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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, 2000
[ ] 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 2,061,283 of our common stock held by
non-affiliates of the Company as of December 22, 2000 is $1,803,623.
The number of shares outstanding of each class of our common equity as
of December 22, 2000 is as follows:
Class of Common Equity Number of Shares
- ---------------------- ----------------
Common Stock, par value $.01 4,702,483
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 January 28, 2001.
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
PART I
1. Business 3
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters 15
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
7A. Quantitative and Qualitative Disclosures About Market Risk 22
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 22
PART III
10. Directors and Executive Officers of the Registrant 23
11. Executive Compensation 23
12. Security Ownership of Certain Beneficial Owners and Management 23
13. Certain Relationships and Related Transactions 23
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
Signatures 25
2
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
CHANGE IN CONTROL
On December 14, 2000, pursuant to the terms of a Stock Purchase
Agreement, as amended, between the selling shareholders described below
and Applied Digital Solutions, Inc., a Missouri corporation, Applied
Digital Solutions acquired approximately 55% of our issued and outstanding
common shares, resulting in a change in control of the Company. Shares of
our common stock were sold to Applied Digital Solutions by the following
persons and in the following amounts:
Selling Shareholders Number of Shares Held Percent Ownership
- -------------------------------------------------------------------------------------------------------------
John H. Spielberger 1,920,000 41%
Catherine Spielberger 50,000 1%
Bearpen Limited Partnership 600,000 13%
- -------------------------------------------------------------------------------------------------------------
Total 2,570,000 55%
=============================================================================================================
Applied Digital Solutions acquired the shares listed above for $4.5
million by issuing approximately 1.7 million shares of its common stock,
valued at approximately $2.75 million, to the selling shareholders listed
above and upon payment of an aggregate amount of cash equal to approximately
$1.75 million to the selling shareholders listed above.
As a condition to the closing of the transaction, John H. Spielberger,
John C. Spielberger, Lee Adams and Cornelia Eldridge resigned as officers
and directors of the Company. Garrett A. Sullivan, David A. Loppert and Anat
Ebenstein were appointed to fill the vacancies on the board of directors
created by such resignations, and the following persons become the officers
of the Company:
David A. Loppert Chief Executive Officer, Assistant Secretary and
Assistant Treasurer
Anat Ebenstein President, Chief Operating Officer
Michael Krawitz Vice President, Secretary
J. Robert Patterson Vice President, Chief Financial Officer and Treasurer
John C. Spielberger Vice President, Sales and Marketing
ACQUISITION OF ASSETS
On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement,
as amended, between us and Applied Digital Solutions, we acquired fifty-one
percent (51%) of the outstanding shares of common stock of Information Products
Center, Inc., a New Jersey corporation. The purchase price for the shares of
Information Products Center was $2.075 million, payable $1.821 million in cash
and $0.254 million by promissory note.
On December 15, 2000, pursuant to the terms of a Stock Purchase Agreement
between us and Applied Digital Solutions, we acquired forty-nine percent (49%)
of the outstanding shares of common stock of Information Products Center. The
purchase price for the shares of Information Products Center was approximately
$2.4 million, payable by promissory note.
The assets of Information Products Center to be acquired indirectly by us
include, without limitation, physical property. For the foreseeable future,
we intend to utilize those assets in connection with the operations of the
business of Information Products Center.
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GENERAL
We are a Delaware corporation incorporated in 1997. Through our wholly
owned subsidiary, Information Technology Services, Inc., we are a systems
integrator and reseller of computer hardware, operating software and networking
applications to Fortune 1000 companies. From 1985 until 1998, our primary focus
had been on the sale, integration and servicing of International Business
Machine Corporation, or 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, we integrate, resell and service products from such
manufacturers as Hewlett Packard, Compaq, Microsoft, and Novell.
In 1999 we recognized that our margins were shrinking in our core
business, and because of a change in IBM's policies with respect to the
Authorized Assembler Program, we made a strategic decision to
fundamentally change the nature of our business. While we continue to
provide our customers with cost efficient, comprehensive solutions that
satisfy their information technology requirements, we attempted to focus
less on personal computer products and hardware, and more on mid-range
products network connectivity, services and consulting to develop e-solutions.
During the last year eighteen months, we transitioned our workforce,
through training and specialized hires, to position ourselves as a total
e-business solutions provider of hardware, software and consulting services,
while maintaining our status as an IBM Tier II Premier Business Partner in
mid-range systems. In addition we attempted to expand our capabilities in
web design and creation, remote access to databases via web interface, and
Tivoli enterprise systems management. The transformation was not altogether
successful and during the last six months we laid off a substantial portion
of our workforce as we strived to find a strategic partner with whom to
align ourselves or seek to be acquired. In December 2000, Applied Digital
Solutions acquired a controlling interest and, simultaneously, we acquired
from Applied Digital Solutions, Information Products Center, a full service,
profitable, systems integrator.
A significant percentage of our revenue is derived from sales to
customers in the financial and investment communities. However, our customer
base also includes retailers, manufacturers, health care providers,
distributors, colleges, universities and state and local government
agencies. Our customers include:
Amdahl Corporation Liberty Mutual
Barter.Com Mass Financial Services
Baystate Medical NYS Electric & Gas
Bentley College Philip Morris
Bestfoods Phoenix Home Life
Blue Cross/Blue Shield NH Polytechnic University
Columbia University Reuters America
Connecticut College Sharp Electronics
Desantis Warehouse Sunguard
Deutsche Bank The City of New York
Dowling College UAPC
Elf Atochem UMass Medical Center
Fugi Capital Unisys Corporation
Gillette Witco Corporation
ISI
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We intend 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, we have identified the
following growth strategies: (i) targeting our traditional markets,
particularly those businesses seeking to expand their presence on the
internet, (ii) offering a more complete line of IBM and related products,
(iii) expanding our role as an IBM Premier Business Partner, and (iv)
targeting client-server architecture, e-commerce, enterprise network
management and website hosting.
STRATEGY
With our acquisition of Information Products Center, we are striving
to become a leading supplier of Enterprise Computing in e-Business solutions
that enable customers to maximize return on technology investments by
providing open, integrated end-to-end solutions from system architecture
and implementation to hardware and software procurement. We strive to offer
our 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 manner. We believe that the
following factors are significant elements to the successful implementation
of this strategy:
TARGETING MARKETS
We have a twelve-year track record in the installation and integration
of high-level information systems to the banking and financial services
communities. In addition, we have recently begun to focus 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. Our in-depth understanding of our
customers' current and future needs combined with our experience and
in-depth market focus enable us to offer an optimum range of products and
services that meet each of our customer's requirements.
OFFERING A COMPLETE LINE OF IBM PRODUCTS
We have chosen to represent primarily IBM products because we believe
that IBM is the world's premier designer and manufacturer of computer
equipment, software and networking products. The wide range of products and
services we offer, include personal computers (desktop workstations, file
servers and notebook computers), mid-range computers (RS/6000 and AS/400
systems), IBM S/390 mainframe, and IBM software products, including Lotus
Domino, ADSM, HACMP and DB 2. In addition, with our recent acquisition of
Information Products Center, we believe that our current mix of products
now meets the needs of our customers and will help us in achieving our goal
of becoming a total solution integrator.
TARGETING THE CLIENT-SERVER ARCHITECTURE AND 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. We
are certified by IBM to sell IBM Client Server solutions.
Business Intelligence refers to the analysis of vast quantities of
information within a corporate enterprise which is used to make business
decisions such as investments, product development and marketing programs.
We are certified by IBM to sell IBM Business Intelligence solutions.
E-Business refers to the conduct of business on the Internet (World
Wide Web). We offer turn-key e-business solutions based on our IBM
certification and skill sets acquired with the acquisition of IPC and new
hires. This will allow us to perform online design and Intranet/Internet
programming, combined with other support skills, to deliver dynamic web
solutions.
Through our affiliation with Applied Digital Solutions, we are now able
to offer web-hosting and design services which entails designing,
implementing and maintaining customer web sites.
5
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 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.
We believe that these two information system models - legacy systems
and client/server systems - will continue to coexist, each containing
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 we intend 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 us 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.
PRODUCT LINES
We have access to a full range of computer product lines, networking
and interconnectivity systems and operating software, from IBM, Hewlett
Packard, and Compaq, as well as other selected manufacturers. However, in
the past, we have concentrated our efforts in developing strong
relationships with IBM because we believed that IBM offers the most
comprehensive and well established product line in the industry. While we
have had a long-term relationship with IBM to configure, sell and service
IBM's full line of personal computers, mid-range information and mainframe
processing systems, such relationships may be terminated at any time. We
believe that our past strong marketing and technical skills have enabled
us to continue to have a strong business relationship with IBM. Our principal
sales revenues are derived from the following IBM products: (i) IBM personal
computer systems; (ii) IBM RS/6000 systems; (iii) IBM AS/400 systems; and
(iv) communication and networking systems.
