UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-22693
SYSCOMM INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-2889809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Precision Drive, Shirley, New York 11967
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 205-9000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 2,001,435 shares of Common Stock held by
non-affiliates of the Company as of December 21, 1998 is $2,940,108.02.
<PAGE>
The number of shares outstanding of each of the registrant's classes of
common equity as of December 21, 1998 is as follows:
Class of Common Equity Number of Shares
- ---------------------- ----------------
Common Stock 4,757,705
par value $.01
The information required by Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive proxy statement to be filed with the
Commission on or before December 30, 1998.
<PAGE>
PART I
Item 1. BUSINESS
General
SysComm International Corporation ("SysComm" or the "Company"), through its
wholly owned subsidiary, Information Technology Services, Inc. ("InfoTech"), is
a leading systems integrator and reseller of computer hardware, operating
software and networking applications to Fortune 1000 companies. The Company
provides its customers with cost efficient, comprehensive solutions that satisfy
their information technology requirements. Since 1985, the Company's primary
focus has been on the sale, integration and servicing of International Business
Machine Corporation ("IBM") products including personal computers, mid-range
systems based on the IBM RS/6000, servers, the IBM AS/400 and the System/390
mainframe. In addition, the Company integrates, resells and services products
from manufacturers such as Sun Microsystems, Hewlett Packard, Compaq, Microsoft,
Bay Networks and Novell.
In March 1997, the Company commenced the assembly and sale of IBM PCs
through IBM's Authorized Assembler Program ("AAP") providing the Company with
greater flexibility in meeting its customers' needs. However, due to expected
changes in IBM's policies, the Company has chosen not to invest any further
resources in the AAP program and will discontinue its participation effective
April 1, 1999.
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 retailers, manufacturers, health care providers,
distributors, colleges, universities and state and local government agencies.
The Company's customers include:
<TABLE>
<CAPTION>
<S> <C> <C>
Astra Pharmaceutical Liberty Mutual Spear, Leeds & Kellogg
Baystate Medical Center Mass. Financial Services Sungard
Brown Brothers Harriman Memorial Sloan - Kettering Hospital The City of New York
Citibank Mount Sinai Medical Center The City University of New York
CPC International Northeastern University The Hartford
Deutsche Bank Pfizer The Pershing Division of Donaldson
Lufkin & Jenrette
Fidelity Investments PHCS The Stop & Shop Companies
Gillette Philip Morris Unisys Corporation
Harvard University Prudential Insurance Company United Healthcare
IBM Reuters America Witco Corporation
Corporation
Lawrence Public Schools Sony
</TABLE>
The Company intends to pursue new business by focusing on the sale and
integration of high-end systems in the financial, commercial, governmental,
healthcare and educational areas. To this end, the Company has the following
growth strategies: (i) targeting markets, (ii) offering a complete line of IBM
products, (iii) expanding its role as an IBM Premier Business Partner, (iv)
focus on high growth, higher margin mid-range products and services while
expanding product lines to include other manufacturer's products, (v) expanding
into other geographic regions through selected acquisitions and strategic
alliances, and (vi) targeting the client-server architecture and the business
intelligence markets.
The Company currently has six (6) operating locations. From its Shirley,
New York headquarters it operates a distribution center, a computer
configuration, integration and PC assembly facility. The Company conducts its
sales operations from offices located in Shirley, New York City, and Buffalo,
New York; Waltham, Massachusetts; Marlton, New Jersey; and Fairfield,
Connecticut. In addition, technical support services are conducted out of all of
the Company's sales offices.
Strategy
The Company strives to offer its customers high quality computer and
networking system hardware, related operating system software and network
design, system implementation and support services in a timely, cost-effective
and value-added manner. The Company believes that the following factors are
significant elements to the successful implementation of this strategy:
Targeting Markets
The Company has a ten (10) year track record as a market leader in the
installation and integration of high-level information systems to the banking
and financial services communities. In addition, the Company focuses on other
selected, major markets, including retailers, manufacturers and distributors,
institutions of higher learning, health care and pharmaceutical companies, and
state and local government agencies. The Company's in-depth understanding of its
customers current and future needs combined with its experience and in-depth
market focus enable it to offer an optimum range of products and services that
meet each customer's requirements.
Offering a Complete Line of IBM Products
The Company has chosen to represent primarily IBM products because it
believes that IBM is the world's premier designer and manufacturer of computer
equipment, software and networking products. The wide range of products and
services offered by the Company, include personal computers (desktop
workstations, file servers and notebook computers), mid-range computers (RS/6000
and AS/400 systems), IBM S/390 mainframe, networking products (network hubs,
routers, bridges and switches) and IBM software products, including Lotus
Domino, ADSM, HACMP and DB 2. The Company believes that its current mix of
products meets the needs of its customers and brings the Company to its goal of
becoming a total solution integrator.
Expanding the Company's Role as an IBM Premier Business Partner
The Company's designation as an IBM Premier Business Partner provides it
with important competitive advantages. In 1996, 1997 and 1998, the Company was
among a small number of value-added resellers selected by IBM as a Premier
Business Partner. This designation by IBM was in recognition of the Company's
long-standing relationship with IBM, combined with its overall value,
performance and contribution in value to its customers. The Company believes
that the principal advantage to being a Premier Business Partner is the
potential referral of business by IBM.
High-Growth Products and Services/Expanding Product Lines
Mid-range products are defined as computer servers based upon RISC, SPARC
or Intel processors utilizing Unix (Aix or Solaris), proprietary (OS/400) or
Microsoft NT operating systems. Servers are highly scaleable computer systems
designed to process information, manage data, or act as computer network control
systems. Infotech sells servers from IBM, Sun Microsystems, Compaq and Hewlett
Packard.
High end products are defined as mainframe computer systems (IBM's System
390) and information storage and archival devices such as IBM's RAMAC, SSA, VTS
and VSS products.
Expanding Into Other Geographic Regions Through Acquisition and Strategic
Alliance
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
continue focusing its expansion efforts on value-added resellers that complement
its existing operations.
Targeting the Client-Server Architecture and the Business Intelligence
Markets
Client-Server refers to the migration of software applications and data
from a centralized mainframe or legacy environment to a system of distributed
servers with data access via local and wide area networks.
Business intelligence refers to the analysis of vast quantities of
information within a corporate enterprise to make business decisions such as
investments, product development and marketing programs.
Industry Background
Complex computer information processing systems, the foundation on which
business and organizations now function, are continuously being redesigned,
modified and upgraded as new computer and telecommunications technologies are
introduced. Until the mid-1980's, either mid-range or mainframe computer
systems, were used to manage an organization's mission-critical,
transaction-oriented commerce and business functions, such as banking, credit
transactions, retail point-of-sale transactions and airline reservations.
Client/server networks support access to these functions, either within a single
site or from numerous geographically-dispersed sites.
In the late 1980's, a new architecture for information processing called
"client/server" computing emerged, fueled by the growing intelligence in desktop
computers, expanding capabilities of software applications and growing
capabilities of networks. A client/server system typically consists of multiple
intelligent desktop client computers linked with high performance server
computers by a local and/or wide area network ("LAN" and/or "WAN") and is
characterized by the flexibility and mobility of both application and user. In
order to take advantage of their established operational staff and physical
plant, many corporations are seeking to reconfigure their existing
mainframe/mid-range computers (sometimes referred to as "legacy" systems) to
operate in parallel with client/server networks.
The Company believes that these two information system models - legacy
systems and client/server systems - will continue to coexist, each with
advantages for certain applications. Thus, organizations are faced with complex
decisions concerning the current and future configurations of their information
systems, based upon factors such as the re-engineering of aspects of legacy
systems to function more efficiently with related client/server systems, the
explosive growth of the Internet (and related World Wide Web) and stand-alone
intranets, the convergence of computer and telecommunications technologies and
the universal recognition of information systems as the medium for commerce,
finance, education and administration. Mid-range and mainframe computer systems
remain important in this changing environment, and the Company intends to
exploit opportunities in both segments of the high end computer system markets.
At the same time, manufacturers such as IBM and Sun Microsystems are increasing
their reliance upon companies such as SysComm to work with mid- and large-sized
businesses and organizations to provide single-source responsibility for the
design, procurement, installation and implementation of such systems.
Principal Markets and Customers
Since 1994, the Company has sold and delivered computer systems, network
products, software, maintenance and system support services to more than 800
customers throughout the United States and in more than 20 countries worldwide.
Based on its installed customer base, the Company believes it is a leading IBM
supplier/systems integrator of mid-range and computer/network systems in the
northeastern United States. In fiscal year 1996, revenues from sales to Deutsche
Bank and Citibank accounted for 19% and 16%, respectively, of the Company's
total revenues: No one customer accounted for more than 6% of the Company's
total revenues in fiscal year 1997. In fiscal year 1998, the Company's top
customer accounted for approximately 6.8% of total revenues. In fiscal year
1998, the Company's top five customers (three of which were new) accounted for
21% of total revenues.
Dependence on Major Customers; Risk of Industry Concentration
For the last three (3) fiscal years, 1996, 1997, and 1998, a significant
portion (50%, 28%, and 21% 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 1996
sales to Deutsche Bank and Citibank accounted for 19% and 16%, respectively, of
the Company's total revenues. No customer accounted for more than 6% of the
Company's total revenues for fiscal 1997. In fiscal year 1998, the Company's top
customer accounted for approximately 6.8% of total revenues. Although the number
of customers who purchase at least $250,000 of computer systems from the Company
has increased from 29 in fiscal year 1995 to 87 in fiscal year 1998, the failure
to acquire a significant or principal customer could have a material adverse
effect on the Company's operations.
In the fiscal year ended September 30, 1998, approximately 24% of the
Company's sales of computer systems were to customers in the banking, financial
and securities industry based in the Northeastern United States. Although the
Company continues to broaden its market focus to include sales to other markets,
such as educational institutions, government agencies, healthcare and insurance
companies, the Company expects that it will continue to derive a substantial
percentage of its sales of computer systems from such banking, financial and
securities businesses. Accordingly, unfavorable economic conditions or factors
that relate to these industries, particularly any such conditions that might
result in reductions in capital expenditures or changes in such company's
information processing system requirements, would have a material adverse affect
on the Company's results of operations.
Products Lines
The Company has access to a full range of computer product lines,
networking and interconnectivity systems and operating software, from IBM,
Hewlett Packard, Sun Microsystems and Compaq, as well as other selected
manufacturers. However, the Company has concentrated its efforts in developing
strong relationships with IBM because it believes that IBM offers the most
comprehensive and well established product line in the industry. The Company has
had a long term relationship with IBM whereby it has the opportunity to
configure, sell and service IBM's full line of PCs, mid-range information and
mainframe processing systems. The Company believes its strong marketing and
technical skills enabled it to become North America's largest reseller of IBM's
RS/6000 product line in 1996 and 1997, and the Company believes it will continue
to have a close business relationship with IBM. The Company's principal sales
are derived from the following: (i) IBM PC systems; (ii) IBM RS/6000 systems;
(iii) IBM S/390 Mainframe; (iv) IBM AS/400 systems; and (v) communication and
networking systems.
