Form 10-Q Quarterly Report
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number 0-22693
SYSCOMM INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2889809
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
275 Marcus Blvd.
Hauppauge, N.Y. 11788
(Address of Principal Executive Offices and Zip Code)
(516) 273-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
Number of shares outstanding of the issuer's Common Stock, par value $.01
per share, as of August 8, 1997: 4,555,540 shares.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSCOMM INTERNATIONAL CORPORATION
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
6/30/97 6/30/96 6/30/97 6/30/96
<S> <C> <C> <C> <C>
Net sales $ 24,718,664 $ 33,644,269 $ 63,877,540 $ 71,687,092
Cost of sales 22,101,526 31,147,419 55,991,555 65,306,648
-------------- ------------ ----------- ------------
Gross profit 2,617,138 2,496,850 7,885,985 6,380,444
--------------
Selling & administrative expenses 1,544,756 1,123,525 4,501,904 3,513,221
-------------- ---------- ------------ ----------
Income from operations 1,072,382 1,373,325 3,384,081 2,867,223
-------------- ---------- ------------ ----------
Other income (expenses)
Interest expenses (226,558) (361,504) (778,702) (995,218)
Other 21,723 10,435 79,283 18,922
---------------- ---------- ------------ -----------
Total other expenses (204,835) (351,069) (699,419) (976,296)
--------------- ---------- ------------ -----------
Income from operations before
income taxes 867,547 1,022,256 2,684,662 1,890,927
Provision for income taxes 365,200 475,000 1,132,000 839,927
--------------- ---------- ----------- ----------
Net income $ 502,347 $ 547,256 $ 1,552,662 $ 1,051,000
============== =========== ============= =============
Net income per common share $ 0.14 $ 0.16 $ 0.45 $ 0.32
============== =========== ============= =============
Weighted average number of common
shares outstanding 3,649,042 3,334,880 3,468,229 3,334,880
============== ========== ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1997 September 30, 1996
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 758,438 $ 1,180,680
Accounts receivable, net 19,554,133 21,012,242
Inventory 7,788,675 8,936,845
Other 255,118 249,457
--------------- ---------------
Total current assets 28,356,364 31,379,224
--------------- ---------------
Property, plant and equipment, net 759,333 539,174
Other assets 194,105 184,159
--------------- ---------------
Total assets $ 29,309,802 $ 32,102,557
=============== ===============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Supplier credit facility $ 3,706,271 $ 12,483,391
Accounts payable and accrued liabilities 14,956,926 14,440,421
Income taxes payable 140,945 1,069,197
Other current liabilities 41,686 43,670
--------------- --------------
Total current liabilities 18,845,828 28,036,679
Long-term liabilities 76,839 67,291
--------------- --------------
Total liabilities 18,922,667 28,103,970
--------------- --------------
Stockholders' Equity:
Preferred stock, $.01 par value - -
Common stock, $.01 par value 48,822 36,322
Additional paid-in capital 5,017,779 138,143
Unrealized loss on available-for-
sale securities (56,250)
Retained earnings 5,518,954 3,966,292
Less: Treasury stock (at cost) (142,170) (142,170)
---------------- -------------
Total stockholders' equity 10,387,135 3,998,587
---------------- -------------
Total liabilities and
stockholders' equity $ 29,309,802 $ 32,102,557
================ =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended June 30
1997 1996
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 1,552,662 $ 1,051,000
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 123,107 101,903
Gain on disposition of fixed assets (2,570) - 0 -
Changes in assets and liabilities
Accounts receivable 1,458,109 (23,949,377)
Note receivable - 0 - 21,939
Inventory 1,148,170 (1,822,731)
Prepaid expenses (78,955) 12,473
Other assets (9,946) 13,967
Accounts payable and accrued liabilities 516,505 34,605,541
Income taxes payable (928,252) 644,230
-------------- ------------
Net Cash Provided by Operating Activities 3,778,830 10,678,945
------------- ------------
Cash Flows from Investing Activities
Purchase of fixed assets (298,871) (135,545)
Proceeds from disposition of fixed assets 7,300 - 0 -
-------------- -----------
Net Cash Used in Investing Activities (291,571) (135,545)
------------- -----------
Cash Flows From Financing Activities
Net payments under supplier credit facility (8,777,120) (10,797,111)
Net proceeds from initial public offering of common stock 4,892,136 - 0 -
Payments of long-term liabilities (24,517) (8,651)
--------------- -----------
Net Cash Used by Financing Activities (3,909,501) (10,805,762)
-------------- -----------
Net Decrease in Cash and Cash Equivalents (422,242) (262,362)
Cash and Cash Equivalents at Beginning of Period 1,180,680 1,064,949
-------------- -----------
Cash and Cash Equivalents at End of Period $ 758,438 $ 802,587
============= ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes $ 2,060,279 $ 202,447
Interest 778,702 995,218
Supplemental Schedules of Non-cash investing and
Financing Activities
Acquisition of equipment:
Cost of Equipment $ 79,245 $ 78,472
Less: Equipment financed (79,245) (78,472)
-------------- -----------
Cash Paid for Capital Expenditures $ -0- $ - 0 -
============== ===========
</TABLE>
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements of SysComm International
Corporation (the "Company") are unaudited (except for the balance sheet
information as of September 30, 1996, which is derived from the Company's
audited financial statements) and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for the
interim periods. The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto,
contained in the Company's Prospectus dated June 17, 1997. The results of
operations for the nine months ended June 30, 1997 are not necessarily
indicative of the results for the entire fiscal year ending September 30, 1997,
or any future interim period.