IBM PERSONAL COMPUTER SYSTEMS
IBM is one of the world's leading designers and manufacturers of
personal computer systems. IBM's personal computer product line includes
mobile (notebook) and desktop workstations as well as file, application and
network servers. In fiscal year 1998, our sales of IBM personal computer
products were approximately $27 million, or 27.4% of the total sales. In fiscal
1999, personal computer products accounted for approximately $15 million, or
14.8% of total sales. In fiscal 2000, personal computer products accounted for
approximately $8 million, or 20.1% of total sales.
6
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.
For fiscal 1998, 1999 and 2000, our sales of the RS/6000 were
approximately $46 million, $33 million and $15 million, or 47%, 46% and 38%
of revenues, respectively.
IBM AS/400
Although the IBM Application System/400 (also known as AS/400) has not
been a major source of revenue for us, we are 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 personal computer technology and associated software to enhance the
computer's speed for personal computer 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.
ALL OTHER PRODUCTS
Communication -- Networking Systems. With our acquisition of Information
Products Center, we have enhanced and provide 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. We are authorized to sell other manufacturers' personal computer
systems, networking, printers and software products including: Bay Networks,
Compaq, Lexmark, Hewlett Packard, Microsoft,
7
and Novell. Our agreements with such suppliers allow for volume discounts
if certain quotas are met. Although we have, to date, complied with these
agreements, there is no assurance that we will continue to meet such quotas.
To the extent that we do not comply with such terms, we may lose our status
as an authorized reseller for such suppliers.
DEPENDENCE ON IBM AS A SUPPLIER
For the fiscal year ended September 30, 2000, approximately 62% of our
revenue was derived from the sale of IBM personal computers, mid-range
computer systems, networking systems and operating software manufactured by
IBM, down from approximately 84% in fiscal 1998 and 1999. Although we have
had a long-standing reseller relationship with IBM, IBM may terminate
this relationship "at will" and upon relatively short notice. Our reseller
arrangements with IBM are not exclusive, and IBM is not obligated to have
product on hand for timely delivery to us, nor will IBM guarantee product
availability in sufficient quantities to meet our demands.
We currently do not meet the volume requirements to purchase personal
computers and components directly from IBM. We currently purchase computers
and components from third-party distributors such as Pinacor and Ingram
Micro on terms more favorable than those we previously received when we were
purchasing directly from IBM.
FINANCING AGREEMENT
Our business activities are capital intensive and, consequently, we
finance our accounts receivable and inventory. Failure to obtain adequate
product financing on a timely basis could have a material adverse affect on
our business, results of operations, financial condition and cash flows. We
entered into an Inventory and Working Capital Financing Agreement with IBM
Credit Corporation in September 1996, as amended, which permitted us to borrow
up to $22,500,000 based upon 85% of all eligible receivables due within 90 days
and up to 100% of all eligible inventory. As of September 30, 1999 and 2000,
we had not borrowed under this agreement. Our credit availability under this
agreement is reduced by the aggregate amount of accounts payable owed to IBM
Credit Corporation which, as of September 30, 1999 and 2000 was $3,282,454
and $4,411,031, respectively. We are also required to comply with certain
financial covenants with which we were in compliance, as of September 30, 2000.
On November 27, 2000 we entered into an Agreement for Wholesale Financing
with IBM Credit Corporation. This agreement replaced the Inventory and Working
Capital Financing Agreement. However, certain terms of this agreement are still
being negotiated and, consequently we are presently operating under the terms
of our existing Inventory and Working Capital Financing Agreement.
As a result of Applied Digital Solutions having acquired a majority
interest in the Company, we will, in the future, be required to borrow from IBM
Credit Corporation through Applied Digital Solutions under its credit facility
with IBM Credit Corporation. Borrowings from Applied Digital Solutions will be
on such terms and conditions as it may reasonably make available to us from
time to time, which will be no worse than those currently provided for in the
Inventory and Working Capital Financing Agreement. There can be no assurance
that Applied Digital Solutions will have sufficient availability in the future
to permit us to have sufficient resources to conduct or maintain our business.
Our inability to have continuous access to such financing at reasonable
costs would materially and adversely impact our financial condition, results
of operations and cash flows.
SALES AND MARKETING
We have a broad customer base of primarily Fortune 1000 companies. Our
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 our reputation and
expertise in delivering and installing effective total information technology
solutions, which initially may not be the least expensive. We rely on our
marketing and sales programs, our industry-wide expertise, our
8
relationship with existing customers and our status as an IBM Business Partner
to generate sales opportunities.
We pursue new business opportunities by referrals from manufacturers
and existing customers, direct solicitation by telephone or mail of
pre-qualified customers and participation in industry trade shows.
We have 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.
All of our revenue is derived from US based customers.
CUSTOMER SUPPORT AND SERVICE
We believe that our ability to provide effective total solutions to
meet the needs of our customers is enhanced by its internal management
information system, which combines accounting, purchasing, inventory
control, sales order processing and work order management. We provide a
large array of services to our 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 we operate 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, Andersen Consulting, IBM
Global Services and UNISYS. Other competitors who purchase directly from
IBM, include value-added resellers, systems integrators and third-party
service companies, including CompuCom Systems, Inc., InaCom Corp., MicroAge,
Inc., EnPoint Technologies and GE ITS. While we receive 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. We expect to face further competition from
new market entrants and possible alliances between competitors in the
future. Certain of our current and potential competitors have greater
financial, technical, marketing and other resources than we do. 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 us. No
assurance can be given that we will be able to compete successfully against
current and future competitors.
Our 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 we will be able to continue to compete
successfully with existing or new competition, we believe that we currently
compete favorably due to our focus and expertise of network integration and
mid-range infrastructure services.
9
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Annual Report, and the documents
incorporated by reference herein, constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, Section
21E of the Securities Exchange Act of 1934 and the Private Securities
Litigation Reform Act of 1995. We intend that such forward-looking
statements be subject to the safe harbors created thereby. Such forward-
looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: our
continued ability to sustain our growth through product development and
business acquisitions; the successful completion and integration of future
acquisitions; the ability to hire and retain key personnel; the continued
development of our technical, manufacturing, sales, marketing and management
capabilities; relationships with and dependence on third-party suppliers;
anticipated competition; uncertainties relating to economic conditions where
we operate; uncertainties relating to government and regulatory policies;
uncertainties relating to customer plans and commitments; rapid technological
developments and obsolescence in the industries in which we operate and
compete; potential performance issues with suppliers and customers;
governmental export and import policies; global trade policies; worldwide
political stability and economic growth; the highly competitive environment
in which we operate; potential entry of new, well-capitalized competitors into
our markets; changes in our capital structure and cost of capital; and
uncertainties inherent in international operations and foreign currency
fluctuations. The words "believe", "expect", "anticipate", "intend" and "plan"
and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date the statement was made.
RISK FACTORS
In addition to the other information contained herein, the following
factors should be considered in evaluating our Company and our business.
These risks and uncertainties include, but are not limited to those set
forth herein and the risk factors described in our Prospectus dated
June 17, 1997, and from time to time in our other filings with the
Securities and Exchange Commission.
UNCERTAINTY OF FUTURE FINANCIAL RESULTS
We have incurred operating losses for each of the last three fiscal
years, and our future financial results are uncertain. There can be no
assurance that we will return to profitability, and we may continue to
operate at a loss for the foreseeable future. Profitability depends upon
many factors, including the success of our various marketing programs, the
maintenance or reduction of expense levels and our ability to successfully
coordinate the efforts of the different divisions of our business.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
Our quarterly operating results have fluctuated in the past and may
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 our
delivery of significant orders, the ability of manufacturers to deliver, in
a timely fashion, products for which we have received orders, the length of
the sales cycle, receipt of volume discounts, the demand for products and
services we offer, 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 our sales transactions have varied
substantially from quarter to quarter, and we expect 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 we receive orders that we expect to deliver
during that quarter. In addition, our collection periods have fluctuated due
to periodic unavailability of product, which resulted in delayed payment
10
from certain customers until their entire orders were shipped. Accordingly,
it is likely that in one or more future fiscal quarters, our operating results
may be below the expectations of public market analysts and investors. As a
result, the market price of our Common Stock would be materially adversely
affected.