IBM RISC System/6000
The IBM RISC System/6000 is a mid-range computer workstation and server
configuration providing industry-leading computing and graphic performance that
meets large-scale, data handling and network management demands for many types
of businesses. RS/6000 systems perform mission critical applications, such as
those found in financial trading systems, from the combination of a robust UNIX
operating system with fast 2D and 3D graphic capabilities. The RS/6000 is a
flexible and scalable system incorporating (1) symmetric multiprocessing
capabilities, a design that makes it possible for a number of processors to
share memory and other existing features more efficiently; (2) scalable parallel
processing, a technology that allows several hundred processor nodes to run in
tandem as application servers, data servers, Internet or Intranet servers; and
(3) a multi-operating system support, allowing a user to run existing programs
simultaneously.
RS/6000 systems have been used for general business and financial
applications, including billing, payroll and accounts receivable, as well as for
advanced graphics programs for mechanical and electrical design, scientific
visualization, communications and networking applications for optimum
client/server and Internet performance, and word processing and desktop
publishing applications for both scientific and commercial documents. These
applications are particularly useful for the securities, manufacturing, retail,
education and transportation industries.
As Internet and Intranet-based transactions grow, RS/6000 systems'
networking capabilities, including security and integrity features, are becoming
increasingly important.
In 1996 and 1997, IBM recognized the Company (ranked by dollar value of
systems sold) as its largest "Solution Provider" for RS/6000 systems in North
America. For the year ending December 31, 1996 the Company's sales of the
RS/6000 was approximately $59 million, or 59%, of the Company's annual sales.
For fiscal 1997 and 1998, the Company's sales of the RS/6000 were approximately
$40 million and $46 million, or 45% and 47% respectively. The Company considers
RS/6000 systems to be an integral product for future increases in the Company's
sales volume.
IBM System/390
The IBM System/390 is IBM's large scale mainframe. The System/390 is the
current generation of IBM mainframe computer systems, which were first
introduced in the early 1960's as the System/360. System/390 is the computing
platform used by a majority of Fortune 1000 corporations for "legacy" computing
applications, that assist businesses to perform core applications, such as
accounting, operations, order entry, customer service and inventory tracking.
The System/390 has evolved into the central hub of network computing strategy,
enabling businesses to provide applications on demand, secure and available 24
hours a day, 365 days a year. Industry analyst's estimate that 70% of all
mission critical data resides on a mainframe and that 75% of all real-time
transactions run on mainframe based networks. IBM is the world's largest
supplier of mainframe computer systems.
All Other Products
IBM AS/400 Product Line. Although the IBM Application System/400 (also
known as AS/400) has not been a major source of revenue to the Company, the
Company is attempting to increase its revenue in this market. The AS/400 is
designed and built as a multi-user commercial application platform integrating a
relational database and networking capabilities into the operating system of the
computer. It is designed as a general purpose business computer, optimized for
the commercial environment. Its design reflects the dominant requirements for
businesses, i.e., integration of new technology without disrupting existing
applications, large portfolio of business solutions allowing companies to
discover the most suitable application for their needs, integration of functions
including security, database, system management, communications and on-line
teleprocessing, enabling companies to manage a system with limited resources in
a demanding business climate.
The AS/400 provides businesses with a cost effective solution, allowing
them to adopt advanced technologies at their own pace, integrating high quality
PC technology and associated software to enhance the computer's speed for PC
file serving. The AS/400 is a popular business computing system due to its ease
of installation, implementation, usage (it can support up to 7,000 users) and
ability to upgrade.
Communication -- Networking Systems. The Company provides various
communications and networking products including complex data communications
equipment and software such as bridges, hubs and routers, as well as modems and
network interface cards (NIC) to connect personal computers to local and wide
area networks (LAN/WAN). Nearly every computer sold today in the commercial
marketplace is connected to a communications network.
Other. The Company is authorized to sell other manufacturers' personal
computer systems, networking, printers and software products including: Bay
Networks, Compaq, Lexmark, Hewlett Packard, Microsoft, Novell, and Sun
Microsystems. 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 1998, the Company's sales of non-IBM products accounted for approximately
$13 million, or 15%, of total revenue.
Dependence on IBM as a Supplier
For the fiscal years ended September 30, 1997 and 1998, in excess of 84% of
the Company's revenues resulted from the sale of personal computers, mid-range
computer systems, networking systems and operating software manufactured by
International Business Machines Corporation ("IBM"). Although the Company has
had a long standing reseller relationship with IBM, IBM may terminate this
relationship with the Company at will and upon relatively short notice. The
Company's reseller arrangements with IBM are not exclusive. Moreover, IBM is not
obligated to have product on hand for timely delivery to the Company, nor can
IBM guarantee product availability in sufficient quantities to meet the
Company's demands.
In September 1997, IBM announced new criteria which its resellers must meet
in order to be eligible to acquire personal computers directly from IBM.
Beginning on January 1, 1998, in order to directly purchase from IBM, resellers
must have purchased a minimum of $100 million worth of computer systems and
other products directly from IBM during the period between January 1, 1997 and
December 31, 1997. Beginning on January 1, 1999, resellers must have purchased a
minimum of $150 million worth of computer systems and other products directly
from IBM during the period January 1, 1998 through December 31, 1998. IBM has
stated that resellers who are approved to assemble IBM PCs under the AAP, must
meet this new criteria to continue to purchase components directly from IBM.
The Company has not satisfied the volume requirements under the AAP and
does not expect future purchases to do so. The Company will terminate its
involvement in the AAP in April 1999 and does not expect such termination to
have a material adverse effect on the Company's business and operations. The
Company currently purchases many components from third-party distributors such
as Pinacor and Ingram Micro on terms more favorable than the Company was
receiving from IBM direct.
Risk of Losing Price Protection
Prior to January 1, 1997, resellers who purchased directly from IBM were
fully protected against any reduction in prices by IBM. If, for example, the
Company purchased products from IBM, but subsequently IBM lowered its sales
price, then the Company would receive a credit in the amount of the difference
between the current sales price and the actual purchase price. Effective
November 1, 1997, resellers will only receive price reduction credits on new
products based on the previous 15 days of IBM's net shipments to the Company
from the date the product is shipped from IBM. In addition, as an inducement to
the Company to accept these new terms, IBM will rebate to the Company an amount
equal to 2.5% of its net purchases. If the Company is unable to sell its
inventory within those 15 days and IBM lowers the sales price on these items,
the Company would be unable to recoup the difference on the lowered price which
could have a material adverse effect on the Company's business, financial
condition or results of operation, as was reflected by the Company's write-down
of inventory at the end of fiscal 1998.
Periodic IBM Product Shortages
From time to time, including during the fiscal year ended September 30,
1998, IBM and the Company's other vendors were unable to deliver products in a
timely fashion to meet the Company's outstanding orders, which has negatively
affected the Company's results of operations. Specifically, during the quarter
ended September 30, 1997, delays by IBM in shipment of products resulted in a
backlog of approximately $2,400,000 of sales by the Company. There can be no
assurance that IBM (and other manufacturers with whom the Company deals with)
will consistently provide an adequate supply of products in order for the
Company to fulfill all of its customers' orders in a timely manner. The failure
to obtain adequate product supplies would have a material adverse effect on the
Company's results of operations or financial condition.
Financing Agreement
The Company's business activities are capital intensive, requiring the
Company to finance accounts receivable and inventory. The failure to obtain
adequate product financing on a timely basis could have a material adverse
affect on the Company's business, results of operations and financial condition.
Pursuant to the Company's financing agreement ("Financing Agreement") with IBM
Credit Corporation ("IBM Credit"), the Company is permitted to borrow up to
$27,500,000, based upon 85% of all eligible receivables due within 90 days and
up to 100% of all eligible inventory. As of September 30, 1998, borrowings
outstanding under the Financing Agreement were $3,020,234. Pursuant to the
Financing Agreement, the Company's credit availability is reduced by the
aggregate amount of accounts payable owed to IBM Credit which, as of September
30, 1998, was $9,855,736. The Financing Agreement is subject to temporary
increases, thereby increasing the line of credit to $41,250,000 during certain
periods. The Company is also required to comply with certain financial
covenants.
The amount of credit available to the Company pursuant to the Financing
Agreement at any point in time may be adversely affected by factors such as
delays in collection or deterioration in the quality of the Company's accounts
receivable, inventory obsolescence, economic trends in the computer industry and
interest rate fluctuations. Any decrease or material limitation on the amount of
capital available to the 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 Company has
had a credit facility with IBM Credit since 1992 and although the Financing
Agreement expires on September 24, 1999, the Company believes that its credit
facility with IBM will be renewed on its expiration. However, there can be no
assurance that the credit facility will be renewed, or that if renewed, the
financing to the Company under this renewal will be available in amounts at
comparable or better terms than those in effect. The inability of the Company to
have continuous access to such financing at reasonable costs would materially
and adversely impact the Company's financial condition and results of
operations.
Dependence on Volume Discount Schedules and Market Development Funds
As part of its overall reseller arrangements with various vendors, the
Company receives volume discounts and market development funds on products
purchased. These discounts and funds are used to offset a portion of the
Company's cost of products sold, thereby affecting income from operations and
the Company's expenses relating to marketing and technical support resources for
these vendors' products. Any adverse change in the volume discount schedule
available to the Company, or changes in the availability, structure or timing of
the receipt of development funds, would materially adversely affect the
Company's business, results of operations and financial condition.
Sales and Marketing
The Company has a broad customer base of primarily Fortune 1000 companies.
The Company's sales and marketing efforts are focused on high level decision
making executives, whose purchasing decisions are based on factors such as the
overall cost of purchasing and maintaining a system and the Company's reputation
and expertise in delivering and installing effective total information
technology solutions, which initially may not be the least expensive. The
Company relies on its marketing and sales programs, its industry-wide expertise,
its relationship with existing customers and its status as an IBM Premier
Business Partner to generate sales opportunities.
The Company currently has sales offices in six locations: New York City,
Shirley, and Buffalo, New York; Waltham, Massachusetts; Marlton, New Jersey; and
Fairfield, Connecticut. Currently, the Company employs approximately 36 field
sales representatives and system engineers. The sales efforts are led by the
Company's senior executives, John H. Spielberger and Thomas Baehr, who have more
than 50 years of combined experience in sales of high-level computer systems.
The Company believes that due to the complex nature of the computer products it
sells and supports, maximum marketing effectiveness can only be achieved by
sales specialization. Each sales representative is trained in one specific
product line and representatives of one product line can call upon specialized
sales and systems engineering personnel from another product line.