Stockholders' Equity
On June 17, 1997, the Company completed an initial public offering of
1,250,000 shares of the Company's common stock at $5.00 per share. On July 21,
1997, the Company sold an additional 135,000 shares of common stock to its
underwriters at the initial public offering price to cover over-allotments. In
connection with the public offering, 125,000 warrants were granted to the
Company's representative underwriter. The fair value was estimated at $.52 per
warrant using the Black-Scholes pricing model. The fair value of these warrants
were offset against the offering proceeds at the time of the initial public
offering.
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 Company
has no current plans to issue any preferred stock. The preferred stock's rights,
preferences and characteristics will be determined by the Board of Directors at
such time the preferred stock is issued.
On March 31, 1997, the Company effected a two-for-one split of common
stock. All references in the accompanying condensed consolidated financial
statements and notes 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.
<PAGE>
Commitments and Contingencies
Employment Agreements
Effective June 17, 1997, the Company entered into two-year employment
agreements with four senior executives. The employment agreements include
compensation plans for fiscal 1997 as follows: John H. Spielberger will receive
a base salary of $140,000 plus a bonus of 3% of all pre-tax earnings of the
Company; Thomas J. Baehr will receive $150,000 plus a bonus of 3.5% of all
pre-tax earnings of Information Technology Services, Inc. ("InfoTech"), the
Company's wholly-owned subsidiary, Dennis R. Wilson will receive $120,000 plus a
discretionary bonus determined by the Compensation Committee; and Norman M.
Gaffney will receive $125,000 plus a bonus of 1.5% of the gross profit dollars
of InfoTech. These annual performance incentive plans will be reviewed during
the fiscal year and new incentive plans will be implemented by the Company's
Compensation Committee for the fiscal year 1998, and thereafter as applicable.
Litigation
The Company is a defendant in a lawsuit which alleges wrongful termination
of employment. The action has been in the discovery state 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.
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
Results of Operations:
Three Months Ended June 30, 1997 Compared with Three Months Ended June 30,
1996
Net income for the three months ended June 30, 1997 decreased 8% or $44,909
to $502,347 compared to $547,256 for the same period last year. Earnings per
share decreased 13% to $0.14 for the three months ended June 30, 1997 compared
to $0.16 for the three months ended June 30, 1996.
Revenues
Sales for the three months ended June 30, 1997 were $24,718,664 compared to
$33,644,269 for the comparable period last year a decrease of approximately 27%.
The decrease in sales for the current three month period is primarily
attributable to the fact that during the comparable period of the prior year the
Company had an unusually large sale of one system, which represented $11,000,000
of revenue. Putting aside this unusual sale in the prior year, revenues for the
three months ended June 30, 1997 would have increased by approximately 9% over
the corresponding period last year.
Gross Profit
Gross Profit as a percentage of sales increased to 10.6% for the three
months ended June 30, 1997 compared to 7.4% for the three months ended June 30,
1996. The major reason for the increase was that during the three months ended
June 30, 1996, the Company had an $11,000,000 sale, which produced a lower gross
profit margin, thereby reducing the overall gross profit percentage for the
quarter. In addition, during the three months ended June 30, 1997, the Company
increased the revenue it generated from its service business, which generally
produces a higher gross profit percentage.
Selling & Administrative Expenses
Selling and administrative expenses increased by 38% or $421,231 to
$1,544,756 in the three months ended June 30, 1997 from $1,123,525 for the three
months ended June 30, 1996. The primary increase in expenses was in payroll and
payroll related expenses associated with the hiring of additional personnel.