PRINCIPAL MARKETS AND CUSTOMERS
Since 1994, we have 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, we believe we are a leading
IBM supplier/systems integrator of mid-range and computer/network systems in
the northeastern United States. In fiscal years 1998, 1999 and 2000, our top
customer accounted for approximately 6.8%, 8.6% and 25.0%, respectively, of
our total revenues. In fiscal year 1999, the Company's top five customers (3
of which were new) accounted for approximately 24.7% of total revenues. In
fiscal year 2000, the Company's top five customers (1 of which was new)
accounted for approximately 48.0% of total revenues.
DEPENDENCE ON MAJOR CUSTOMERS; RISK OF INDUSTRY CONCENTRATION
For the last three fiscal years, 1998, 1999, and 2000, a significant
portion (21%, 25% and 48%, respectively) of our revenues were derived from
sales to five principal customers, which customers varied annually, and
encompass markets where the demands of any one customer may vary greatly.
In addition, we do not have any exclusive long-term arrangements with our
customers for the continued sales of computer systems. The number of
customers who purchased at least $250,000 of computer systems from us
decreased from 67 in 1999 to 29 in 2000. Our failure to acquire a
significant or principal customer or to maintain its relationship could
have a material adverse effect on our operations.
In the fiscal year ended September 30, 2000, approximately 10.9% of our
sales of computer systems were to customers in the banking, financial and
securities industry based in the Northeastern United States. Although we are
striving to broaden our market focus to include sales to other markets, such
as educational institutions, government agencies, healthcare and insurance
companies, in the immediate future we expect that we will continue to derive
a substantial percentage of our 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 companies' information processing system requirements, could
have a material adverse effect on our results of operations.
GOODWILL WRITE-OFF'S WILL REDUCE OUR EARNINGS
As a result of the December 2000 acquisition of Information Products
Center, we have approximately $2.4 million of goodwill which will be
amortized over 20 years at the rate of approximately $122,000 per year,
which reduces our net income and our earnings per share. In addition,
future acquisitions may also increase our existing goodwill and the amount
of annual amortization, further reducing net income and earnings per share.
As required by Statement of Financial Accounting Standards No. 121, we will
periodically review our goodwill for impairment based on expected future
discounted cash flows. If we determine that there is such impairment, we
would be required to write down the amount of goodwill accordingly, which
would also reduce our earnings.
NEED FOR ADDITIONAL CAPITAL
We may require additional capital to fund growth of our current
business as well as to make future acquisitions. However, we may not be able
to obtain capital from outside sources. Even if we obtain capital from
outside sources, it may not be on terms favorable to us. Our current credit
agreement with IBM Credit Corporation may hinder our ability to raise
additional debt capital. If we raise additional capital by issuing equity
securities, these securities may have rights, preferences or privileges
senior to those of our common stockholders.
11
DEPENDENCE ON KEY INDIVIDUALS
Our future success is highly dependent upon our ability to attract and
retain qualified key employees. We are organized with a small senior
management team, with each of our separate operations under the day-to-day
control of local managers. If we were to lose the services of any members of
our central management team, our overall operations could be adversely
affected, and the operations of any of our individual facilities could be
adversely affected if the services of the local managers should be
unavailable.
CONTROL BY PRINCIPAL STOCKHOLDER
As of September 30, 2000, John H. Spielberger, our former Chairman of the
Board, President and Chief Executive Officer, beneficially owned approximately
55% of our outstanding common stock. As a result of his stock ownership as
of September 30, 2000, Mr. Spielberger had effective control of the Company
and the power to control the outcome of matters submitted to a vote of the
stockholders, such as the election of at least a majority of the members of
our Board of Directors and to direct the future operations of the Company.
On December 14, 2000, Mr. Spielberger and certain affiliates sold their
controlling interest in the Company to Applied Digital Solutions which now has
effective control of the Company and the power to control the outcome of
matters submitted to a vote of the stockholders, such as the election of at
least a majority of the members of our Board of Directors and to direct the
future operations of the Company.
Such concentration may have the effect of discouraging, delaying or
preventing a future change in control of the Company.
ANTI-TAKEOVER PROVISIONS
Certain provisions of our Amended and Restated Certificate of
Incorporation, Amended and Restated By-laws and Delaware law may be deemed
to have an anti-takeover effect. Our certificate of incorporation provides
that our 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, our certificate of incorporation and by-laws
provide that our 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,
we are 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.
RISKS THAT THE VALUE OF OUR INVENTORY MAY DECLINE
We purchase and warehouse inventory. As a result, we assume inventory
risks and price erosion risks for these products. These risks are especially
significant because computer equipment generally is characterized by rapid
technological change and obsolescence. These changes affect the market for
refurbished or excess inventory equipment. Our success will depend on our
ability to purchase inventory at attractive prices relative to its resale
value and our ability to turn our inventory rapidly through sales. If we pay
too much or hold inventory too long, we may be forced to sell our inventory
at a discount or at a loss or write down its value, and our business could
be materially adversely affected.
12
LACK OF DIVIDENDS ON COMMON STOCK; ISSUANCE OF PREFERRED STOCK
We do not have a history of paying dividends on our common stock, and
there can be no assurance that such dividends will be paid in the
foreseeable future. Pursuant to certain restrictions under our financing
agreement with IBM Credit Corporation, there are restrictions on the
declaration and payment of dividends. We intend to use any earnings which
may be generated to finance the growth of our businesses. Our Board of
Directors has the right to authorize the issuance of preferred stock, without
further shareholder approval, the holders of which may have preferences over
the holders of the common stock as to payment of dividends.
POSSIBLE VOLATILITY OF STOCK PRICE
Our common stock is quoted on the Nasdaq SmallCap Stock Market(R),
which has experienced, and is likely to experience in the future, significant
price and volume fluctuations which could adversely affect the market price
of our common stock without regard to our operating performance. In
addition, we believe that factors such as the significant changes to our
business resulting from continued acquisitions and expansions, quarterly
fluctuations in our financial results or cash flows, shortfalls in earnings
or sales below expectations, changes in the performance of other companies
in our same market sectors and the performance of the overall economy and
the financial markets could cause the price of our common stock to fluctuate
substantially. During the 12 month period prior to December 22, 2000, the
price per share of our common stock has ranged from a high of $3.47 to a low
of $0.41.
YEAR 2000 COMPLIANCE
We have not experienced any significant Year 2000 related problems.
During 1998 and 1999, we implemented a company wide program to ensure that
we would be compliant prior to the Year 2000 failure dates. We experienced
no problems on either January 1, 2000 or February 29, 2000. However we
cannot make any assurances that unforeseen problems may not arise in the
future.
We do not believe that the Year 2000 problem has had or will continue
to have a material adverse effect on our business, results of operations or
cash flows. The estimate of the potential impact on our financial position,
overall results of operations or cash flows for the Year 2000 problem could
change in the future. Our ability to achieve Year 2000 compliance and the
level of incremental costs associated therewith, could be adversely impacted
by, among other things, the availability and cost of programming and testing
resources, vendors' ability to modify proprietary software, and
unanticipated problems identified in the ongoing compliance review. The
discussion of our efforts, and management's expectations, relating to Year
2000 compliance are forward-looking statements.
EMPLOYEES
As of September 30, 2000, we employed 32 full-time and 3 part-time
employees. We have no collective bargaining agreements and believe our
relations with our employees are good.
BACKLOG
Customers typically do not place recurring "long-term" orders with us,
resulting in a limited order backlog at any point in time. Our failure to
receive orders from customers on a continuous basis would have a material
adverse effect on our financial condition, results of operations and cash
flows given our lack of recurring orders.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Federal, state, and local laws or regulations which have been enacted
or adopted regulating the discharge of materials into the environment have
not had, and under present conditions we do not foresee that they will have,
a material adverse effect on our capital expenditures, earnings, cash flows
or our competitive position. We will continue to monitor its operations with
respect to potential environmental issues, including changes in legally
mandated standards.
13
ITEM 2. PROPERTIES
In May 1998, our 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. Construction costs were reduced by $100,000,
after application of a $100,000 grant from The Empire State Development
Corporation in 1999.
We lease 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.
We leased 2,850 square feet of general office space in Waltham,
Massachusetts pursuant to a five year lease with an initial term which
expired on October 31, 1999 and was renewed through January 31, 2002 at a
base annual rental of $62,700 subject to escalation. On September 30, 2000,
we closed the Waltham office and sublet the space at no profit or loss.
We lease 340 square feet of general office space in Marlton, New Jersey
for $13,200 per year, expiring on July 31, 2001.
We leased 795 square feet of general office space in Fairfield,
Connecticut for $17,180 per year. The office was closed on August
31, 2000 and we were released from any obligations under the lease.
