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 December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number 0-22693
SYSCOMM INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2889809
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
275 Marcus Blvd.
Hauppauge, N.Y. 11788
(Address of Principal Executive Offices and Zip Code)
(516) 273-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
Number of shares outstanding of the issuer's Common Stock, par value $.01
per share, as of February 2, 1998: 4,555,540 shares.
<PAGE>
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Income (Unaudited)
for the Three Months Ended
December 31, 1997 and December 31, 1996 3
Consolidated Balance Sheets -
December 31, 1997 and September 30, 1997 4
Consolidated Statements of Cash Flows
for the Three Months Ended December
31, 1997 and December 31, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
Part II. Other Information 10
Signatures 11
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSCOMM INTERNATIONAL CORPORATION
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
12/31/97 12/31/96
<S> <C> <C>
Net sales $ 28,062,283 $ 21,282,537
Cost of sales 25,248,026 18,643,039
------------- -------------
Gross profit 2,814,257 2,639,498
------------- -------------
Selling & administrative expenses 2,005,201 1,364,003
------------- -------------
Income from operations 809,056 1,275,495
------------- -------------
Other income (expense)
Interest expense (247,794) (313,778)
Other 2,506 625
------------- -------------
Total other expense (245,288) (313,153)
------------- -------------
Income from operations before
income taxes 563,768 962,342
Provision for income taxes 247,000 402,700
------------- ------------
Net income $ 316,768 $ 559,642
============= ============
Net income per common share:
Basic $ 0.07 $ 0.18
Diluted $ 0.06 $ 0.16
Weighted average number of common shares outstanding:
Basic 4,555,540 3,170,540
Diluted 4,996,244 3,428,660
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 527,496 $ 437,594
Accounts and note receivable, net 23,977,487 23,209,156
Inventory 8,475,856 12,644,343
Other 315,314 275,307
--------------- ----------------
Total current assets 33,296,153 36,566,400
--------------- ----------------
Property, plant and equipment, net 1,724,492 1,201,549
Other assets 342,120 336,087
--------------- ----------------
Total assets $ 35,362,765 $ 38,104,036
=============== ================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Supplier credit facility $ 6,637,764 $ 10,614,838
Accounts payable and accrued liabilities 16,294,430 15,052,319
Income taxes payable 186,617 499,214
Other current liabilities 44,101 43,613
-------------- ----------------
Total current liabilities 23,162,912 26,209,984
Long-term liabilities 55,449 66,416
-------------- ----------------
Total liabilities 23,218,361 26,276,400
-------------- ----------------
Stockholders' Equity:
Preferred stock, no 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 (60,716) (60,716)
Retained earnings 6,686,666 6,369,898
Less: Treasury stock (at cost) (142,170) (142,170)
-------------- ----------------
Total stockholders' equity 12,144,404 11,827,636
-------------- ----------------
Total liabilities and
stockholders' equity $ 35,362,765 $ 38,104,036
============== ================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended December 31
1997 1996
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 316,768 $ 559,642
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 68,400 40,718
Gain on disposition of fixed assets - 0 - (2,570)
Changes in assets and liabilities
Accounts and note receivable (768,331) 3,856,409
Inventory 4,168,487 (1,700,773)
Prepaid expenses (40,007) (165,775)
Other assets (6,033) (8,071)
Accounts payable and accrued liabilities 1,242,111 (225,561)
Income taxes payable (312,597) (766,032)
--------------- --------------
Net Cash Provided by Operating Activities 4,668,798 1,587,987
--------------- --------------
Cash Flows from Investing Activities
Purchase of fixed assets (591,343) ( 81,752)
Proceeds from disposition of fixed assets -0- 7,300
--------------- --------------
Net Cash Used in Investing Activities (591,343) ( 74,452)
-------------- --------------
Cash Flows From Financing Activities
Net payments under supplier credit facility (3,977,074) (462,878)
Payments of long-term liabilities (10,479) (7,942)
--------------- --------------
Net Cash Used by Financing Activities (3,987,553) (470,820)
--------------- --------------
Net Increase in Cash and Cash Equivalents 89,902 1,042,715
Cash and Cash Equivalents at Beginning of Period 437,594 1,180,680
--------------- --------------
Cash and Cash Equivalents at End of Period $ 527,496 $ 2,223,395
=============== ==============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes $ 559,740 $ 1,168,562
Interest 247,794 313,778
Supplemental Schedules of Non-cash Investing and
Financing Activities
Acquisition of equipment:
Cost of Equipment $ -0- $ 25,631
Less: Equipment financed -0- (25,631)
--------------- -------------
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 months ended December 31, 1997 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 of InfoTech 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 is a defendant in a lawsuit which alleges wrongful termination
of employment. The action has been in the discovery state since 1992. While the
results of litigation cannot be predicted with any certainty, management
believes that the final outcome of such litigation will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows. Changes in assumptions, as well as actual experience,
could cause the estimates made by management to be altered.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations: Three Months Ended December 31, 1997 Compared with
Three Months Ended December 31, 1996
Net income for the three months ended December 31, 1997 decreased 43% to
$316,768 compared to $559,642 for the same period last year. Basic earnings per
share decreased 61% to $.07 for the three months ended December 31, 1997
compared to $0.18 for the same period last year.
Revenues: Sales for the three months ended December 31, 1997 were
$28,062,283 compared to $21,282,537 for the same period last year an increase of
approximately 32%. Approximately $4,100,000 of the sales increase 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. Additionally, sales in the Company's Massachusetts
location increased approximately $2,000,000 due to an increase in the sales of
RS/6000 products.
