of the Preferred Stock and Common Stock.
(2) On April 21, 1997, a special meeting of stockholders was held to amend the
Certificate of Incorporation to increase the aggregate of authorized
shares 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.
(3) Excludes 498,000 shares of Common Stock issuable upon exercise of
outstanding options and 150,000 shares of Common Stock issuable upon
exercise of Representative's Warrants. See "Underwriting."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected Consolidated Financial Data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The financial statement data as of and for the
fiscal years ended September 30, 1994, 1995 and 1996 are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements
included elsewhere in this Prospectus 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, 1992 and 1993
are derived from audited consolidated financial statements not included in this
Prospectus. The Selected Consolidated Financial Data presented for the six
months ended March 31, 1996 and 1997 have been derived from unaudited
consolidated financial statements of the Company, but in the opinion of
management of the Company include all adjustments necessary for a fair
presentation for the results of such operating periods. The operating results
for such interim periods are not necessarily indicative of operating results
for the full year. This data is qualified by reference to, and should be read
in conjunction with, the Company's consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this Prospectus.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---------------- ---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales ........................ $ 40,355,000(1)$ 51,085,000(1)$ 45,459,575(1) $ 55,195,507 $ 98,446,698
Cost of sales .................. 37,575,000 46,948,000 40,796,425 49,441,544 89,025,331
--------------- --------------- --------------- ------------ ------------
Gross profit ..................... 2,780,000 4,137,000 4,663,150 5,753,963 9,421,367
Selling and administrative
expenses ........................ 2,754,000 3,565,000 3,406,316 4,079,184 5,028,812
--------------- --------------- --------------- ------------ ------------
Income from operations ......... 26,000 572,000 1,256,834 1,674,779 4,392,555
Interest expense (net) ......... (225,000) (498,000) (713,778) (1,207,316) (1,390,867)
Other income ..................... -- -- 39,630 37,126 63,151
Realized loss on available-for-
sale securities ............... -- -- -- -- (1,406,250)
--------------- --------------- --------------- ------------ ------------
Income (loss) from continuing
operations before income
taxes ........................... (199,000) 74,000 582,686 504,589 1,658,589
Provision for income taxes ...... 8,000 31,000 242,889 223,769 735,886
--------------- --------------- --------------- ------------ ------------
Income (loss) from continuing
operations ..................... (207,000) 43,000 339,797 280,820 922,703
Discontinued operations ......... -- -- 1,485,698 -- --
Cumulative effect of a change in
accounting principle ............ -- 78,000 -- -- --
--------------- --------------- --------------- ------------ ------------
Net income (loss) ............... $ (207,000) $ 121,000 $ 1,825,495 $ 280,820 $ 922,703
=============== =============== =============== ============ ============
Per Share Data:
Income (loss) from continuing
operations ..................... $ (.06) $ .01 $ .10 $ .08 $ .25
Income from discontinued
operations ..................... -- -- $ .43 -- --
Income from accounting
changes ........................ -- $ .02 -- -- --
Weighted average number of
shares outstanding ............ 3,584,164 3,615,830 3,448,900 3,614,040 3,677,290
<PAGE>
<CAPTION>
Six Months Ended
March 31,
---------------------------
1996 1997
------------ -----------
<S> <C> <C>
Consolidated Statement of Operations
Net sales ........................ $ 38,042,823 $39,158,875
Cost of sales .................. 34,159,227 33,890,028
------------ ------------
Gross profit ..................... 3,888,596 5,268,847
Selling and administrative
expenses ........................ 2,382,727 2,957,149
------------ ------------
Income from operations ......... 1,500,869 2,311,698
Interest expense (net) ......... (633,193) (551,907)
Other income ..................... 7,964 57,324
Realized loss on available-for-
sale securities ............... -- --
------------ ------------
Income (loss) from continuing
operations before income
taxes ........................... 875,640 1,817,115
Provision for income taxes ...... 371,000 766,800
------------ ------------
Income (loss) from continuing
operations ..................... 504,640 1,050,315
Discontinued operations ......... -- --
Cumulative effect of a change in
accounting principle ............ -- --
------------ ------------
Net income (loss) ............... $ 504,640 $ 1,050,315
============ ============
Per Share Data:
Income (loss) from continuing
operations ..................... $ .14 $ .29
Income from discontinued
operations .....................
Income from accounting
changes ........................ -- --
Weighted average number of
shares outstanding ............ 3,686,040 3,668,540
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1992 1993 1994 1995 1996 March 31, 1997
----------- ------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital ............... $ 579,000 $ 661,000 $ 1,171,764 $ 1,769,589 $ 3,342,545 $ 4,217,120
Total assets .................. 8,380,000 16,067,000 18,867,758 18,471,659 32,102,557 24,543,969
Short term debt ............... 2,665,000 7,677,000 6,469,072 10,797,111 12,510,017 6,907,940
Long term debt .................. -- -- -- -- 67,291 85,156
Stockholders' equity ............ 920,000 1,041,000 2,412,564 2,355,884 3,998,587 5,048,992
</TABLE>
- ------------
(1) Includes sales of the Company's former subsidiary, Romel Technology, Inc.
(d/b/a MSG) of $19,876,500, $29,272,300 and $4,127,768 for the three years
ended September 30, 1994, respectively, which was sold in November 1993.
The profit/loss from this subsidiary during these periods were de minimis.
After adjusting for these sales figures, the Company's revenues were
$20,478,500, $21,812,700 and $41,331,807 for the three years ended
September 30, 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 11 to Consolidated Financial
Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis is intended to assist the reader in
understanding and assessing the significant changes and trends relating to the
results of operations and financial condition of SysComm and its subsidiaries.
This discussion and analysis should be read in conjunction with the Company's
Consolidated Financial Statements and Notes.
The Company is a systems integrator and a reseller of a broad range of
computers and related products. The Company offers integrated technological
expertise to serve its customers' automation and communication needs.
The Company has experienced significant growth over the past three years
with sales increasing approximately 21% from $45,459,575 in the fiscal year
ended September 30, 1994 to $55,195,507 in the fiscal year ended September 30,
1995 and 78% from $55,195,507 in the fiscal year ended September 30, 1995 to
$98,446,698 in the fiscal year ended September 30, 1996. 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.
Results of Operations
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.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------ ---------------------
(unaudited)
1994 1995 1996 1996 1997
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net sales ........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................... (89.7) (89.6) (90.4) (89.8) (86.5)
Gross profit ..................... 10.3 10.4 9.6 10.2 13.5
Selling and administrative
expenses ........................ (7.5) (7.4) (5.1) (6.3) (7.6)
Income from operations ............ 2.8 3.0 4.5 3.9 5.9
Interest expense (net) ............ (1.6) (2.1) (1.4) (1.6) (1.3)
Realized loss on available-for-sale
securities ........................ -- -- (1.4) -- --
Income from continuing operations
before income taxes ............... 1.2 .9 1.7 2.3 4.6
Income taxes ..................... (.5) (.4) (.7) (1.0) (2.0)
Income from continuing operations .7 .5 1.0 1.3 2.6
Discontinued operations income
from sale of subsidiary ......... 3.3 -- -- -- --
Net income ........................ 4.0 .5 1.0 1.3 2.6
</TABLE>
Six Months Ended March 31, 1997 Compared to Six Months Ended March 31, 1996
Sales for the six months ended March 31, 1997 increased 3% or $1,116,052
to $39,158,875 from $38,042,823 for the six months ended March 31, 1996. This
increase in sales was primarily attributable to an increase in demand for IBM's
mid-range RS/6000 computer systems. At March 31, 1997, the Company had a
backlog of approximately $4,000,000 which would have been shipped had product
been available. In addition, the Company's concentration and dependence on any
one customer diminished during the six months ended March 31, 1997 when no one
customer accounted for more than 10% of the Company's sales as compared to the
six months ended March 31, 1996 when two customers accounted for 26% and 13% of
the Company's sales. Also the Company had a major rollout for one of its
customers postponed from the second quarter to the third and fourth quarters of
the current fiscal year.
18
<PAGE>
Gross profit as a percentage of sales increased to 13.5% for the six
months ended March 31, 1997 as compared to 10.2% for the six months ended March
31, 1996. This increase is due in part to the Company taking lower volume but
higher margin business. Generally, the Company generates a higher gross profit
percentage on customer orders aggregating less than $1 million, and conversely,
a lower profit percentage on customer orders aggregating greater than $1
million, regardless of product mix. In addition, the Company increased the
revenue it generated from its service business, which is generally higher
margin business. During the six months ended March 31, 1996, the Company sold
two RISC Symmetrical Processors which accounted for approximately $6,000,000 in
sales. This type of sale is typically low margin business and tends to pull
down the overall gross profit percentage.
Selling and administrative expenses increased by 24% or $574,422 to
$2,957,149 in the six months ended March 31, 1997 from $2,382,727 for the six
months ended March 31, 1996. Included in the increase of $574,422 were
increases of approximately $290,000 in commissions, payroll and payroll related
expenses and an increase of approximately $100,000 in the Company's bad debt
expense.
Interest expense for the six months ended March 31, 1997 decreased 13% to
$552,143 from $633,716 for the six months ended March 31, 1996. This decrease
was primarily the result of credits received from IBM Credit Corporation
relating to various leases for which the Company's payment had been delayed. In
addition, the Company believes that its constant monitoring of accounts
receivable has helped to keep interest costs at a minimum. The Company uses all
available funds to reduce its outstanding loan balance on a daily basis.
Income from continuing operations before income taxes increased by 108% to
$1,817,115 for the six months ended March 31, 1997 from $875,640 for the six
months ended March 31, 1996. This increase resulted from the significant
increase in gross profit.
The Company's effective tax rate is 42.2% for the six months ended March
31, 1997 and 42.4% for the six months ended March 31, 1996.
The Company's net income for the six months ended March 31, 1997 increased
to $1,050,315 from $504,640 for the six months ended March 31, 1996 resulting
from all the factors described above.
Fiscal Year 1996 Compared to Fiscal Year 1995
Sales for fiscal 1996 increased 78% or $43,251,191 to $98,446,698 from
$55,195,507 in fiscal year 1995. This increase in sales was primarily due to
the increase in sales in IBM's mid-range RS/6000 computer systems. The Company
also participated in major rollouts for a number of financial institutions
which produced substantial sales. In addition, two of the Company's customers
accounted for 16% and 19%, of those fiscal year 1996 sales. During fiscal year
1996, the Company also increased the amount of service and service related
billings from the prior year.
Gross profit as a percentage of sales slightly decreased in fiscal year
1996 from fiscal year 1995. This decrease was the result of pricing
competition, major customer rollouts which typically produce lower gross profit
margins, vendor pricing, and rebate policies. A reduction of cost of goods sold
resulted from rebates and other favorable pricing from many vendors. These
rebates, if cancelled or lowered, will have an effect on gross profit
percentages and profitability.
Selling and administrative expenses increased by 23% or $949,628 to
$5,028,812 in fiscal year 1996 from $4,079,184 in fiscal year 1995. Included in
the increase of $949,628 were increases in commission expense of $456,587,
which was a direct result of the significant increase in sales during fiscal
year 1996. In addition, payroll expenses increased by approximately $350,000
due to additional personnel, payroll increases and management incentives of
approximately $100,000, which were paid based on the profitability of the
Company.
Interest expense for fiscal year 1996 increased 15% to $1,391,452 from
$1,211,727 in fiscal year 1995, due to an increase in borrowings necessary to
fund the Company's continuing sales growth. The Company believes that its
constant monitoring of accounts receivable has helped to keep interest costs at
a minimum. In addition, the Company uses all available funds to reduce its
outstanding loan balance on a daily basis. Net interest expense (interest
expenses less interest income) for fiscal year 1996 and 1995 was $1,390,867 and
$1,207,316, respectively.
19
<PAGE>
As of September 30, 1996, the Company determined that the decline in value
of its available-for-sale securities was other-than-temporary and recorded a
realized loss on these securities. The effect of this was to reduce income from
continuing operations, income taxes and net income by $1,406,250, $562,500 and
$843,750, respectively, for the year ended September 30, 1996.
Income from continuing operations before income taxes increased by 229% to
$1,658,589 in fiscal year 1996 from $504,589 in fiscal year 1995. This increase
resulted from a significant increase in sales during 1996.
The Company's effective tax rate was 44.4% for fiscal year 1996 and 44.3%
for fiscal year 1995.
The Company's net income for fiscal year 1996 increased to $922,703 from
$280,820 in fiscal year 1995 resulting from all the factors described above.
Fiscal Year 1995 Compared to Fiscal Year 1994
Sales for fiscal year 1995 increased 21% or $9,735,932 to $55,195,507 from
$45,459,575 in fiscal year 1994. This increase in sales was due to the fact
that the Company began selling IBM's RS/6000 mid-range computers during fiscal
year 1995.
Gross profit as a percentage of sales increased slightly over the
preceding year, resulting from the Company's effort to increase its service and
service related sales.
Selling and administrative expenses increased by 20% or $672,868 to
$4,079,184 in fiscal year 1995 from $3,406,316 in fiscal year 1994 due to
increases in payroll and payroll related expenses, the Company's move to a new
location in Waltham Massachusetts, the opening of a new office in Princeton,
New Jersey and the first full year of operations in the Company's New York City
office.
Interest expense for fiscal year 1995 increased 67% to $1,211,727 from
$726,367 in fiscal year 1994 resulting from inventory increases during the year
which were necessary due to the Company's increased sales level. Net interest
expense (interest expense less interest income) for fiscal year 1995 and 1994
was $1,207,316 and $713,778, respectively. Also, due to sporadic collateral
shortfalls, the Company was paying interest on the shortfall amounts at the
rate of 6.5% over the prime rate.
Income from continuing operations before income tax decreased $78,907 or
13% primarily due to the reasons described above.
The Company's effective tax rate was 44.3% for fiscal year 1995 and 41.7%
for fiscal year 1994.
Income from discontinued operations was $1,485,698 for fiscal year 1994.