ITEM 3. LEGAL PROCEEDINGS
We are party to one legal action arising in the ordinary course of
business. In the opinion of management, this proceeding will not have a
material adverse effect on the financial position, cash flows or overall
trends in our results. The estimate of the potential impact on our financial
position, overall results of operations or cash flows for this proceeding
could change in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock trades on the Nasdaq SmallCap Stock Market(R) under
the symbol "SYCM." The following table shows, for the periods indicated, the
high and low sale prices per share of the common stock based on published
financial sources.
HIGH LOW
---- ---
1999
----
First Quarter $1.75 $1.06
Second Quarter 3.00 1.13
Third Quarter 2.00 1.25
Fourth Quarter 2.50 1.19
2000
----
First Quarter $1.53 $0.63
Second Quarter 3.47 1.09
Third Quarter 1.94 0.88
Fourth Quarter 1.25 0.63
DIVIDENDS
We have never paid cash dividends on our common stock. The decision
whether to apply legally available funds to the payment of dividends on our
common stock will be made by our Board of Directors from time to time in the
exercise of its business judgment. The financing agreement with IBM Credit
Corporation contains restrictions on our ability to declare and pay dividends.
See "Lack of Dividends on Common Stock; Issuance of Preferred Stock" on
page 13.
HOLDERS
As of December 22, 2000, there were 54 holders of record of our common
stock. We believe that there are a substantially greater number of beneficial
owners of shares of our common stock.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below, insofar as
they relate to the five years ended September 30, 2000, are derived from,
and are qualified by reference to, our audited consolidated financial
statements included herein and should be read in conjunction with those
consolidated financial statements and the notes thereto. The selected
consolidated financial data as of September 30, 1996, 1997 and 1998 and
for the years ended September 30, 1996 and 1997 are derived from audited
consolidated financial statements not included herein. Results for past
periods are not necessarily indicative of results that may be expected for
future periods.
CONSOLIDATED STATEMENT OF For the Year Ended September 30,
OPERATIONS DATA ------------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Net sales....................... $ 98,446,698 $ 89,725,938 $ 98,302,636 $ 69,683,295 $ 40,689,842
Cost of sales................... 89,025,331 78,049,310 89,047,731 62,731,687 36,116,860
Inventory write-down............ - - 657,491 -
------------ ------------ ------------ ------------ ------------
Gross Profit.................... 9,421,367 11,676,628 8,597,414 6,951,608 4,572,982
Selling and administrative
expenses........................ 5,028,812 6,534,552 8,193,905 7,249,568 6,719,424
------------ ------------ ------------ ------------ ------------
Income/(loss) from operations... 4,392,555 5,142,076 403,509 (297,960) (2,146,442)
Interest expense (net).......... (1,390,867) (979,185) (881,781) (216,521) (36,324)
Other income.................... 63,151 2,570 (35,000) 2,553 (8,734)
Realized loss on available-
for-sale securities............. (1,406,250) - (206,250) - -
------------ ------------ ------------ ------------ ------------
Income/(loss) from continuing
operations before income taxes.. 1,658,589 4,165,461 (719,522) (511,928) (2,191,500)
(Provision) benefit for income
taxes........................... (735,886) (1,761,855) 272,160 111,603 231,440
------------ ------------- ------------ ------------ ------------
Net income/(loss)............... $ 922,703 $ 2,403,606 $ (447,362) $ (400,325) $ (1,960,060)
============ ============ ============ ============ ============
PER SHARE DATA:
Income (loss) from continuing
operations...................... $ 0.25 $ 0.61 $ (0.10) $ (0.08) $ (0.42)
Diluted weighted average number
of shares outstanding........... 3,677,290 3,931,846 4,613,750 4,771,364 4,694,306
CONSOLIDATED BALANCE SHEET
DATA: As of September 30,
------------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Working capital.................. $ 3,342,545 $ 10,356,416 $ 9,314,237 $ 9,077,650 $ 6,062,837
Total assets..................... 32,102,557 38,104,036 27,857,265 19,301,700 15,630,688
Short term debt.................. 12,510,017 10,658,451 3,114,998 96,461 278,758
Long term debt................... 67,291 66,416 1,611,355 1,610,338 999,473
Stockholders' equity............. 3,998,587 11,827,636 11,551,919 11,206,868 9,208,021
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
CHANGE IN CONTROL
On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement,
as amended, between the selling shareholders described below and Applied
Digital Solutions, Applied Digital Solutions acquired approximately 55% of our
issued and outstanding common shares, resulting in a change in control of the
Company. Shares of our common stock were sold to Applied Digital Solutions by
the following persons and in the following amounts:
Selling Shareholders Number of Shares Held Percent Ownership
- -------------------------------------------------------------------------------------------------------------
John H. Spielberger 1,920,000 41%
Catherine Spielberger 50,000 1%
Bearpen Limited Partnership 600,000 13%
- -------------------------------------------------------------------------------------------------------------
Total 2,570,000 55%
=============================================================================================================
Applied Digital Solutions acquired the shares listed above for $4.5
million by issuing approximately 1.7 million shares of its common stock,
valued at approximately $2.75 million to the selling shareholders listed
above and upon payment of an aggregate amount of cash equal to approximately
$1.75 million, to the selling shareholders listed above.
As a condition to the closing of the transaction, John H. Spielberger,
John C. Spielberger, Lee Adams and Cornelia Eldridge resigned as officers
and directors of the Company. Garrett A. Sullivan, David A. Loppert and Anat
Ebenstein were appointed to fill the vacancies on the board of directors
created by such resignations, and the following persons become the officers
of the Company:
David A. Loppert Chief Executive Officer, Assistant Secretary and
Assistant Treasurer
Anat Ebenstein President, Chief Operating Officer
Michael Krawitz Vice President, Secretary
J. Robert Patterson Vice President, Chief Financial Officer and Treasurer
John C. Spielberger Vice President, Sales and Marketing
ACQUISITION OF ASSETS
On December 14, 2000, pursuant to the terms of a Stock Purchase
Agreement, as amended, between us and Applied Digital Solutions, we acquired
fifty-one percent (51%) of the outstanding shares of common stock of
Information Products Center. The purchase price for the shares of Information
Products Center was $2.075 million, payable $1.821 million in cash and $0.254
million by promissory note.
On December 15, 2000, pursuant to the terms of a Stock Purchase Agreement,
between us and Applied Digital Solutions, we acquired forty-nine percent (49%)
of the outstanding shares of common stock of Information Products Center. The
purchase price for the shares of Information Products Center was approximately
$2.4 million, payable by promissory note.
The assets of Information Products Center to be acquired indirectly by us
include, without limitation, physical property. For the foreseeable future,
we intend to utilize these assets in connection with the operations of the
business of Information Products Center.
17
OVERVIEW
We operate in a highly competitive industry which in turn places
constant pressures on maintaining gross profit margins. Many of our 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.
Years Ended September 30,
-----------------------------------------
2000 1999 1998
---- ---- ----
% % %
- - -
Net sales 100.0% 100.0% 100.0%
Cost of goods sold -88.8% -90.0% -90.6%
Writedown of Inventory 0.0% 0.0% -0.7%
-----------------------------------------
Gross profit 11.2% 10.0% 8.7%
Selling, general and administrative expenses -16.5% -10.4% -8.3%
-----------------------------------------
Income (loss) from operations -5.3% -0.4% 0.4%
Interest expense (net) -0.1% -0.3% -0.9%
Realized loss on available-for-sale securities 0.0% 0.0% -0.2%
-----------------------------------------
Loss before income taxes -5.4% -0.7% -0.7%
Income tax benefit 0.6% 0.2% 0.3%
-----------------------------------------
Net loss -4.8% -0.5% -0.4%
=========================================
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Sales for fiscal year 2000 decreased approximately 41.6%, or $28,993,453,
to $40,689,842, from $69,683,295 in fiscal year 1999. The decrease in sales
was a result of the Company transitioning its business from a primarily
hardware distributor and personal computer assembler to a reseller of
mid-range systems and the transition to a systems integrator.
Gross profit as a percentage of sales increased to 11.2% in fiscal year
2000, from 10.0% in fiscal year 1999. This increase was primarily
attributable to the sale of more profitable mid-range systems than less
profitable personal computer systems.
Selling and Administrative expenses decreased by approximately 7.3%, or
$530,144, to $6,719,424 in fiscal 2000, from $7,249,568 in fiscal year 1999.
The reduction in expense is primarily due to cost control programs, reduced
commissions on lower sales and staff reductions associated with redirecting
marketing efforts, offset by an increase in salaries related to systems
integration engineers and specialists.
