Form 10-Q Quarterly Report
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number 0-22693
SYSCOMM INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2889809
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
275 Marcus Blvd.
Hauppauge, N.Y. 11788
(Address of Principal Executive Offices and Zip Code)
(516) 273-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
Number of shares outstanding of the issuer's Common Stock, par value $.01
per share, as of May 4, 1998: 4,555,540 shares.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SYSCOMM INTERNATIONAL CORPORATION
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
3/31/98 3/31/97 3/31/98 3/31/97
<S> <C> <C> <C> <C>
Net sales $ 22,227,999 $ 17,876,338 $ 50,290,282 $ 39,158,875
Cost of sales 20,354,849 15,246,989 45,602,875 33,890,028
------------- ------------- ------------- -------------
Gross profit 1,873,150 2,629,349 4,687,407 5,268,847
------------- ------------- ------------- -------------
Selling & administrative expenses 2,024,003 1,593,144 4,029,204 2,957,149
------------- -------------- ------------- --------------
Income (loss) from operations (150,853) 1,036,205 658,203 2,311,698
------------- -------------- ------------- --------------
Other income (expenses)
Interest expenses (208,075) (238,366) (455,869) (552,143)
Other 3,788 56,934 6,294 57,560
------------- --------------- ------------- --------------
Total other expenses (204,287) (181,432) (449,575) (494,583)
------------- --------------- -------------- --------------
Income (loss) from operations
before income taxes (355,140) 854,773 208,628 1,817,115
Provision (benefit) for income taxes (159,000) 364,100 88,000 766,800
--------------- -------------- ------------- ---------------
Net income (loss) $ (196,140) $ 490,673 $ 120,628 $ 1,050,315
============== ============== ============= =============
Net income (loss) per common share
Basic $ (0.04) $ 0.15 $ 0.03 $ 0.33
Diluted $ (0.04) $ 0.14 $ 0.02 0.31
Weighted average number of common
shares outstanding
Basic 4,555,540 3,170,540 4,555,540 3,170,540
Diluted 4,981,619 3,442,915 4,987,451 3,429,487
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1998 September 30, 1997
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 624,409 $ 437,594
Accounts and note receivable, net 20,231,842 23,209,156
Inventory 7,922,516 12,644,343
Other 607,445 275,307
--------------- ---------------
Total current assets 29,386,212 36,566,400
------------- ---------------
Property, plant and equipment, net 3,060,978 1,201,549
Other assets 345,120 336,087
--------------- ---------------
Total assets $ 32,792,310 $ 38,104,036
=============== ===============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Supplier credit facility $ 9,434,252 $ 10,614,838
Accounts payable and accrued liabilities 11,343,500 15,052,319
Income taxes payable --- 499,214
Other current liabilities 39,617 43,613
--------------- ---------------
Total current liabilities 20,817,369 26,209,984
Long-term liabilities 49,177 66,416
--------------- ---------------
Total liabilities 20,866,546 26,276,400
--------------- ---------------
Stockholders' Equity:
Preferred stock, $.01 par value - -
Common stock, $.01 par value 50,172 50,172
Additional paid-in capital 5,610,452 5,610,452
Unrealized loss on available-for-
sale securities (83,216) (60,716)
Retained earnings 6,490,526 6,369,898
Less: Treasury stock (at cost) (142,170) (142,170)
---------------- ----------------
Total stockholders' equity 11,925,764 11,827,636
---------------- ----------------
Total liabilities and
stockholders' equity $ 32,792,310 $ 38,104,036
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 120,628 $ 1,050,315
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 136,800 81,437
Gain on disposition of fixed assets - 0 - (2,570)
Changes in assets and liabilities
Accounts and note receivable 2,977,314 7,177,650
Inventory 4,721,827 233,831
Other assets (363,671) (177,222)
Accounts payable and accrued liabilities (3,708,819) (2,056,139)
Income taxes payable (499,214) (968,702)
-------------- --------------
Net Cash Provided by Operating Activities 3,384,865 5,338,600
-------------- --------------
Cash Flows from Investing Activities
Purchase of fixed assets (1,996,229) (221,016)
Proceeds from disposition of fixed assets -0- 7,300
-------------- --------------
Net Cash Used in Investing Activities (1,996,229) (213,716)
-------------- ---------------
Cash Flows From Financing Activities
Net payments under supplier credit facility (1,180,586) (5,616,120)
Payments of long-term liabilities (21,235) (17,217)
--------------- ---------------
Net Cash Used by Financing Activities (1,201,821) (5,633,337)
--------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 186,815 (508,453)
Cash and Cash Equivalents at Beginning of Period 437,594 1,180,680
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 624,409 $ 672,227
=============== ===============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes $ 788,500 $ 1,735,528
Interest 455,869 552,143
Supplemental Schedules of Non-cash Investing and
Financing Activities
Acquisition of equipment:
Cost of Equipment $ -0- $ 49,125
Less: Equipment financed -0- (49,125)
--------------- ----------------
Cash Paid for Capital Expenditures $ -0- $ -0-
=============== ================
</TABLE>
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements of SysComm International
Corporation (the "Company") are unaudited (except for the balance sheet
information as of September 30, 1997, which is derived from the Company's
audited financial statements) and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for the
interim periods. The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto,
contained in the Company's Annual Report. The results of operations for the
three and six months ended March 31, 1998 are not necessarily indicative of the
results for the entire fiscal year ending September 30, 1998, or any future
interim period.