Effective November 30, 1993, the Company exchanged 100% of the shares of a
subsidiary (Romel Technology, Inc. (d/b/a MSG)) for 300,000 shares of
Ameriquest Technologies, Inc., formerly known as CMS Enhancements, Inc. Such
transaction qualified as a tax-free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended. The Company realized a gain as a
result of this transaction of $1,485,698, which is net of deferred taxes of
$641,000.
Net income for fiscal year 1995 was significantly below fiscal year 1994
due to the gain resulting from the sale of a subsidiary discussed above as well
as the other items mentioned above.
Liquidity and Capital Resources
The Company's current ratios at March 31, 1997 and 1996 were 1.22 and
1.10, respectively. Working capital at March 31, 1997 was $4,217,120, an
increase of $2,014,292 over the prior period. This increase was primarily due
to the Company's earnings.
Cash provided by operating activities was $5,338,600 for the six months
ended March 31, 1997. Cash used by operating activities was $7,966,923 for the
six months ended March 31, 1996. Cash used in investing activities was $213,716
and $58,371 for the six months ended March 31, 1997 and 1996, respectively, and
was used to finance capital expenditures including computer equipment,
leasehold improvements, furniture and fixtures and automobiles. Cash used by
financing activities included $5,633,337 for the six months ended March 31,
1997 and included net payments under the Financing Agreement and cash provided
by financing activities was $8,308,067 for the six months ended March 31, 1996
and included net proceeds under the Financing Agreement.
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
20
<PAGE>
line uplifts during the year which can increase the line of credit by as much
as 50%. As of March 31, 1997 and 1996, interest on outstanding borrowings was
prime plus 1.375% and 1.625%, respectively, or prime plus 6.5%, should the
Company fail to meet certain collateral requirements. As of March 31, 1997 and
1996, borrowings outstanding under this facility were $6,867,271 and
$10,999,060, respectively. Additionally, $10,082,368 and $9,624,695 were
included in accounts payable at March 31, 1997 and 1996, respectively, and are
included against the maximum credit available.
The Company believes that its present line of credit with IBM Credit
coupled with its current earning capacity and the proceeds of this Offering
will be sufficient to meet its capital and operational requirements for at
least the next twelve months, including but not limited to establishing a new
headquarters, distribution and assembly facility and inventory and accounts
receivable financing. Through the first six months of fiscal 1997, the Company
has been in a positive collateral position with IBM Credit and has had the
ability to draw down against its current line of credit whenever needed.
Although the last three quarters have not shown progressive increases in sales,
net income for the six months ended March 31, 1997 increased 108% over the same
period last year. The Company's sales volume has caused an increase in
borrowings from IBM Credit and thus the Company has become highly leveraged.
Additionally, accounts receivable has fluctuated as a function of sales. The
number of days sales outstanding has been reduced to approximately 70 as of
March 31, 1997 from a high of approximately 92 as of March 31, 1995. The
Company is increasing its personnel resources in accounts receivable as well as
utilizing its existing sales force in its collection effort in order to
generate additional cash flow. As of March 31, 1997, the Company has
approximately $10,500,000 of unused borrowings which based upon inventory and
accounts receivable availability may be utilized. This amount will increase to
approximately $16,000,000 after the Offering is completed.
The Internal Revenue Service commenced an audit of the Company's Federal
Income Tax return for the fiscal year ended September 30, 1995. In addition,
New York State commenced a sales tax audit for the period June 1, 1994 to
February 28, 1997. Management believes that both these audits are within the
ordinary course of business and will not have a material adverse effect on the
Company.
Seasonality and Quarterly Fluctuations
The Company has historically experienced, and expects to continue to
experience, seasonal fluctuations in its net sales, earnings from operations
and net earnings. As the Company continues to increase its percentage of sales
from business, education and government markets, management believes that the
Company's quarterly net sales will be less impacted by seasonality. The revenue
for the quarter ended June 30, 1996 reflected an unusually large sale
(approximately $10 million) of a major system to a financial institution.
Disregarding that sale, the Company's upward revenue trend would have continued
through the quarter ended September 30, 1996. Sales declined during the first
quarter of fiscal year 1997 (the quarter beginning October, 1996) due to the
postponement by one of the Company's customers of the purchase of computer
equipment associated with the completion of that customer's project. The
Company's sales in the second quarter declined from the prior quarter due to
the postponement of orders by several customers in anticipation of IBM's
announcement of "upgrades/refreshers" of certain products which the Company
would otherwise have sold then in that quarter. The following table sets forth
certain quarterly information for the periods indicated:
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year 1995
-----------------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30,
1994 1995 1995 1995
---------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Net sales .................. $10,135 $13,723 $15,840 $15,497
Gross profit ............... 1,333 1,059 1,376 1,986
Income (loss) from continu-
ing operations before
income taxes ............ 198 (306) 73 539
Net income (loss) (1) ...... 116 (223) 73 315
<CAPTION>
Fiscal Year 1996 Fiscal Year 1997
----------------------------------------------- ---------------------
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1995 1996 1996 1996 1996 1997
---------- ---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................. $14,556 $23,487 $33,644 $ 26,760 $21,283 $17,876
Gross profit ............... 1,490 2,393 2,497 3,041 2,640 2,629
Income (loss) from continu-
ing operations before
income taxes ............ 198 678 1,022 (239) 962 855
Net income (loss) (1) ...... 114 390 547 (128) 560 490
</TABLE>
- ------------
(1) Taxes are computed based on effective tax rates for the respective fiscal
years.
Recent Pronouncement of the Financial Accounting Standards Board
A recent pronouncement of the Financial Accounting Standards Board
("FASB"), which is not required to be adopted at this date, is Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," issued
in February 1997. This statement establishes standards for computing and
presenting earnings per share and is effective for periods ending after
December 15, 1997. This standard requires the Company to present basic earnings
per share and diluted earnings per share. The impact of adopting this standard
has not yet been determined.
21
<PAGE>
BUSINESS
General
SysComm International Corporation ("SysComm" or the "Company"), through
its wholly owned subsidiary, Information Technology Services, Inc.
("InfoTech"), is a leading systems integrator and reseller of computer
hardware, operating software and networking applications to Fortune 1000
companies. The Company provides its customers with cost efficient,
comprehensive solutions that satisfy their information technology requirements.
Since 1985 the Company's primary focus has been on the sale, integration and
servicing of International Business Machine Corporation ("IBM") products
including personal computers, mid-range systems based on the IBM RS/6000,
servers, and the IBM AS/400. In addition, the Company integrates, resells and
services products from manufacturers such as Hewlett Packard, Compaq, Apple,
Microsoft, 3Com, Bay Networks and Novell.
In March 1997, the Company commenced the assembly and sale of IBM PCs
through the "AAP" providing the Company with greater flexibility in meeting its
customers' needs. The Company believes that this relationship with IBM will
provide it with the opportunity to enhance its responsiveness to client
specific requests and orders, and improve its operating efficiencies.
A significant percentage of the Company's revenues are derived from sales
to customers in the financial and investment communities. However, the
Company's customer base also includes mid-size retailers, manufacturers,
distributors, colleges, universities and state and local government agencies in
the Northeastern United States. The Company's customers include:
<TABLE>
<S> <C> <C>
Astra Pharmaceutical CPC International Merrill Lynch
Boston College Deutsche Bank Northeastern University
Boston Financial Group Fidelity Investments Oxford Healthcare
Brown Brothers Harriman The Gillette Company Pepsico
Cadbury-Motts GTE Services Corp. The Pershing Division of
Carrier Corporation Harvard University Donaldson Lufkin & Jenrette
The Chase Manhattan Bank Healthsource Smith Barney
Citibank International Business The Stop & Shop Companies
The City University of Machines Corporation
New York J.P. Morgan
</TABLE>
The Company intends to pursue new business by focusing on the sale and
integration of high-end systems in financial, commercial, governmental,
healthcare and educational areas. To this end, the Company has the following
growth strategies: (i) targeting vertical markets, (ii) offering a complete
line of IBM products, including IBM mainframe systems, (iii) expanding its role
as an IBM Premier Business Partner, (iv) enhancing competitiveness through the
AAP, and (v) expanding into other geographic regions through selected
acquisitions and strategic alliances.
The Company currently has five operating locations. From its Hauppauge,
New York headquarters it operates a distribution center, a computer
configuration, integration and PC assembly facility and its technical support
services. The Company conducts its sales operations from offices located in
Hauppauge, New York City, Waltham, Massachusetts, Marlton, New Jersey, and
North Haven, Connecticut.
Strategy
The Company strives to offer its customers high quality computer and
networking system hardware (particularly IBM products), related operating
system software and network design, system installation and testing in a
timely, cost-effective and value-added manner. The Company believes that the
following factors are significant elements to the successful implementation of
this strategy:
Targeting Vertical Markets
The Company has a ten year track record as a market leader in the
installation and integration of high-level information systems to the banking
and financial services communities. In addition, the Company focuses
22
<PAGE>
on other selected, major vertical markets, including retailers, manufacturers
and distributors, institutions of higher learning, health care and
pharmaceutical companies, and state and local government agencies. The
Company's in-depth understanding of its customers current and future needs
combined with its experience and in-depth market focus enable it to offer an
optimum range of products and services that meet each customer's requirements.
Offering a Complete Line of IBM Products
The Company has chosen to represent IBM products because it believes that
IBM is the world's premier designer and manufacturer of computer equipment,
software and networking products. The wide range of products and services
offered by the Company, include personal computers (desktop workstations, file
servers and notebook computers), mid-range computers (RS/6000 and AS/400
systems), networking products (network hubs, routers, bridges and switches) and
IBM software products, including OS/2, Netfinity, Eduquest and Lotus Notes. The
Company also offers warranty repair, systems support and customized training
programs. In order to offer its customers a full line of IBM products, the
Company is planning on becoming a value-added reseller of IBM S/390 mainframe
systems. The Company believes that its current mix of IBM products meets the
needs of its customers and brings the Company closer to reaching its goal of
becoming a total solution integrator of the complete IBM product line.
Expanding the Company's Role as an IBM Premier Business Partner
The Company's designation as an IBM Premier Business Partner provides it
with important competitive advantages. In 1997, the Company was among a small
number of original value-added resellers selected by IBM as a Premier Business
Partner. This designation by IBM was in recognition of the Company's
long-standing relationship with IBM, combined with its overall value,
performance and contribution in value to its customers. The Company believes
that the principal advantage to being a Premier Business Partner is the
potential referral of business by the IBM sales force.
Enhancing Competitiveness Through the IBM AAP
Within the past twelve months, the PC industry has experienced a
fundamental change as major PC suppliers, led by IBM, have begun shifting
responsibility for the final assembly and delivery of PC products to a select
number of companies, including the Company. The AAP will allow the Company to
sell IBM PCs configured to the exact customer hardware and software
specifications in a more timely and efficient manner. In addition to permitting
the Company to offer greater product selection, the Company believes AAP will
afford it future opportunities and competitive advantages, including the
potential to increase gross margins on build-to-
order systems, and the ability to act as an assembler and distributor to other
resellers. The Company is also planning on becoming an assembler of the RS/6000
product line.
Expanding Into Other Geographic Regions Through Acquisition and Strategic
Alliance
The Company's participation in the AAP will make it an attractive acquirer
and/or joint venture partner to companies that do not possess the expertise or
resources to attain this status. The Company believes that the systems
integration business which targets Fortune 1000 companies is both extremely
competitive and based on existing relationships.
The Company believes that the expansion of its business into growing
markets and varied geographic regions, including the possibility of
acquisitions of qualified systems integrators and resellers, will allow it to
service existing customers in these new locations, expand its customer base,
expand its product and service offerings, and obtain more competitive pricing
as a result of increased purchasing volumes of particular products. The Company
intends to focus its expansion efforts on value-added resellers that complement
its existing operations. In particular, the Company believes that IBM resellers
who do not participate in the AAP will be at a competitive disadvantage to the
Company and other AAP participants. Accordingly, the Company believes that
certain of these companies will find that an acquisition by, or a joint venture
with, the Company to be an attractive alternative.
23
<PAGE>
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, otherwise known as "hub and spoke" networks, supported
access to these functions, either within a single site or from numerous
geographically-dispersed sites.
In the late 1980's, a new architecture for information processing called
"client/server" computing emerged, fueled by the growing intelligence in
desktop computers, expanding capabilities of software applications and growing
capabilities of networks. A client/server system typically consists of multiple
intelligent desktop client computers linked with high performance server
computers by a local and/or wide area network ("LAN" and/or "WAN") and is
characterized by the flexibility and mobility of both application and user. In
order to take advantage of their established operational staff and physical
plant, many corporations are seeking to reconfigure their existing
mainframe/mid-range computers (sometimes referred to as "legacy" systems) to
operate in parallel with client/server networks.
The Company believes that these two information system models - legacy
systems and client/server systems - will continue to coexist, each with
advantages for certain applications. Thus, organizations are faced with complex
decisions concerning the current and future configurations of their information
systems, based upon factors such as the re-engineering of aspects of legacy
systems to function more efficiently with related client/server systems, the
explosive growth of the Internet (and related World Wide Web) and stand-alone
intranets, the convergence of computer and telecommunications technologies and
the universal recognition of information systems as the medium for commerce,
finance, education and administration. Mid-range and mainframe computer systems
remain important in this changing environment, and the Company intends to
exploit opportunities in both segments of the high end computer system markets.
At the same time, manufacturers such as IBM are increasing their reliance upon
companies such as SysComm to work with mid- and large-sized businesses and
organizations to provide single-source responsibility for the design,
procurement, installation and implementation of such systems.
24
<PAGE>
Principal Markets and Customers
Since 1994, the Company has sold and delivered computer systems, network
products, software, maintenance and system support services to more than 700
customers throughout the United States and in more than 20 countries worldwide.