Gross Profit: Gross Profit as a percentage of sales decreased to 10.0% for
the three months ended December 31, 1997 compared to 12.4% for the same period
last year. The decrease in gross profit percentage is primarily due to a more
competitive market in both the personal computer and open systems i.e. UNIX
markets, which has forced the Company to lower selling prices in order to
compete for business.
Selling & Administrative Expenses: Selling and administrative expenses
increased by $641,198 or 47% to $2,005,201 from $1,364,003 in the same period
last year. Approximately $200,000 of the increases represents expenses relating
to the opening of new offices, $140,000 relates to additional commissions on the
increased sales volume and the balance relates to payroll and payroll related
expenses due to the hiring of 19 additional personnel.
Interest Expense: Interest expense for the three months ended December 31,
1997 decreased $65,984 or 21% to $247,794 from $313,778 in the same period last
year. This decrease in interest costs is primarily attributable to a reduction
in debt as a result of the use of proceeds from the Company's 1997 public
offering coupled with the constant monitoring of accounts receivable and
inventory levels. In addition, the Company uses all available funds to reduce
its outstanding loan balance on a daily basis.
<PAGE>
Income from Operations before Income Taxes: Income from operations before
income taxes decreased $398,574 or 41% to $563,768 for the three months ended
December 31, 1997 from $962,342 for the same period last year. The decrease is
primarily attributable to the decrease in gross profit percentage along with the
increases in selling and administrative expenses.
Taxes: The Company's effective tax rate is 43.8% for the three months ended
December 31, 1997 as compared to 41.8% for the same period last year.
Liquidity and Capital Resources: The Company's current ratio at December
31, 1997 and 1996 was 1.43 and 1.15, respectively. Working capital at December
31, 1997 was $10,133,241 an increase of $6,213,532 over the same period last
year. The increase was due to the proceeds of the Company's initial public
offering in 1997 and the Company's earnings.
Cash provided by operating activities was $4,668,798 and $1,587,987,
respectively, for the three months ended December 31, 1997 and 1996. The
increase in 1997 and 1996 was due to reductions in inventory and accounts
receivable, respectively. Cash used in investing activities was $591,343 and
$74,452 for the three months ended December 31, 1997 and 1996, respectively, and
was used to finance the building of the Company's new facility in 1997 and
computer equipment, leasehold improvements and furniture and fixtures in 1996.
Cash used by financing activities was $3,987,553 and $470,820 for the three
months ended December 31, 1997 and 1996, respectively and included net payments
made under the Financing Agreement.
The Company has a credit arrangement with IBM Credit Corporation pursuant
to which it may borrow up to 85% of its eligible receivables and 100% of
eligible inventory to a maximum of $27,500,000. In addition to the regular
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 December 31, 1997, interest
on outstanding borrowings was prime or prime plus 6.5%, should the Company fail
to meet certain collateral requirements. Throughout fiscal 1997 and the first
quarter of fiscal 1998, the Company has been in a positive collateral position
with IBM Credit and has had the ability to draw down against its current line of
credit whenever needed.
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.
<PAGE>
Forward-Looking Statements: Certain information contained in this Quarterly
Report on Form 10-Q, including, without limitation, information appearing under
Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," are forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). Factors set forth in the Company's Prospectus filed June
17, 1997, or in the Company's other Securities and Exchange Commission filings,
could affect the Company's actual results and could cause the Company's actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company in this Quarterly Report on
Form 10-Q.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in a legal proceeding that is incidental to the
conduct of its business. This proceeding is not, in the opinion of management,
material. In the ordinary course of its business, the Company is, from time to
time, subject to litigation. The Company does not believe that any litigation to
which the Company is currently subject is likely, individually, or in the
aggregate, to have a material effect on the financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Amended and Restated Certificate of Incorporation
*3.2 Amended and Restated By-Laws
*4.1 Form of Common Stock Certificate
*4.2 Form of Representative Warrant
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration No. 333-25593
<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)
By:/s/----------------------------
John H. Spielberger
President and Chief Executive Officer
By:/s/----------------------------
Dennis R. Wilson
Vice President, Chief Financial Officer
And Secretary
Dated: February 11, 1998
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended December 31
1997 1996
Weighted average shares outstanding
Common stock 4,555,540 3,170,540
Common stock equivalents 440,704 258,120
---------- ----------
Weighted average common shares and
equivalents 4,996,244 3,428,660
========== ==========
Net income $ 316,768 $ 559,642
============= =============
Net income per share:
Basic $ 0.07 $ 0.18
Diluted $ 0.06 $ 0.16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037417
<NAME> SYSCOMM INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 527,496
<SECURITIES> 84,375
<RECEIVABLES> 24,066,365
<ALLOWANCES> (88,878)
<INVENTORY> 8,475,856
<CURRENT-ASSETS> 33,296,153
<PP&E> 2,319,131
<DEPRECIATION> (594,639)
<TOTAL-ASSETS> 35,362,765
<CURRENT-LIABILITIES> 23,162,912
<BONDS> 0
0
0
<COMMON> 50,172
<OTHER-SE> 12,094,232
<TOTAL-LIABILITY-AND-EQUITY> 35,362,765
<SALES> 28,062,283
<TOTAL-REVENUES> 28,062,283
<CGS> 25,248,026
<TOTAL-COSTS> 25,248,026
<OTHER-EXPENSES> 2,005,201
<LOSS-PROVISION> 9,000
<INTEREST-EXPENSE> 247,794
<INCOME-PRETAX> 563,768
<INCOME-TAX> 247,000
<INCOME-CONTINUING> 316,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 316,768
<EPS-PRIMARY> .07
<EPS-DILUTED> .06
</TABLE>