2. Commitments and Contingencies
(A) Employment Agreements
Effective June 17, 1997, the Company entered into two-year employment
agreements with four senior executives. The employment agreements include
compensation plans for fiscal 1998 as follows: John H. Spielberger will receive
a base salary of $160,000 plus a bonus based on a percentage of pre-tax earnings
of the Company based on sales volume; Thomas J. Baehr will receive $160,000 plus
a bonus of a percentage of pre-tax earnings based on sales volume of Information
Technology Services, Inc. ("InfoTech"); the Company's wholly-owned subsidiary;
Dennis R. Wilson will receive $140,000 plus a discretionary bonus determined by
the Compensation Committee; and Norman M. Gaffney will receive $140,000 plus a
bonus of 1% of the gross profit dollars and 1% of the pre-tax earnings of
InfoTech. These annual performance incentive plans will be reviewed during the
fiscal year and new incentive plans may be implemented by the Company's
Compensation Committee for the fiscal year 1999, and thereafter as applicable.
(B) Litigation
The Company was a defendant in a lawsuit which alleged wrongful termination
of employment. The action had been in the discovery stage since 1992. Effective
April 14, 1998, the Company entered into a Confidential Settlement Agreement and
General Release with the plaintiff. Neither the execution of the Agreement nor
the Agreement itself is an admission of liability or wrongdoing by the Company.
In consideration of the obligations of the plaintiff and in full and complete
settlement and final satisfaction of any claims which plaintiff may have against
the Company, the Company agreed to pay plaintiff $35,000 as full and complete
settlement of the Action. The Company has no other legal actions pending.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
Results of Operations: Three Months Ended March 31, 1998 Compared with
Three Months Ended March 31, 1997
Net loss for the three months ended March 31, 1998 was $196,140 compared to
net income of $490,673 for the same period last year. Basic loss per share was
$.04 for the three months ended March 31, 1998 compared to Basic earnings per
share of $.15 for the same period last year. Basic earnings per share was
calculated using 4,555,540 common shares outstanding for the three months ended
March 31, 1998 versus 3,170,540 common shares outstanding for the same period
last year.
Revenues: Sales for the three months ended March 31, 1998 were $22,227,999
compared to $17,876,338 for the same period last year an increase of $4,351,661
or 24%. Approximately $3,100,000 of the sales increase relates to sales
generated by the continued improvement of the Company's new locations in
Connecticut and New Jersey which began operations in January 1997, and Buffalo,
New York which began operations in October 1997.
Gross Profit: Gross Profit as a percentage of sales decreased to 8.4% for
the three months ended March 31, 1998 compared to 14.7% for the same period last
year. This reduction in gross profit percentage was due primarily to tighter
competition especially in the personal computer segment of the market.
Additionally, the Company did not meet vendor's quotas which limited the amount
of soft dollars or vendor rebates it received. Also, in order to increase sales
volume, the Company took some large sales with relatively low margins.
Selling & Administrative Expenses: Selling and administrative expenses
increased by $430,859 or 27% to $2,024,003 from $1,593,144 for the same period
last year. The increase in expenses relates to the costs associated with the
growth in the Connecticut; New Jersey; and Buffalo, New York offices as well as
payroll and payroll related expenses due to the hiring of 20 additional
personnel.
Interest Expense: Interest expense for the three months ended March 31,
1998 decreased $30,291 or approximately 13% to $208,075 from $238,366 for the
same period last year. Although the Company did use a majority of the proceeds
from the Company's 1997 public offering to reduce debt, the increase in accounts
receivables due to the increased sales volume and the funding of the new
facility actually increased the amount of debt outstanding from the same period
last year.