Interest expense decreased 43.5%, or $113,282, to $146,858 in fiscal year
2000, from $260,140 in fiscal year 1999. We believe that constant monitoring
of accounts receivable has helped to keep interest costs at a minimum. In
addition, we use all available funds to reduce our outstanding supplier credit
facility on a daily basis. Net interest expense (interest expense less interest
income) for fiscal year 2000 and 1999 was $36,324 and $216,521, respectively.
Loss from operations before income taxes increased 428.1% to $2,191,500
in fiscal year 2000, from $511,928 in fiscal year 1998. This increase
resulted primarily from increase in salary expense to support our transition
to a systems integrator.
Our effective tax rate was a negative 10.6% in fiscal year 2000 and a
negative 21.8% in fiscal year 1999.
18
Our net loss for fiscal year 2000 increased to $1,960,060, from $400,325
in fiscal year 1999 primarily due to increases in Selling and Administrative
Expenses.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Sales for fiscal year 1999 decreased approximately 29%, or $28,619,341,
to $69,683,295, from $98,302,636 in fiscal year 1998. The decrease in sales
was a result of customer reluctance to spend on new programs before the
effects of the new millennium are understood, and we are transitioning
our business from a personal computer assembler to a reseller of mid-range
systems.
Gross profit as a percentage of sales increased to 10.0% in fiscal year
1999, from 8.7% in fiscal year 1998. This increase was primarily attributable
to the inclusion of a $657,491 writedown of inventory in fiscal 1998, or .7%
of sales.
Selling and Administrative expenses decreased by approximately 11.5%, or
$944,337 to $7,249,568 in fiscal year 1999, from $8,193,905 in fiscal year
1998. The reduction in expense is primarily due to cost control programs,
reduced commissions on lower sales and staff reductions associated with
redirecting marketing efforts.
Interest expense decreased 70.7%, or $628,075 to $260,140 in fiscal year
1999, from $888,215 in fiscal year 1998. We believe that constant monitoring
of accounts receivable has helped to keep interest costs at a minimum. In
addition, we use all available funds to reduce our outstanding supplier credit
facility on a daily basis. Net interest expense (interest expense less interest
income) for fiscal year 1999 and 1998 was $216,521 and $881,781, respectively.
Loss from continuing operations before income taxes decreased by 28.9%
to $511,928 in fiscal year 1999, from $719,522 in fiscal year 1998. This
decrease resulted primarily from improved gross margin percentage and
reduced interest expense referred to above.
Our effective tax rate was a negative 21.8% in fiscal year 1999 and a
negative 37.8% in fiscal year 1998.
Our net loss for fiscal year 1999 decreased to $400,325, from $447,362
in fiscal year 1998, primarily due to the lost gross profit in fiscal 1999
being more than offset by the inventory write-off, increased operating expenses
and interest expense in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our current ratios at September 30, 2000 and 1999 were 2.1 and 2.4,
respectively. Working capital at September 30, 2000 was $6,062,837, a decrease
of $3,014,813, from $9,077,650 at September 30, 1999.
Cash used for operating activities in fiscal 2000 was $457,640 compared
to $4,569,649 of cash provided by operating activities in fiscal year 1999
and $9,342,275 provided in fiscal 1998. The cash used in operating
activities in fiscal 2000 was primarily as a result of the net loss and
reductions in accounts receivable and payable, inventory, recoverable income
taxes, prepaid expenses and deferred income taxes. The cash provided by
operating activities during fiscal years 1999 and 1998 were a result of
significant reductions in both inventory and accounts receivable.
Cash used in investing activities was $299,986, $109,357 and $2,607,070
for fiscal years 2000, 1999 and 1998, respectively, and was used primarily
to finance capital expenditures. We moved into our new facility in 1998.
Net cash used in financing activities was $467,355, $3,111,280 and
$6,258,290 in each of fiscal 2000, 1999 and 1998, respectively. The net cash
used during fiscal 2000 was primarily payments on long-term debt and the
re-purchase of our common stock. The net cash used in financing activities
during fiscal years 1999 and 1998 related primarily to payments made under
our supplier credit facility, payments on long-term debt and the repurchase
of our common stock. In addition, in 1998, we obtained
19
a mortgage from the Chase Manhattan Bank secured by our new facility in the
amount of $1,650,000. The proceeds were used to pay down our debt with IBM
Credit Corporation.
Under our financing arrangement with IBM Credit Corporation, as of
September 30, 2000, we were able to borrow up to 85% of our eligible accounts
receivable and 100% of our eligible inventory, up to a maximum of $22,500,000.
As of September 30, 2000, 1999 and 1998, interest on the outstanding borrowings
for IBM Credit Corporation were payable monthly at the prime rate, or prime
rate plus 6.5% should we fail to meet certain collateral requirements. As of
September 30, 2000 and 1999, there were no borrowings outstanding under the IBM
Credit Corporation facility. Additionally, advances under our Agreement for
Wholesale Financing from IBM Credit Corporation totaling $4,411,031 and
$3,282,454 were included in accounts payable at September 30, 2000 and 1999,
respectively, and were offset against the maximum credit available at that
time from IBM Credit Corporation.
As a result of Applied Digital Solutions having acquired a majority
interest in the Company, we will, in the future, be required to borrow from
IBM Credit Corporation through Applied Digital Solutions under its credit
facility with IBM Credit Corporation. Borrowings from Applied Digital Solutions
will be on such terms and conditions as it may reasonably make available to us
from time to time, which will be no worse than those currently provided for
in the Inventory and Working Capital Financing Agreement.
In 1999, we received a grant of $100,000 and a loan of $100,000 from The
Empire State Development Corporation to assist in the financing of the new
facility in Shirley, New York.
We believe that our present Agreement for Wholesale Financing with IBM
Credit Corporation, financing provided by Applied Digital Solutions and our
projected earnings capacity will be sufficient to fund our operations and
capital expenditures for at least 12 months.
SEASONALITY AND QUARTERLY FLUCTUATIONS
We have historically experienced, and expect to continue to experience,
fluctuations in our 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 our overhead is fixed, our results of operations may
be adversely affected if revenues were to fall below our expectations. We can
typically deliver systems within a short period of time and therefore we do
have a significant long-term backlog in orders.
The following table sets forth certain quarterly information for the
periods indicated:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FOR THE YEAR ENDED
SEPTEMBER 30, 2000:
Net sales $ 11,725,000 $ 9,338,000 $ 10,832,000 $ 8,795,000
Gross profit 1,282,000 1,313,000 1,034,000 944,000
Loss from operations (952,000) (535,000) (538,000) (122,000)
Net loss (748,000) (470,000) (530,000) (213,000)
FOR THE YEAR ENDED
SEPTEMBER 30, 1999:
Net sales $ 27,329,000 $ 14,355,000 $ 14,018,000 $ 13,982,000
Gross profit 2,839,000 1,921,000 1,218,000 974,000
Income (loss) from operations 938,000 368,000 (777,000) (827,000)
Net income (loss) 511,000 172,000 (478,000) (605,000)
FOR THE YEAR ENDED
SEPTEMBER 30, 1998:
Net sales $ 28,062,000 $ 22,228,000 $ 26,417,000 $ 21,596,000
Gross profit 2,814,000 1,873,000 2,500,000 1,410,000
Income (loss) from operations 809,000 (151,000) 432,000 (687,000)
Net income (loss) 317,000 (196,000) 89,000 (657,000)
DISCLOSURES REGARDING FORWARD LOOKING STATEMENTS
Management's discussion and analysis of our financial conditions and
results of operations should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in
20
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.
YEAR 2000 COMPLIANCE
We have not experienced any significant internal Year 2000 related
problems. During 1998 and 1999, we implemented a company wide program to
ensure that our internal systems would be compliant prior to the Year 2000
failure dates. We have not experienced any Year 2000 compliance problems.
However, we cannot make any assurances that unforeseen problems may not
arise in the future.
We do not believe that the Year 2000 problem has had or will continue
to have a material adverse effect on our business, results of operations or
cash flows. The estimate of the potential impact on our financial position,
overall results of operations or cash flows for the Year 2000 problem could
change in the future. Our ability to achieve Year 2000 compliance and the
level of incremental costs associated therewith, could be adversely impacted
by, among other things, the availability and cost of programming and testing
resources, a vendor's ability to modify proprietary software, and
unanticipated problems identified in the ongoing compliance review. The
discussion of our efforts, and management's expectations, relating to Year
2000 compliance are forward-looking statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
FAS 133, Accounting for Derivative Instruments and Hedging Activities, which
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The statement is
effective for fiscal years commencing after June 15, 2000. In June 2000, the
FASB issued FAS 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FAS statement 133, which
addresses implementation issues experienced by those companies that adopted
FAS 133 early. We will adopt FAS 133, as well as its amendments and
interpretations, in fiscal year 2001. We do not believe that FAS 133 will
have a material impact on our results of operations, cash flows and
financial condition.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements. This Staff Accounting
Bulletin summarizes certain of the staff's views on applying Generally
Accepted Accounting Principles to revenue recognition in financial
statements. On June 26, 2000, the SEC staff issued SAB No. 101B, which
delays the implementation date of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. Therefore,
we will adopt this statement no later than the fourth quarter of fiscal
2001. We do not believe that SAB 101 will have a material impact on our
results of operations, cash flows and financial condition.