The Company pursues new business opportunities by referrals from
manufacturers, referrals from existing customers, direct solicitation by
telephone or mail of pre-qualified customers, and participation in industry
trade shows.
The Company has developed and maintained automated sales tools intended to
improve sales productivity, quality and reliability and increased customer
satisfaction. These systems include on-line systems configuration and pricing,
real time order entry, order confirmation and electronic mail for customers
through privately leased telephone lines and through the Internet.
Customer Support and Service
The Company believes that its ability to provide effective total solutions
to meet the needs of its customers is enhanced by its internal management
information system, which combines accounting, purchasing, inventory control,
sales order processing and work order management. The Company provides a large
array of services to its customers, including warranty repair on all IBM
personal computer products; toll-free telephone number for sales and product
information and order placement; toll-free telephone number for customer service
on all products sold, including technical assistance and repair warranty; E-mail
network access for customers to receive real time price quotations, place orders
and check order status; on-site system engineers to provide technical assistance
for installations and upgrades; partnership with IBM to provide customized
services such as helpdesk, consulting, extended warranty, extended maintenance
coverage; and IBM Credit Corporation financing options on all products sold.
Competition
The markets in which the Company operates are characterized by intense
competition from several types of network integrators and technical service
providers, including mainframe and mid-range computer manufacturers and
outsourcers, including, among others, Sun Microsystems, Electronic Data Systems
Corporation, Hewlett-Packard Company, Anderson Consulting, IBM Global Services
and UNISYS. Other competitors which purchase directly from IBM, like the
Company, include value added resellers, systems integrators and third-party
service companies, including CompuCom Systems, Inc., Entex Information Services,
InaCom Corp., MicroAge, Inc., EnPoint Technologies and GE ITS. While the Company
receives sales and marketing assistance from IBM, including introductions and
referrals to potential customers, the Company, from time to time, faces direct
competition from IBM with respect to large contracts. The Company expects to
face further competition from new market entrants and possible alliances between
competitors in the future. Certain of the Company's current and potential
competitors have greater financial, technical, marketing and other resources
than the Company. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sales of their services than
the Company. No assurance can be given that the Company will be able to compete
successfully against current and future competitors.
The Company's ability to compete successfully depends on a number of
factors such as breadth of product and service offerings, sales and marketing
efforts, pricing, quality and reliability of services and other support
capabilities. While there can be no assurance that the Company will be able to
continue to compete successfully with existing or new competition, the Company
believes that it currently competes favorably due to its focus and expertise of
network integration.
Limited Backlog of Orders
Customers typically do not place recurring "long-term" orders with the
Company, resulting in a limited order backlog at any point in time. The failure
by the Company to receive orders from customers on a continuous basis would have
a material adverse effect on the Company's financial condition and results of
operations given the Company's lack of recurring orders.
Rapid Technological Change
The industry in which the Company competes is characterized by rapid
technological change and frequent introduction of new products and product
enhancements which result in relatively short product life cycles and rapid
product obsolescence. The expectation, or announcement of new or enhanced
products often causes customers to delay their purchasing decisions until such
new or enhanced products are announced and available. Furthermore, the Company's
success depends in large part on IBM's ability and the ability of other
manufacturers to identify and develop products that meet the changing
requirements of the marketplace. In the event that IBM or such other
manufacturers are unable to do so, the Company's continued success will depend
upon its ability to identify and source substitute products from other vendors.
There can be no assurance that the Company will be able to identify and offer
such products necessary to remain competitive or avoid losses related to
obsolete inventory and drastic price reductions.
Management of Growth
The Company's ability to manage growth effectively will require it to
continue to implement and improve its operational, technical, financial, and
sales systems, to develop the skills of its managers and supervisors, and to
hire, train, motivate and manage its employees. There can be no assurance that
the Company will be successful in managing growth. The failure to do so would
materially adversely affect the Company's financial position and results of
operations. The Company has recently opened sales offices in Connecticut and New
Jersey. In May 1998, the Company commenced operations at its 40,000 square foot
facility in Shirley, New York. The cost to construct this facility and to supply
furniture, fixtures and equipment for this facility was approximately $2.325
million, exclusive of land. There can be no assurance that the Company will be
able to further expand its operations successfully either internally or through
acquisition. Expansion of the Company's operations will be dependent upon, among
other things, the continued growth of the computer industry, the Company's
ability to withstand intense price competition, its ability to obtain new
customers, and retain skilled technicians, engineers, sales and other personnel.
If the Company does not have sufficient cash resources, its growth could be
limited unless it is able to obtain additional capital through debt or equity
financings. There can be no assurance that additional financings will be
available to the Company on commercially reasonable terms, if at all.
Dependence on Key Personnel
The Company's success during the foreseeable future will depend largely
upon the continued services of its founder and Chief Executive Officer, John H.
Spielberger, and the executive team of Dennis R. Wilson, Thomas J. Baehr and
Norman Gaffney, who joined the Company in 1995, 1994 and 1994, respectively.
Each of the executive officers entered into employment agreements in June 1997
that expire on September 30, 1999. The loss of any of the services of the
Company's key personnel could have a material adverse affect on the Company's
business, ongoing results and financial condition. These employment agreements
contain confidentiality, non-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.
Control by Principal Stockholder
As of September 30, 1998, John H. Spielberger, Chairman of the Board,
President and Chief Executive Officer of the Company, beneficially owned
approximately 53% of the Company's outstanding Common Stock. As a result of his
stock ownership, Mr. Spielberger has effective control of the Company and the
power to control the outcome of matters submitted to a vote of the Company's
stockholders, such as the election of at least a majority of the members of the
Company's Board of Directors and to direct the future operations of the Company.
Such concentration may have the effect of discouraging, delaying or preventing a
change in control of the Company.
Anti-Takeover Provisions
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation ("Certificate of Incorporation"), Amended and Restated By-laws
("By-Laws") and Delaware law may be deemed to have an anti-takeover effect. The
Company's Certificate of Incorporation provides that the Board of Directors may
issue additional shares of Common Stock or establish one or more classes or
series of Preferred Stock with such designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations that
the Board of Directors fixes without stockholder approval. Moreover, the
Company's Certificate of Incorporation and By-Laws provide that its Board of
Directors is divided into three classes serving staggered three year terms,
resulting in approximately one-third of the directors being elected each year
and also contain certain other provisions relating to voting and the removal of
the officers and directors. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law.
In general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Each of the foregoing provisions may have the effect of
rendering more difficult, delaying, discouraging, preventing or rendering more
costly an acquisition of the Company or a change in control of the Company
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 manufacturers to deliver, in a
timely fashion, products for which the Company has received orders, the length
of the sales cycle, receipt of volume discounts, the demand for products and
services offered by the Company, the introduction or announcements by IBM and
other manufacturers relating to new products, the hiring and training of
additional personnel, as well as general business conditions.
Historically, the size and timing of the Company's sales transactions have
varied substantially from quarter to quarter and the Company expects such
variations to continue in future periods, including the possibility of losses in
one or more fiscal quarters. The fluctuations may be caused by delays in
shipping certain computer systems for which the Company received orders that it
expected to deliver during that quarter. In addition, the Company's collection
periods have fluctuated due to periodic unavailability of product, which
resulted in the Company not receiving payment from certain customers until their
entire orders were shipped. Accordingly, it is likely that in one or more future
fiscal quarters, the Company's operating results may be below the expectations
of public market analysts and investors. As a result, the market price of the
Company's Common Stock would be materially adversely affected.
Potential Volatility of Stock Price
The market price of the Common Stock may be subject to significant
fluctuations in response to numerous factors, including, but not limited to,
fluctuations or uncertainties in the Company's quarterly operating results
(including losses), delays with respect to the Company's suppliers and vendors,
announcements of technological innovations of new products by IBM or other
suppliers or vendors, conditions in the markets in which the Company and its
competitors compete, changes by financial analysts in their estimates of the
earnings of the Company, the trading volume of the Company's common stock and
the economy in general. From time to time, the stock market experiences
significant price and volume volatility which may affect the market price of the
Company's Common Stock for reasons unrelated to the performance of the Company.
In addition, because the Company is somewhat dependent upon and associated with
IBM, the Company's stock price may be adversely affected based on the
performance of IBM's operations.
Employees
As of September 30, 1998, the Company had 70 full-time employees. The
Company has no collective bargaining agreements and believes its relations with
its employees are good.
Disclosures Regarding Forward Looking Statements
This report on Form 10-K includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical facts included in this Form 10-K including,
but not limited to, statements contained in this "Business," "Management's
Discussion and Analysis" and "Notes to Consolidated Financial Statements,"
located elsewhere herein regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations, and industry conditions, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove correct.
Item 2. Properties
In May 1998, the Company's new 40,000 square foot assembly, warehouse and
headquarters facility located in Shirley, New York became operational. The total
cost to construct and equip this facility was approximately $2.325 million,
exclusive of land.
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 does not expect to renew this 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 October 31, 1999.
The Company leases 300 square feet of general office space in Marlton, New
Jersey for $13,860 per year, expiring on January 31, 1999. The Company expects
to renew this lease.
The Company leases 795 square feet of general office space in Fairfield,
Connecticut for $17,180 per year. The lease expires on November 30, 2002.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) The Company's Common Stock, par value $.01 per share (the "Common
Stock"), trades on the Nasdaq Stock Market under the symbol SYCM. The following
table sets forth for each period indicated the high and low sales prices for the
Common Stock for the period June 17, 1997, the date of the Company's initial
public offering, through September 30, 1998, as reported by Nasdaq:
Fiscal 1997 Sales Prices
----------- ------------
High Low
---- ---
Quarter Ended June 30, 1997 5 1/2 5 1/4
Quarter Ended September 30, 1997 6 5/8 5
Fiscal 1998
-----------
Quarter Ended December 31, 1997 6 1/4 5
Quarter Ended March 31, 1998 5 1/4 4 1/4
Quarter Ended June 30, 1998 4 19/32 1 3/4
Quarter Ended September 30, 1998 3 1 1/8
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.
On or about September 16, 1998, the Company received notification from
Nasdaq that because the aggregate market value of its public float had fallen
below the $5,000,000 threshold set forth in Marketplace Rule 4450(A)(2) for a
period of ten (10) consecutive trade days, its stock could be subject to
delisting from the Nasdaq National Market. The Company has scheduled a hearing
before Nasdaq officials in early 1999 to explain why its stock should continue
to be listed on the Nasdaq National Market. While the Company believes that it
will satisfy all applicable Nasdaq requirements, there can be no assurance that
it will succeed in doing so and that its stock will continue to be listed on the
Nasdaq National Market.
(b) The number of recordholders of the Common Stock as of December 4, 1998
is approximately 40. The Company believes that there are a substantially greater
number of beneficial owners of shares of its Common Stock.
