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, 1998
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)
20 Precision Drive
Shirley, N.Y. 11967
(Address of Principal Executive Offices and Zip Code)
(516) 205-1000
(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 5, 1998: 4,749,905 shares.
<PAGE>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended June 30, 1998
and 1997 1
Consolidated Balance Sheets
as of June 30, 1998 and September 30, 1997 2
Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 1998
and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Signatures 9
<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
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 26,416,609 $ 24,718,664 $ 76,706,890 $ 63,877,540
Cost of sales 23,917,082 22,101,526 69,519,956 55,991,555
---------- ---------- ---------- ----------
Gross profit 2,499,527 2,617,138 7,186,934 7,885,985
---------- ---------- ---------- ----------
Selling & administrative expenses 2,067,453 1,544,756 6,096,657 4,501,904
---------- ---------- ---------- ----------
Income from operations 432,074 1,072,382 1,090,277 3,384,081
---------- ---------- ---------- ----------
Other income (expenses)
Interest expenses (245,456) (226,558) (701,324) (778,702)
Other ( 34,930) 21,723 ( 28,637) 79,283
--------- --------- --------- -----------
Total other expenses (280,386) (204,835) (729,961) (699,419)
--------- --------- --------- -----------
Income from operations
before income taxes 151,688 867,547 360,316 2,684,662
Provision for income taxes 62,600 365,200 150,600 1,132,000
--------- --------- --------- -----------
Net income $ 89,088 $ 502,347 $ 209,716 $ 1,552,662
========= ========= ========= ===========
Net income per common share
Basic $ 0.02 $ 0.15 $ 0.05 $ 0.48
Diluted $ 0.02 $ 0.14 $ 0.04 $ 0.45
Weighted average number of common
shares outstanding
Basic 4,562,969 3,362,848 4,558,016 3,234,409
Diluted 4,932,794 3,649,042 4,963,031 3,468,229
</TABLE>
The accompanying notes are an integral part of these statements.
(1)
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
------------- ------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,623,278 $ 437,594
Accounts and note receivable, net 23,707,792 23,209,156
Inventory 6,469,513 12,644,343
Other 451,882 275,307
---------- ----------
Total current assets 32,252,465 36,566,400
---------- ----------
Property, plant and equipment, net 3,440,972 1,201,549
Other assets 315,476 336,087
---------- ----------
Total assets $ 36,008,913 $ 38,104,036
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Supplier credit facility $ 12,721,731 $ 10,614,838
Accounts payable and accrued liabilities 11,175,078 15,052,319
Income taxes payable --- 499,214
Other current liabilities 34,972 43,613
---------- ----------
Total current liabilities 23,931,781 26,209,984
Long-term liabilities 42,780 66,416
---------- ----------
Total liabilities 23,974,561 26,276,400
========== ==========
Stockholders' Equity:
Preferred stock, no par value - -
Common stock, $.01 par value 50,432 50,172
Additional paid-in capital 5,629,692 5,610,452
Unrealized loss on available-for-
sale securities (83,216) (60,716)
Retained earnings 6,579,614 6,369,898
Less: Treasury stock (at cost) (142,170) (142,170)
---------- ----------
Total stockholders' equity 12,034,352 11,827,636
---------- ----------
Total liabilities and
stockholders' equity $ 36,008,913 $ 38,104,036
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
(2)
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 209,716 $ 1,552,662
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 208,200 123,107
Gain on disposition of fixed assets - 0 - (2,570)
Changes in assets and liabilities
Accounts and note receivable (498,636) 1,458,109
Inventory 6,174,830 1,148,170
Other assets (178,464) (88,901)
Accounts payable and accrued liabilities (3,877,241) 516,505
Income taxes payable (499,214) (928,252)
---------- ---------
Net Cash Provided by Operating Activities 1,539,191 3,778,830
---------- ---------
Cash Flows From Investing Activities
Purchase of fixed assets (2,447,623) (298,871)
Proceeds from disposition of fixed assets -0- 7,300
----------- ----------
