Form 10-Q Quarterly Report
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number 0-22693
SYSCOMM INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2889809
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 Precision Drive
Shirley, N.Y. 11967
(Address of Principal Executive Offices and Zip Code)
(516) 205-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
Number of shares outstanding of the issuer's Common Stock, par value $.01
per share, as of August 6, 1999: 4,744,205 shares.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSCOMM INTERNATIONAL CORPORATION
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
6/30/99 6/30/98 6/30/99 6/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 14,017,525 $ 26,416,609 $ 55,701,422 $ 76,706,890
Cost of sales 12,799,626 23,917,082 49,723,309 69,519,956
---------- ---------- ---------- ----------
Gross profit 1,217,899 2,499,527 5,978,113 7,186,934
--------- --------- --------- ---------
Selling & administrative expenses 1,994,503 2,067,453 5,449,208 6,096,657
--------- --------- --------- ---------
Income (loss) from operations (776,604) 432,074 528,905 1,090,277
--------- ------- ------- ---------
Other income (expenses)
Interest expenses (35,972) (245,456) (217,187) (701,324)
Other 15,482 ( 34,930) 32,684 ( 28,637)
-------- --------- --------- ---------
Total other expenses (20,490) (280,386) (184,503) (729,961)
-------- --------- --------- ---------
Income (loss) from operations
before income taxes (797,094) 151,688 344,402 360,316
Provision (benefit) for income taxes (319,000) 62,600 140,000 150,600
--------- ------- ------- -------
Net income (loss) $ (478,094) $ 89,088 $ 204,402 $ 209,716
=========== =========== =========== ===========
Net income (loss) per common share
Basic $ (0.10) $ 0.02 $ 0.04 $ 0.05
Diluted $ (0.10) $ 0.02 $ 0.04 $ 0.04
Weighted average number of common
shares outstanding
Basic 4,745,897 4,562,969 4,755,243 4,558,016
Diluted 4,745,940 4,932,794 4,755,243 4,963,031
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998
------------- ------------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,820,543 $ 914,509
Accounts receivable, net 9,976,424 19,612,934
Inventory 596,164 2,586,236
Other current assets 820,336 894,549
-------------- --------------
Total current assets 15,213,467 24,008,228
-------------- --------------
Property, plant and equipment, net 3,239,012 3,509,345
Other assets 358,092 339,692
-------------- --------------
Total assets $ 18,810,571 $ 27,857,265
============== ==============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Supplier credit facility $ - 0 - $ 3,020,234
Accounts payable and accrued liabilities 5,210,213 11,578,993
Other current liabilities 97,518 94,764
-------------- --------------
Total current liabilities 5,307,731 14,693,991
Long-term liabilities 1,634,111 1,611,355
-------------- --------------
Total liabilities 6,941,842 16,305,346
-------------- --------------
Stockholders' Equity:
Preferred stock, no par value - 0 - - 0 -
Common stock, $.01 par value 55,152 55,152
Additional paid-in capital 6,486,517 6,317,617
Retained earnings 6,126,938 5,922,536
Less: Treasury stock (at cost) (799,878) (743,386)
-------------- --------------
Total stockholders' equity 11,868,729 11,551,919
-------------- --------------
Total liabilities and
stockholders' equity $ 18,810,571 $ 27,857,265
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 204,402 $ 209,716
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 247,500 208,200
Compensatory stock options issued to non-employees 168,900 -
0 -
Changes in assets and liabilities
Accounts receivable 9,665,946 (498,636)
Inventory 1,990,072 6,174,830
Prepaid expenses (206,763) - 0 -
Recoverable income taxes 251,540 - 0 -
Other assets (18,400) (178,464)
Accounts payable and accrued liabilities (6,368,780) (3,877,241)
Income taxes payable - 0 - (499,214)
------------- -------------
Net Cash Provided by Operating Activities 5,934,417 1,539,191
------------- -------------
Cash Flows From Investing Activities
Purchase of fixed assets (77,167) (2,447,623)
-------- -----------
Net Cash Used in Investing Activities (77,167) (2,447,623)
-------- -----------
Cash Flows From Financing Activities
Net proceeds from (payments under) supplier credit facility (3,020,234) 2,106,893
Net proceeds from term loan 100,000 - 0 -
Net proceeds from government grant 100,000 - 0 -
Net proceeds from the exercise of stock options - 0 - 19,500
Payments of long-term liabilities (74,490) (32,277)
Purchase of treasury stock (56,492) - 0 -
------------- -------------
Net Cash Provided by (Used in) Financing Activities (2,951,216) 2,094,116
------------- -------------
Net Increase in Cash and Cash Equivalents 2,906,034 1,185,684
Cash and Cash Equivalents at Beginning of Period 914,509 437,594
------------- -------------
Cash and Cash Equivalents at End of Period $ 3,820,543 $ 1,623,278
============= =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes $ 205,724 $ 809,910
Interest 217,187 701,324
</TABLE>
The accompanying notes are an integral part of these statements.