(c) The Company currently intends to retain all future earnings for use in
the operations of its business and, therefore, does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent, among other things, upon earnings, capital requirements, financing
agreement covenants, the financial condition of the Company and applicable law.
Item 6. Selected Financial Data
The following financial statement data as of and for the fiscal years ended
September 30, 1996, 1997 and 1998 are derived from, and are qualified by
reference to, the audited Consolidated Financial Statements included herein and
should be read in conjunction with those Consolidated Financial Statements and
the Notes thereto. The financial statement data as of and for the fiscal years
ended September 30, 1994 and 1995 are derived from audited consolidated
financial statements not included herein.
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
Consolidated Statement of Operations
Data 1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 45,459,575 (1) $55,195,507 $98,446,698 $89,725,938 $98,932,636
Cost of sales....................... 40,796,425 49,441,544 89,025,331 78,049,310 89,047,731
------------ ----------- ----------- ----------- ------------
Gross profit........................ 4,663,150 5,753,963 9,421,367 11,676,628 7,939,923
Inventory write-down -- -- -- -- 657,491
------------ ----------- ----------- ----------- ------------
Selling and administrative expenses. 3,406,316 4,079,184 5,028,812 6,534,552 8,193,905
------------ ------------ ----------- ----------- ------------
Income from operations.............. 1,256,834 1,674,779 4,392,555 5,142,076 403,509
Interest expense (net).............. (713,778) (1,207,316) (1,390,867) (979,185) (881,781)
Other income........................ 39,630 37,126 63,151 2,570 (35,000)
Realized loss on available-for-sale
securities.......................... -- -- (1,406,250) -- (206,250)
------------ ------------ ----------- ----------- ------------
Income from continuing operations
before income taxes................. 582,686 504,589 1,658,589 4,165,461 (719,522)
Provision for income taxes.......... 242,889 223,769 735,886 1,761,855 (272,160)
------------ ------------ ----------- ----------- ------------
Income from continuing operations...
339,797 280,820 922,703 2,403,606 (447,362)
Discontinued operations............. 1,485,698 -- -- -- --
Cumulative effect of a change in
accounting principle................ -- -- -- -- --
------------ ------------ ----------- ----------- ------------
Net income.......................... $ 1,825,495 $ 280,820 $ 922,703 $ 2,403,606 $ (447,362)
============ ============ =========== =========== ============
Per Share Data:
Income from continuing operations...
$ .10 $ .08 $ .25 $ .61 $ (.10)
Income from discontinued
operations.......................... .43 -- -- -- --
Income from accounting changes...... -- -- -- -- --
Weighted average number of shares
outstanding......................... 3,448,900 3,614,040 3,677,290 3,931,846 4,613,750
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital..................... $ 1,171,764 $ 1,769,589 $ 3,342,545 $ 10,356,416 $ 9,314,237
Total assets.......................... 18,867,758 18,471,659 32,102,557 38,104,036 $ 27,857,265
Short term debt....................... 6,469,072 10,797,111 12,510,017 10,658,451 $ 3,114,998
Long term debt........................ -- -- 67,291 66,416 $ 1,611,355
Stockholders' equity.................. 2,412,564 2,355,884 3,998,587 11,827,636 $ 11,551,919
(1) Includes sales of the Company's former subsidiary, Romel Technology,
Inc. (d/b/a MSG) of $4,127,768, 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 $41,331,807.
</TABLE>
Item 7. Management's Discussion and Analysis
Results of Operations
Overview
The Company operates in a highly competitive industry which in turn places
constant pressures on maintaining gross profit margins. Many of the Company's
sales are high volume equipment sales which produce lower than average gross
profit margins, but are often accompanied by a service arrangement which yields
higher than average gross profit margins.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of operations.
<TABLE>
<CAPTION>
Year Ended September 30
--------------------------
1998 1997 1996
<S> <C> <C> <C>
---------------------------
Net sales...................................................................................... 100.0% 100.0% 100.0%
Cost of sales................................................................................ (90.6) (87.0) (90.4)
Writedown of inventory.............................................................. (.7) --- ---
---------------------------
Gross profit................................................................................. 8.7 13.0 9.6
Selling and administrative expenses........................................... (8.3) (7.3) (5.1)
---------------------------
Income from operations.............................................................. .4 5.7 4.5
Interest expense (net).................................................................. (.9) (1.1) (1.4)
Realized loss on available-for-sale securities............................. (.2) --- (1.4)
---------------------------
(Loss) income before income taxes............................................ (.7) 4.6 1.7
Benefit (provision) for income taxes.......................................... .3 (1.9) (.7)
---------------------------
Net (loss) income....................................................................... (.4) 2.7 1.0
</TABLE>
Fiscal Year 1998 Compared to Fiscal Year 1997
Sales for fiscal year 1998 increased approximately 10% or $8,576,698 to
$98,302,636 from $89,725,938 in fiscal year 1997. The entire increase in sales
relates to improved results from the Company's locations in Connecticut and
Buffalo, New York which began operations in January 1997 and October 1997,
respectively.
Gross Profit as a percentage of sales decreased to 8.7% in fiscal year 1998
from 13.0% in fiscal year 1997. Included in this decrease is the Company's
writedown of inventory in the amount of $657,491 during fiscal year 1998.
Excluding this writedown, gross profit percentage would have been 9.4% for
fiscal year 1998. The decrease in gross profit percentage was the result of
increased competition and lower selling prices, most notably in the personal
computer segment of the market. In addition, the Company attempted to increase
its sales volume by taking some orders at relatively low margins. As pricing
pressures in the computer market remain intense, the Company is becoming more
selective in its participation in programs that cannot meet profitability
requirements.
Selling and Administrative expenses increased by $1,659,353 or 25% to
$8,193,905 for fiscal year 1998 from $6,534,552 in fiscal year 1997.
Approximately $700,000 of the increase relates to costs associated with the
commencement and growth of operations in the Company's Connecticut, New Jersey,
and Buffalo, New York offices. Professional services and insurance increased by
approximately $250,000 for expenses incurred as a result of the transition to a
public company. The balance relates to payroll and payroll related expenses
incurred as a result of the hiring of systems engineers and additional sales
personnel, along with an increase in commissions paid as a result of the
increased sales volume.
Interest expense decreased $97,872 or 9.9% to $888,215 in fiscal year 1998
from $986,087 in fiscal year 1997. This decrease is a result of a reduction in
debt due to the decrease in inventory during fiscal year 1998. The full impact
of this reduction in inventory on interest expense will be realized during the
first quarter of fiscal year 1999. Additionally, the Company uses all available
funds to reduce its outstanding loan balance on a daily basis. Net interest
expense (interest expense less interest income) for fiscal year 1998 and 1997
was $881,781 and $979,185, respectively.
Losses from operations before income taxes was $719,522 for fiscal year
1998 compared to income from operations before income taxes of $4,165,461 in
fiscal year 1997. This decrease of $4,884,983 is the result of the significant
decline in gross profits along with the Company's writedown of inventory and the
increase in selling and administrative expenses.
As a result of the loss, the Company had a tax benefit for fiscal year 1998
of $272,160. The effective tax rate for fiscal year 1998 was (37.83%). This
compared to a tax provision of $1,761,855 for fiscal year 1997. The effective
tax rate for fiscal year 1997 was 42.3%.
The Company's net loss for fiscal year 1998 was $447,362 or $.10 per
diluted share compared to net income of $2,403,606 or $.61 per diluted share for
fiscal year 1997. The decrease is the result of all the factors described above.
Fiscal Year 1997 Compared to Fiscal Year 1996
Sales for fiscal year 1997 decreased approximately 9% or $8,720,760 to
$89,725,938 from $98,446,698 in fiscal year 1996. The decrease in sales was
anticipated in light of the fact that the Company did not have any large SP-2
sales similar to those that it had in fiscal year 1996. Additionally, the
Company did not have any single customer who accounted for more than
approximately 6% of the Company's total sales.
Gross profit as a percentage of sales increased to 13.0% in fiscal year
1997 from 9.6% in fiscal year 1996. This increase was primarily attributable to
an increase in the Company's service business (which tripled in fiscal year
1997), including the on-site billings of systems engineers as well as income
generated from the sale of vendor leases and warranties.
Selling and administrative expenses increased by approximately 30% or
$1,505,740 to $6,534,552 in fiscal year 1997 from $5,028,812 in fiscal year
1996. Included in the increase of $1,505,740 were increases in payroll of
approximately $900,000 due to the hiring of 20 additional personnel during
fiscal 1997. In addition, the Company expanded an existing office and opened two
new offices in Marlton, New Jersey and North Haven, Connecticut.
Interest expense decreased 29% or $405,365 to $986,087 in fiscal year 1997
from $1,391,452 in fiscal year 1996. This decrease is primarily attributable to
a reduction in debt as a result of the use of proceeds from the Company's recent
public offering. The Company also believes that its constant monitoring of
accounts receivable has helped to keep interest costs at a minimum. In addition,
the Company uses all available funds to reduce its outstanding loan balance on a
daily basis. Net interest expense (interest expense less interest income) for
fiscal year 1997 and 1996 was $979,185 and $1,390,867, respectively.
Income from continuing operations before income taxes increased by 151% to
$4,165,461 in fiscal year 1997 from $1,658,589 in fiscal year 1996. This
increase resulted from a significant increase in the Company's gross profit.
The Company's effective tax rate was 42.3% in fiscal year 1997 and 44.4% in
fiscal year 1996.
The Company's net income for fiscal year 1997 increased to $2,403,606 from
$922,703 in fiscal year 1996 resulting from a combination of all the factors
described above.
Liquidity and Capital Resources
The Company's current ratios at September 30, 1998 and 1997 were 1.63 and
1.40, respectively. Working capital at September 30, 1998 was $9,314,237, a
decrease of $1,042,179 from the prior year.
Cash provided by operating activities was $9,342,275 in fiscal year 1998
and cash used in operating activities was $3,528,240 in fiscal year 1997. The
cash provided during fiscal year 1998 was the result of significant reductions
in both inventory and accounts receivable whereas the cash used in operating
activities in fiscal year 1997 was due to increases in both inventory and
accounts receivable. Cash used in investing activities was $2,607,070 and
$796,017 for the fiscal years 1998 and 1997, respectively, and was used to
finance capital expenditures including approximately $2,300,000 for the
Company's Shirley, New York facility in fiscal year 1998 and $400,000 for land
in fiscal year 1997. A 40,000 square foot facility was completed and occupied in
May 1998 and houses the Company's corporate office, warehouse and assembly
facility. Net cash used in financing activities was $6,258,290 in fiscal year
1998 and net cash provided by financing activities was $3,581,171 in fiscal year
1997. The net cash used in financing activities during fiscal year 1998 related
to payments made under the Company's supplier credit facility. Included in the
cash provided by financing activities for fiscal year 1997 were the proceeds
from the Company's initial public offering.