<PAGE>
Income (loss) from Operations before Income Taxes: Income (loss) from
operations before income taxes was a loss of $355,140 for the three months ended
March 31, 1998 compared to income of $854,773 for the same period last year. The
decrease is attributable to a decrease in gross profit percentage along with
increases in selling and administrative expenses.
Taxes: The Company had a tax benefit of $159,000 for the three months ended
March 31, 1998 compared to a tax liability of $364,100 or an effective tax rate
of 42.6% for the same period last year.
Six Months Ended March 31, 1998 Compared With Six Months Ended March 31,
1997.
Net income for the six months ended March 31, 1998 decreased by $929,687 or
89% to $120,628 from $1,050,315 for the same period last year. Basic earnings
per share was $.03 for the six months ended March 31, 1998 compared to $.33 for
the same period last year. Basic earnings per share was calculated using
4,555,540 common shares outstanding for the six months ended March 31, 1998
versus 3,170,540 common shares outstanding for the same period last year. The
decrease in net income is attributable to the reduction in gross profit
percentage during the six months ended March 31, 1998.
Revenues: Sales for the six months ended March 31, 1998 were $50,290,282
compared to $39,158,875 for the same period last year an increase of $11,131,407
or 28%. Approximately $7,200,000 of the sales increases relates to sales
generated by the Company's new locations in Connecticut and New Jersey, which
began operations in January 1997 and Buffalo, New York which began operations in
October 1997.
Gross Profit: Gross profit as a percentage of sales decrease to 9.3% for
the six months ended March 31, 1998 as compared to 13.5% for the same period
last year. The reduction in gross profit is attributable to a more competitive
market, especially in the personal computer segment of the market. Additionally,
since the Company did not attain its vendors quotas, the amount of money it
received is soft dollars and vendor rebate was reduced. Also, the Company , in
an effort to increase its sales volume, had several large volume sales with
relatively low margins.
Selling & Administrative Expenses: Selling and administrative expenses
increased by $1,072,055 or 36% to $4,029,204 from $2,957,149 for the same period
last year. The increases in expenses relates to the cost associated with the
growth in the Connecticut; New Jersey; and Buffalo, New York locations as well
as payroll and payroll related expenses due to the hiring of 20 additional
personnel and increased commissions on the increased sales volume.
<PAGE>
Interest Expense: Interest expense for the six months ended March 31, 1998
decreased $96,274 or 17% to $455,869 from $552,143 for the same period last
year. The net decrease is primarily attributable to the reduction in debt as a
result of the use of proceeds for the Company's 1997 public offering.
Income from Operations before Income Taxes: Income from operations before
income taxes decreased $1,608,487 or 89% to $208,628 for the six months ended
March 31, 1998 from $1,817,115 for the same period last year. The decrease is
primarily attributable to a decrease in the gross profit percentage.
Taxes: The Company's effective tax rate is 42.2% for the six months ended
March 31, 1998 and 1997.
Liquidity and Capital Resources: The Company's current ratio at March 31,
1998 and 1997 was 1.41 and 1.22, respectively. Working capital at March 31, 1998
was $8,568,843 an increase of $4,351,723 over the same period last year. The
increase was due to the proceeds of the Company's initial public offering in
1997.
Cash provided by operating activities was $3,384,865 and $5,338,600,
respectively, for the six months ended March 31, 1998 and 1997 due to reductions
in both inventory and accounts receivables. Cash used in investing activities
was $1,996,229 and $213,716 for the six months ended March 31, 1998 and 1997,
respectively, and was used to finance the building of the Company's new facility
in 1998 and computer equipment, leasehold improvements and furniture and
fixtures in 1997. Cash used by financing activities was $1,201,821 and
$5,633,337 for the six months ended March 31, 1998 and 1997, respectively, and
included net payments made under the Financing Agreement.
The Company has a credit arrangement with IBM Credit Corporation pursuant
to which it may borrow up to 85% of its eligible receivables and 100% of
eligible inventory to a maximum of $27,500,000. In addition to the permanent
credit line, there are various credit line uplifts during the year, which can
increase the line of credit by as much as 50%. As of March 31, 1998, interest on
outstanding borrowings was prime or prime plus 6.5%, should the Company fail to
meet certain collateral requirements. Throughout fiscal 1997 and first six month
fiscal 1998, the Company has been in a positive collateral position with IBM
Credit and has had the ability to draw down its current line of credit whenever
needed.