Based on its installed customer base, the Company believes it is a leading IBM
supplier/systems integrator of mid-range and computer/network systems in the
northeast United States. In fiscal year 1994, sales to The Chase Manhattan Bank
accounted for 22% of the Company's total revenues; revenues from sales to The
Chase Manhattan Bank and Deutsche Bank accounted for 23% and 14%, respectively,
of the Company's total revenues in fiscal year 1995; and revenues from sales to
Deutsche Bank and Citibank accounted for 19% and 16%, respectively, of the
Company's total revenues in fiscal year 1996. In fiscal year 1996, the
Company's top five customers (two of which were new customers) accounted for
50% of total revenues.
The Company's significant markets, some of its representative customers
and some of the applications to which the customers adapted the Company's
systems are described below.
<TABLE>
<CAPTION>
Market Organizations Applications
- ------------------------- ------------------------------------ -------------------------------------
<S> <C> <C>
Banking Bankers Trust; Citibank; The Chase Credit Card Processing; Retail
Manhattan Bank Banking; Research; Customer Ser-
vice; Account Inquiry; Data Mining
Brokerage Deutsche Bank; J.P. Morgan; Mer- Electronic Mail; Foreign Exchange;
rill Lynch; Smith Barney; Spear, Securities Trading; Currency Trad-
Leeds & Kellogg; Brown Brothers ing; Client-Server Computing; Ana-
Harriman; Fidelity Investments lytics
Pharmaceutical/ Astra; Healthsource; Private Office Automation; Order Entry;
Healthcare Healthcare Systems; Oxford Bill Payments; Invoicing; Account
Healthcare History; Healthcare Electronic Mail
Education Boston College; Harvard Univer- Student Registration; Office Auto-
sity; Lawrence Public Schools; mation; Electronic Mail; Primary
MIT; Northeastern University; City Education; Teaching Aid; School
University of New York Administration; Student Schedul-
ing; Grades Administration, Report-
ing, Research
Governmental State and local government agen- Office Automation; Reporting;
cies throughout the Northeastern Printing Systems
United States
Industrial and Consumer Cadbury-Motts; Carrier Corpora- Office Automation; Order Process-
tion; The Stop & Shop Companies; ing; Electronic Mail; Invoicing;
CPC International; Pepsico; Barnes Client-Server Computing
& Noble
</TABLE>
25
<PAGE>
Banking. The Company was engaged by a large international bank to
configure, install and provide operating and network support for a 98 node
RS/6000 Power Parallel System 2 for data mining and market evaluations for
credit card products. Examples of data mining include profiling prospective
credit card customers and usage, spending patterns, credit risks, new credit
card product offerings, credit card marketing and promotion.
Brokerage. The Company provided RS/6000 workstations, servers and Power
Parallel System 2 systems to the investment banking and finance operations
departments of a large investment bank to assist in the international trading
of loans in the United States, Asia and Latin America.
Pharmaceutical/Healthcare Industry. The Company has been an ongoing
supplier of IBM PC's and related hardware to several divisions of a
pharmaceutical company. In connection with the sales of the computer systems,
the Company provided the pharmaceutical company with a long-term on-site
support technician. The Company has assisted the pharmaceutical company in
establishing its computer system to operate salesforce automation and FDA
application programs based on Windows NT and the Pentium Pro server.
Education. One of the public school systems in the Massachusetts area has
implemented a technology plan to incorporate computers in the teaching
environment. The plan, which covers 22 schools, includes the installation of a
LAN comprised of IBM servers and running the IBM Schoolview(TM) software, and a
WAN, running a large Lotus Notes network, utilizing attendance, discussion, and
mail databases. Each LAN server connects each classroom, containing 4 student
and 1 teacher workstations. Systemwide, the Company supplied the schools with
2,000 PCs and 40 servers. The Company believes that working closely with school
systems affords it the opportunity to increase the utilization of technology in
the classroom.
Industrial and Consumer. The Company completed the installation and
integration of a networking system linking 180 stores of a major retail chain.
To accomplish this task, the Company custom configured each RS/6000 and PC
systems with specific store information, allowing the systems to "plug & play"
immediately upon their arrival at each store location. The Company worked
closely with IBM to coordinate delivery of all hardware in a timely and orderly
manner, resulting in the successful installation of the systems within a two
month time-frame.
26
<PAGE>
Products/IBM Relationship
The Company has access to a full range of computer product lines,
networking and interconnectivity systems and operating software, from IBM,
Hewlett Packard and Compaq, as well as other selected manufacturers. However,
the Company has concentrated its efforts in developing strong relationships
with IBM because it believes that IBM offers the most comprehensive and well
established product line in the industry. The Company has had a long term
relationship with IBM whereby it has the opportunity to configure, sell and
service IBM's full line of PCs and mid-range information processing systems. In
addition, as a member of several IBM advisory committees, the Company maintains
close communications with IBM's future plans and directions. The Company
believes its strong marketing and technical skills have enabled it to become
North America's largest reseller of IBM's RS/6000 product line, and the Company
believes it will continue to have a close business relationship with IBM. The
Company's principal sales are derived from the following: (i) IBM PC systems;
(ii) IBM RS/6000 systems; (iii) IBM AS/400 systems; and (iv) communication and
networking systems.
IBM PC Product Line and Participation in IBM's PC Company Authorized Assembler
Program
IBM is one of the world's leading designers and manufacturers of personal
computer systems. IBM's personal computer product line includes mobile
(notebook) and desktop workstations as well as file, application and network
servers. In 1996, according to industry estimates, IBM produced and sold more
than $13 billion of PC products worldwide. Accordingly, in 1996, IBM had
approximately a 9% marketshare of the worldwide personal computer market.
IBM PC systems feature Pentium(TM) processors from Intel and are available
with a choice of operating software, including SelectaSystem, which allows
end-users' systems to store both IBM OS/2 Warp and Microsoft DOS/Windows on the
same hardware, or Microsoft(R) Windows 95(TM). For the last five years, due to
the amount of sales volume for IBM products generated by the Company, IBM has
enabled the Company to purchase products directly from IBM for resale at the
lowest prices available. There can be no assurances that the Company will be
able to continue to purchase at these prices, and loss of this competitive
pricing could have a material adverse affect on the Company's business and
results of operations.
In fiscal year 1996, the Company's sales of IBM PC products were
approximately $30 million, or 30.5%, of the Company's annual sales.
In March 1997, the Company commenced participation in the AAP at its
Hauppauge, New York location. By combining the assembly of PCs with its proven
systems integration abilities, the Company believes that it will provide its
clients with speed of delivery and flexibility of design at both the PC and
systems levels. The Company also believes that the establishment and operation
of its IBM PC assembly facility will greatly enhance the Company's position in
the marketplace, enabling it to assemble various IBM personal computer systems,
which in effect permits it to better serve its customers as well as reduce
finished goods inventory levels.
The continued operation of this assembly facility is dependent upon the
Company complying with the terms of the AAP Agreement, including satisfying
certain minimum purchase requirements, compliance with strict quality control
provisions and maintaining trained and certified personnel. The AAP Agreement
is terminable by either IBM or the Company upon 30 days' prior notice and
immediately terminable by IBM in the event that IBM determines, in its sole
discretion, that (i) the assembled products fail to meet required
specifications (whether or not the Company is at fault), (ii) the Company
materially breaches the terms and/or conditions of the AAP Agreement, (iii) the
Company engages in a course of conduct that has injured IBM's reputation or the
reputation of its products, or (iv) the Company's status with IBM as a Business
Partner is terminated for any reason, expires or if the Company is no longer
eligible to purchase IBM personal computer products directly from IBM. In
addition, the Company is required to maintain ISO 9002 registration standards,
the registered international standard for ensuring the consistent and
measurable quality of products and services. Subject to the terms of the AAP
Agreement, IBM is permitted to periodically review the Company's performance in
order to monitor and assess continued compliance. The AAP Agreement expires on
December 31, 1997. The Company intends to renew it.
By being part of the AAP, the Company believes it may increase its
inventory turnover rate, expand the range of products available to its
customers and improve delivery time to its customers. In addition, the Company
will maintain an inventory of component parts, rather than an inventory of
fully-configured PC models.
27
<PAGE>
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.
IBM has recognized the Company (ranked by dollar value of systems sold) as
its largest "Industry Remarketer" for RS/6000 systems in North America for the
year ending December 31, 1996, with sales of the RS/6000 for fiscal year 1996
of approximately $59 million, or 59%, of the Company's annual sales. The
Company considers RS/6000 systems to be an integral product for future
increases in the Company's sales volume.
All Other Products
IBM AS/400 Product Line. Although the IBM Application System/400 (also
known as AS/400) has not been a major source of revenue to the Company, the
Company is attempting to increase its revenue in this market. The AS/400 is
designed and built as a multi-user commercial application platform integrating
a relational database and networking capabilities into the operating system of
the computer. It is designed as a general purpose business computer, optimized
for the commercial environment. Its design reflects the dominant requirements
for businesses, i.e., integration of new technology without disrupting existing
applications, large portfolio of business solutions allowing companies to
discover the most suitable application for their needs, integration of
functions including security, database, system management, communications and
on-line teleprocessing, enabling companies to manage a system with limited
resources in a demanding business climate.
The AS/400 provides businesses with a cost effective solution, allowing
them to adopt advanced technologies at their own pace, integrating high quality
PC technology and associated software to enhance the computer's speed for PC
file serving. The AS/400 is a popular business computing system due to its ease
of installation, implementation, usage (it can support up to 7,000 users) and
ability to upgrade.
Communication -- Networking Systems. The Company provides various
communications and networking products including complex data communications
equipment and software such as bridges, hubs and routers, as well as modems and
network interface cards (NIC) to connect personal computers to local and wide
area networks (LAN/WAN). Nearly every computer sold today in the commercial
marketplace is connected to a communications network.
Other. The Company is authorized to sell other manufacturers' personal
computer systems, networking, printers and software products including: Bay
Networks, Compaq, Lexmark, Hewlett Packard, Apple, MicroSoft, Novell, and 3Com.
Certain of the Company's agreements with such suppliers provide for minimum
annual purchase requirements. Although the Company, to date, has complied with
these agreements, there is no assurance that the Company will continue to meet
such minimum purchase requirements or other terms of such agreements. To the
extent that it does not comply with such terms, the Company may lose its status
as an authorized reseller for such suppliers. For fiscal year 1996, the
Company's sales of non-IBM products accounted for approximately $9 million, or
9%, of total revenue.
28
<PAGE>
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 five locations: New York City
and Hauppauge, New York, Waltham, Massachusetts, Marlton, New Jersey and North
Haven, Connecticut. Currently, the Company employs 28 field sales
representatives and system engineers. The sales efforts are led by the
Company's senior executives, John H. Spielberger, Thomas Baehr and Norman
Gaffney, who have more than 69 years of combined experience in sales of
high-level computer systems. The Company believes that due to the complex
nature of the computer products it sells and supports, maximum marketing
effectiveness can only be achieved by sales specialization. Each sales
representative is trained in one specific product line and representatives of
one product line can call upon specialized sales and systems engineering
personnel from another product line.
The Company pursues new business opportunities by referrals from IBM or
other manufacturers, referrals from existing customers, direct solicitation by
telephone or mail of prequalified customers, and participation in IBM and other
industry trade shows.
The Company has developed and maintained automated sales tools intended to
improve sales productivity, quality and reliability and increased customer
satisfaction. These systems include on-line systems configuration and pricing,
real time order entry, order confirmation and electronic mail for customers
through privately leased telephone lines and through the Internet.
Customer Support and Service
The Company believes that its ability to provide effective total solutions
to meet the needs of its customers is enhanced by its internal management
information system, which combines accounting, purchasing, inventory control,
sales order processing and work order management. The Company provides a large
array of services to its customers, including warranty repair on all IBM
personal computer products; toll-free telephone number for sales and product
information and order placement; toll-free telephone number for customer
service on all products sold, including technical assistance and repair
warranty; E-mail network access for customers to receive real time price
quotations, place orders and check order status; on-site system engineers to
provide technical assistance for installations and upgrades; partnership with
IBM to provide customized services such as helpdesk, consulting, extended
warranty, extended maintenance coverage; and IBM Credit Corporation financing
options on all products sold.
Competition
The markets in which the Company operates are characterized by intense
competition from several types of network integrators and technical service
providers, including mainframe and mid-range computer manufacturers and
outsourcers, including, among others, Digital Equipment Corporation, Sun
Microsystems, Electronic Data Systems Corporation, Hewlett-Packard Company and
Integrated Systems Solution Corporation. Other competitors which purchase
directly from IBM, like the Company, include value added resellers, systems
integrators and third-party service companies, including AmeriData
Technologies, Inc., CompuCom Systems, Inc., Entex Information Services, InaCom
Corp., MicroAge, Inc. and Vanstar. While the Company receives substantial 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.
29
<PAGE>
The Company's ability to compete successfully depends on a number of
factors such as breadth of product and service offerings, sales and marketing
efforts, pricing, quality and reliability of services and other support
capabilities. While there can be no assurance that the Company will be able to
continue to compete successfully with existing or new competition, the Company
believes that it currently competes favorably due to its focus and expertise of
network integration and its concentration on sales of IBM product lines.
Employees
As of March 31, 1997, the Company had 59 full-time employees. The Company
has no collective bargaining agreements and believes its relations with its
employees are good.
Description of Property
The Company leases 11,200 square feet of executive office and warehouse
space in Hauppauge, New York pursuant to a five year contract which expires on
January 31, 1999. The lease provides for payments totaling $288,580 over the
course of the lease.
The Company leases 5,027 square feet of general office space in New York
City pursuant to a five year lease at an annual rental of $130,704. This lease
expires on February 28, 2002.
The Company leases 5,350 square feet of general office space in Waltham,
Massachusetts pursuant to a five year lease which expires on October 31, 1999.
The lease provides payments in the amount of $70,085 annually for the period
from December 1, 1994 through September 30, 1997 and $76,772 annually for the
period from October 1, 1997 through December 31, 1999.
The Company leases 300 square feet of general office space in Marlton, New
Jersey and North Haven, Connecticut for $7,800 per year and $8,100 per year,
expiring on January 31, 1998 and December 31, 1997, respectively.