Additionally, the Company incurred higher costs relating to the move of its New
York City sales office as well as the opening of new offices in Marlton, New
Jersey and North Haven, Connecticut.
Interest Expense
Interest expense for the three months ended June 30, 1997 decreased
$134,946 or 37% to $226,558 from $361,504 for the three months ended June 30,
1996. The Company believes that its constant monitoring of accounts receivable
has helped to keep interest costs at a minimum as well as the fact that it uses
all available funds to reduce its outstanding loan balance on a daily basis.
Additionally, the Company used the proceeds of its recent initial public
offering to reduce its outstanding indebtedness.
<PAGE>
Income from Operations before Income Taxes
Income from operations before income taxes decreased $154,709 or 15% to
$867,547 for the three months ended June 30, 1997 from $1,022,256 for the three
months ended June 30, 1996. This decrease is primarily attributable to the
decrease in sales from the prior year.
Taxes
The Company's effective tax rate is 42.1% for the three months ended June
30, 1997 as compared to 46.5% for the three months ended June 30, 1996.
Nine Months Ended June 30, 1997 Compared With Nine Months Ended June 30,
1996.
Net income for the nine months ended June 30, 1997 increased $501,662 or
48% to $1,552,662 from $1,051,000 for the nine months ended June 30, 1996.
Earnings per share increased 41% to $0.45 for the nine months ended June 30,
1997 compared to $0.32 for the three months ended June 30, 1996. The increase in
net income is attributable to the increase in gross profit percentage during the
nine months ended June 30, 1997.
Revenues
Sales for the nine months ended June 30, 1997 decreased $7,809,552 or 11%
to $63,877,540 from $71,687,092 for the corresponding period of the prior year.
This decrease in sales is attributable to the fact that the Company had an
unusually large sale of one system, which represented $11,000,000 of revenue.
Putting aside this unusual sale in the prior year, revenues would have increased
approximately 5% over the corresponding period of the prior year.
Gross Profit
Gross profit as a percentage of sales increased to 12.3% for the nine
months ended June 30, 1997 as compared to 8.9% for the nine months ended June
30, 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 orders aggregating less than $1 million, and conversely, a lower
profit percentage on customer orders greater than $1 million, regardless of
product mix. In addition, the Company increased the revenue it generates from
the sale of services, which includes the on-site billings of systems engineers,
and the sale of IBM warranties and leases.
Selling & Administrative Expenses
Selling and administrative expenses increased by 28% or $988,683 to
$4,501,904 for the nine months ended June 30, 1997 as compared to $3,513,221 for
the nine months ended June 30, 1996. Approximately $500,000 of the increases was
for payroll and payroll related expenses and $100,000 related to an increase in
the Company's bad debt expense.
<PAGE>
Interest Expense
Interest expense for the nine months ended June 30, 1997 decreased
approximately 22% or $216,516 to $778,702 from $995,218 for the nine months
ended June 30, 1996. Approximately $70,000 of the decrease was the result of
credits received from IBM Credit Corporation relating to two lease transactions
for which the Company's payment had been delayed. In addition, the Company
believes that its constant monitoring of accounts receivable has helped to
reduce interest costs. The Company uses all available funds to reduce its
outstanding loan balance on a daily basis.
Income from Operations before Income Taxes
Income from operations before income taxes increased $793,735 or 42% to
$2,684,662 for the nine months ended June 30, 1997 as compared to $1,890,927 for
the nine months ended June 30, 1996. The increase is attributable to the
increase in gross profit percentage over the prior year.
Taxes
The Company's effective tax rate is 42.2% for the nine months ended June
30, 1997 as compared to 44.4% for the nine months ended June 30, 1996.
Liquidity and Capital Resources
The Company's current ratio at June 30, 1997 and 1996 were 1.50 and 1.12,
respectively. Working capital at June 30, 1997 was $9,510,536 an increase of
$6,167,991 over the prior year. This increase was primarily due to the proceeds
from the Company's initial public offering on June 17, 1997 as well as the
Company's increased earnings.
Cash provided by operating activities was $3,778,830 and $10,678,945,
respectively, for the nine months ended June 30, 1997 and 1996. Cash used in
investing activities was $291,571 and $135,545 for the nine months ended June
30, 1997 and 1996, respectively, and was used to finance capital expenditures
including computer equipment, leasehold improvements, furniture and fixtures and
telephone systems. Cash used by financing activities was $3,909,501 and
$10,805,762 for the nine months ended June 30, 1997 and 1996, respectively and
included net payments made under the Financing Agreement.