Net Cash Used in Investing Activities (2,447,623) (291,571)
----------- ----------
Cash Flows From Financing Activities
Net proceeds from (payments under) supplier credit facility 2,106,893 (8,777,120)
Net proceeds from initial public offering of common stock -0- 4,892,136
Net proceeds from the exercise of stock options 19,500 -0-
Payments of long-term liabilities (32,277) (24,517)
---------- ----------
Net Cash Provided by (Used by) Financing Activities 2,094,116 (3,909,501)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 1,185,684 (422,242)
Cash and Cash Equivalents at Beginning of Period 437,594 1,180,680
---------- ----------
Cash and Cash Equivalents at End of Period $ 1,623,278 $ 758,438
========== ==========
Supplemental Disclosures of Cash Flow Information Cash paid during the year for:
Income taxes $ 809,910 $ 2,060,279
Interest 701,324 778,702
Supplemental Schedules of Non-cash Investing and
Financing Activities
Acquisition of equipment:
Cost of Equipment $ -0- $ 79,245
Less: Equipment financed -0- (79,245)
---------- ----------
Cash Paid for Capital Expenditures $ -0- $ - 0 -
========== ==========
</TABLE>
(3)
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements of SysComm International
Corporation (the "Company") are unaudited (except for the balance sheet
information as of September 30, 1997, 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 Annual Report. The results of operations for the
three and nine months ended June 30, 1998 are not necessarily indicative of the
results for the entire fiscal year ending September 30, 1998, or any future
interim period.
2. Commitments and Contingencies
(A) 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 1998 as follows: John H. Spielberger will receive
a base salary of $160,000 plus a bonus based on a percentage of pre-tax earnings
of the Company based on sales volume; Thomas J. Baehr will receive $160,000 plus
a bonus of a percentage of pre-tax earnings based on sales volume of Information
Technology Services, Inc. ("InfoTech"); the Company's wholly-owned subsidiary;
Dennis R. Wilson will receive $140,000 plus a discretionary bonus determined by
the Compensation Committee; and Norman M. Gaffney will receive $140,000 plus a
bonus of 1% of the gross profit dollars and 1% of the pre-tax earnings of
InfoTech. These annual performance incentive plans will be reviewed during the
fiscal year and new incentive plans may be implemented by the Company's
Compensation Committee for the fiscal year 1999, and thereafter as applicable.
(B) Litigation
The Company was a defendant in a lawsuit which alleged wrongful termination
of employment. The action had been in the discovery stage since 1992. Effective
April 14, 1998, the Company entered into a Confidential Settlement Agreement and
General Release with the plaintiff. Neither the execution of the Agreement nor
the Agreement itself is an admission of liability or wrongdoing by the Company.
In consideration of the obligations of the plaintiff and in full and complete
settlement and final satisfaction of any claims which plaintiff may have against
the Company, the Company agreed to pay plaintiff $35,000 as full and complete
settlement of the Action. The Company has no other legal actions pending.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
Results of Operations:
Three Months Ended June 30, 1998 Compared with Three Months Ended June 30,
1997
Net income for the three months ended June 30, 1998 was $89,088 compared to
$502,347 for the same period last year. Basic earnings per share was $.02 for
the three months ended June 30, 1998 compared to $.15 for the same period last
year. Basic earnings per share was calculated using 4,562,969 common shares
outstanding for the three months ended June 30, 1998 versus 3,362,848 common
shares for the same period last year.
Revenues
Sales for the three months ended June 30, 1998 were $26,416,609 compared to
$24,718,664 for the same period last year an increase of $1,697,945 or 6.9%. All
of the sales increase relates to improved results in the Company's new locations
in Connecticut and Buffalo, New York which began operations in January 1997 and
October 1997, respectively.