Legal Proceedings
The Company is involved in a legal proceeding that is incidental to the
conduct of its business. This proceeding is not, in the opinion of management,
material. In the ordinary course of its business, the Company is, from time to
time, subject to litigation. The Company does not believe that any litigation
to which the Company is currently subject is likely, individually or in the
aggregate, to have a material adverse effect on the financial condition of the
Company.
30
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names and ages of the Company's
directors and persons nominated to become directors and executive officers and
the positions they hold with the Company.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- ----- -------------------------------------------
<S> <C> <C>
John H. Spielberger 55 Chairman of the Board of Directors,
President and Chief Executive Officer of
SysComm
Thomas J. Baehr (2) 40 Vice President, Director of SysComm,
President and Chief Operating Officer of
InfoTech
Dennis R. Wilson 47 Vice President, Chief Financial Officer,
Secretary and Director of SysComm
Norman M. Gaffney 49 Director of SysComm, Executive Vice
President of Marketing and Sales of Info-
Tech
John C. Spielberger (1) 28 Director of SysComm
Cornelia Eldridge (1) (2) 55 Nominee for Director of SysComm
Lee Adams (1)(2) 65 Nominee for Director of SysComm
</TABLE>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
John H. Spielberger is the Chairman of the Board of Directors, President
and Chief Executive Officer of SysComm, which he founded in 1986. He is also
currently the Chairman of the Board and Chief Executive Officer of InfoTech,
which he founded in 1980. From 1968 through 1976, Mr. Spielberger worked for
IBM as a sales representative. From 1976 through 1980, Mr. Spielberger was
employed as Vice President of The Harvey Group Inc., a company listed on the
American Stock Exchange, where he was responsible for all management
information systems and communications. In 1980, Mr. Spielberger founded John
Spielberger & Associates, Inc., a designer, programmer and installer of
computer systems, which later became known as InfoTech. Mr. Spielberger is a
member of various IBM advisory boards which assist IBM in developing new and
innovative programs to market their products. Mr. Spielberger graduated from
Long Island University, C.W. Post Campus, New York in May 1966 with a B.A. in
Biology.
Thomas J. Baehr joined InfoTech in January 1994 and has been a member of
SysComm's Board of Directors since August 1995. Mr. Baehr became InfoTech's
President in January 1996 and is currently its Chief Operating Officer. From
June 1978 through October 1979, Mr. Baehr worked as a sales representative at
the Burroughs Corporation. From October 1979 through November 1986, Mr. Baehr
was employed at Honeywell Information Systems, where he was responsible for the
sale of mainframe and minicomputers to the General Electric Company. From
November 1986 through July 1992, Mr. Baehr was employed by Prime Computer Inc.
in various positions including sales manager for the New York metropolitan area
and regional manager for the northeastern United States. From July 1992 through
January 1994, Mr. Baehr was employed by Basic Computer Corporation in White
Plains, New York. Mr. Baehr graduated Fairfield University, Connecticut in May
of 1978 with a B.S. in Marketing.
Dennis R. Wilson has been a director of the Company since 1986 and became
Vice President and Chief Financial Officer of SysComm and InfoTech in March
1995. From 1972 through March 1992, Mr. Wilson was employed by The Harvey Group
Inc. During his career at The Harvey Group, Mr. Wilson held the following
positions: Member of the Board of Directors, Executive Vice President and Chief
Financial Officer, Corporate Secretary and Director of Internal Audit. From
1992 through February 1995, Mr. Wilson was employed at
31
<PAGE>
The Boerner Company, a successor to the Harvey Group, as Chief Financial
Officer. He received a B.S. in Accounting from St. John's University in June
1970 and received his M.B.A. from St. John's in January 1976. He is also a
member of the Association of Management Accountants and the Association of MBA
Executives.
Norman M. Gaffney has been a Director of the Board of SysComm since
September 1996. He joined the Company in November 1994 and has served as
Executive Vice President of Sales and Marketing of InfoTech since January 1996.
Prior to joining SysComm, Mr. Gaffney was employed by IBM in various positions
including Consulting Marketing Representative and Senior Accounts Manager for
22 years. Mr. Gaffney graduated from the University of Miami receiving a B.S.
in Marketing.
John C. Spielberger is a Director of the Board of SysComm. In 1991, he
received a B.S. in Marketing from the Wallace School of Management, Boston
College. From February 1992 through October 1992, Mr. Spielberger was employed
as a marketing support representative for Lexmark International. Mr.
Spielberger joined InfoTech in October 1992 and is a sales specialist for the
RISC System/6000. Mr. Spielberger is the son of John H. Spielberger, the
Chairman of the Board, President and Chief Executive Officer of SysComm.
Cornelia Eldridge has been nominated to serve on the Company's Board of
Directors upon consummation of the Offering. Since 1981, Ms. Eldridge has been
President of Eldridge Associates, Inc., a management consulting firm. Eldridge
Associates provides strategic planning and organizational consulting services
to senior executive management including Chief Executive Officers. Ms. Eldridge
has a B.A. from Ohio Wesleyan University and an M.B.A. from the University of
Massachusetts. She serves on the Board of Directors of DE Frey, Inc., a
privately-held financial services firm. Ms. Eldridge also currently provides
consulting services to Commonwealth Associates.
Lee Adams has been nominated to serve on the Company's Board of Directors
upon consummation of the Offering. From 1989 through March 1997, when that
company was sold, Mr. Adams was the Chairman and Chief Executive Officer of
Target Solutions, Incorporated, a privately-held vertical remarketer of IBM's
AS/400 line of products. From 1963 to 1989, Mr. Adams held various executive
sales and marketing positions at IBM. Mr. Adams received a B.B.A. from
Kalamazoo College in June 1963.
Board of Directors
The Board of Directors currently consists of five members. There are two
vacancies on the Board. Upon completion of the Offering, the Company expects to
appoint Cornelia Eldridge and Lee Adams as directors to its Board of Directors.
The Company's Board of Directors is divided into three classes with each
class consisting, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board. The Company's Board of
Directors presently consists of five members with one member in Class I and two
members in Classes II and III. Class III consists of John H. Spielberger and
Thomas Baehr, whose term will expire at the 2000 annual meeting of
stockholders; Class II consists of Norman Gaffney and John C. Spielberger,
whose term will expire at the 1999 annual meeting of stockholders; and Class I
currently consists of Dennis Wilson, and, upon their appointment upon
completion of the Offering, will additionally consist of Cornelia Eldridge and
Lee Adams, whose term will expire at the 1998 annual meeting of stockholders.
After the initial term, each Class is elected for a term of three years. At
each annual meeting, directors are elected to succeed those in the Class whose
term expires at that annual meeting, such newly elected directors to hold
office until the third succeeding annual meeting and the election and
qualification of their respective successors.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Board Committees
The Board of Directors has an Audit Committee and Compensation Committee.
The Audit Committee makes annual recommendations to the Board of Directors
concerning the appointment of the independent public accountants of the Company
and reviews the results and scope of the audit and other services provided by
the Company's independent auditors. The Audit Committee is currently comprised
of one Board Member,
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<PAGE>
John C. Spielberger. The Compensation Committee, currently comprised of Thomas
Baehr, makes recommendations to the Board of Directors concerning salaries and
incentive compensation for employees of the Company. Upon consummation of the
Offering, the Board of Directors intends to appoint Cornelia Eldridge and Lee
Adams to the Audit Committee and the Compensation Committee.
Director Compensation
Directors who are employees of the Company receive no compensation, as
such, for service as members of the Board. It is expected that directors who
are not employees of the Company will receive options to purchase 5,000 shares
of Common Stock for each year served on the Board of Directors, and
reimbursement of expenses incurred in connection with attendance of Board and
committee meetings.
Key Man Insurance
The Company is the beneficiary of $1,000,000 whole life policy covering
the life of John H. Spielberger and a $1,000,000 term policy covering the life
of Thomas J. Baehr.
Limitation of Liability and Indemnification of Directors and Officers
The Certificate of Incorporation and By-Laws of the Company provides that
a director shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except: (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (iii) for liability under
Section 174 of the Delaware General Corporation Law (relating to certain
unlawful dividends, stock repurchases or stock redemptions); or (iv) for any
transaction from which the director derived any improper personal benefit. The
effect of this provision in the Certificate is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in certain limited situations.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws.
The Company's By-Laws provides that the Company shall indemnify each
director and such of the Company's officers, employees and agents as the Board
of Directors shall determine from time to time in its sole discretion to the
fullest extent provided by the laws of the State of Delaware.
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<PAGE>
Executive Compensation
The following table sets forth the compensation for services in all
capacities awarded to, earned by or paid to the Company's Chief Executive
Officer and the most highly compensated executive officers of the Company whose
aggregate cash compensation exceeded $100,000 during the last three fiscal
years:
Annual Compensation
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($)
- ----------------------------------------- ------ ------------ ----------- -----------------
<S> <C> <C> <C> <C>
John H. Spielberger, Chairman of the 1996 100,000 90,000 $ 29,411(1)
Board of Directors, President and Chief 1995 100,000 -- --
Executive Officer of SysComm 1994 100,000 -- --
Dennis R. Wilson, Vice President, 1996 100,000 35,000 --
Chief Financial Officer, Secretary and 1995 58,333 -- --
Director of SysComm 1994 -- -- --
Thomas J. Baehr, Vice President and 1996 134,579 157,000 --
Director of SysComm, President and 1995 157,016 -- --
Chief Operating Officer of InfoTech 1994 101,272 -- --
Norman M. Gaffney, Director of 1996 304,613 -- --
SysComm, Executive Vice President, 1995 141,972 -- --
Marketing and Sales of InfoTech 1994 -- -- --
</TABLE>
- ------------
(1) Consists of expenses for a Company car ($4,464), life insurance premiums
($23,897) for John H. Spielberger, and administration fees on his pension
plan ($1,050). This life insurance policy will be cancelled after the
effective date of this Prospectus and any cash value will be returned to
the Company.
Employment Agreements
The Company will enter into employment agreements effective upon the
consummation of the Offering with its executive officers. Each of the
employment agreements expire on September 30, 1999, unless sooner terminated
for death, physical or mental incapacity or cause (which is defined as the
uncured refusal to perform, or habitual neglect of, the performance of his
duties, willful misconduct, dishonesty or breach of trust which causes the
Company to suffer any loss, fine, civil penalty, judgment, claim, damage or
expense, a material breach of the employment agreement, or a felony
conviction), or terminated by either party with thirty (30) days' written
notice, and are automatically renewed for consecutive terms, unless cancelled
at least thirty days prior to expiration of the existing term. Each Employment
Agreement provides that all of such executive's business time be devoted to the
Company. In addition, each of the Employment Agreements also contain: (i)
non-competition provisions that preclude each employee from competing with the
Company for a period of up to two years from the date of the termination of his
employment of the Company, (ii) non-disclosure and confidentiality provisions
providing that all confidential information developed or made known during the
term of employment shall be exclusive property of the Company, and (iii)
non-interference provisions whereby, for a period of two years after his
termination of employment with the Company, the executive shall not interfere
with the Company's relationship with its customers or employees.
The employment agreements also include compensation plans for fiscal year
1997 as follows: John H. Spielberger will receive base salary of $140,000 plus
a bonus based on 3% of all pre-tax earnings of the Company; Thomas J. Baehr
will receive $150,000 plus a bonus based on 3.5% of all pre-tax earnings of
InfoTech, payable quarterly; Dennis R. Wilson will receive $120,000 plus a
discretionary bonus determined by the Compensation Committee; and Norman M.
Gaffney will receive $125,000 plus a bonus plan based on 1.5% of gross profit
dollars of InfoTech, payable monthly.
These employment agreements contain annual performance incentive plans
which will be reviewed during the fiscal year and new incentive plans will be
implemented by the Company's Compensation Committee for fiscal year 1998, and
thereafter as applicable.
34
<PAGE>
In addition, the employment agreements provide that if an executive
officer is terminated for reasons other than for cause, the Company has agreed
to continue to pay his total base salary for the remainder of the term of the
employment agreement or one year, whichever is greater.
Stock Option Plan
On July 29, 1988, the stockholders approved a stock option plan (the "1988
Stock Option Plan"). In connection with the 1988 Stock Option Plan, 1,000,000
shares of Common Stock are reserved for issuance pursuant to options that may
be granted under the plan through May 5, 1998. As of September 30, 1996,
498,000 options were granted at exercise prices ranging from $.68 to $.75 per
share. To date, none of those options has been exercised. The options vest over
a three year period following the date of the grant. Currently, only 166,000
shares are exercisable.
The purpose of the 1988 Stock Option Plan is to encourage stock ownership
by employees of the Company, its divisions and subsidiary corporations and to
give them a greater personal interest in the success of the Company. The 1988
Stock Option Plan is administered by the Compensation Committee. The
Compensation Committee consists of at least three members of the Board of
Directors. The Compensation Committee shall have the authority in its
discretion, subject to and not inconsistent with the express provisions of the
Plan, to administer the Plan and to exercise all the powers and authorities
either specifically granted to it under the Plan or necessary or advisable in
the administration of the Plan, including, without limitation, the authority to
grant Options; to determine which Options shall constitute incentive stock
options ("ISO") and which Options shall constitute Non-Qualified Stock Options;
to determine which Options (if any) shall be accompanied by rights or limited
rights; to determine the purchase price of the shares of Common Stock covered
by each Option (the "Option Price"); to determine the persons to who, and the
time or times at which, Options shall be granted; to determine the number of
shares to be covered by each Option; to interpret the Plan; to prescribe, amend
and rescind rules and regulations relating to the Plan; and to make all other
determinations deemed necessary or advisable for the administration of the
Plan. The Compensation Committee may delegate to one or more of its members or
to one or more agents such administrative duties as it may deem advisable, and
the Compensation Committee or any person to whom it has delegated duties as
aforesaid may employ one or more persons to render advice with respect to any
responsibility the Compensation Committee or such person may have under the
Plan.