Since 1992, the Company has had a series of credit arrangements with IBM
Credit Corporation. Pursuant to the Financing Agreement, the Company may borrow
up to 85% of its eligible receivables and 100% of eligible inventory, to a
maximum of $27,500,000. In addition to the permanent credit line, there are
various credit line uplifts during the year which can increase the line of
credit by as much as 50%. As of September 30, 1998 and 1997, interest on the
outstanding borrowings is payable monthly at the prime rate, or prime rate plus
6.5% should the Company fail to meet certain collateral requirements. As of
September 30, 1998 and 1997, borrowings outstanding under this facility were
$3,020,234 and $10,614,838, respectively. Additionally, $9,855,736 and
$12,035,345 were included in accounts payable at September 30, 1998 and 1997,
respectively, and are included against the maximum credit available.
The Company believes that its present line of credit with IBM Credit
Corporation coupled with its projected earnings capacity will be sufficient to
fund its operations and capital expenditures for at least 12 months. In
addition, the Company secured a mortgage during fiscal year 1998 with Chase
Manhattan Bank on its new facility in the amount of $1,650,000. The proceeds of
this mortgage were used to pay down its debt with IBM Credit Corporation.
Throughout fiscal year 1998, the Company has been in a positive collateral
position with IBM Credit Corporation resulting in the ability to draw down
against its current line of credit whenever needed. The number of days sales
outstanding for each of fiscal years 1998 and 1997 was 68 days. The Company is
increasing its efforts in the accounts receivable area and is expecting to
reduce its days sales outstanding in the coming fiscal year.
Seasonality and Quarterly Fluctuations
The Company has historically experienced and expects to continue to
experience fluctuations in its net sales, income from operations and net income
due to the size and timing of system sales transactions. Due to the fact that a
significant portion of the Company's overhead is fixed, the Company's results of
operations may be adversely affected if revenues were to fall below Company
expectations. The Company can typically deliver systems within a short period of
time and therefore does not have a significant long-term backlog in orders.
The following table sets forth certain quarterly information for the
periods indicated:
<TABLE>
<CAPTION>
Fiscal Year 1998
----------------
Sept. 30 June 30 March 31 Dec. 31
(in thousands) 1998 1998 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales.....................................21,596 26,417 22,228 28,062
Gross profit...................................1,410 2,500 1,873 2,814
Income (loss) from continuing operations
before income taxes......................(1,080) 152 (355) 564
Net income (loss)(1)............................(657) 89 (196) 317
(1) Taxes are computed based on effective tax rates for the respective
fiscal years.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
(in thousands) 1997 1997 1997 1996 1996 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $25,848 $24,719 $17,876 $21,283 $26,760 $33,644 $23,487 $14,556
Gross profit 3,791 2,617 2,629 2,640 3,041 2,497 2,393 1,490
Income (loss) from
continuing operations
before income taxes 1,481 868 855 962 (239) 1,022 678 198
Net income (loss)(1) 851 502 490 560 (128) 547 390 114
--------------------------------------------------------------------------------------------
(1) Taxes are computed based on effective tax rates for the respective
fiscal years.
</TABLE>
Recent Pronouncements of the Financial Accounting Standards Board
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and presenting information on comprehensive income and its components
(revenues, expenses, gains, losses and currency translation adjustments) in the
financial statements. Also in June 1997, the FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
effective beginning in fiscal year 1999. This statement revises standards for
public companies to report financial and descriptive information about
reportable operating segments and certain other geographic information. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits, which is effective for fiscal years
commencing after December 15, 1997. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits. In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. This statement standardizes the accounting
methods for derivative instruments and hedging activities. The Company is
evaluating methods for the adoption of these statements, if necessary, and
currently does not expect these new pronouncements to have a material impact on
its consolidated financial statements.
Disclosures Regarding Forward Looking Statements
Management's discussion and analysis of financial conditions and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto appearing elsewhere in
this Report. Except for the historical statements and discussions contained in
this Report, statements contained herein constitute forward looking statements
within the meanings of the Securities Act of 1933 as amended, and Section 21E of
the Securities and Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from the results anticipated in such statements. These risks
and uncertainties include, but are not limited to those set forth herein and the
risk factors described in the Company's prospectus dated June 17, 1997, its Form
10-K for the year ended September 30, 1998 and from time to time in the
Company's other filings with the Securities and Exchange Commission.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900, rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in normal business activities.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose, the term "computer equipment and
software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing and scanning
equipment.
Based upon its identification and assessment efforts to date, the Company
believes that certain of its computer equipment and software that it currently
uses will require replacement or modification. In addition, in the ordinary
course of replacing computer equipment and software, the Company attempts to
obtain replacements that it believes are Year 2000 compliant. Utilizing internal
resources to identify and assess needed Year 2000 remediation, the Company
currently anticipates that its Year 2000 identification, assessment,
remediation, and testing efforts, which began in October 1997, will be completed
by September 30, 1999, and that such efforts will be completed prior to any
currently anticipated impact on its computer equipment and software. The Company
estimates that as of September 30, 1998, it had completed approximately 60% of
the initiatives that it believes will be necessary to fully address potential
Year 2000 issues relating to its computer equipment and software. The projects
comprising the remaining 40% of the initiatives are in process and are expected
to be completed on or about September 30, 1999.
<TABLE>
<CAPTION>
PERCENT
YEAR 2000 INITIATIVE COMPLETE
<S> <C>
Initial IT systems identification and assessment.......................................95%
Remediation and testing regarding central system issues ...............................75%
Remediation and testing regarding branch departmental
system issues.................................................................25%
Electronic data interchange trading partner conversions................................25%
Identification, assessment, remediation, and testing regarding
desktop and individual system issues..........................................25%
</TABLE>
The Company is in the process of surveying its significant vendors and
service providers to determine the extent to which interfaces with such entities
and supply sources are vulnerable to Year 2000 issues and whether the products
and services purchased from or by such entities are Year 2000 compliant. The
Company expects all its vendors and service providers to address all such
significant Year 2000 issues on a timely basis.
The Company believes that the cost of its Year 2000 identification,
assessment, remediation, and testing efforts, as well as currently anticipating
costs to be incurred by the Company with respect to Year 2000 issues of third
parties, will not be material. The Company presently believes that the Year 2000
issue will not pose significant operational problems for the Company. However,
if all Year 2000 issues are not properly identified, or assessment, remediation,
and testing are not effected timely with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issue will not
materially adversely impact the Company" results of operations or adversely
affect the Company's relationships with customers, vendors or others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations.
The Company has begun, but not yet completed, an analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts to achieve Year 2000 compliance on a timely basis. A
contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by September 30, 1999.
The costs of the Company's Year 2000 identification, assessment,
remediation, and testing efforts and the dates on which the Company believes it
will complete such efforts are based upon management's good-faith estimates,
which were derived using numerous assumptions regarding future events, including
the continued availability of certain resources, possible third-party
remediation plans, and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate, and test all relevant computer codes and imbedded technology, and
similar uncertainties. In addition, variability of definitions of "compliance
with Year 2000" and the myriad of different products and services, and
combinations thereof, sold by the Company may lead to claims whose impact on the
Company is not currently estimateable. No assurance can be given that the
aggregate cost of defending and resolving such claims, if any, will not
materially adversely affect the Company's results of operations. Although some
of the Company's agreements with manufacturers and others from whom it purchases
products for resale contain provisions requiring such parties to indemnify the
Company under some circumstances, there can be no assurance that such
indemnification arrangements will cover all of the Company's liabilities and
costs related to claims by third parties related to Year 2000 issue.
Inflation
In the opinion of management, inflation has not had a material effect on
the operations of the Company.
Item 8. Consolidated Financial Statements
The information is contained on Pages F-1 through F-19 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and reports on Form 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
<TABLE>
<CAPTION>
<S> <C>
Index to Consolidated Financial Statements........................................................F-1
Independent Auditors' Report......................................................................F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997.....................................F-3
Consolidated Statements of Income for the years ended
September 30, 1998, 1997 and 1996...............................................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1998, 1997 and 1996.........................................................F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996...............................................................F-6
Notes to Consolidated Financial Statements.................................................F-7 - F-19
(a)(2) FINANCIAL STATEMENT SCHEDULE
Combined Consent and Report of Independent Accountants on Schedule................................S-1
Schedule II - Valuation and Qualifying Accounts...................................................S-2
</TABLE>
(a)(3) EXHIBITS
*3.1 Form of Amended and Restated Certificate of Incorporation
*3.2 Form of Amended and Restated By-Laws
*4.1 Form of Common Stock Certificate
*10.1 1988 Incentive Stock Option Plan
**10.2 1998 Incentive Stock Option Plan
*22.1 List of Subsidiaries
23 Consent of Albrecht, Viggiano, Zureck & Company, P.C.
27 Financial Data Schedule
- ---------------
*Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration Number 333-25593.
**Incorporated by reference from the Registrant's definitive proxy statement
filed with the Securities and Exchange Commission on January 29, 1998.
(b)(1) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last quarter
of its fiscal year ended September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYSCOMM INTERNATIONAL CORPORATION
Registrant
By: /s/ John H. Spielberger
----------------------------
John H. Spielberger, President
Dated: December 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John H. Spielberger Chairman of the Board, President and Chief December 29, 1998
- --------------------------- Executive Officer (Principal Operating Officer)
John H. Spielberger
/s/ Thomas J. Baehr Vice President and Director December 29, 1998
- ---------------------------
Thomas J. Baehr
/s/ Dennis R. Wilson Chief Financial Officer, Vice President, Secretary December 29, 1998
- --------------------------- and Director (Principal Accounting and Financial
Dennis R. Wilson Officer)
/s/ Norman M. Gaffney Director December 29, 1998
- ---------------------------
Norman M. Gaffney
/s/ John C. Spielberger Director
- --------------------------- December 29, 1998
John C. Spielberger
/s/ Cornelia Eldridge Director December 29, 1998
- ---------------------------
Cornelia Eldridge
/s/ Lee Adams Director December 29, 1998
- ---------------------------
Lee Adams
</TABLE>
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TABLE OF CONTENTS
Page No.
INDEPENDENT AUDITORS' REPORT.......................................... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets........................................F-3
Consolidated Statements of Operations..............................F-4
Consolidated Statements of Stockholders' Equity....................F-5
Consolidated Statements of Cash Flows..............................F-6
Notes to Consolidated Financial Statements.........................F-7
<PAGE>
A L B R E C H T , V I G G I A N O , Z U R E C K & C O M P A N Y , P . C .