(4)
<PAGE>
Gross Profit
Gross Profit as a percentage of sales decreased to 9.5% for the three
months ended June 30, 1998 compared to 10.6% for the same period last year. The
reduction in gross profit percentage was due primarily to tighter competition
and lower selling prices especially in the personal computer segment of the
market. Additionally, the Company had some large sales during the three months
ended June 30, 1998 which produced relatively low margins. As pricing pressures
in the computer market remain intense, the Company is becoming more selective in
participating in programs that cannot meet profitability requirements. It is
anticipated that this will help to increase gross profit margins.
Selling & Administrative Expenses
Selling and Administrative expenses increased by $522,697 or 34% to
$2,067,453 from $1,544,756 for the same period last year. The increase in
expense relates to the costs associated with the openings and growth in the
Connecticut; New Jersey; and Buffalo, New York offices including payroll and
payroll related expenses. The Company is currently reviewing all operating
expenses with the intention of lowering costs.
Interest Expense
Interest expense for the three months ended June 30, 1998 increased $18,898
or approximately 8% to $245,456 from $226,558 for the same period last year. The
increase in interest expense for the three months ended June 30, 1998 is the
result of the increase in accounts receivable due to the increased sales volume
and the funding of the new facility in Shirley, New York.
Income from Operations before Income Taxes
Income from operations before income taxes was $151,688 for the three
months ended June 30, 1998 compared to $867,547 for the same period last year.
The decrease is attributable to the decrease in gross profit percentage along
with the increases in selling and administrative expenses.
Taxes
The Company's effective tax rate was 41.3% for the three months ended June
30, 1998 compared to 42.1% for the same period last year.
Nine Months Ended June 30, 1998 Compared With Nine Months Ended June 30,
1997.
Net income for the nine months ended June 30, 1998 was $209,716 compared to
$1,552,662 for the same period last year. Basic earnings per share was $.05 for
the nine months ended June 30, 1998 compared to $.48 for the same period last
year. Basic earnings per share was calculated using 4,558,016 common shares
outstanding for the nine months ended June 30, 1998 versus 3,234,409 common
shares for the same period last year.
Revenues
Sales for the nine months ended June 30, 1998 were $76,706,890 compared to
$63,877,540 for the same period last year an increase of $12,829,350 or 20%.
Approximately $10,400,000 of the sales increases relates to improved results
from the Company's new locations in Connecticut and New Jersey, which began
operations in January 1997 and Buffalo, New York which began in October 1997.
Gross Profit
Gross profit as a percentage of sales decreased to 9.4% for the nine months
ended June 30, 1998 as compared to 12.3% for the same period last year. The
reduction in gross profit is attributable to a more competitive market and lower
selling prices especially in the personal computer market. In addition, the
Company did not attain all its vendors quotas which substantially reduced the
amount of vendor rebates and soft dollars available. During the nine months
ended June 30, 1998, the Company had some large sales with relatively low
margins. The Company is currently becoming more selective and is re-evaluating
its position regarding low margin sales.
(5)
<PAGE>
Selling & Administrative Expenses
Selling and administrative expenses increased by $1,594,753 or 35% to
$6,096,657 from $4,501,904 for the same period last year. This increase in
expenses is attributable to the expenses related to the costs associated with
the growth in the Connecticut; New Jersey; and Buffalo, New York locations as
well as payroll and payroll related expenses including increased commissions due
on the increased sales volume.
Interest Expense
Interest expense for the nine months ended June 30, 1998 decreased $77,378
or 10% to $701,324 from $778,702 for the same period last year. The Company used
a majority of the proceeds from the Company's 1997 public offering to reduce
debt, but the increase in Accounts Receivable due to the increased sales volume
and the funding of the new facility increased the amount of debt outstanding
from the same period last year.
Income from Operations before Income Taxes
Income from operations before income taxes was $360,316 for the nine months
ended June 30, 1998 compared to $2,684,662 for the same period last year. The
increase relates directly to the decrease in gross profit percentage along with
the increases in selling and administrative expenses.