Options granted under the 1988 Stock Option Plan may not be granted at a
price less than the fair market value of the Common Stock on the date of grant
(or 110% of fair market value in the case of persons holding 10% or more of the
voting stock of the Company). The aggregate fair market value of shares for
which ISOs granted to any employee are exercisable for the first time by such
employee during any calendar year (under all stock option plans of the Company
and any related corporation) may not exceed $100,000. Options granted under the
1988 Stock Option Plan will expire not more than ten years from the date of
grant (five years in the case of ISOs granted to persons holding 10% or more of
the voting stock of the Company). Options granted under the 1988 Stock Option
Plan are not transferable during an optionee's lifetime but are transferable at
death by will or by the laws of descent and distribution.
35
<PAGE>
Each Executive Officer and Director has been granted options to purchase
shares of Common Stock pursuant to the 1988 Stock Option Plan as follows:
Option Grants
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
for Option Term(2)
Dated Options Exercise Expiration ---------------------------
Name Granted Granted (1) Price Date 5% ($) 10% ($)
- --------------------- --------- ------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John H. Spielberger 6/30/95 40,000 $.75 9/1/98 $192,336.00 $204,850.00
Dennis R. Wilson 6/30/95 104,000 $.68 9/1/98 507,353.60 539,890.00
Thomas J. Baehr 6/30/95 100,000 $.68 9/1/98 487,840.00 519,125.00
Norman M. Gaffney 6/30/95 100,000 $.68 9/1/98 487,840.00 519,125.00
John C. Spielberger 6/30/95 4,000 $.68 9/1/98 19,513.60 20,765.00
</TABLE>
- ------------
(1) Each option is exercisable into one share of Common Stock.
(2) The potential realizable values set forth under the columns represent the
difference between the stated option exercise price and the market value of
the Common Stock based on certain assumed rates of stock price appreciation
from the assumed initial public offering price of $5.25 per share and
assuming that the options were exercised on their stated expiration date;
the potential realizable values set forth do not take into account
applicable tax and expense payments which may be associated with such option
exercises. Actual realizable value, if any, will be dependent on the future
price of the Common Stock on the actual date of exercise, which may be
earlier than the stated expiration date. The 5% and 10% assumed annualized
rates of stock price appreciation over the exercise period of the options
used in the table above are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of the future price of the Common Stock on any date. There is no
representation either express or implied that the stock price appreciation
rates for the Common Stock assumed for purposes of this table will actually
be achieved.
Aggregate Option Exercises in Last Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of
Number of Options in-the-money options
Shares Acquired Value Realized at Fiscal Year End at fiscal year end ($)(1)
Name on Exercise $ exercisable unexercisable exercisable unexercisable
- --------------------- --------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John H. Spielberger 0 0 13,200 26,800 $ 59,400 $120,600
Dennis R. Wilson 0 0 34,320 69,680 156,842 318,438
Thomas J. Baehr 0 0 33,000 67,000 150,810 306,190
Norman M. Gaffney 0 0 33,000 67,000 150,810 306,190
John C. Spielberger 0 0 1,320 2,680 6,032 12,248
</TABLE>
- ---------
(1) Determined by subtracting the option exercise price per share of Common
Stock from the assumed minimal public offering price per share of $5.25,
and multiplying by the number of shares subject to purchase upon option
exercise.
401(k) Plan
On January 1, 1994, the Company adopted a 401(k) savings plan for the
benefit of all eligible employees. All employees as of the effective date of
the 401(k) became eligible. An employee who became employed after January 1,
1994 would become a participant after the completion of six months of service
and attainment of 20 years of age. Under the 401(k) plan, participants may
elect to contribute from their compensation any amount up to the maximum
deferral allowed by the Internal Revenue Code. Company contributions are
discretionary and the Company may make optional contributions for any plan year
at its discretion. During the fiscal years ended September 30, 1996, 1995 and
1994, the Company recorded 401(k) costs totalling $31,738, $19,148 and $100,
respectively.
36
<PAGE>
CERTAIN TRANSACTIONS
John H. Spielberger has a consulting agreement with Ameriquest
Technologies, Inc., a company that purchased Romel Technology, Inc., a SysComm
subsidiary. This agreement, which commenced in December 1993, pays Mr.
Spielberger $10,000 per month through January 1998.
Currently, the Company is required to purchase as much as $1,000,000 worth
of Mr. Spielberger's stock from his family upon the occurrence of his death.
The buy-back price per share would be the greater of ten times the net income
for the prior four quarters preceding his death divided by the average number
of shares outstanding during that period or three times the current net worth
divided by the current number of shares outstanding, whichever is greater. The
Company and Mr. Spielberger have agreed to cancel the buy-back arrangement
concurrent with the Offering.
In addition, Mr. Spielberger has personally guaranteed the Company's
financing arrangements with IBM Credit Corporation. The Company and Mr.
Spielberger anticipate that IBM Credit Corporation will release Mr. Spielberger
from his personal guarantee immediately prior to, or upon completion of, the
Offering.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of the date of this Prospectus, and as adjusted to reflect the
sale of 1,500,000 shares of Common Stock offered hereby by (i) each person
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director and nominee director of
the Company, (iii) each named executive officer of the Company, and (iv) all
directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
Percentage Beneficially Owned (2)
-----------------------------------
Number of Shares
Name and Address Beneficially Owned (2) Before Offering After Offering
- --------------------------------------- ------------------------ ----------------- ---------------
<S> <C> <C> <C>
John H. Spielberger (1) (3) 2,506,400 71.62% 50.14%
Dennis R. Wilson (1) (5) 88,640 2.53% 1.77%
Thomas J. Baehr (1) (6) 86,000 2.46% 1.72%
Norman M. Gaffney (1) (6) 66,000 1.89% 1.32%
John C. Spielberger (1) (4) 7,640 .22% .15%
Cornelia Eldridge (7) -- -- --
Lee Adams (8) -- -- --
Mark Vinelli (1) 270,000 7.72% 5.40%
All Officers and Directors as a group
(five persons) 2,754,680 78.72% 55.10%
</TABLE>
- ------------
(1) The addresses of John H. Spielberger, Dennis R. Wilson, Thomas Baehr, John
C. Spielberger, Norman Gaffney, and Mark Vinelli are c/o SysComm
International Corporation, 275 Marcus Boulevard, Hauppauge, New York
11788.
(2) Beneficial ownership is determined in accordance with the Rule 13d-3 of the
Securities Exchange Act of 1934 and generally includes voting and
investment power with respect to securities, subject to community property
laws, where applicable. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the
date of this Prospectus upon exercise of options or warrants. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person (but not those held by
any other person) and that are exercisable within 60 days from the date of
this Prospectus have been exercised. Unless otherwise noted, the Company
believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(3) Includes 600,000 shares owned by Bearpen Limited Partnership, a partnership
of which John H. Spielberger and his wife, Catherine, are the general
partners. Excludes 50,000 shares owned by Mr. Spielberger's wife,
Catherine, of which John H. Spielberger disclaims beneficial ownership.
Includes options to purchase 26,400 shares of Common Stock at an exercise
price of $.75 per share, exercisable as of June 30, 1997. Does not include
options to purchase 13,600 shares of Common Stock at an exercise price of
$.75 per share.
(4) Excludes 20,000 shares owned by Teresa Murphy, John C. Spielberger's wife.
Includes options to purchase 2,640 shares of Common Stock at an exercise
price of $.68 per share, exercisable as of June 30, 1997. Does not include
options not currently exercisable to purchase 1,360 shares of Common Stock
at an exercise price of $.75 per share.
(5) Includes options to purchase 68,640 shares of Common Stock at an exercise
price of $.68 per share, exercisable as of June 30, 1997. Does not include
options not currently exercisable to purchase 35,360 shares of Common
Stock at an exercise price of $.68 per share.
(6) Includes options to purchase 66,000 shares of Common Stock at an exercise
price of $.68 per share, exercisable as of June 30, 1997. Does not include
options not currently exercisable to purchase 34,000 shares of Common
Stock at an exercise price of $.68 per share.
(7) The address of Cornelia Eldridge is 4514 Elkhorn Road, P.O. Box 6243, Sun
Valley, Idaho 83354.
(8) The address of Lee Adams is P.O. Box 2404, Lake Arrowhead, California
92352.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share. As of April 15, 1997, there were 3,632,200
shares of Common Stock issued and 3,170,540 shares of Common Stock outstanding
held of record by 30 stockholders. No shares of Preferred Stock are issued and
outstanding.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the stockholders of the Company.
Holders of shares of Common Stock are entitled to receive dividends when, as,
and if declared by the Company's Board of Directors out of funds legally
available to the Company. The Company currently intends to retain all future
earnings for the use in the operation of its business and therefore does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. See "Dividend Policy." Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in the
assets remaining after payment of all liabilities and liquidation of
preferences if any. Shares of Common Stock are not redeemable and have no
preemptive or similar rights to subscribe for additional shares. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will, upon issuance and payment, be fully paid and non-assessable.
Preferred Stock
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to 1,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"), in one or
more series, to designate the number of shares constituting any series, and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, voting rights, rights and terms of redemption, redemption
price or prices and liquidation preferences of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders.
The issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control. The Company has no present plans to issue any shares of
preferred stock. See "Risk Factors -- Anti-Takeover Provisions."
Anti-Takeover Provisions; Section 203 of the Delaware General Corporation Law
The Company is governed by Section 203 of the Delaware General Corporation
Law, an anti-takeover law. In general, this statute restricts a corporation
from entering into certain business combinations with an interested stockholder
(defined as any person or entity that is the beneficial owner of at least 15%
of a corporation's voting stock) or its affiliates for a period of three years
after the date of the transaction in which the person became an interested
stockholder unless (i) the transaction is approved by the Board of Directors of
the corporation prior to such business combination, (ii) the interested
stockholder acquires 85% of the corporation's voting stock in the same
transaction in which it exceeds 15%, or (iii) the business combination is
approved by the Board of Directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. The Company's Amended and
Restated Certificate of Incorporation excludes John H. Spielberger from the
definition of "interested stockholder" and also defines an "interested
stockholder" as any person or entity that is the beneficial owner of at least
10% of the Company's voting stock.
The Company's Amended and Restated Certificate of Incorporation and/or
Amended and Restated By-Laws include certain provisions which may have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in its best interests, including
attempts that might result in a premium over the market for the shares held by
the stockholders and could make it more difficult to remove incumbent
management. The Company's Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws provide (i) that the Board of Directors will be
divided into three classes of directors serving staggered three year terms
resulting in approximately one-third of the Company's Board of Directors being
elected each year; (ii) that directors may be removed from office only for
cause and only by the affirmative vote of the holders of 66 2/3% of the then
outstanding shares of capital stock entitled to vote generally in an election
of directors; (iii) that, except as otherwise required by law, vacancies in the
Board of Directors may be filled
39
<PAGE>
only by the remaining directors; (iv) that commencing with the consummation of
the Offering, any action required or permitted to be taken by the stockholders
of the Company may be effected only at an annual or special meeting of
stockholders and not by written consent of the stockholders; (v) that subject
to certain provisions, any special meeting of stockholders may be called only
upon the affirmative vote of at least a majority of the members of the Board of
Directors; and (vi) for an advance notice procedure for the nomination other
than by or at the discretion of the Board of Directors or a committee of the
Board of Directors for the candidates for election as directors as well as for
other stockholder proposals to be considered at annual meetings of the
stockholders. In general, notice of an intent to nominate a director or raise
business at such meetings must be received by the Company not less than sixty
(60) nor more than ninety (90) days prior to the first anniversary of the
preceeding year's annual meeting and must contain certain information
concerning the person to be nominated or the matters to be brought before the
meeting and concerning stockholders submitting the proposal. The affirmative
vote of at least a majority of the directors or the holders of at least 662/3%
of the voting power of the Company's Common Stock is required to alter, amend,
repeal or adopt any provision inconsistent with the provisions described in
this paragraph.
The Delaware General Corporation Law, the Amended and Restated Certificate
of Incorporation and the Amended and Restated By-Laws may discourage certain
types of transactions involving an actual or potential change in control of the
Company.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, Inc.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 1,500,000 shares of Common Stock sold in the Offering will be freely
transferable without restriction or further registration under the Securities
Act unless acquired by an "affiliate" of the Company within the meaning of the
Securities Act. Upon completion of the Offering, the existing stockholders of
the Company will own 3,170,540 shares of Common Stock. All of these shares are
deemed "restricted securities" as defined by Rule 144 under the Securities
("Rule 144"). Upon expiration of the contractual restrictions between the
Company, its officers, directors and current stockholders and option holders
and the Representative, beginning one year after the date of this Prospectus,
these shares will be available for sale in the public market, subject to
compliance with Rule 144.
Rule 144, as currently in effect, provides that a person (or persons whose
sales are aggregated) who is an affiliate of the Company, or who has
beneficially owned shares for at least one year which were issued and sold in
reliance upon certain exemptions from registration under the Securities Act
("Restricted Shares"), is entitled to sell within any three month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who has beneficially owned Restricted Shares for at
least two years and who is not an affiliate of the Company may sell such shares
under Rule 144 without regard to volume limitations, manner-of-sale provisions,
notice requirements or the availability of current public information about the
Company.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 of the Securities Act ("Rule 701")
may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants
or advisors prior to the date the issuer becomes subject to the reporting
requirements of the Exchange Act, pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Commission has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and subject
to the contractual restrictions described above, beginning ninety days after
the date of this Prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements.
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market
sales of Restricted Shares or the availability of Restricted Shares for sale
will have on the market price prevailing from time to time. Nevertheless, sales
of substantial amounts of Restricted Shares in the public market could
adversely affect prevailing market prices.
41
<PAGE>
UNDERWRITING
The underwriters named below (collectively, the "Underwriters") for which
Commonwealth Associates is acting as representative (the "Representative" or
"Commonwealth"), have severally, not jointly, subject to the terms and
conditions of the underwriting agreement ("Underwriting Agreement") agreed to
purchase from the Company, and the Company has agreed to sell, the shares of
Common Stock which equal the number of shares set forth opposite the name of
such Underwriters below:
Underwriter Number of Shares
- ------------------------------- -----------------
Commonwealth Associates ......