CERTIFIED PUBLIC ACCOUNTANTS 25 SUFFOLK COURT HAUPPAUGE, NY 11788 (516) 434-9500
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
SysComm International Corporation and Subsidiary
Shirley, New York
We have audited the accompanying consolidated balance sheets of SysComm
International Corporation and Subsidiary as of September 30, 1998 and 1997 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,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly in all material respects, the consolidated financial position of
SysComm International Corporation and Subsidiary as of September 30, 1998 and
1997 and the results of its operations and its cash flows for each of the years
in the three-year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
Hauppauge, New York
November 3, 1998
F-2
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 914,509 $ 437,594
Accounts and note receivable, net 19,612,934 23,209,156
Inventory 2,586,236 12,644,343
Recoverable income taxes 280,976 -0-
Prepaid expenses 83,780 103,672
Investments -0- 84,375
Deferred income taxes 529,793 87,260
------------------ ------------------
Total Current Assets 24,008,228 36,566,400
Property, Plant and Equipment, Net 3,509,345 1,201,549
Other Assets 339,692 336,087
------------------ ------------------
Total Assets $ 27,857,265 $ 38,104,036
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Supplier credit facility $ 3,020,234 $ 10,614,838
Accounts payable and accrued liabilities 11,578,993 15,052,319
Current portion of long-term debt 94,764 43,613
Income taxes payable -0- 499,214
------------------ ------------------
Total Current Liabilities 14,693,991 26,209,984
Long-Term Debt 1,611,355 66,416
------------------ ------------------
Total Liabilities 16,305,346 26,276,400
------------------ ------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock; no par value; 1,000,000
shares authorized; none issued
Common stock; $.01 par value; 40,000,000 shares authorized; 5,515,200 shares
issued at September 30, 1998; 5,017,200 shares issued at September 30,
1997; 4,773,905 shares outstanding at September 30, 1998;
4,555,540 shares outstanding at September 30, 1997 55,152 50,172
Additional paid-in capital 6,317,617 5,610,452
Unrealized loss on available-for-sale securities -0- (60,716)
Retained earnings 5,922,536 6,369,898
------------------ ------------------
12,295,305 11,969,806
Treasury stock (at cost); 741,295 shares at September 30, 1998;
461,660 shares at September 30, 1997 (743,386) (142,170)
------------------ ------------------
Total Stockholders' Equity 11,551,919 11,827,636
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 27,857,265 $ 38,104,036
================== ==================
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Sales $ 98,302,636 $ 89,725,938 $ 98,446,698
Cost of Sales 89,047,731 78,049,310 89,025,331
Writedown of Inventory 657,491 -0- -0-
------------------ ------------------ ------------------
89,705,222 78,049,310 89,025,331
------------------ ------------------ ------------------
Gross Profit 8,597,414 11,676,628 9,421,367
Selling and Administrative Expenses 8,193,905 6,534,552 5,028,812
------------------ ------------------ ------------------
Income from Operations 403,509 5,142,076 4,392,555
------------------ ------------------ ------------------
Other Income (Expense)
Interest expense (888,215) (986,087) (1,391,452)
Interest income 6,434 6,902 585
Other (35,000) 2,570 63,151
Realized loss on available-for-sale
securities (206,250) -0- (1,406,250)
------------------ ------------------- ------------------
Total Other Expense (1,123,031) (976,615) (2,733,966)
------------------ ------------------ ------------------
(Loss) Income Before Income Taxes (719,522) 4,165,461 1,658,589
Benefit (Provision) for Income Taxes 272,160 (1,761,855) (735,886)
------------------ ------------------ ------------------
Net (Loss) Income $ (447,362) $ 2,403,606 $ 922,703
================== ================== ==================
Per Share Data
Basic $ (0.10) $ 0.67 $ 0.29
Diluted (0.10) 0.61 0.25
Weighted Average Shares
Basic 4,593,065 3,562,033 3,170,540
Diluted 4,613,750 3,931,846 3,677,290
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additional Unrealized
Total
Common Stock Paid-In Treasury Stock Loss Retained
Stockholders'
Shares Amount Capital Shares Amount on Securities Earnings Equity
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of September 30,1995 3,170,540 $36,322 $ 138,143 461,660 $(142,170) $(720,000) $ 3,043,589 $ 2,355,884
Net Income 922,703 922,703
Unrealized Loss on Available-for-
Sale Securities (123,750) (123,750)
Realized Loss on Available-for-Sale
Securities 843,750 843,750
---------- --------- ---------- -------- ---------- ----------- ---------- -----------
Balance as of September 30, 1996 3,170,540 36,322 138,143 461,660 (142,170) -0- 3,966,292 3,998,587
Common Stock Sold in Public
Offerings
Net of Offering Costs 1,385,000 13,850 5,472,309 5,486,159
Net Income 2,403,606 2,403,606
Unrealized Loss on Available-for-
Sale Securities (60,716) (60,716)
---------- -------- ---------- -------- --------- ----------- ---------- -----------
Balance as of September 30, 1997 4,555,540 50,172 5,610,452 461,660 (142,170) (60,716) 6,369,898 11,827,636
Net Loss (447,362) (447,362)
Unrealized Loss on Available-for-
Sale Securities (63,034) (63,034)
Realized Loss on Available-for-Sale
Securities 123,750 123,750
Compensatory Stock Options
Issued to Directors 75,225 75,225
Exercise of Stock Options 498,000 4,980 631,940 636,920
Purchase of Treasury Shares (279,635) 279,635 (601,216) (601,216)
---------- --------- ---------- -------- --------- ----------- ---------- -----------
Balance as of
September 30, 1998 4,773,905 $ 55,152 $6,317,617 741,295 $(743,386) $ -0- $5,922,536 $11,551,919
========== ========= ========== ======== ========== ============ =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net (loss) income $ (447,362) $ 2,403,606 $ 922,703
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 299,274 188,759 149,090
Compensatory stock options issued to Directors 75,225 -0- -0-
Deferred tax benefit (208,212) (43,145) (564,114)
Gain on disposition of equipment -0- (2,570) (23)
Realized loss on available-for-sale securities 206,250 -0- 1,406,250
Changes in assets and liabilities:
Accounts and note receivable 3,655,192 (2,255,884) (10,647,117)
Inventory 10,058,107 (3,707,498) (2,960,653)
Recoverable income taxes (280,976) -0- -0-
Prepaid expenses and other assets (42,683) (153,423) 25,819
Accounts payable and accrued liabilities (3,473,326) 611,898 9,245,967
Income taxes payable (499,214) (569,983) 1,046,144
--------------- --------------- ----------------
Net Cash Provided by (Used in) Operating Activities 9,342,275 (3,528,240) (1,375,934)
--------------- --------------- ----------------
Cash Flows From Investing Activities
Purchase of property, plant and equipment (2,607,070) (803,317) (235,388)
Proceeds from disposition of equipment -0- 7,300 450
--------------- --------------- ----------------
Net Cash Used in Investing Activities (2,607,070) (796,017) (234,938)
--------------- --------------- ----------------
Cash Flows From Financing Activities
Net proceeds from (payments under) supplier
credit facility (7,594,604) (1,868,553) 1,686,280
Net proceeds from long-term debt 1,650,000 -0- 58,229
Payments of long-term debt (53,910) (36,435) (17,906)
Net proceeds from issuance of common stock -0- 5,486,159 -0-
Purchase of treasury stock (259,776) -0- -0-
--------------- --------------- ----------------
Net Cash (Used in) Provided by Financing Activities (6,258,290) 3,581,171 1,726,603
--------------- --------------- ----------------
Net Increase (Decrease) in Cash and
Cash Equivalents 476,915 (743,086) 115,731
Cash and Cash Equivalents at Beginning of Year 437,594 1,180,680 1,064,949
--------------- --------------- ----------------
Cash and Cash Equivalents at End of Year $ 914,509 $ 437,594 $ 1,180,680
=============== =============== ================
Supplemental Disclosures of Cash Flow Information Cash paid during the year for:
Income taxes $ 809,910 $ 2,386,580 $ 248,606
Interest 888,215 986,087 1,391,452
Supplemental Schedules of Noncash Investing
and Financing Activities
Purchase of treasury stock:
Proceeds from sale of stock options $ 341,440 $ -0- $ -0-
Purchase of treasury stock (601,216) -0- -0-
--------------- --------------- ----------------
Cash Paid for Treasury Stock $ (259,776) $ -0- $ -0-
=============== ============== ================
Acquisition of equipment:
Cost of equipment $ -0- $ 52,547 $ 53,594
Equipment financed -0- (52,547) (53,594)
--------------- --------------- ----------------
Cash Paid for Equipment $ -0- $ -0- $ -0-
=============== =============== ================
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Business Organization and Basis of Presentation
SysComm International Corporation (the "Company"), incorporated on
September 30, 1987, is a Delaware corporation with one active subsidiary:
Information Technology Services, Inc. (doing business as InfoTech, a New York
Corporation since 1980).
The Company, through its subsidiary, is authorized to conduct business in
New York, New Jersey, Connecticut and Massachusetts. The Company is a supplier
and systems integrator of a broad range of computer and related products.
On March 31, 1997, the Company effected a two-for-one split of common
stock. All references in the accompanying consolidated financial statements and
notes thereto relating to common stock and additional paid-in capital, stock
options, per share and share data have been retroactively adjusted to reflect
the two-for-one stock split.
On April 21, 1997, a special meeting of the stockholders was held to amend
the Certificate of Incorporation to increase the aggregate of authorized shares
of common stock from 5,000,000 shares of common stock to 40,000,000 shares of
common stock and to authorize 1,000,000 shares of preferred stock. The preferred
stock is not expected to be issued at any time in the near future. The preferred
stock's rights, preferences and characteristics will be determined by the Board
of Directors at such time as the preferred stock is issued.
On June 17, 1997, the Company consummated an initial public offering of
common stock (the "Offering"). The Company sold 1,250,000 shares at $5.00 per
share. On July 21, 1997, the underwriters exercised their over-allotment option
to purchase an additional 135,000 shares. In connection with the Offering,
125,000 warrants were granted to the Company's representative underwriter. The
fair value was estimated at $.52 per warrant using the Black-Scholes pricing
model. The fair value of these warrants were offset against the Offering
proceeds.
Basis of Consolidation
The consolidated financial statements include the accounts of SysComm
International Corporation and its wholly-owned subsidiary. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for stock options as prescribed by Accounting
Principles Board Opinion No. 25 and includes pro forma information in the stock
option plan footnote, as permitted by Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123").
Accordingly, no compensation cost is recognized for stock options granted to
employees since the option exercise price is not less than the market price of
the underlying stock on the date of grant. Compensation cost is recognized for
stock options granted to nonemployees based upon the fair market value of the
options granted.
Accounts and Note Receivable
Accounts and note receivable are presented net of allowances for doubtful
accounts and for sales returns. The allowances are based on prior experience and
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 $116,606 and $108,343 as of
September 30, 1998 and 1997, respectively.
The allowance for sales returns was $37,389 as of September 30, 1998 and
1997.