<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, 1998, 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 nine
months ended June 30, 1999 are not necessarily indicative of the results for the
entire fiscal year ending September 30, 1999, 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. These contracts expire on September 30,
1999. The employment agreements include base salary and incentive plans, which
are reviewed on an annual basis by the Company's Compensation Committee. For
fiscal 1999, John H. Spielberger will receive a base salary of $128,000 and
Dennis R. Wilson will receive a base salary of $112,000. Under the incentive
plan for fiscal year 1999, John H. Spielberger will receive 2 1/2% of the
earnings before income taxes on a quarterly basis and will receive on an annual
basis an additional 1% of the earnings before taxes. Dennis R. Wilson will
receive on an annual basis 1% of the earnings before taxes. In addition, both
executives have certain annual goals and objectives, which if met, could earn
them additional incentives. Thomas J. Baehr and Norman M. Gaffney, the other two
senior executives previously covered by employment agreements are no longer
employed by the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
Results of Operations:
Three Months Ended June 30, 1999 Compared with Three Months Ended June 30,
1998
The Company recorded a net loss for the three months ended June 30, 1999 of
$478,094 or $.10 per share compared to net income of $89,088 or $.02 per share
for the same period last year. The net loss is attributable to the significant
decline in sales.
Revenues
Sales for the three months ended June 30, 1999 were $14,017,525 compared
with $26,416,609 for the same period last year, a decrease of $12,399,084 or
46.9%. This decrease in sales is the result of what the Company believes is a
slowdown attributable to customers deferring the start of new projects due in
large measure to Y2K uncertainties. In addition, sales have also been affected
by the Company's decision to forego business that does not meet the Company's
minimum standards of profitability.
Gross Profit
Gross Profit as a percentage of sales were 8.7% for the three months ended
June 30, 1999 compared to 9.5% for the same period last year. The Company
believes that the slight decrease for the quarter was the result of the soft
market conditions that existed as a result of Y2K concerns.
Selling & Administrative Expenses
Selling and administrative expenses for the three months ended June 30,
1999 decreased by $72,950 or 3.5% to $1,994,503 from $2,067,453 for the same
period last year. For the three months ended June 30, 1999, the Company recorded
approximately $170,000 for compensation to non-employees relating to the
issuance of stock options. In addition, the Company hired nine systems engineers
during the quarter, expanding the size of the InfoTech Consulting Group. The
cost of these additional expenses kept selling and administrative expenses at a
high level relative to the reduced sales volume, but were deemed necessary
investments.
Interest Expense
Interest expense for the three months ended June 30, 1999 decreased
$209,484 or 85.3% to $35,972 from $245,456 for the same period last year. The
decrease is attributed to a reduction in borrowing as a result of the Company's
reduction in inventory and accounts receivable. The Company had virtually no
interest bearing debt during the third quarter of Fiscal 1999 with the exception
of the mortgage on its Shirley facility and a $100,000 term loan. The inventory
reduction is due primarily to the Company's decision to utilize a new
distributor-based supply arrangement. Accounts receivable is lower due to
reduced sales levels and more stringent monitoring of collections.