Total ........................ 1,500,000
==========
The Underwriters are committed on a "firm commitment" basis to purchase
and pay for all shares of Common Stock offered hereby (other than those covered
by the Over-Allotment Option described below), if any such shares are
purchased. The shares are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to approval of certain legal matters by counsel and to certain other
conditions.
Through the Representative, the several Underwriters have advised the
Company that they propose to offer the shares of Common Stock to the public at
the price set forth on the cover page of this Prospectus and the Underwriters
may allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") concessions, not in excess of $---- per
share, of which not in excess of $---- per share may be reallowed to other
dealers who are members of the NASD. After the commencement of the Offering,
the public offering price, concessions and reallowance may be changed. The
Representative has informed that Company that it does not expect any sales of
the shares of Common Stock offered hereby to be made to discretionary accounts
of the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 225,000 additional
shares of Common Stock, at the initial public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. Such option may
be exercised in whole or, from time to time, in part, to purchase additional
shares solely for the purpose of covering over-allotments, if any, incurred in
connection with the sale of the shares offered hereby.
The Company has agreed to pay to Commonwealth individually, and not as
Representative of the Underwriters, a non-accountable expense allowance in the
amount of 1.5% of the gross proceeds of the Offering, including the
Over-Allotment Option, $50,000 of which has been paid to date. The Company
shall bear all fees and expenses incurred by the Company in connection with
qualifying the shares of Common Stock offered hereby for sale under the laws of
such states as the Representative may designate, including expenses of counsel
retained for such purposes by the Representative.
In addition, the Company has agreed to pay to Commonwealth individually,
and not as Representative of the Underwriters, a corporate advisory fee equal
to 1.5% of the gross proceeds of the Offering (including any shares purchased
pursuant to the Underwriters' Over-Allotment Option) as reimbursement for
Commonwealth's advisory services, which is payable at the closing of the
Offering.
The Company has agreed to sell to the Representative and its designees for
an aggregate price of $150, the warrants ("Representative's Warrants") to
purchase up to 150,000 shares of Common Stock at an exercise price per share
equal to 160% of the initial public offering price per share of Common Stock
offered hereby. The Representative's Warrants may not be transferred for one
year from the date of this Prospectus, except to the officers or partners of
the Representative and are exercisable during the four-year period commencing
one year from
42
<PAGE>
the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant
Exercise Term, the holders of the Representative's Warrants are given, at
nominal cost, the opportunity to profit from a rise in the market price of the
Company's Common Stock. To the extent that the Representative's Warrants are
exercised or exchanged, dilution to the interests of the Company's stockholders
will occur. Further, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holders of the
Representative's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in the Representative's
Warrants. Any profit realized by the Representative on the sale of the
Representative's Warrants or the underlying shares of Common Stock may be
deemed additional underwriting compensation. Subject to certain limitations and
exclusions, the Company has agreed to register the Representative's Warrants
and the underlying shares of Common Stock under the Securities Act on one
occasion during the four year period ending five years from the date of this
Prospectus and to include such Representative's Warrants and shares in any
appropriate Registration Statement that is filed by the Company during the
seven years following the date of this Prospectus. The Representative's
Warrants include a provision permitting the holders to elect a "cashless
exercise" whereby the holders may exchange, in lieu of cash, such number of
shares issuable upon exercise of the Representative's Warrants equal in value
to the aggregate exercise price.
The Company and its officers, directors, stockholders and holders of any
options, warrants or other securities convertible into, or exercisable for,
shares of Common Stock, have agreed that they will not, directly or indirectly,
offer, sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of any shares of Common Stock or other capital stock
of the Company, or any securities convertible into or exchangeable for any
shares of Common Stock or other capital stock of the Company for a period of
one year commencing upon the date of this Prospectus, without the prior written
consent of Commonwealth, on behalf of the Underwriters.
The Underwriting Agreement provides for reciprocal indemnification and
contribution between the Company and the Underwriters against certain civil
liabilities in connection with the Registration Statement of which this
Prospectus forms a part, including liabilities under the Securities Act.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be
determined by negotiations between the Company and the Representative. Among
the factors considered in determining the initial public offering price are the
history of, and the prospects for, the Company's business and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for earnings of the Company, the present
state of the Company's development, the general condition of the securities
market at the time of the Offering and the market prices and earnings of
similar securities of comparable companies at the time of the Offering and
prevailing market and economic conditions.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New
York. Certain legal matters in connection with the Offering will be passed upon
for the Underwriters by Todtman, Young, Nachamie, Hendler & Spizz, P.C., New
York, New York.
EXPERTS
The Consolidated Financial Statements of SysComm International Corporation
and its subsidiaries included in this prospectus and the related financial
statement schedules included elsewhere in the Registration Statement have been
audited by Albrecht, Viggiano, Zureck & Company, P.C., independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement, and are included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the
43
<PAGE>
shares of Common Stock offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511 or Seven World Trade Center, New York, New York
10048. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission in Washington, D.C. 20549.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company; the address of such site is http://www.sec.gov.
44
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
INDEPENDENT AUDITORS' REPORT ................................................................ F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1995 and 1996 and March 31, 1997
(unaudited)............................................................................ F-3
Consolidated Statements of Operations for the Years Ended September 30, 1994, 1995, and
1996 and the Six Months Ended March 31, 1996 (unaudited) and 1997 (unaudited) ............ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1994,
1995, and 1996 and the Six Months Ended March 31, 1997 (unaudited) ....................... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1994, 1995, and
1996 and the Six Months Ended March 31, 1996 (unaudited) and 1997 (unaudited) ............ F-6
Notes to Consolidated Financial Statements .............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
SysComm International Corporation and Subsidiaries
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of SysComm
International Corporation and Subsidiaries as of September 30, 1995 and 1996
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, 1996. 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 Subsidiaries as of September 30, 1995 and 1996
and the results of its operations and its cash flows for each of the years in
the three-year period ended September 30, 1996, in conformity with generally
accepted accounting principles.
ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
November 1, 1996, except as to
Note 14 which is as of April 21, 1997
and Note 15 which is as of
May 29, 1997
F-2
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
----------------------------------- March 31,
1995 1996 1997
---------------- ---------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .............................. $ 1,064,949 $ 1,180,680 $ 672,227
Accounts receivable, net .............................. 10,343,186 21,012,242 13,834,592
Note receivable ....................................... 21,939 -0- -0-
Inventory ............................................. 5,976,192 8,936,845 8,703,014
Prepaid expenses ....................................... 66,598 43,207 210,708
Investments .......................................... 412,500 206,250 206,400
------------- ------------- -------------
Total Current Assets .............................. 17,885,364 31,379,224 23,626,941
Property, Plant and Equipment, Net ..................... 399,708 539,174 723,148
Other Assets ............................................. 186,587 184,159 193,880
------------- ------------- -------------
Total Assets ....................................... $ 18,471,659 $ 32,102,557 $ 24,543,969
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Supplier credit facility .............................. $ 10,797,111 $ 12,483,391 $ 6,867,271
Accounts payable and accrued liabilities ............... 5,194,454 14,440,421 12,384,282
Current portion of long-term liabilities ............... -0- 26,626 40,669
Income taxes payable ................................. 23,053 1,069,197 100,495
Deferred income taxes ................................. 101,157 17,044 17,104
------------- ------------- -------------
Total Current Liabilities ........................... 16,115,775 28,036,679 19,409,821
Long-Term Liabilities .................................... -0- 67,291 85,156
------------- ------------- -------------
Total Liabilities ................................. 16,115,775 28,103,970 19,494,977
------------- ------------- -------------
Commitments and Contingencies
Stockholders' Equity
Common stock; $.01 par value; 5,000,000
shares authorized; 3,632,200 shares issued;
3,170,540 shares outstanding ........................ 36,322 36,322 36,322
Additional paid-in capital ........................... 138,143 138,143 138,143
Unrealized gain (loss) on available-for-sale securities (720,000) -0- 90
Retained earnings .................................... 3,043,589 3,966,292 5,016,607
Less: Treasury stock (at cost) -- 461,660 shares ...... (142,170) (142,170) (142,170)
------------- ------------- -------------
Total Stockholders' Equity ........................ 2,355,884 3,998,587 5,048,992
------------- ------------- -------------
Total Liabilities and Stockholders' Equity ......... $ 18,471,659 $ 32,102,557 $ 24,543,969
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
---------------------------------------------- -----------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales ........................... $ 45,459,575 $ 55,195,507 $ 98,446,698 $ 38,042,823 $ 39,158,875
Cost of Sales ........................ 40,796,425 49,441,544 89,025,331 34,159,227 33,890,028
------------- ------------- ------------- ------------- -------------
Gross Profit ..................... 4,663,150 5,753,963 9,421,367 3,883,596 5,268,847
Selling and Administrative Expenses 3,406,316 4,079,184 5,028,812 2,382,727 2,957,149
------------- ------------- ------------- ------------- -------------
Income from Operations ......... 1,256,834 1,674,779 4,392,555 1,500,869 2,311,698
------------- ------------- ------------- ------------- -------------
Other Income (Expense)
Interest expense .................. (726,367) (1,211,727) (1,391,452) (633,716) (552,143)
Interest income ..................... 12,589 4,411 585 523 236
Other income ........................ 39,630 37,126 63,151 7,964 57,324
Realized loss on available-for-sale
securities ........................ -0- -0- (1,406,250) -0- -0-
------------- ------------- ------------- ------------- -------------
Total Other Expense ............ (674,148) (1,170,190) (2,733,966) (625,229) (494,583)
------------- ------------- ------------- ------------- -------------
Income from Continuing
Operations Before Income
Taxes ........................ 582,686 504,589 1,658,589 875,640 1,817,115
Provision for Income Taxes ......... 242,889 223,769 735,886 371,000 766,800
------------- ------------- ------------- ------------- -------------
Income from Continuing
Operations .................. 339,797 280,820 922,703 504,640 1,050,315
Discontinued Operations
Income from sale of subsidiary ...... 1,485,698 -0- -0- -0- -0-
------------- ------------- ------------- ------------- -------------
Net Income ..................... $ 1,825,495 $ 280,820 $ 922,703 $ 504,640 $ 1,050,315
============= ============= ============= ============= =============
Net Income Per Common Share
Continuing Operations ............... $ .10 $ .08 $ .25 $ .14 $ .29
Discontinued Operations ............ .43 -0- -0- -0- -0-
------------- ------------- ------------- ------------- -------------
Net Income per Common Share $ .53 $ .08 $ .25 $ .14 $ .29
============= ============= ============= ============= =============
Weighted Average Number of Common
Shares Outstanding .................. 3,448,900 3,614,040 3,677,290 3,686,040 3,668,540
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------------------ Paid-In -------------------------
Shares Amount Capital Shares Amount
----------- ---------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C>
Balance as of September 30, 1993 ... 3,368,164 $ 36,322 $ 138,143 264,036 $ (72,440)
Net Income ........................
Purchase of Common Stock ............ (197,624) 197,624 (69,730)
Unrealized Loss on Available-for-
Sale Securities .....................
--------- -------- --------- ------- ---------
Balance as of September 30, 1994 ... 3,170,540 36,322 138,143 461,660 (142,170)
Net Income ........................
Unrealized Loss on Available-for-
Sale Securities ..................
--------- -------- --------- ------- ---------
Balance as of September 30, 1995 . 3,170,540 36,322 138,143 461,660 (142,170)
Net Income ...........................
Unrealized Loss on Available-for-
Sale Securities .....................
Realized Loss on Available-for-Sale
Securities ........................
--------- -------- --------- ------- ---------
Balance as of September 30, 1996 ... 3,170,540 36,322 138,143 461,660 (142,170)
Net Income (unaudited) ...............
Unrealized Gain on Available-for-
Sale Securities (unaudited) ......
