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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number 0-22693
SYSCOMM INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2889809
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 Precision Drive
Shirley, N.Y. 11967
(Address of Principal Executive Offices and Zip Code)
(516) 205-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
Number of shares outstanding of the issuer's Common Stock, par value $.01
per share, as of January 15, 1999: 4,757,705 shares.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSCOMM INTERNATIONAL CORPORATION
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
12/31/98 12/31/97
Net sales $ 27,329,070 $ 28,062,283
Cost of sales 24,489,958 25,248,026
------------- -------------
Gross profit 2,839,112 2,814,257
------------- -------------
Selling & administrative expenses 1,901,450 2,005,201
------------- -------------
Income from operations 937,662 809,056
------- -------
Other income (expenses)
Interest expenses (101,648) (247,794)
Other 15,585 2,506
------- -----
Total other expenses (86,063) (245,288)
Income before income taxes 851,599 563,768
Provision for income taxes 341,000 247,000
Net income $ 510,599 $ 316,768
============ =============
Net income per common share
Basic $ 0.11 $ 0.07
Diluted $ 0.11 $ 0.06
Weighted average number of common
shares outstanding
Basic 4,767,190 4,555,540
Diluted 4,767,190 4,996,244
The accompanying notes are an integral part of these statements.
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,109,373 $ 914,509
Accounts receivable, net 22,272,767 19,612,934
Inventory 1,183,093 2,586,236
Other 739,508 894,549
---------- ----------
Total current assets 26,304,741 24,008,228
---------- ----------
Property, plant and equipment, net 3,439,768 3,509,345
Other assets 351,692 339,692
---------- ----------
Total assets $ 30,096,201 $ 27,857,265
=============== =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Supplier credit facility $ 2,842,012 $ 3,020,234
Accounts payable and accrued liabilities 13,142,822 11,578,993
Income taxes payable 393,620 - 0 -
Other current liabilities 89,798 94,764
----------- ----------
Total current liabilities 16,468,252 14,693,991
Long-term liabilities 1,589,676 1,611,355
----------- ----------
Total liabilities 18,057,928 16,305,346
----------- ----------
Stockholders' Equity:
Preferred stock, no par value - -
Common stock, $.01 par value 55,152 55,152
Additional paid-in capital 6,317,617 6,317,617
Retained earnings 6,433,135 5,922,536
Less: Treasury stock (at cost) (767,631) (743,386)
---------- ---------
Total stockholders' equity 12,038,273 11,551,919
------------- ----------
Total liabilities and
stockholders' equity $ 30,096,201 $ 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>
Three Months Ended December 31
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 510,599 $ 316,768
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 82,500 68,400
Changes in assets and liabilities
Accounts receivable (2,659.833) (768,331)
Inventory 1,403,143 4,168,487
Prepaid expenses 73,306 (40,007)
Recoverable income taxes 81,735 - 0 -
Other assets (12,000) (6,033)
Accounts payable and accrued liabilities 1,563,829 1,242,111
Income taxes payable 393,620 (312,597)
--------- ---------
Net Cash Provided by Operating Activities 1,436,899 4,668,798
--------- ---------
Cash Flows from Investing Activities
Purchase of fixed assets (12,923) (591,343)
--------- ---------
Net Cash Used in Investing Activities (12,923) (591,343)
--------- ---------
Cash Flows From Financing Activities
Net payments under supplier credit facility (178,222) (3,977,074)
Payments of long-term debt (26,645) (10,479)
Purchase of treasury stock (24,245) - 0 -
--------- ----------
Net Cash Used in Financing Activities (229,112) (3,987,553)
--------- -----------
Net Increase in Cash and Cash Equivalents 1,194,864 89,902
Cash and Cash Equivalents at Beginning of Period 914,509 437,594
-------- --------
Cash and Cash Equivalents at End of Period $ 2,109,373 $ 527,496
============= ============
Supplemental Disclosures of Cash Flow Information
Cash paid (received)during the period for:
Income taxes $ (204,000) $ 559,740
Interest 101,648 247,794
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
NOTE 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
three months ended December 31, 1998 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. 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. Notwithstanding the foregoing, each of the above-named executive
officers received twenty (20%) percent reductions in their base compensation
during the fiscal year ended September 30, 1998. These annual employment
agreements contain performance incentive plans which 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
Results of Operations:
Three Months Ended December 31, 1998 Compared to Three Months Ended
December 31, 1997.
Net income for the three months ended December 31, 1998 was $510,599
compared to $316,768 for the same period last year. This increase in net income
was the result of slightly higher gross profits and lower selling and
administrative and interest expenses. Diluted earnings per share were $.11 for
the three months ended December 31, 1998 compared to $.06 for the same period
last year.
Revenues:
Sales for the three months ended December 31, 1998 were $27,329,070
compared to $28,062,283 for the same period last year a decrease of $733,213 or
approximately 3%. The overall slight decrease in sales is the result of
decreases in sales in the New York and Massachusetts offices, however, small
increases in sales were experienced in the New Jersey, Connecticut and Buffalo
offices. The decreases in New York and Massachusetts were due primarily to the
Company's strategy of avoiding low-margin personal computer business.