In September 2000, the EITF reached a consensus in EITF Issues 00-10,
"Accounting for Shipping and Handling Fees and Costs," agreeing that
shipping and handling fees must be classified as revenues and comparable
prior periods should be restated. Further, they agreed that shipping and
handling costs can be classified anywhere in the statement of earnings,
except they cannot be netted against sales. If shipping and handling costs
are not included in costs of goods sold, the amount and classification of
these expenses must be disclosed in the footnotes to the financial
statements. This consensus must be adopted no later than the fourth quarter
of fiscal years beginning after December 15, 1999. Therefore, we will adopt
EITF Issue 00-10 in the fourth quarter of 2001. We do not anticipate that
the adoption of EITF Issue 00-10 will have a material impact on our results
of operations, cash flows and financial condition.
INFLATION
In the opinion of management, inflation has not had a material effect
on the operations of the Company.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We presently do not use any derivative financial instruments to hedge
our exposure to adverse fluctuations in interest rates, foreign exchange
rates, fluctuations in commodity prices or other market risks, nor do we
invest in speculative financial instruments. Borrowings under the financing
agreement with IBM Credit Corporation are at the prime rate. Our interest
income is sensitive to changes in the general level of U. S. interest rates,
particularly since the majority of our investments are in short-term
investments.
Due to the nature of our borrowings and our short-term investments, we
have concluded that there is no material market risk exposure and,
therefore, no quantitative tabular disclosures are required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data included
in this Annual Report are listed in Item 14 and begin immediately after Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be included in our Proxy
Statement for our 2001 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in our Proxy
Statement for our 2001 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be included in our Proxy
Statement for our 2001 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be included in our Proxy
Statement for our 2001 Annual Meeting of Stockholders and is incorporated
herein by reference.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The financial statements and financial statement schedule
listed below are included in this report
Independent Auditors' Report
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule of Valuation and Qualifying Accounts
(a)(2) Financial statement schedules have been included in Item 14(a)(1)
above.
(a)(3) Exhibits
See Index to Exhibits filed as part of this annual report on
Form 10-K.
(b) Reports on Form 8-K
On December 22, 2000, we filed a Current Report on Form 8-K
reporting (a) a change in control of the Registrant and (b)
the acquisition of Information Products Center, Inc.
(c) Exhibits - Included in Item 14(a)(3) above.
24
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 in the
city of Palm Beach, State of Florida, on December 28, 2000.
SYSCOMM INTERNATIONAL CORPORATION
(Registrant)
BY: /S/ DAVID A. LOPPERT
-------------------------------------------
Dated: December 28, 2000 David A. Loppert, Chief Executive Officer
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.
Signature Title Date
--------- ----- ----
/S/ GARRETT A. SULLIVAN
- ------------------------------------------------ Chairman of the Board of December 28, 2000
(Garrett A. Sullivan) Directors
Chief Executive Officer, Assistant
/S/ DAVID A. LOPPERT Secretary and Assistant December 28, 2000
- ------------------------------------------------ Treasurer (Principal Executive
(David A. Loppert) Officer)
/S/ ANAT EBENSTEIN
- ------------------------------------------------ President and Director (Principal December 28, 2000
(ANAT EBENSTEIN) Operating Officer)
/S/ J. ROBERT PATTERSON Vice President, Treasurer and
- ------------------------------------------------ Chief Financial Officer December 28, 2000
(J. ROBERT PATTERSON) (Principal Accounting Officer)
25
LIST OF EXHIBITS
(Item 14 (c))
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (File No.
333-25593) filed with the Commission on April 22, 1997)
3.2 Amended and Restated By-Laws (incorporated herein by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 333-25593) filed with the
Commission on April 22, 1997)
10.1 Inventory and Working Capital Financing Agreement, dated
September 24, 1996 between the Company's subsidiary,
Information Technology Services, Inc., and IBM Credit
Corporation (incorporated herein by reference to Exhibit 10.2.
to the Company's Registration Statement on Form S-1/A
(File No. 333-25593) filed with the Commission on June 12, 1997)
10.2 Agreement for Wholesale Financing (Security Agreement),
dated November 27, 2000 between the Company's subsidiary,
Information Technology Services, Inc., and IBM Credit
Corporation
10.3* 1998 Incentive Stock Option Plan (incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-25593) filed with the
Commission on April 22, 1997)
10.4* 1998 Incentive Stock Option Plan, as Amended (incorporated
herein by reference to Exhibit 99 to the Company's
definitive Proxy Statement filed with the Commission on
December 27, 1999)
10.5* 1999 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit A to the Company's definitive Proxy
Statement filed with the Commission on December 28, 1998)
12.1 Statement re Computation of Ratios
21.1 List of Subsidiaries
23.1 Consent of Albrecht, Viggiano, Zureck & Company, P.C.
27.1 Financial Data Schedule
[FN]
-------
* Management contract or compensatory plan.
26
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
F-1
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
(631) 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, 2000 and 1999
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, 2000. 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, 2000
and 1999 and the results of its operations and its cash flows for each of
the years in the three-year period ended September 30, 2000, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
/s/ ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
December 15, 2000
F-2
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30,
----------------------------
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,038,540 $ 2,263,521
Accounts receivable, net 9,802,460 11,400,892
Inventory 404,505 741,561
Recoverable income taxes -0- 725,900
Prepaid expenses 42,391 106,740
Deferred income taxes 198,135 323,530
------------ ------------
Total Current Assets 11,486,031 15,562,144
PROPERTY, PLANT AND EQUIPMENT, NET 3,298,074 3,315,187
OTHER ASSETS 471,188 424,369
DEFERRED INCOME TAXES 375,395 -0-
------------ ------------
Total Assets $ 15,630,688 $ 19,301,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 5,131,425 $ 6,378,033
Current portion of long-term debt 278,758 96,461
Income taxes payable 13,011 10,000
------------ ------------
Total Current Liabilities 5,423,194 6,484,494
LONG-TERM DEBT 999,473 1,610,338
------------ ------------
Total Liabilities 6,422,667 8,094,832
------------ ------------
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;
5,554,878 shares issued at September 30, 2000;
5,523,589 shares issued at September 30, 1999 55,549 55,236
Additional paid-in capital 6,502,197 6,473,892
Retained earnings 3,562,151 5,522,211
------------ ------------
10,119,897 12,051,339
Treasury stock (at cost) (911,876) (844,471)
------------ ------------
Total Stockholders' Equity 9,208,021 11,206,868
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,630,688 $ 19,301,700
============ ============
See accompanying notes to consolidated financial statements.
F-3
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
SALES $ 40,689,842 $ 69,683,295 $ 98,302,636
------------ ------------ ------------
Cost of Sales 36,116,860 62,731,687 89,047,731
Writedown of Inventory -0- -0- 657,491
------------ ------------ ------------
36,116,860 62,731,687 89,705,222
------------ ------------ ------------
Gross Profit 4,572,982 6,951,608 8,597,414
SELLING AND ADMINISTRATIVE EXPENSES 6,719,424 7,249,568 8,193,905
------------ ------------ ------------
Income (Loss) from Operations (2,146,442) (297,960) 403,509
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (146,858) (260,140) (888,215)
Interest income 110,534 43,619 6,434
Other (8,734) 2,553 (35,000)
Realized loss on available-for-sale
securities -0- -0- (206,250)
------------ ------------ ------------
Total Other Expense (45,058) (213,968) (1,123,031)
------------ ------------ ------------
Loss before Income Taxes (2,191,500) (511,928) (719,522)
INCOME TAX BENEFIT 231,440 111,603 272,160
------------ ------------ ------------
Net Loss $ (1,960,060) $ (400,325) $ (447,362)
============ ============ ============
PER SHARE DATA
Basic $ (0.42) $ (0.08) $ (0.10)
Diluted (0.42) (0.08) (0.10)
WEIGHTED AVERAGE SHARES
Basic 4,694,306 4,749,519 4,593,065
Diluted 4,694,306 4,771,364 4,613,750
See accompanying notes to consolidated financial statements.