Income (loss) from Operations before Income Taxes
The loss before income tax benefit for the three months ended June 30, 1999
was $797,094 compared to income before income taxes of $151,688 for the same
period last year. The decrease of $948,782 was attributable to the significant
decrease in sales.
Taxes
The Company had a tax benefit of $319,000 for the three months ended June
30, 1999, compared to an effective tax rate of 41.3% for the same period last
year.
Nine Months Ended June 30, 1999 Compared With Nine Months Ended June 30, 1998
Net income for the nine months ended June 30, 1999 was $204,402 compared to
$209,716 for the same period last year. Basic earnings per share were $.04 for
the nine months ended June 30, 1999 versus $.05 for the same period last year.
Basic earnings per share were calculated using 4,755,243 common shares
outstanding for the nine months ended June 30, 1999 versus 4,558,016 for the
same period last year. Net income remained virtually the same as the prior year
despite the significantly lower sales volume due to savings in selling and
administrative costs and reduced interest expense.
Revenues
Sales for the nine months ended June 30, 1999 decreased by $21,005,468 or
27.4% to $55,701,422 from $76,706,890 for the same period last year. This
decrease reflects what the Company believes is a slowdown due to Y2K
uncertainties, which has customers deferring new projects until these
uncertainties are resolved. Additionally, sales have been affected by the
Company's decision to forego business that cannot meet minimum standards of
profitability.
Gross Profit
Gross profit as a percentage of sales were 10.7% for the nine months ended
June 30, 1999 compared to 9.4% for the same period last year. This increase
reflects the Company's strategy to focus on mid-range computer sales and
services. Additionally, the Company has received better pricing through its new
distributor-based supply arrangement for purchasing product.
Selling & Administrative Expenses
Selling and administrative expenses for the nine months ended June 30, 1999
decreased $647,449 or 10.6% to $5,449,208 from $6,096,657 for the same period
last year. The decrease is due to a company-wide initiative focused on cost
containment. During the third quarter of Fiscal 1999, the Company made an
investment in personnel expanding the size and capabilities of its InfoTech
Consulting Group. In addition, several seasoned sales representatives were
hired. The Company believes that these are necessary investments aimed at making
the Company a leading provider of mid-range services.
Interest Expense
Interest expenses for the nine months ended June 30, 1999 decreased
$484,137 or 69% to $217,187 compared to $701,324 for the same period last year.
The decrease in interest is a direct result of the significant decrease in
inventory and accounts receivable.
Income from Operations before Income Taxes
Income from operations before income taxes for the nine months ended June
30, 1999 was $344,402, a decrease of $15,914 from the $360,316 in the same
period last year. The income from operations before income taxes for Fiscal 99
was virtually unchanged from the prior year despite the significant reduction in
sales which was offset by higher gross profit percentages, lower selling and
administrative expenses and reduced interest expense.
Taxes
The Company's effective tax rate for the nine months ended June 30, 1999
and 1998, was 40.7 and 41.8, respectively.
Liquidity and Capital Resources
The Company's current ratio at June 30, 1999 and 1998 was 2.87 and 1.63,
respectively. Working capital at June 30, 1999 was $9,905,736 an increase of
$1,585,052 over the same period last year. Working capital increased due to the
receipt of the proceeds of the mortgage taken on its Shirley facility.
Cash provided by operating activities was $5,934,417 and $1,539,191 for the
nine months ended June 30, 1999 and 1998, respectively, due primarily to
reductions in the Company's inventory and accounts receivable in 1999 and
inventory in 1998. Cash used in investing activities was $77,167 and $2,447,623
for the nine months ended June 30, 1999 and 1998, respectively, and was used to
purchase computer equipment in 1999 and finance the Company's new facility in
1998. Cash used in financing activities during the nine months ended June 30,
1999 was $2,951,216 and represented net payments made under the Supplier Credit
Facility, long-term debt, the purchase of treasury stock and the net proceeds
from a term loan and government grant. For the nine months ended June 30, 1998,
cash provided by financing activities was $2,094,116 and represented net
proceeds received under the Supplier Credit Facility.