--------- -------- --------- ------- ---------
Balance as of March 31, 1997
(unaudited) ........................ 3,170,540 $ 36,322 $ 138,143 461,660 $(142,170)
========== ========= ========== ======== =========
<PAGE>
<CAPTION>
Unrealized Total
Gain (Loss) Retained Stockholders'
on Securities Earnings Equity
-------------- ------------- --------------
<S> <C> <C> <C>
Balance as of September 30, 1993 ... $ 937,274 $ 1,039,299
Net Income ........................ 1,825,495 1,825,495
Purchase of Common Stock ............ (69,730)
Unrealized Loss on Available-for-
Sale Securities ..................... $ (382,500) (382,500)
------------ ---------- ------------
Balance as of September 30, 1994 ... (382,500) 2,762,769 2,412,564
Net Income ........................ 280,820 280,820
Unrealized Loss on Available-for-
Sale Securities .................. (337,500) (337,500)
------------ ---------- ------------
Balance as of September 30, 1995 . (720,000) 3,043,589 2,355,884
Net Income ........................... 922,703 922,703
Unrealized Loss on Available-for-
Sale Securities ..................... (123,750) (123,750)
Realized Loss on Available-for-Sale
Securities ........................ 843,750 843,750
------------ ---------- ------------
Balance as of September 30, 1996 ... -0- 3,966,292 3,998,587
Net Income (unaudited) ............... 1,050,315 1,050,315
Unrealized Gain on Available-for-
Sale Securities (unaudited) ...... 90 90
------------ ---------- ------------
Balance as of March 31, 1997
(unaudited) ........................ $ 90 $5,016,607 $ 5,048,992
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1994 1995 1996
--------------- ------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income ............................................. $ 1,825,495 $ 280,820 $ 922,703
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization ........................ 111,412 134,139 149,090
Income from sale of subsidiary ........................ (1,485,698) -0- -0-
Disposition of accumulated deficit of subsidiary ...... 514,198 -0- -0-
Deferred tax (benefit) expense ........................ 35,115 (5,442) (1,614)
(Gain) loss on disposition of fixed assets ............ 2,701 114 (23)
Realized loss on available-for-sale securities ......... -0- -0- 843,750
Changes in assets and liabilities:
Accounts receivable ................................. (592,271) (585,610) (10,669,056)
Note receivable ....................................... (40,217) 41,705 21,939
Inventory ............................................. (55,516) 93,808 (2,960,653)
Prepaid expenses and other assets ..................... (37,028) (55,666) 25,819
Accounts payable and accrued liabilities ............ 2,465,743 (287,525) 9,245,967
Income taxes payable ................................. 156,237 (164,451) 1,046,144
Deferred revenue .................................... (89,517) -0- -0-
------------ ------------ -------------
Net Cash Provided (Used) by Operating
Activities .......................................... 2,810,654 (548,108) (1,375,934)
------------ ------------ -------------
Cash Flows From Investing Activities
Purchase of fixed assets ................................. (291,387) (92,697) (235,388)
Proceeds from disposition of fixed assets ............... 10,000 400 450
------------ ------------ -------------
Net Cash Used in Investing Activities ............... (281,387) (92,297) (234,938)
------------ ------------ -------------
Cash Flows From Financing Activities
Net proceeds from (payments under) supplier credit
facility ............................................. (1,436,428) 343,000 1,686,280
Net proceeds from long-term debt ........................ -0- -0- 58,229
Payments of long-term liabilities ..................... -0- -0- (17,906)
Purchase of treasury stock .............................. (69,730) -0- -0-
------------ ------------ -------------
Net Cash Provided (Used) by Financing
Activities .......................................... (1,506,158) 343,000 1,726,603
------------ ------------ -------------
Net Increase (Decrease) in Cash and Cash
Equivalents ....................................... 1,023,109 (297,405) 115,731
Cash and Cash Equivalents at Beginning of Period ......... 339,245 1,362,354 1,064,949
------------ ------------ -------------
Cash and Cash Equivalents at End of Period ............... $ 1,362,354 $ 1,064,949 $ 1,180,680
============ ============ =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes .......................................... $ 63,709 $ 219,543 $ 248,606
Interest ............................................. 732,864 1,211,727 1,391,452
Supplemental Schedules of Noncash Investing and
Financing Activities
Acquisition of equipment:
Cost of equipment .................................... $ -0- $ -0- $ 53,594
Less: Equipment financed .............................. -0- -0- (53,594)
------------ ------------ -------------
Cash Paid for Capital Expenditures .................. $ -0- $ -0- $ -0-
============ ============ =============
<PAGE>
<CAPTION>
Six Months Ended
March 31,
--------------------------------
1996 1997
--------------- --------------
(unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net income ............................................. $ 504,640 $ 1,050,315
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization ........................ 67,781 81,437
Income from sale of subsidiary ........................ -0- -0-
Disposition of accumulated deficit of subsidiary ...... -0- -0-
Deferred tax (benefit) expense ........................ -0- -0-
(Gain) loss on disposition of fixed assets ............ -0- (2,570)
Realized loss on available-for-sale securities ......... -0- -0-
Changes in assets and liabilities:
Accounts receivable ................................. (6,538,994) 7,177,650
Note receivable ....................................... 20,621 -0-
Inventory ............................................. (554,133) 233,831
Prepaid expenses and other assets ..................... 40,579 (177,222)
Accounts payable and accrued liabilities ............ (1,733,399) (2,056,139)
Income taxes payable ................................. 225,982 (968,702)
Deferred revenue .................................... -0- -0-
------------ ------------
Net Cash Provided (Used) by Operating
Activities .......................................... (7,966,923) 5,338,600
------------ ------------
Cash Flows From Investing Activities
Purchase of fixed assets ................................. (58,371) (221,016)
Proceeds from disposition of fixed assets ............... -0- 7,300
------------ ------------
Net Cash Used in Investing Activities ............... (58,371) (213,716)
------------ ------------
Cash Flows From Financing Activities
Net proceeds from (payments under) supplier credit
facility ............................................. 8,313,021 (5,616,120)
Net proceeds from long-term debt ........................ -0- -0-
Payments of long-term liabilities ..................... (4,954) (17,217)
Purchase of treasury stock .............................. -0- -0-
------------ ------------
Net Cash Provided (Used) by Financing
Activities .......................................... 8,308,067 (5,633,337)
------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents ....................................... 282,773 (508,453)
Cash and Cash Equivalents at Beginning of Period ......... 1,064,949 1,180,680
------------ ------------
Cash and Cash Equivalents at End of Period ............... $ 1,347,722 $ 672,227
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes .......................................... $ 77,114 $ 1,735,528
Interest ............................................. 633,716 552,143
Supplemental Schedules of Noncash Investing and
Financing Activities
Acquisition of equipment:
Cost of equipment .................................... $ 78,472 $ 49,125
Less: Equipment financed .............................. (78,472) (49,125)
------------ ------------
Cash Paid for Capital Expenditures .................. $ -0- $ -0-
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited)
Note 1 -- Summary of Significant Accounting Policies
Nature of Operations
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, Massachusetts, and Connecticut. The Company is a supplier
and systems integrator of a broad range of computer and related products.
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.
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 $50,000, $63,846, and $114,127 as
of September 30, 1995, September 30, 1996, and March 31, 1997, respectively.
The allowance for sales returns was $125,000 as of September 30, 1995 and
$37,389 as of September 30, 1996 and March 31, 1997.
Inventory
Inventory consists principally of computer hardware and software, and is
valued at the lower of cost (first-in, first-out) or market.
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-7
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) -- (Continued)
Note 1 -- Summary of Significant Accounting Policies -- (Continued)
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
Estimated
Useful Lives
-------------
Vehicles ..................... 1-5 years
Computer Equipment ......... 5 years
Furniture and Fixtures ...... 7 years
Leasehold Improvements ...... 5 years
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities.
Investments
The Company evaluates its investment policies consistent with Financial
Accounting Standards Board Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("FASB 115"). Accordingly, investment
securities are classified as available-for-sale securities and carried at fair
value, with temporary unrealized gains and losses reported as a separate
component of stockholders' equity. Realized losses are recorded for any decline
in value determined to be other-than-temporary on available-for-sale
securities.
Revenue Recognition
Revenue related to the sales of computer equipment is recorded at the time
of shipment. Service revenue and costs are recognized when services are
provided.
Net Income Per Common Share
Net income per common share is based on the weighted average number of
shares of common stock and dilutive common share equivalents outstanding during
each period. Dilutive common share equivalents include stock options.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
liquid instruments purchased with a maturity of three months or less to be cash
equivalents.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current financial statement presentation.
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-8
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) -- (Continued)
Note 1 -- Summary of Significant Accounting Policies -- (Continued)
Unaudited Interim Financial Statements
In the opinion of management, the unaudited consolidated financial
statements for the six months ended March 31, 1996 and 1997 are presented on a
basis consistent with the audited consolidated financial statements and reflect
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the results thereof. The results of operations for the
six months ended March 31, 1997, are not necessarily indicative of the results
to be expected for the year ending September 30, 1997.
Recently Issued Pronouncement
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
issued in February 1997, establishes standards for computing and presenting
earnings per share and is effective for periods ending after December 15, 1997.
This standard requires the Company to present basic earnings per share and
diluted earnings per share. The impact of adopting this standard has not yet
been determined.
Note 2 -- Investments
Investments consist of the following:
<TABLE>
<CAPTION>
September 30,
------------------------- March 31,
1995 1996 1997
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Ameriquest Technologies, Inc.
(Formerly CMS Enhancements, Inc.)
Number of Shares ............... 300,000 300,000 300,000
Fair Value ..................... $ 412,500 $ 206,250 $ 206,400
Cost ........................... $1,612,500 $1,612,500 $1,612,500
</TABLE>
Marketable equity securities have been categorized as available for sale
and are stated at fair value. At September 30, 1995, an unrealized loss of
$1,200,000 is shown, net of deferred taxes of $480,000 as a separate component
of stockholders' equity until realized. The increase in the net unrealized loss
for the years ended September 30, 1995 and 1996 totaled $337,500 and $123,750,
respectively, and $67,500 for the six months ended March 31, 1996. As further
discussed in Note 15, the Company recorded a realized loss on available-for-
sale securities of $1,406,250 for the year ended September 30, 1996. The net
unrealized gain for the six months ended March 31, 1997, was $90.
Note 3 -- Property, Plant and Equipment
Property, plant and equipment is set forth below.
<TABLE>
<CAPTION>
September 30,
----------------------------- March 31,
1995 1996 1997
------------- ------------- -----------
(unaudited)
<S> <C> <C> <C>
Vehicles ................................. $ 33,182 $ 93,412 $ 119,159
Computer equipment ..................... 615,786 733,297 886,195
Furniture and fixtures .................. 267,090 360,106 442,145
Leasehold improvements .................. 76,017 93,243 93,243
---------- ---------- ----------
992,075 1,280,058 1,540,742
Accumulated depreciation ............... (592,367) (740,884) (817,594)
---------- ---------- ----------
Property, plant and equipment, net ...... $ 399,708 $ 539,174 $ 723,148
---------- ---------- ----------
</TABLE>
F-9
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) -- (Continued)
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, 1995,
September 30, 1996, and March 31, 1997, amounted to $137,546, $145,046, and
$145,046, respectively.
Note 5 -- Financing Arrangements
The Company entered into a formal credit agreement with the financing
subsidiary of its major supplier. Under the credit facility, the Company may
borrow up to 85% of receivables due within 90 days and up to 100% of eligible
inventory, to a maximum of $27,500,000. The agreement, which expires on
September 30, 1997, is subject to temporary increases, thereby increasing the
line of credit to $41,250,000 during certain periods.
As of September 30, 1995, September 30, 1996 and March 31, 1997,
borrowings outstanding under this facility were $10,591,511, $12,483,391, and
$6,867,271, respectively. For the years ended September 30, 1995 and 1996, and
for the six months ended March 31, 1996 and 1997, interest on the outstanding
borrowings was payable monthly at prime plus 1.625%, 1.375%, 1.625% and 1.375%,
respectively, or prime plus 6.5%, should the Company fail to meet certain
collateral requirements. Interest costs included in interest expense for the
years ended September 30, 1994, 1995, and 1996 totaled $726,367, $1,188,525,
and $1,381,373, respectively. Interest costs included in interest expense for
the six months ended March 31, 1996 and 1997, totaled $633,716 and $552,143,
respectively.
The credit facility contains certain financial covenants and is personally
guaranteed by the principal stockholder/officer of the Company. Additionally,
$4,772,075, $12,560,441, and $10,082,368, were included in accounts payable at
September 30, 1995, September 30, 1996, and March 31, 1997, respectively, and
are included against the maximum credit available.
F-10
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) -- (Continued)
Note 6 -- Long-Term Liabilities
Long-term liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
--------------- ------------
(unaudited)
<S> <C> <C>
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 pay-
ment due October 1999. $ -0- $ 22,470
Collateralized by a lien on a Company automobile; payable in 36 monthly
installments of $1,194 including interest of 9.9% per annum; final pay-
ment due December 1998. 27,832 21,928
Collateralized by a lien on a Company automobile; payable in 36 monthly
installments of $678 including interest of 8.9% per annum; final pay-
ment due November 1998. 16,480 13,066
AT&T Credit Corp.
Capital lease collateralized by a lien on the Company's phone system;
payable in monthly installments of $654 including interest of 14.446%
per annum; final payment due May 2001. .............................. 29,497 27,105
Capital lease collateralized by a lien on the Company's phone system;
payable in monthly installments of $573 including interest of 15.089%
per annum; final payment due December 2000. ........................... 20,108 18,256
Capital lease collateralized by a lien on the Company's phone system;
payable in monthly installments of $494 including interest of 9.9% per
annum; final payment due February 2002. .............................. -0- 23,000
--------- ---------
93,917 125,825
Less: Current maturities ............................................. (26,626) (40,669)
--------- ---------
$ 67,291 $ 85,156
========= =========
</TABLE>
Maturities of long-term liabilities as of March 31, 1997 are as follows:
1998 ...... $ 40,669
1999 ...... 38,958
2000 ...... 22,010
2001 ...... 17,673
2002 ...... 6,515
---------
$125,825
=========
Note 7 -- Capital Leases
As further discussed in Note 6, the Company began leasing telephone
equipment in December 1995. As of September 30, 1996 and March 31, 1997, the
gross assets capitalized under such leases totaled $54,486 and $77,980,
respectively, and the accumulated amortization totaled $3,892 and $7,934,
respectively. The amortization expense for the year ended September 30, 1996,
of $3,892 is included in depreciation expense. Amortization expense included in
depreciation expense for the six months ended March 31, 1997 is $4,042.
F-11
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) -- (Continued)
Note 8 -- Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
----------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal ........................ $ 145,859 $ 148,504 $ 956,000 $ 262,000 $ 566,100
State ........................... 61,915 80,707 344,000 109,000 200,700
---------- ---------- ---------- ---------- ----------
Total Current ............ 207,774 229,211 1,300,000 371,000 766,800
---------- ---------- ---------- ---------- ----------
Deferred:
Federal ........................ 29,848 (4,626) (479,642) -0- -0-
State ........................ 5,267 (816) (84,472) -0- -0-
---------- ---------- ---------- ---------- ----------
Total Deferred ............ 35,115 (5,442) (564,114) -0- -0-
---------- ---------- ---------- ---------- ----------
Provision for Income Taxes ...... $ 242,889 $ 223,769 $ 735,886 $ 371,000 $ 766,800
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
The difference between the provision for income taxes at the Company's
effective income tax rate and the federal statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ---------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income taxes at statutory rate ............ $ 198,113 $ 171,560 $563,920 $ 297,718 $ 617,819
State taxes, net of federal benefit ...... 44,340 52,728 122,735 71,940 132,462
Other .................................... 436 (519) 49,231 1,342 16,519
---------- ---------- --------- ---------- ----------
Provision for Income Taxes ............... $ 242,889 $ 223,769 $735,886 $ 371,000 $ 766,800
========== ========== ========= ========== ==========
</TABLE>
The tax effects of temporary differences giving rise to significant
portions of deferred taxes are as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------- March 31,
1995 1996 1997
------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Allowance for doubtful accounts ...... $ 20,000 $ 25,538 $ 30,000
Inventory capitalization ............ 21,753 15,742 16,000
Investments ........................... (161,000) (78,500) (78,560)
Depreciation ........................ -0- 5,840 5,360
Other .............................. 18,090 14,336 10,096
------------ ----------- -----------
Net deferred tax liability ............ $ (101,157) $ (17,044) $ (17,104)
============ =========== ===========
</TABLE>
Note 9 -- Stock Option Plan
On July 29, 1988, the stockholders approved a stock option plan. In
connection therewith, 1,000,000 shares of common stock are reserved for
issuance pursuant to options that may be granted under the plan through May 5,
1998. The options vest straight-line over a three-year period following the
date of grant.