Taxes
The Company's effective tax rate is 41.8% for the nine months ended June 30
1998 compared to 42.2% for the same period last year.
Liquidity and Capital Resources
The Company's current ratio at June 30, 1998 and 1997 was 1.35 and 1.50,
respectively. Working capital at June 30, 1998 was $8,320,684 a decrease of
$1,189,852 from the same period last year. This decrease in working capital is
the result of the Company's funding of its new facility in Shirley. The Company
secured a mortgage on this facility in July 1998 for $1,650,000.
(6)
<PAGE>
Cash provided by operating activities was $1,539,191 and $3,778,830,
respectively, for the nine months ended June 30, 1998 and 1997 due to reductions
in inventory during 1998 and both inventory and receivables in 1997. Cash used
in investing activities was $2,447,632 and $291,571 for the nine months ended
June 30, 1998, respectively, and was used to finance the building and
furnishings of the new facility in 1998 and computer equipment, leasehold
improvements and furniture and fixtures in 1997. Cash provided by financing
activities during the nine months ended June 30, 1998 was $2,094,116 and
included net proceeds received from the Supplier Credit Facility. Cash used by
financing activities during the nine months ended June 30, 1997 was $3,909,501,
and included net payments made under the Supplier Credit Facility.
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, 1998, interest on
outstanding borrowings was prime or prime plus 6.5% should the Company fail to
meet certain collateral requirements. Throughout fiscal 1997 and the first nine
months of fiscal 1998, the Company has been in a positive collateral position
with IBM Credit.
The Company believes that its present line of credit with IBM Credit
Corporation coupled with its current earnings capacity and the proceeds of the
recent mortgage on its new facility 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.
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.
(7)
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was a defendant in a lawsuit which alleged wrongful termination
of employment. The action had been in the discovery stage since 1992. Effective
April 14, 1998, the Company entered into a Confidential Settlement Agreement and
General Release with the plaintiff. Neither the execution of the Agreement nor
the Agreement itself is an admission of liability or wrongdoing by the Company.
In consideration of the obligations of the plaintiff and in full and complete
settlement and final satisfaction of any claims which plaintiff may have against
the Company, the Company agreed to pay plaintiff $35,000 as full and complete
settlement of the Action. The Company has no other legal actions pending.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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
(8)
<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
(9)
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended June 30
1998 1997
---- ----
<S> <C> <C>
Weighted average shares outstanding
Common stock 4,558,016 3,234,409
Common stock equivalents 405,015 233,820
--------- ---------
Weighted average common shares and
equivalents 4,963,031 3,468,229
========= =========
Net income $ 209,716 $ 1,552,662
========= =========
Net income per share:
Basic $ 0.05 $ 0.48
Diluted $ 0.04 $ 0.45
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
<ARTICLE> 5
<CIK> 0001037417
<NAME> SYSCOMM INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,623,278
<SECURITIES> 46,875
<RECEIVABLES> 23,857,077
<ALLOWANCES> (149,285)
<INVENTORY> 6,469,513
<CURRENT-ASSETS> 32,252,465
<PP&E> 4,175,411
<DEPRECIATION> (734,439)
<TOTAL-ASSETS> 36,008,913
<CURRENT-LIABILITIES> 23,931,781
<BONDS> 0
0
0
<COMMON> 50,432
<OTHER-SE> 11,983,920
<TOTAL-LIABILITY-AND-EQUITY> 36,008,913
<SALES> 76,706,890
<TOTAL-REVENUES> 76,706,890
<CGS> 69,519,956
<TOTAL-COSTS> 69,519,956
<OTHER-EXPENSES> 6,131,657
<LOSS-PROVISION> 92,000
<INTEREST-EXPENSE> 701,324
<INCOME-PRETAX> 360,316
<INCOME-TAX> 150,600
<INCOME-CONTINUING> 209,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209,716
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
</TABLE>