<PAGE>
The Company believes that its present line of credit with IBM Credit
Corporation coupled with its current earnings capacity and the proceeds of its
initial public offering will be sufficient to meet its capital and operational
requirements for at least the next twelve months, including but not limited to
establishing a new headquarters, distribution and assembly facility and
inventory and accounts receivable financing.
Forward-Looking Statements: Certain information contained in this Quarterly
Report on Form 10-Q, including, without limitation, information appearing under
Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," are forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). Factors set forth in the Company's Prospectus filed June
17, 1997, or in the Company's other Securities and Exchange Commission filings,
could affect the Company's actual results and could cause the Company's actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company in this Quarterly Report on
Form 10-Q.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was a defendant in a lawsuit which alleged wrongful termination
of employment. The action had been in the discovery stage since 1992. Effective
April 14, 1998, the Company entered into a Confidential Settlement Agreement and
General Release with the plaintiff. Neither the execution of the Agreement nor
the Agreement itself is an admission of liability or wrongdoing by the Company.
In consideration of the obligations of the plaintiff and in full and complete
settlement and final satisfaction of any claims which plaintiff may have against
the Company, the Company agreed to pay plaintiff $35,000 as full and complete
settlement of the Action. The Company has no other legal actions pending.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) On February 24, 1998, the Company held its Annual Meeting of
Stockholders (the "Meeting").
(b) At the Meeting, the Stockholders of the Company elected Dennis R.
Wilson, Lee Adams and Cornelia Eldridge as Class III directors.
(c) At the Meeting, the Stockholders approved the selection of Albrecht,
Viggiano, Zureck & Company, P.C. as the Company's independent auditors for the
fiscal year ended September 30, 1998.
(d) In addition to electing directors and approving the independent
auditors at the Meeting, the Stockholders of the Company approved the adoption
of the Company's 1998 Stock Option Plan.
<PAGE>
(e) The following sets forth results of voting on each matter voted upon at
the Meeting:
<TABLE>
<CAPTION>
1. Election of Directors
For Against
<S> <C> <C>
Dennis R. Wilson 4,307,390 4,500
Lee Adams 4,307,390 4,500
Cornelia Eldridge 4,307,390 4,500
</TABLE>
2. Adoption of the Company's 1998 Stock Option Plan
For Against
3,331,620 30,400
3. Selection of Albrecht, Viggiano, Zureck & Company, P.C. as the
Company's independent auditors for the fiscal year ended
September 30, 1998
For Against
4,306,690 1,500
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Amended and Restated Certificate of Incorporation
*3.2 Amended and Restated By-Laws
*4.1 Form of Common Stock Certificate
*4.2 Form of Representative Warrant
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
________________________________________________________________________
*Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration No. 333-25593
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSCOMM INTERNATIONAL CORPORATION
(Registrant)
/s/ John H. Spielberger
-------------------------------------
President and Chief Executive Officer
/s/ Dennis R. Wilson
-------------------------------------
Vice President, Chief Financial Officer
And Secretary
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended March 31
1998 1997
<S> <C> <C>
Weighted average shares outstanding
Common stock 4,555,540 3,170,540
Common stock equivalents 431,911 258,947
--------------- ---------------
Weighted average common shares and
equivalents 4,987,451 3,429,487
=============== ===============
Net income $ 120,628 $ 1,050,315
=============== ===============
Net income per share:
Basic $ 0.03 $ 0.33
Diluted $ 0.02 $ 0.31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037417
<NAME> SYSCOMM INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> MAR-1-1998
<CASH> 624,409
<SECURITIES> 46,875
<RECEIVABLES> 20,345,021
<ALLOWANCES> (113,179)
<INVENTORY> 7,922,516
<CURRENT-ASSETS> 29,386,212
<PP&E> 3,724,017
<DEPRECIATION> (663,039)
<TOTAL-ASSETS> 32,792,310
<CURRENT-LIABILITIES> 20,817,369
<BONDS> 0
0
0
<COMMON> 50,172
<OTHER-SE> 11,875,592
<TOTAL-LIABILITY-AND-EQUITY> 32,792,310
<SALES> 50,290,282
<TOTAL-REVENUES> 50,290,282
<CGS> 45,602,875
<TOTAL-COSTS> 45,602,875
<OTHER-EXPENSES> 4,029,204
<LOSS-PROVISION> 53,000
<INTEREST-EXPENSE> 455,869
<INCOME-PRETAX> 208,628
<INCOME-TAX> 88,000
<INCOME-CONTINUING> 120,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,628
<EPS-PRIMARY> .03
<EPS-DILUTED> .02
</TABLE>