The Company has a credit arrangement with IBM Credit Corporation pursuant
to which it may borrow up to 85% of its eligible receivables and 100% of
eligible inventory to a maximum of $27,500,000. In addition to the permanent
credit line, there are various credit line uplifts during the year, which can
increase the line of credit by as much as 50%. As of June 30, 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.
<PAGE>
The Company believes that its present line of credit with IBM Credit
Corporation coupled with its current earnings capacity and the proceeds of its
initial public offering will be sufficient to meet its capital and operational
requirements for at least the next twelve months, including but not limited to
establishing a new headquarters, distribution and assembly facility and
inventory and accounts receivable financing.
The Internal Revenue Service is currently conducting an audit of the
Company's Federal Income Tax return for the fiscal year ended September 30,
1995. In addition, New York State is conducting a sales tax audit for the period
June 1, 1994 through 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.
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). Factors set forth in the Company's Prospectus filed June 17, 1997, or in
the Company's other Securities and Exchange Commission filings, could affect the
Company's actual results and could cause the Company's actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company in this Quarterly Report on Form 10-Q.
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in a legal proceeding that is incidental to the
conduct of its business. This proceeding is not, in the opinion of management,
material. In the ordinary course of its business, the Company is, from time to
time, subject to litigation. The Company does not believe that any litigation to
which the Company is currently subject is likely, individually or in the
aggregate, to have a material adverse effect on the financial condition of the
Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 21, 1997, the Company held a special meeting of its
Stockholders (the "Meeting").
(b) At the Meeting, the Stockholders of the Company elected John H.
Spielberger and Thomas Baehr as Class I directors, Norman Gaffney and John C.
Spielberger as Class II directors and Dennis Wilson as a Class III director.
(c) In addition to electing directors at the Meeting, the Stockholders of
the Company amended the Company's Certificate of Incorporation to increase the
number of authorized shares from 5,000,000 shares to 41,000,000, consisting of
40,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock.
(d) The following sets forth the results of voting on each matter voted
upon at the meeting:
1. Election of Directors For Against
John H. Spielberger 3,050,000 0
Thomas Baehr 3,050,000 0
Norman M. Gaffney 3,050,000 0
John C. Spielberger 3,050,000 0
Dennis Wilson 3,050,000 0
2. Amendment of the Company's Certificate of Incorporation
For Against
3,050,000 0
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Amended and Restated Certificate of Incorporation
*3.2 Amended and Restated By-Laws
*4.1 Form of Common Stock Certificate
*4.2 Form of Representative Warrant
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
- ----------------------------
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration No. 333-25593
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSCOMM INTERNATIONAL CORPORATION
(Registrant)
/s/John H. Spielberger
------------------------------------------
John H. Spielberger
President and Chief Executive Officer
/s/Dennis R. Wilson
------------------------------------------
Dennis R. Wilson
Vice President, Chief Financial Officer
and Secretary
Dated:____________________
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended June 30
1997 1996
<S> <C> <C>
Weighted average shares outstanding
Common stock 3,234,643 3,170,540
Common stock equivalents 233,596 164,340
------------- ----------
Weighted average common shares and
equivalents 3,468,239 3,334,880
Net income $ 1,552,662 $ 1,051,000
============= ==========
Net income per share (1) $0.45 $0.32
============= ==========
</TABLE>
(1) There is no difference between primary and fully diluted net income per
share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001037417
<NAME> SYSCOMM INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 758,438
<SECURITIES> 112,500
<RECEIVABLES> 19,684,234
<ALLOWANCES> (167,489)
<INVENTORY> 7,788,675
<CURRENT-ASSETS> 28,356,364
<PP&E> 1,618,597
<DEPRECIATION> (859,264)
<TOTAL-ASSETS> 29,309,802
<CURRENT-LIABILITIES> 18,845,828
<BONDS> 0
0
0
<COMMON> 48,822
<OTHER-SE> 10,338,313
<TOTAL-LIABILITY-AND-EQUITY> 29,309,802
<SALES> 63,877,540
<TOTAL-REVENUES> 63,877,540
<CGS> 55,991,555
<TOTAL-COSTS> 55,991,555
<OTHER-EXPENSES> 4,501,904
<LOSS-PROVISION> 110,000
<INTEREST-EXPENSE> 778,702
<INCOME-PRETAX> 2,684,662
<INCOME-TAX> 1,132,000
<INCOME-CONTINUING> 1,552,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,552,662
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