The Company has a credit arrangement with IBM Credit Corporation pursuant
to which it may borrow up to 85% of its eligible receivables and 100% of
eligible inventory up to a maximum of $27,500,000. In addition to the permanent
credit line, there are various credit line uplifts during the year, which can
increase the line of credit by as much as 50%. As of June 30, 1999, interest on
outstanding borrowings was prime or prime plus 6.5% should the Company fail to
meet certain collateral requirements. Throughout fiscal 1998 and the first nine
months of fiscal 1999, the Company has been in a positive collateral position
with IBM Credit. The Company believes that its present line of credit with IBM
Credit Corporation, coupled with its current earnings capacity, will be
sufficient to meet its capital and operational requirements for at least the
next twelve months.
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, 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 miscalculation 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, the Company has replaced or
modified some of its computer equipment and software that it had identified as
not year 2000 ready. 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 began its Year 2000
identification, assessment, remediation, and testing efforts in October 1997. As
of June 4, 1999, the Company has completed final testing and is now 100% year
2000 ready.
The Company believes that the cost of its Year 2000 identification,
assessment, remediation, and testing efforts, as well as the anticipated 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's 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 not fully developed a comprehensive contingency plan to
address situations that may result from the year 2000. If Year 2000 compliance
issues are discovered, the Company will evaluate the need for contingency plans
relating to such issues.
The costs of the Company's Year 2000 identification, assessment,
remediation, and testing 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 "Year 2000
Compliant" 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
such 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 issues.
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
None
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
Effective May 28, 1999, Thomas J. Baehr resigned as President and Chief
Operating Officer of Information Technology Services, Inc. and as a Vice
President and Director of SysComm International Corporation. In addition,
effective May 20, 1999, Norman M. Gaffney resigned as a Director of SysComm
International Corporation.
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
------------------------------------------
John H. Spielberger
President and Chief Executive Officer
By:/s/ Dennis R. Wilson
------------------------------------------
Dennis R. Wilson
Vice President, Chief Financial Officer
And Secretary
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30
1999 1998
<S> <C> <C>
---- ----
Weighted average shares outstanding
Common stock 4,755,243 4,558,016
Common stock equivalents - 0 - . 405,015
-------------- --------------
Weighted average common shares and
equivalents 4,755,243 4,963,031
============== ==============
Net income 204,402 $ 209,716
=============== ==============
Net income per share:
Basic $ 0.04 $ 0.05
Diluted $ 0.04 $ 0.04
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
<ARTICLE> 5
<CIK> 0001037417
<NAME> SYSCOMM INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,820,543
<SECURITIES> 0
<RECEIVABLES> 10,132,675
<ALLOWANCES> 156,251
<INVENTORY> 596,164
<CURRENT-ASSETS> 15,213,467
<PP&E> 4,312,025
<DEPRECIATION> 1,073,013
<TOTAL-ASSETS> 18,810,571
<CURRENT-LIABILITIES> 5,307,731
<BONDS> 0
0
0
<COMMON> 55,152
<OTHER-SE> 11,813,577
<TOTAL-LIABILITY-AND-EQUITY> 18,810,571
<SALES> 55,701,422
<TOTAL-REVENUES> 55,701,422
<CGS> 49,723,309
<TOTAL-COSTS> 49,723,309
<OTHER-EXPENSES> 5,416,524
<LOSS-PROVISION> 58,500
<INTEREST-EXPENSE> 217,187
<INCOME-PRETAX> 344,402
<INCOME-TAX> 140,000
<INCOME-CONTINUING> 204,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,402
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