F-12
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) -- (Continued)
Note 9 -- Stock Option Plan -- (Continued)
A summary of stock option activity related to the Company's plan is as
follows:
<TABLE>
<CAPTION>
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Period Period Period Outstanding Exercisable
------------- --------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended September 30, 1994
Number of shares ............... 0 302,000 0 0 302,000 0
Weighted average exercise price
per share ..................... 0 $ .95 0 0 $ .95 0
Year ended September 30, 1995
Number of shares ............ 302,000 768,000 0 502,000 568,000 0
Weighted average exercise price
per share ..................... $ .95 $ .72 0 $ .90 $ .69 0
Year ended September 30, 1996
Number of shares ............... 568,000 0 0 70,000 498,000 166,000
Weighted average exercise price
per share .................. $ .69 0 0 $ .68 $ .69 $ .69
Six months ended March 31, 1997
Number of shares ............ 498,000 0 0 0 498,000 166,000
Weighted average exercise price
per share .................. $ .69 0 0 0 $ .69 $ .69
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation ("FASB 123"), which is
effective for the Company's year beginning October 1, 1996. As permitted under
FASB 123, the Company has elected not to adopt the fair value based method of
accounting for its stock-based compensation plans, but will continue to account
for such compensation under the provisions of Accounting Principles Board
Opinion No. 25. FASB 123 requires pro forma disclosures of the effects of all
awards granted in years that begin after December 15, 1994, which would be the
Company's year beginning October 1, 1995 and ending September 30, 1996. There
is no impact of FASB 123 on the Company's operating results or financial
position, since the Company has not granted any options since June 30, 1995.
The weighted average per share fair value of the options granted during
the years ended September 30, 1994 and 1995 was estimated as $.13 and $.20,
respectively, on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions:
1994 1995
------------ ----------------
Risk-free interest rates ...... 6.53% 5.92-7.84%
Expected option lives ......... 4.33 years 3.17-3.75 years
Expected volatilities ......... 21.94% 22.03-23.87%
Expected dividend yields ...... 0% 0%
The weighted average remaining contractual life of the options outstanding
at March 31, 1997 is 1.417 years. The exercise price of such options range from
$.68 to $.75 per share.
F-13
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) -- (Continued)
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, 1994, 1995, and 1996, the Company
incurred 401(k) costs totaling $100, $19,148, and $31,738, respectively. During
the six months ended March 31, 1997, the Company's 401(k) costs totaled $7,181.
Note 11 -- Sale of Subsidiary
Effective November 30, 1993, the Company exchanged 100% of the shares of a
subsidiary (Romel Technology, Inc. (d/b/a MSG)) for 300,000 shares of CMS
Enhancements, Inc. Such transaction qualified as a tax-
free reorganization under Section 368 of the Internal Revenue Code. The Company
realized a gain as a result of this transaction of $1,485,698, which is net of
deferred income taxes of $641,000. Included in the consolidated statement of
operations for the year ended September 30, 1994, are net sales of $4,127,768,
cost of sales of $3,775,372, and an operating loss of $22,432.
Note 12 -- 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. One customer accounted for 22%
of sales for the year ended September 30, 1994, and 31% of accounts receivable
as of September 30, 1994. In comparison, two customers accounted for 23% and
14%, respectively, of sales for the year ended September 30, 1995. One of these
customers accounted for 10% of accounts receivable as of September 30, 1995.
Two customers comprised 16% and 19%, respectively, of sales for the year ended
September 30, 1996. One of these customers accounted for 33% of accounts
receivable as of September 30, 1996. Two customers accounted for 26% and 13%,
respectively, of sales during the six months ended March 31, 1996. No single
customer comprised more than 10% of sales during the six months ended March 31,
1997. At March 31, 1997, one customer accounted for 15% of accounts receivable.
Purchases
The Company purchases a majority of goods from International Business
Machines Corporation, whose subsidiary represents the Company's major lending
source. The loss of this supplier could materially affect the Company.
Purchases from this supplier represented 70% of total purchases for each of the
years ended September 30, 1994 and 1995 and approximately 90% of total
purchases for the year ended September 30, 1996 and the six months ended March
31, 1996 and 1997.
F-14
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) -- (Continued)
Note 13 -- Commitments and Contingencies
The Company has operating leases on real property and equipment expiring
through the year 2002. In addition to fixed rentals, the real property leases
have escalation clauses that require the Company to pay a percentage of common
area maintenance, real estate taxes, and insurance.
Rent expense and other charges totaled $173,051, $255,307, and $253,412
for years ended September 30, 1994, 1995, and 1996, and $128,357 and $131,919
for the six months ended March 31, 1996 and 1997, respectively.
As of March 31, 1997, the future minimum rental commitments for the twelve
months ending March 31, are as follows:
1998 ...... $ 276,657
1999 ...... 254,748
2000 ...... 175,488
2001 ...... 130,704
2002 ...... 119,812
----------
$ 957,409
==========
The Company is a defendant in a lawsuit which alleges wrongful termination
of employment. The action has been in the discovery stage since 1992. While the
results of litigation cannot be predicted with any certainty, management
believes that the final outcome of such litigation will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows. Changes in assumptions, as well as actual experience,
could cause the estimates made by management to be altered.
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 must purchase a sufficient number of
Base System Units and Approval Components to enable it to assemble at least 20%
of the Company's actual sales volume of PCs.
Note 14 -- Subsequent Events
In March 1997, the Company and an underwriter agreed to a proposed public
offering of the Company's common stock. In connection with the proposed public
offering, 150,000 warrants will be granted to the underwriter. The fair value
is estimated as $.55 per warrant using the Black-Scholes pricing model. The
fair value of these warrants will be offset against the offering proceeds at
the time of the initial public offering.
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.
Note 15 -- Restatement of Financial Statements
The financial statements for the fiscal year ended September 30, 1996
originally reflected an unrealized loss on available-for-sale securities as a
separate component of stockholders' equity. The financial statements for the
year ended September 30, 1996 have been restated to reflect a realized loss on
available-for-sale securities, since the decline in value was determined to be
other-than-temporary as of that date. The effect of this adjustment was to
reduce retained earnings and unrealized loss on available-for-sale securities
as of September 30, 1996, and net income for the year then ended by $843,750,
which is net of income taxes in the amount of $562,500. In addition, earnings
per common share was reduced from $0.48 to $0.25 for the year ended September
30, 1996.
F-15
<PAGE>
================================================================================
No person is authorized in connection with any offering made hereby to give any
information or to make any representation not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any security other than the shares of Common Stock offered hereby, nor
does it constitute an offer to sell or a solicitation of any offer to buy any
of the securities offered hereby to any person in any jurisdiction in which it
is unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstance create any
implication that the information contained herein is correct as of any date
subsequent to the date hereof or that there has been no change in the affairs
of the Company since such date.
-----------------------------------
TABLE OF CONTENTS
Page
-----
Prospectus Summary ........................ 3
Risk Factors .............................. 7
Use of Proceeds ........................... 14
Dividend Policy ........................... 14
Dilution ................................. 15
Capitalization ........................... 16
Selected Consolidated Financial Data ...... 17
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .............................. 18
Business ................................. 22
Management ................................. 31
Certain Transactions ..................... 37
Principal Stockholders ..................... 38
Description of Capital Stock ............... 39
Shares Eligible for Future Sale ............ 41
Underwriting .............................. 42
Legal Matters .............................. 43
Experts .................................... 43
Additional Information ..................... 43
Index to Financial Statements ............ F-1
================================================================================
<PAGE>
================================================================================
1,500,000 Shares
SYSCOMM INTERNATIONAL
CORPORATION
Common Stock
-----------
PROSPECTUS
-----------
Commonwealth Associates
_____________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts. All of the amounts shown are
estimated except the Securities and Exchange Commission registration fee and
the NASD filing fee.
SEC registration fee .................. $ 3,275.00
NASDAQ listing fee ..................... 28,853.00
NASD filing fee ........................ 2,125.60
Printing and engraving expenses ...... 100,000.00
Legal fees and expenses ............... 200,000.00
Accounting fees and expenses ......... 60,000.00
Transfer agent and registrar fee ...... 20,000.00
Miscellaneous ........................ 101,729.24
------------
Total .............................. $515,982.24
============
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers
provided that this provision shall not eliminate or limit the liability of a
directors (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) arising
under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the Company'
By-Laws, any agreement, vote of shareholders or otherwise.
The Company's Certificate of Incorporation eliminates the personal
liability of directors to the fullest extent permitted by Section 102(b)(7) of
the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such
persons in their official capacities if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonably cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the applicable provisions, the Company has been informed that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Exhibits and Financial Statement Schedules
(a) Exhibits
#1.1 Form of Underwriting Agreement
#1.2 Form of Financial and Advisory Consulting Agreement
#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
#4.2 Form of Representative's Warrant
#5.1 Opinion and Consent of Ruskin, Moscou, Evans & Faltischek, P.C.
II-1
<PAGE>
<TABLE>
<S> <C>
#10.1 1988 Incentive Stock Option Plan
#10.2 Inventory and Working Capital Financing Agreement, dated September 26, 1996, and amendment
thereto, dated October 31, 1996
#10.3 Form of Employment Agreement between the Company and John H. Spielberger
#10.4 Form of Employment Agreement between the Company and Thomas J. Baehr
#10.5 Form of Employment Agreement between the Company and Dennis R. Wilson
#10.6 Form of Employment Agreement between the Company and Norman Gaffney
#10.7 Agreement for participation in the IBM Business Partner-PC, Authorized Assembler Program
(certain portions of this exhibit has been omitted. Confidential treatment has been
requested with respect to the omitted portions.)
#21.1 Subsidiaries of Registrant
23.1 Consent of Albrecht, Viggiano, Zureck & Company, P.C., Independent Auditors
#23.2 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
#24.1 Power of Attorney (included on signature page)
#27.1 Financial Statement Schedule
#99.1 Valuation and Qualifying Accounts Schedule (with consent)
</TABLE>
- ------------
# Previously filed.
Schedules other than the ones listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes to provide to the
Underwriter, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Act each
Post-Effective Amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein and
the Offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to its Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized, in Hauppauge, New
York, on June 13, 1997.
SYSCOMM INTERNATIONAL CORPORATION
By: /s/ John H. Spielberger
-------------------------------------
John H. Spielberger, President
Dated: June 13, 1997
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Hauppauge, New
York, on June 13, 1997.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------- ----------------------------------------------- -------------
<S> <C> <C>
/s/ John H. Spielberger Chairman of the Board of Directors, President June 13, 1997
- ------------------------- and Chief Executive Officer
John H. Spielberger
/s/ * Vice President and Director June 13, 1997
- -------------------------
Thomas J. Baehr
/s/ * Vice President, Chief Financial Officer, June 13, 1997
- ------------------------- Secretary and Director
Dennis R. Wilson
/s/ * Director June 13, 1997
- -------------------------
Norman Gaffney
/s/ * Director June 13, 1997
- -------------------------
John H. Spielberger
By /s/ John H. Spielberger
- -------------------------
John H. Spielberger
as attorney-in-fact
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- --------- -----------
<S> <C>
#1.1 Form of Underwriting Agreement
#1.2 Form of Financial and Advisory Consulting Agreement
#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
#4.2 Form of Representative's Warrant
#5.1 Opinion and Consent of Ruskin, Moscou, Evans & Faltischek, P.C.
#10.1 1988 Incentive Stock Option Plan
#10.2 Inventory and Working Capital Financing Agreement, dated September 26, 1996, and amendment
thereto, dated October 31, 1996
#10.3 Form of Employment Agreement between the Company and John H. Spielberger
#10.4 Form of Employment Agreement between the Company and Thomas J. Baehr
#10.5 Form of Employment Agreement between the Company and Dennis R. Wilson
#10.6 Form of Employment Agreement between the Company and Norman Gaffney
#10.7 Agreement for participation in the IBM Business Partner-PC, Authorized Assembler Program
(certain portions of this exhibit has been omitted. Confidential treatment has been
requested with respect to the omitted portions.)
#21.1 Subsidiaries of Registrant
23.1 Consent of Albrecht, Viggiano, Zureck & Company, P.C., Independent Auditors
#23.2 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
#24.1 Power of Attorney (included on signature page)
#27.1 Financial Statement Schedule
#99.1 Valuation of Qualifying Accounts Schedule (with consent)
</TABLE>
- ------------
# Previously filed.
<PAGE>
SYSCOMM
INTERNATIONAL CORPORATION
NUMBER SHARES
SIC
COMMON STOCK CUSIP 871942 10 8
Par Value $.01 SEE REVERSE FOR CERTAIN
DEFINITIONS AND ABBREVIATIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
SYSCOMM INTERNATIONAL CORPORATION
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[Corporate Seal]
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER SECRETARY
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - .....Custodian.......
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act..........................
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
| |
|_____________________________________| ________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute
and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated _____________________
________________________________________________________________________
NOTICE: THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
By _____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION,
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS)
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-18.
<PAGE>
To the Board of Directors
SysComm International Corporation and Subsidiaries
Hauppauge, New York
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
June 13, 1997