Inventory
Inventory consists principally of computer hardware and software, and is
valued at the lower of cost (first-in, first-out) or market. Substantially all
inventory items are finished goods.
With regard to the Company's assessment of the realizability of inventory,
the Company periodically conducts a complete physical inventory, and reviews the
movement of inventory on an item by item basis to determine the value of items
which are slow moving. After considering the potential for near term product
engineering changes and/or technological obsolescence and current realizability
due to changes in returns and price protection policies, the Company determines
the current need for valuation allowances. After applying the above noted
measurement criteria at September 30, 1998 and 1997, the Company determined that
an allowance of $284,000 and $-0-, respectively, was adequate.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are charged against
operations as incurred. Upon retirement or sale, the assets disposed are removed
from the accounts and any resulting gain or loss is reflected in the results of
operations. Capitalized values of property under leases are amortized over the
life of the lease or the estimated life of the asset, whichever is less.
F-8
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment (continued)
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
Estimated
Useful Lives
Vehicles 1-5 years
Computer equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements 5 years
Building 39 years
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. A valuation allowance against deferred tax assets is not
considered necessary because it is more likely than not that the deferred tax
asset will be fully realized.
Investments
The Company evaluates its investment policies consistent with Financial
Accounting Standards Board Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities ("SFAS 115"). Accordingly, investment securities
are classified as available-for-sale securities and carried at fair value, with
temporary unrealized gains and losses reported as a separate component of
stockholders' equity. Realized losses are recorded for any decline in value
determined to be other-than-temporary on available-for-sale securities.
Revenue Recognition
Revenue related to the sales of computer equipment is recorded at the time
of shipment. Service revenue and costs are recognized when services are
provided.
Earnings (Loss) Per Common Share
In February 1997, the Financial Accounting Standard Board issued SFAS No.
128, Earnings per Share. This pronouncement requires the reporting of two net
income (loss) per share figures: basic net income (loss) per share and diluted
net income (loss) per share. Basic net income (loss) is calculated by dividing
net income (loss) by the weighted-average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by dividing
net income (loss) by the sum of the weighted-average number of common shares
outstanding during the period plus the dilutive effect of shares issuable
through stock options and warrants. All prior period net income (loss) per share
figures presented herein have been restated in accordance with the provisions of
SFAS No. 128.
F-9
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Earnings (Loss) Per Common Share (continued)
A reconciliation of the weighted-average number of common shares outstanding
used in the calculations of basic and diluted earnings (loss) per share follows.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 1998 September 30, 1997 September 30, 1996
Basic Dilutive Basic Dilutive Basic Dilutive
<S> <C> <C> <C> <C> <C> <C>
Weighted-average number
of common shares outstanding 4,593,065 4,593,065 3,562,033 3,562,033 3,170,540 3,170,540
============== ============= =============
Dilutive options to
purchase common shares 20,685 369,813 506,750
----------- ------------- ------------
4,613,750 3,931,846 3,677,290
=========== ============= ============
</TABLE>
The dilutive effect of 57,000 options granted in 1997 at exercise prices
ranging from 5.5625 to 6.1875 were not included in the computation of diluted
earnings (loss) per share for the year ended September 30, 1998 because they are
anti-dilutive.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and presenting information on comprehensive income and its components
(revenues, expenses, gains, losses and currency translation adjustments) in the
financial statements. Also in June 1997, the FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
effective beginning in fiscal 1999. This statement revises standards for public
companies to report financial and descriptive information about reportable
operating segments and certain other geographic information. In February 1998,
the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which is effective for fiscal years beginning after
December 15, 1997. This statement standardizes the disclosure requirements for
pensions and other postretirement benefits. In June 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. This statement standardizes the accounting for derivative instruments and
hedging activities. The Company is evaluating methods for adoption of these
statements, if necessary, and currently does not expect these new pronouncements
to have a material impact on its consolidated financial statements.
Cash and Cash Equivalents
The Company considers all liquid instruments purchased with a maturity of
three months or less to be cash equivalents.
F-10
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, prepaid expenses, accounts payable and accrued
liabilities, approximate fair value due to the relatively short maturity of
these instruments. The fair value of investments is estimated based on quoted
market price. The carrying value of the supplier credit facility and long-term
debt, including the current portion, approximates fair value based on the
incremental borrowing rates currently available to the Company for financing
with similar terms and maturities.
Note 2 - Investments
<TABLE>
<CAPTION>
Investments consist of the following:
1998 1997
----------------- -----------------
<S> <C> <C>
Ameriquest Technologies, Inc.
(Formerly CMS Enhancements, Inc.)
Number of Shares 300,000 300,000
Fair Value $ -0- $ 84,375
Cost $ 1,612,500 $ 1,612,500
</TABLE>
At September 30, 1998 and 1997, marketable equity securities have been
categorized as available-for-sale and are stated at fair value. At September 30,
1997, an unrealized holding loss of $60,716 was shown as a separate component of
stockholders' equity until realized. The increase in the net unrealized loss for
the years ended September 30, 1998, 1997, and 1996 totaled $63,034, $60,716 and
$123,750, respectively. The Company recorded a realized loss on
available-for-sale securities of $206,250 and $1,406,250, which net of deferred
taxes amounted to $123,750 and $843,750 for the years ended September 30, 1998
and 1996, respectively, since the decline in value was determined to be
other-than-temporary as of those dates.
Note 3 - Property, Plant and Equipment
Property, plant and equipment is set forth below:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Land $ 437,660 $ 437,660
Building 2,325,480 26,740
Vehicles 119,159 119,159
Computer equipment 833,767 698,911
Furniture and fixtures 501,101 327,627
Leasehold improvements 117,691 117,691
----------------- -----------------
4,334,858 1,727,788
Accumulated depreciation (825,513) (526,239)
----------------- -----------------
Property, plant and equipment, net $ 3,509,345 $ 1,201,549
================= =================
</TABLE>
F-11
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Other Assets
The Company is the owner and beneficiary of a $1,000,000 whole life policy
covering the life of the principal stockholder/officer. The cash surrender value
of life insurance included in Other Assets as of September 30, 1998 and 1997
amounted to $208,267 and $176,350, respectively.
Note 5 - Financing Arrangements
The Company entered into a formal credit agreement with the financing
subsidiary of its major supplier. Under the credit facility, the Company may
borrow up to 85% of receivables due within 90 days and up to 100% of eligible
inventory, to a maximum of $27,500,000. The agreement, which expires September
24, 1999, is subject to temporary increases, thereby increasing the line of
credit to $41,500,000 during certain periods. As of September 30, 1998 and 1997,
borrowings outstanding under this facility were $3,020,234 and $10,614,838,
respectively. As of September 30, 1998 and 1997, interest on the outstanding
borrowings is payable monthly at prime, or prime plus 6.5%, should the Company
fail to meet certain collateral requirements. Interest costs included in
interest expense for the years ended September 30, 1998, 1997 and 1996 totaled
$851,708, $970,912, and $1,381,373, respectively. Additionally, $9,855,736 and
$12,035,345 were included in accounts payable at September 30, 1998 and 1997,
respectively, and are included against the maximum credit available.
Note 6 - Long-Term Debt
Long-term debt consists of the following:
<TABLE>
1998 1997
--------------- ---------------
<S> <C> <C>
CHASE MANHATTAN BANK
Mortgage loan in the amount of $1,650,000 collateralized by the land and building
in Shirley, New York; payable in monthly installments of $14,979 including
interest of 7.16% per annum; final payment due December 2012. $ 1,639,702 $ -0-
FORD MOTOR CREDIT CORP.
Collateralized by a lien on a Company automobile; payable in 36 monthly
installments of $815 including interest of 9.0% per annum; final payment due
October 1999.
10,060 18,517
Collateralized by a lien on a Company automobile; payable in 36 monthly
installments of $1,194 including interest of 9.9% per annum; final payment
due
December 1998. 3,529 16,781
Collateralized by a lien on a Company automobile; payable in 36 monthly
installments of $678 including interest of 9.0% per annum; final payment due
November 1998. 1,341 8,978
--------------- ---------------
(carried forward) 1,654,632 44,276
F-12
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Long Term Debt (continued)
1998 1997
--------------- ---------------
(brought forward) 1,654,632 44,276
AT&T CREDIT CORP.
Capital lease collateralized by a lien on the Company's phone system; payable
in monthly installments of $708 including interest of 14.446% per annum;
final
payment due May 2001. 18,706 24,069
Capital lease collateralized by a lien on the Company's phone system; payable
in monthly installments of $542 including interest of 15.089% per annum;
final
payment due January 2001. 12,838 17,158
Capital lease collateralized by a lien on the Company's phone system; payable
in monthly installments of $560 including interest of 9.5% per annum; final
payment
due March 2002. 19,943 24,526
--------------- ---------------
1,706,119 110,029
Current maturities (94,764) (43,613)
--------------- ---------------
$ 1,611,355 $ 66,416
</TABLE>
Maturities of long-term debt are as follows:
September 30, 1999 $ 94,764
2000 88,441
2001 87,882
2002 83,085
2003 85,721
Thereafter 1,266,226
---------------
$ 1,706,119
Note 7 - Capital Leases
As further described in Note 6, the Company began leasing telephone
equipment during December 1995. As of September 30, 1998 and 1997, the gross
assets capitalized under telephone equipment leases totaled $80,745 and the
accumulated amortization totaled $25,685 and $13,851, respectively. The
amortization expense for the years ended September 30, 1998 and 1997 of $11,834
and $9,959, respectively, is included in depreciation expense.
F-13
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Income Taxes
<TABLE>
<CAPTION>
The provision (benefit) for income taxes consists of the following:
Years Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ (63,948) $ 1,285,000 $ 956,000
State -0- 520,000 344,000
--------------- --------------- ----------------
Total Current (63,948) 1,805,000 1,300,000
--------------- --------------- ----------------
Deferred:
Federal (168,652) (32,440) (479,642)
State (39,560) (10,705) (84,472)
--------------- --------------- ----------------
Total Deferred (208,212) (43,145) (564,114)
--------------- --------------- ----------------
Provision (Benefit) for Income Taxes $ (272,160) $ 1,761,855 $ 735,886
=============== =============== ================
</TABLE>
The difference between the provision (benefit) for income taxes at the
Company's effective income tax rate and the federal statutory rate of 34% is as
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Income taxes at statutory rate $ (244,637) $ 1,416,258 $ 563,920
State taxes, net of federal benefit -0- 333,237 132,687
Other (27,523) 12,360 39,279
--------------- --------------- ----------------
Provision (Benefit) for Income Taxes $ (272,160) $ 1,761,855 $ 735,886
=============== =============== ================
</TABLE>
The tax effects of temporary differences giving rise to significant
portions of deferred taxes are as follows:
<TABLE>
<CAPTION>
September 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Allowance for doubtful accounts $ 48,975 $ 45,504
Inventory 126,792 40,701
Investments 18,096 (17,342)
Depreciation (24,636) 508
Vacation accrual 33,491 17,889
Stock options 327,075 -0-
--------------- ---------------
Net Deferred Tax Asset $ 529,793 $ 87,260
=============== ===============
</TABLE>
F-14
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock Option Plans
The 1988 stock option plan expired on May 5, 1998. In February 1998, a new
stock option plan (the "Plan") was approved by the stockholders, whereby 500,000
shares of common stock are reserved for issuance upon the exercise of options
designated as either incentive stock options or non-qualified stock options. The
Plan will terminate in February 2008; however, options granted under the Plan
will expire not more than ten years from the date of grant.