F-4
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 2000, 1999 and 1998
Common Stock Additional Treasury Stock
------------------------ Paid-In ------------------------
Shares Amount Capital Shares Amount
---------- ----------- ------------ ---------- -----------
Balance as of September 30, 1997 4,555,540 $ 50,172 $ 5,610,452 461,660 $ (142,170)
Comprehensive Loss:
Net Loss
Unrealized Loss on Available-for-
Sale Securities
Realized Loss on Available-for-Sale
Securities
Total Comprehensive Loss
Compensatory Stock Options
Issued to Non-employees 75,225
Exercise of Stock Options 498,000 4,980 631,940
Purchase of Treasury Shares (279,635) 279,635 (601,216)
---------- ----------- ------------ ---------- -----------
Balance as of September 30, 1998 4,773,905 55,152 6,317,617 741,295 (743,386)
Net Loss
Compensatory Stock Options
Issued to Non-employees 147,000
Common Stock Issued Pursuant
to Stock Purchase Plan 8,389 84 9,275
Purchase of Treasury Shares (61,400) 61,400 (101,085)
---------- ----------- ------------ ---------- -----------
Balance as of September 30, 1999 4,720,894 55,236 6,473,892 802,695 (844,471)
---------- ----------- ------------ ---------- -----------
Common Stock Issued Pursuant to
Stock Purchase Plan 31,289 313 28,305
Net Loss
Purchase of Treasury Shares (49,700) 49,700 (67,405)
---------- ----------- ------------ ---------- -----------
Balance as of September 30, 2000 4,702,483 $ 55,549 $ 6,502,197 852,395 $ (911,876)
========== =========== ============ ========== ===========
Accumulated
Other Total
Comprehensive Retained Stockholders'
Income Earnings Equity
------------- ----------- -------------
Balance as of September 30, 1997 $ (60,716) $ 6,369,898 $ 11,827,636
Comprehensive Loss:
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
-------------
Total Comprehensive Loss (386,646)
Compensatory Stock Options
Issued to Non-employees 75,225
Exercise of Stock Options 636,920
Purchase of Treasury Shares (601,216)
------------- ----------- -------------
Balance as of September 30, 1998 -0- 5,922,536 11,551,919
Net Loss (400,325) (400,325)
Compensatory Stock Options
Issued to Non-employees 147,000
Common Stock Issued Pursuant
to Stock Purchase Plan 9,359
Purchase of Treasury Shares (101,085)
------------- ----------- -------------
Balance as of September 30, 1999 -0- 5,522,211 11,206,868
------------- ----------- -------------
Common Stock Issued Pursuant to
Stock Purchase Plan 28,618
Net Loss (1,960,060) (1,960,060)
Purchase of Treasury Shares (67,405)
------------- ----------- ------------
Balance as of September 30, 2000 $-0- $ 3,562,151 $ 9,208,021
============= =========== ============
See accompanying notes to consolidated financial statements.
F-5
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
-------------------------------------------------------
2000 1999 1998
--------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,960,060) $ (400,325) $ (447,362)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 308,365 292,144 299,274
Compensatory stock options issued to non-employees -0- 147,000 75,225
Deferred tax provision (benefit) (250,000) 206,263 (208,212)
Loss on disposition of equipment 8,734 11,371 -0-
Realized loss on available-for-sale securities -0- -0- 206,250
Changes in assets and liabilities:
Accounts receivable 1,598,432 8,212,042 3,655,192
Inventory 337,056 1,844,675 10,058,107
Recoverable income taxes 725,900 (444,924) (280,976)
Prepaid expenses and other assets 17,530 (107,637) (42,683)
Accounts payable and accrued liabilities (1,246,608) (5,200,960) (3,473,326)
Income taxes payable 3,011 10,000 (499,214)
--------------- --------------- ----------------
Net Cash Provided by (Used in) Operating Activities (457,640) 4,569,649 9,342,275
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (305,036) (209,357) (2,607,070)
Proceeds from disposition of equipment 5,050 -0- -0-
Proceeds from state grant -0- 100,000 -0-
--------------- --------------- ----------------
Net Cash Used in Investing Activities (299,986) (109,357) (2,607,070)
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments under supplier
credit facility -0- (3,020,234) (7,594,604)
Net proceeds from long-term debt -0- 100,000 1,650,000
Payments of long-term debt (428,568) (99,320) (53,910)
Net proceeds from issuance of common stock 28,618 9,359 -0-
Purchase of treasury stock (67,405) (101,085) (259,776)
--------------- --------------- ----------------
Net Cash Used in Financing Activities (467,355) (3,111,280) (6,258,290)
--------------- --------------- ----------------
Net Increase (Decrease) in Cash and
Cash Equivalents (1,224,981) 1,349,012 476,915
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,263,521 914,509 437,594
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,038,540 $ 2,263,521 $ 914,509
=============== =============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 28,951 $ 241,935 $ 809,910
Interest 146,858 252,727 888,215
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Purchase of treasury stock:
Proceeds from sale of stock options $ -0- $ -0- $ 341,440
Purchase of treasury stock -0- -0- (601,216)
--------------- --------------- ----------------
Cash Paid for Treasury Stock $ -0- $ -0- $ (259,776)
=============== =============== ================
See accompanying notes to consolidated financial statements.
F-6
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, conducts 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.
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.
Stock-Based Compensation
- ------------------------
The Company accounts for stock options and employees' purchase rights as
prescribed by Accounting Principles Board Opinion No. 25 and includes pro
forma information in the stock-based compensation footnote, as permitted by
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation cost is recognized
for employees' purchase rights and stock options granted to employees.
Compensation cost is recognized for stock options granted to non-employees
based upon the fair market value of the options granted.
Accounts Receivable
- -------------------
Accounts 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 returns from suppliers are
classified as receivables. The allowance for doubtful accounts was $133,000
and $169,050 as of September 30, 2000 and 1999, respectively. The allowance
for sales returns was $25,000 and $110,000 as of September 30, 2000 and
1999, respectively.
F-7
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
The Company 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 its
inventory valuation allowance. The allowance was $250,000 and $164,420 as of
September 30, 2000 and 1999, respectively.
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, any 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.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
Estimated
Useful Life
-----------
Building 39 years
Vehicles 1-5 years
Computer equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements 5 years
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes,
which requires the use of the liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are measured
using enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
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. 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 accumulated other comprehensive income within
stockholders' equity. Realized losses are recorded for any decline in value
determined to be other-than-temporary on available-for-sale securities.
F-8
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income
- --------------------
In 1999, the Company adopted Financial Accounting Standards Board Statement
No. 130, Reporting Comprehensive Income. Comprehensive income consists of
net income and other comprehensive income; the latter includes unrealized
gains and losses on available-for-sale securities and is presented in the
Consolidated Statements of Stockholders' Equity. This adoption had no effect
on stockholders' equity. Prior year financial statements have been
reclassified to conform with this requirement.
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 Statement
No. 128, Earnings per Share. This pronouncement requires the reporting of
two 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.
A reconciliation of the weighted-average number of common shares outstanding
used in the calculations of basic and diluted earnings (loss) per share
follows.
Year Ended Year Ended Year Ended
September 30, 2000 September 30, 1999 September 30, 1998
--------------------------- ---------------------------- ---------------------------
Basic Dilutive Basic Dilutive Basic Dilutive
-------------- ----------- ------------- ------------- ------------- ------------
Weighted-average number
of common shares outstanding 4,694,306 4,694,306 4,749,519 4,749,519 4,593,065 4,593,065
============== =========== ============= ============= ============= ============
The dilutive effect of the following options were not included in the
computation of diluted loss per share for their respective year because they
are anti-dilutive:
* 57,000 options granted in 1997 at exercise prices ranging from $5.56
to $6.12
* 40,000 options granted in 1998 at an exercise price of $1.88
* 327,000 options granted in 1999 at exercise prices ranging from $1.56
to $2.85
* 150,000 options granted in 2000 at exercise prices ranging from $0.88
to $0.97
F-9
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
- -------------------------
The Company considers all liquid instruments purchased with a maturity of
three months or less to be cash equivalents.
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 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 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of:
2000 1999
-------------- --------------
Land $ 437,660 $ 437,660
Building 2,225,480 2,225,480
Vehicles 81,251 81,251
Computer equipment 1,022,611 1,026,084
Furniture and fixtures 502,608 518,141
Leasehold improvements 10,703 117,691
-------------- --------------
4,280,313 4,406,307
Accumulated depreciation (982,239) (1,091,120)
-------------- --------------
Property, plant and equipment, net $ 3,298,074 $ 3,315,187
============== ==============
The Company received a grant of $100,000 from the Empire State Development
Corporation in 1999 that reduced the cost of the building in Shirley, New
York.