Gross Profit:
Gross profit as a percentage of sales increased to 10.4% for the three
months ended December 31, 1998 compared to 10% for the same period last year.
The improvement in gross profit over the prior year and over the previous three
quarters is the result of the Company's new strategic emphasis on serving the
information technology marketplace with mid-range systems and value-added
services.
Selling and Administrative Expenses:
Selling and administrative expenses decreased by $103,751 or approximately
5% to $1,901,450 for the three months ended December 31, 1998 as compared to
$2,005,201 for the same period last year. This decrease is the result of a
company-wide initiative focusing on cost containment and reductions.
Interest Expense:
Interest expense for the three months ended December 31, 1998 decreased
$146,146 or approximately 59% to $101,648 from $247,794 for the same period last
year. This decrease is due to a reduction in borrowings as a result of the
Company's reduction in inventory to $1,183,093 from $8,475,856 for the same
period last year.
Income Before Income Taxes:
Income before income taxes for the three months ended December 31, 1998 was
$851,599 compared to $563,768 for the same period last year. This increase of
$287,831 or approximately 51% was attributable to the Company's improved gross
profit percentage and the reduction in selling and administrative expenses and
interest expense.
<PAGE>
Taxes:
The Company's effective tax rate was 40% for the three months ended
December 31, 1998 compared to 43.3% for the same period last year.
Liquidity and Capital Resources:
The Company's current ratio at December 31, 1998 and 1997 was 1.60 and
1.44, respectively. Working capital at December 31, 1998 was $9,836,489 a
decrease of $296,752 from the same period last year. The decrease in working
capital is the result of the losses sustained by the Company in Fiscal 1998.
Cash provided by operating activities was $1,436,899 and $4,668,798,
respectively, for the three months ended December 31, 1998 and 1997 due mainly
to reductions in the Company's inventory levels. Cash used in investing
activities was $12,923 and $591,343 for the three months ended December 31, 1998
and 1997, respectively, and was used to purchase computer equipment in 1998 and
finance the Company's new facility in 1997. Cash used in financing activities
during the three months ended December 31, 1998 and 1997 was $229,112 and
$3,987,553, respectively, and represented net payments made under the Supplier
Credit Facility and payments of long-term debt in 1998 and 1997 and the purchase
of treasury stock in 1998.
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 December 31, 1998, 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
three 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 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 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.
<PAGE>
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 began
its Year 2000 identification, assessment, remediation, and testing efforts in
October 1997 and anticipates it will be completed by September 30, 1999. The
Company estimates that as of December 31, 1998, it had completed approximately
75% 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 25% of the initiatives are in process and are
expected to be completed on or about September 30, 1999.
<TABLE>
<CAPTION>
Year 2000 Initiative Percent Completed
- -----------------------------------------------------------------------------------------------
<S> <C>
Initial IT systems identification and assessment 95%
Remediation and testing regarding central system issues 80%
Remediation and testing regarding branch departmental system issues 60%
Electronic data interchange trading partners conversions 50%
Identification, assessment, remediation, and testing regarding
desktop and individual system issues 60%
</TABLE>
The Company has surveyed 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. Thus far, for vendor or service providers who
responded to our Year 2000 readiness survey, no one has indicated any
anticipation of a disruption in our business dealings due to Year 2000 concerns.
The Company believes that the cost of its Year 2000 identification,
assessment, remediation, and testing efforts, as well as currently 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.
<PAGE>
The Company has begun, but not yet completed, an analysis of the
operational problems and costs (including loss of revenue) 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 "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
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
------------------------------------------
John H. Spielberger
President and Chief Executive Officer
/s/Dennis R. Wilson
------------------------------------------
Dennis R. Wilson
Vice President, Chief Financial Officer
And Secretary
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31
1998 1997
<S> <C> <C>
Weighted average shares outstanding
Common stock 4,767,190 4,555,540
Common stock equivalents - 0 - 440,704
Weighted average common shares and equivalents 4,767,190 4,996,244
============== ==============
Net income $ 510,599 $ 316,768
=============== ==============
Net income per share:
Basic $ 0.11 $ 0.07
Diluted $ 0.11 $ 0.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037417
<NAME> SYSCOMM INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,109,373
<SECURITIES> 0
<RECEIVABLES> 22,408,238
<ALLOWANCES> 135,471
<INVENTORY> 1,183,093
<CURRENT-ASSETS> 26,304,741
<PP&E> 4,347,781
<DEPRECIATION> 908,013
<TOTAL-ASSETS> 30,096,201
<CURRENT-LIABILITIES> 16,468,252
<BONDS> 0
0
0
<COMMON> 55,152
<OTHER-SE> 11,983,121
<TOTAL-LIABILITY-AND-EQUITY> 30,096,201
<SALES> 27,329,070
<TOTAL-REVENUES> 27,329,070
<CGS> 24,489,958
<TOTAL-COSTS> 24,489,958
<OTHER-EXPENSES> 1,885,865
<LOSS-PROVISION> 19,500
<INTEREST-EXPENSE> 101,648
<INCOME-PRETAX> 851,599
<INCOME-TAX> 341,000
<INCOME-CONTINUING> 510,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 510,599
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