In the case of options granted to an employee of the Company who is a 10%
or more stockholder, the option price is an amount per share of not less than
110% of the fair market value per share on the date the option is granted. The
option price for options granted to all other employees and non-employee
Directors of the Company is an amount per share of not less than the fair market
value per share on the date the option is granted.
The options granted in 1997 vest over a four-year period following the date
of grant and expire on September 1, 2001. On September 1, 1998, 40,000 options
were granted to Directors of the Company at $1.875 with immediate vesting and a
five-year life.
A summary of stock option activity related to the Company's plans 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, 1996
Number of shares 568,000 0 0 70,000 498,000 164,340
Weighted average exercise price
per share $ 0.69 0 0 $ 0.68 $ 0.69 $ 0.69
Year ended September 30, 1997
Number of shares 498,000 69,500 0 3,000 564,500 328,680
Weighted average exercise price
per share $ 0.69 $ 5.59 0 $ 5.56 $ 1.26 $ 0.69
Year ended September 30, 1998
Number of shares 564,500 40,000 498,000 9,500 97,000 54,250
Weighted average exercise price
per share $ 0.69 $ 1.875 $ 0.69 $ 5.56 $ 4.06 $ 2.85
</TABLE>
The weighted average per share fair value of the options granted during the
years ended September 30, 1998 and 1997 was estimated as $1.70 and $2.89,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
1998 1997
------------------ --------------------
Risk-free interest rates 4.234% 5.698%
Expected option lives 4.92 years 4.57 years
Expected volatilities 147% 60%
Expected dividend yields 0% 0%
F-15
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock Option Plans (continued)
The weighted-average remaining contractual life of the options outstanding
at September 30, 1998 is as follows:
Number Weighted-Average Remaining
Outstanding Range of Exercise Prices Contractual Life
57,000 $5.56 - $6.12 2.92 years
40,000 1.875 4.92 years
Had compensation expense for stock option awards granted been determined
consistent with SFAS 123, net income (loss) and earnings (loss) per share would
be reduced to the pro forma amounts indicated below:
1998
Net income (loss)
As reported $ (447,362)
Pro forma (467,057)
Earnings (loss) per share - basic
As reported $ (0.10)
Pro forma (0.10)
Earnings (loss) per share - diluted
As reported $ (0.10)
Pro forma (0.10)
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, 1998, 1997, and 1996, the Company
incurred 401(k) costs totaling $19,945, $42,986 and $31,738, respectively.
F-16
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Concentration of Credit Risk
Cash
The Company places most of its temporary cash investments with one
financial institution and normally exceeds the Federal Deposit Insurance
Corporation limit. The Company has not experienced any loss to date as a result
of this policy.
Major Customers
Computer sales encompass markets wherein the demands of any one customer
may vary greatly due to changes in technology. No single customer comprised more
than 10% of sales or accounts receivable as of and for the years ended September
30, 1998 and 1997. In comparison, two customers comprised 16% and 19%,
respectively, of sales for the year ended September 30, 1996.
Note 12 - Commitments and Contingencies
Purchases
As further discussed in Note 5, the Company purchases a majority of its
products from International Business Machines Corporation, whose subsidiary
represents the Company's major lending source. The loss of this supplier could
materially affect the Company. Purchases from this supplier represented
approximately 85%, 90% and 90% of total purchases for the each of the years
ended September 30, 1998, 1997 and 1996, respectively.
Leases
The Company has operating leases on real property and equipment expiring
through the year 2002. In addition to fixed rentals, the real property leases
have escalation clauses that require the Company to pay a percentage of common
area maintenance, real estate taxes, and insurance.
Rent expense and other charges totaled $387,837, $309,861 and $253,412 for
the years ended September 30, 1998, 1997 and 1996, respectively.
The future minimum rental commitments are as follows:
September 30, 1999 $ 218,607
2000 148,232
2001 141,834
2002 65,590
2003 1,855
----------------
$ 576,118
F-17
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Commitments and Contingencies (continued)
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 were reviewed during 1998
and new incentive plans and salaries were implemented by the Company's
Compensation Committee for the fiscal year 1998, as follows.
John H. Spielberger will receive $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 of
InfoTech based on sales volume; 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 of
InfoTech and 1% of the pre-tax earnings of InfoTech.
Effective September 1, 1998, John H. Spielberger and Dennis R. Wilson
volunteered to accept a 20% salary reduction. Effective October 1, 1998, Thomas
J. Baehr and Norman M. Gaffney volunteered to also accept a 20% salary
reduction.
Purchase Commitment
In March 1997, the Company commenced operation of an IBM PC assembly
facility under IBM's Authorized Assembler Program (the "AAP"). Under the terms
of the AAP Agreement with IBM, the Company will use its best efforts to purchase
a sufficient number of Base System Units and Approved Components to enable it to
assemble at least 20% of the Company's actual sales volume of PCs.
Litigation
The Company was a defendant in a lawsuit which alleged wrongful termination
of employment. The action had been in the discovery stage since 1992. Effective
April 14, 1998, the Company entered into a Confidential Settlement Agreement and
General Release with the plaintiff. Neither the execution of the Agreement nor
the Agreement itself is an admission of liability or wrongdoing by the Company.
In consideration of the obligations of the plaintiff and in full and complete
settlement and final satisfaction of any claims which plaintiff may have against
the Company, the Company agreed to pay plaintiff $35,000 as full and complete
settlement of the Action. The Company has no other legal actions pending.
F-18
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Quarterly Financial Data (unaudited)
Quarterly financial data for the years ended September 30, 1998, 1997 and
1996 follow:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
For the year ended September 30, 1998:
Net sales $ 28,062,283 $ 22,227,999 $ 26,416,609 $ 21,595,745
Gross profit 2,814,257 1,873,150 2,499,527 1,410,480
Income (loss) from operations 809,056 (150,853) 432,074 (686,768)
Net income (loss) 316,768 (196,140) 89,088 (657,078)
Net income (loss) per share:
Basic 0.07 (0.04) 0.02 (0.15)
Diluted 0.06 (0.04) 0.02 (0.14)
For the year ended September 30, 1997:
Net sales $ 21,282,537 $ 17,876,338 $ 24,718,664 $ 25,848,399
Gross profit 2,639,498 2,629,349 2,617,138 3,790,643
Income from operations 1,275,495 1,036,205 1,072,381 1,757,995
Net income 559,642 490,673 502,347 850,944
Net income per share:
Basic 0.18 0.15 0.15 0.19
Diluted 0.16 0.14 0.14 0.17
For the year ended September 30, 1996:
Net sales $ 14,555,620 $ 23,487,203 $ 33,644,269 $ 26,759,606
Gross profit 1,490,660 2,392,934 2,496,850 3,040,923
Income from operations 497,195 1,003,673 1,373,325 1,518,362
Net income (loss) 114,214 389,489 547,000 (128,000)
Net income (loss) per share:
Basic 0.04 0.12 0.17 (0.04)
Diluted 0.03 0.11 0.15 (0.04)
</TABLE>
F-19
<PAGE>
COMBINED CONSENT AND REPORT OF
INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Board of Directors
SysComm International Corporation and Subsidiary
Hauppauge, New York
The audits referred to in our report on page F-2 included the related
financial statement schedule on page S-2 as of September 30, 1998, and for each
of the years in the three-year period ended September 30, 1998, included in this
Form S-1. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
November 30, 1998
S-1
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at (1) Charged (2) Charged Balance
Beginning to Costs and to Other at End
Deducted from Assets of Period Expenses Accounts Deductions of Period
-------------------- ---------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended September 30, 1996 $ 50,000 $ 107,273 $ -0- $ 93,427(a) $ 63,846
Year ended September 30, 1997 63,846 125,000 -0- 80,503(a) 108,343
Year ended September 30, 1998 108,343 151,000 -0- 142,737(a) 116,606
Allowance for Sales Returns:
Year ended September 30, 1996 $ 125,000 $ -0- $ -0- $ 87,611(a) $ 37,389
Year ended September 30, 1997 37,389 -0- -0- -0- 37,389
Year ended September 30, 1998 37,389 -0- -0- -0- 37,389
Allowance for Net Unrealized Losses
on Marketable Equity Securities:
Year ended September 30, 1996 $ 720,000 $ -0- $123,750(b) $ 843,750(c) $ -0-
Year ended September 30, 1997 -0- -0- 60,716(b) -0- 60,716
Year ended September 30, 1998 60,716 -0- 63,034(b) 123,750(c) -0-
Allowance for Inventory
Obsolescence:
Year ended September 30, 1996 $ -0- $ -0- $ -0- $ -0- $ -0-
Year ended September 30, 1997 -0- -0- -0- -0- -0-
Year ended September 30, 1998 -0- 657,491 -0- 373,491(d) 284,000
(a) Amounts written off, net of recoveries.
(b) Net unrealized loss on marketable equity securities recorded in
stockholders' equity.
(c) Net realized loss on marketable equity
securities.
(d) Realized loss on sale of inventory.
</TABLE>
S-2
Exhibit 23
To the Board of Directors
SysComm International Corporation and Subsidiary
Shirley, New York
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in this Form 10-K.
ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
November 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037417
<NAME> SYSCOMM INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> SEP-30-1998
<CASH> 914,509
<SECURITIES> 0
<RECEIVABLES> 17,600,879
<ALLOWANCES> 116,607
<INVENTORY> 2,586,236
<CURRENT-ASSETS> 24,008,228
<PP&E> 4,334,858
<DEPRECIATION> 825,513
<TOTAL-ASSETS> 27,857,265
<CURRENT-LIABILITIES> 14,693,991
<BONDS> 1,706,119
0
0
<COMMON> 55,152
<OTHER-SE> 11,496,767
<TOTAL-LIABILITY-AND-EQUITY> 27,857,265
<SALES> 98,302,636
<TOTAL-REVENUES> 98,302,636
<CGS> 89,047,731
<TOTAL-COSTS> 89,705,222
<OTHER-EXPENSES> 8,193,905
<LOSS-PROVISION> 151,000
<INTEREST-EXPENSE> 888,215
<INCOME-PRETAX> (719,522)
<INCOME-TAX> (272,160)
<INCOME-CONTINUING> (447,362)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (447,362)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