NOTE 3 - 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, 2000
and 1999 amounted to $276,974 and $240,652, respectively.
F-10
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - FINANCING ARRANGEMENTS
The Company entered into a formal credit agreement with the financing
subsidiary of IBM. 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 $22,500,000. The agreement, which is subject to renewal each
September, is also subject to temporary increases, thereby increasing the
line of credit to $41,500,000 during certain periods. Interest on the
outstanding borrowings is payable monthly at prime, or prime plus 6.5%,
should the Company fail to meet certain collateral requirements.
Additionally, $4,411,031 and $3,282,454 were included in accounts payable at
September 30, 2000 and 1999, respectively, and are included against the
maximum credit available. Subsequent to September 30, 2000, this agreement
is in the process of being revised as further detailed in Note 12.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
2000 1999
------------ ------------
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; subsequent to September 30, 2000,
this agreement was modified, as further detailed in Note 12. $ 1,173,778 $ 1,575,274
EMPIRE STATE DEVELOPMENT CORPORATION
Loan in the amount of $100,000 to finance improvements to the facility in
Shirley, New York; payable in 119 monthly installments of $1,012,
beginning May 1, 1999 and ending April 1, 2009, including principal and a
base interest rate of 4.0% per annum; interest rate is subject to change
each March 1 to prime plus 2.0% if the number of full-time employees in
Shirley, New York declines below 85% of certain annual base numbers. 88,142 95,892
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. -0- 809
------------ ------------
(carried forward) 1,261,920 1,671,975
F-11
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG TERM DEBT (continued)
2000 1999
------------ ------------
(brought forward) $ 1,261,920 $ 1,671,975
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 14.5%
per annum; final payment due May 2001. 5,368 12,515
Capital lease collateralized by a lien on the Company's phone system;
payable in monthly installments of $542 including interest of 15.1%
per annum; final payment due January 2001. 1,581 7,406
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. 9,362 14,903
------------ ------------
1,278,231 1,706,799
Current maturities (278,758) (96,461)
------------ ------------
$ 999,473 $ 1,610,338
============ ============
Maturities of long-term debt are as follows:
September 30, 2001 $ 278,758
2002 929,256
2003 9,514
2004 9,902
2005 10,305
Thereafter 40,496
------------
$ 1,278,231
============
NOTE 6 - CAPITAL LEASES
As of September 30, 2000 and 1999, gross assets capitalized under equipment
leases totaled $80,745 and the accumulated amortization totaled $49,353 and
$37,519, respectively. Amortization expense for the years ended September
30, 2000, 1999 and 1998 amounted to $11,834.
F-12
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Years Ended September 30,
-------------------------------------------------------
2000 1999 1998
--------------- ---------------- ----------------
Current:
Federal $ (25,863) $ (362,184) $ (63,948)
State 44,423 44,318 -0-
--------------- ---------------- ----------------
Total Current 18,560 (317,866) (63,948)
--------------- ---------------- ----------------
Deferred:
Federal (202,500) 167,073 (168,652)
State (47,500) 39,190 (39,560)
--------------- ---------------- ----------------
Total Deferred (250,000) 206,263 (208,212)
--------------- ---------------- ----------------
Provision (Benefit) for Income Taxes $ (231,440) $ (111,603) $ (272,160)
=============== ================ ================
A reconciliation of income tax benefit at the statutory federal income tax
rate to net income taxes included in the accompanying statements of
operations is as follows:
Years Ended September 30,
-------------------------------------------------------
2000 1999 1998
--------------- ---------------- ----------------
Income taxes at federal statutory rate $ (745,110) $ (174,056) $ (244,637)
State taxes, net of federal benefit (59,860) 62,453 (27,523)
Valuation allowance 573,530 -0- -0-
--------------- ---------------- ----------------
Provision (Benefit) for Income Taxes $ (231,440) $ (111,603) $ (272,160)
=============== ================ ================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
September 30,
------------------------------------
2000 1999
--------------- ----------------
Allowance for doubtful accounts $ 51,870 $ 71,001
Allowance for sales returns 9,750 46,200
Inventory 98,936 71,891
Investments 16,803 18,096
Depreciation (29,018) (21,742)
Vacation accrual 20,776 39,078
Stock options 86,668 93,335
Other 4,875 5,671
Net operating loss carry forward 886,400 -0-
--------------- ----------------
Total Deferred Tax Assets $ 1,147,060 $ 323,530
Less: Valuation Allowance (573,530) -0-
--------------- ----------------
Net Deferred Tax Assets $ 573,530 $ 323,530
=============== ================
F-13
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (continued)
At September 30, 2000, the Company has a net operating loss carryforward of
approximately $2,300,000 which will expire in 2020. Utilization of the
Company's net operating loss is subject to a substantial annual limitation
due to ownership change limitations provided by the Internal Revenue Code
and similar state provisions. Realization of deferred tax assets is
dependent upon future earnings, the timing and amount of which are
uncertain. Accordingly, the net deferred tax assets have been partially
offset by a valuation allowance at September 30, 2000.
NOTE 8 - STOCK-BASED COMPENSATION
Stock Option Plans
- ------------------
The 1988 stock option plan expired on May 5, 1998. In February 1998, a new
stock option plan (the "1998 Plan") was approved by the stockholders. The
1998 Plan was amended in January 2000. Under the revised plan, 1,000,000
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 1998 Plan will terminate in February 2008. Options granted
under the 1998 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-employees 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.
During 2000 and 1999, 110,000 and 115,000 options, respectively, were
granted to investment bankers, directors and employees of the Company with
immediate vesting. All other options granted vest over a four-year period
following the date of grant. The options granted in 1997 expire on September
1, 2001. All other options expire five years from the date of the grant.
A summary of stock option activity related to the Company's stock option
plans is as follows:
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Period Period Period Outstanding Exercisable
----------- ---------- ---------- ---------- ----------- -----------
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 $ 1.26 $ 1.875 $ 0.69 $ 5.56 $ 4.06 $ 2.85
Year ended September 30, 1999
Number of shares 97,000 327,000 -0- 21,000 403,000 173,000
Weighted average exercise price
per share $ 4.06 $ 2.02 $ -0- $ 5.56 $ 2.32 $ 2.90
Year ended September 30, 2000
Number of shares 403,000 150,000 -0- 244,000 309,000 283,000
Weighted average exercise price
per share $ 2.32 $ .92 $ -0- $ 1.71 $ 2.12 $ 2.12
F-14
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK-BASED COMPENSATION (continued)
The weighted average per share fair value of the options granted during the
years ended September 30, 2000 and 1999 was estimated as $.59 and $1.34,
respectively, on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
2000 1999
----------------- --------------
Risk-free interest rates 5.83% - 6.22% 5.62% - 5.86%
Expected option lives 4.13 - 4.84 years 4.48 - 5 years
Expected volatilities 110% 110%
Expected dividend yields 0% 0%
The following table summarizes information about the options outstanding at
September 30, 2000:
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercisable Number Exercisable
Exercise Price Outstanding Life Price Exercisable Price
- ----------------------------- ----------- ---------- ----------- ----------- -----------
$5.56 - $6.12 24,000 .92 years $ 5.63 18,000 $ 5.63
$2.69 - $2.85 115,000 3.48 years 2.83 115,000 2.83
$0.88 - $1.88 170,000 4.18 years 1.14 150,000 1.16
Employee Stock Purchase Plan
- ----------------------------
On December 17, 1998, the Company adopted the 1999 Employee Stock Purchase
Plan (the "1999 Plan") whereby 200,000 shares of common stock are reserved
for issuance to eligible employees. A participant may have up to 10% of
their earnings withheld during a period of approximately six months
commencing on the first trading day on or after April 1 and terminating on
the last trading day ending the following September 30, or commencing on the
first trading day on or after October 1 and terminating on the last trading
day ending the following March 31. The purchase price shall be an amount
equal to 85% of the fair market value of a share of common stock on the
enrollment date or on the exercise date, whichever is lower.
During the year ended September 30, 2000, participating employees in the
1999 Plan exercised their rights to purchase 31,289 shares of common stock
at 85% of the fair market value. No purchase rights remain outstanding or
exercisable at September 30, 2000.
The fair market value of each stock purchase plan grant is estimated on the
date of grant using the Black-Scholes model with the following assumptions:
no estimated dividends; expected volatility of 110%; risk free interest
rates of 6.26% and 5.72%; and an expected life of 0.5 years. The
weighted-average fair value of these purchase rights granted in 2000 was
$0.40.
F-15
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK-BASED COMPENSATION (continued)
Employee Stock Purchase Plan
- ----------------------------
Had compensation expense for the Company's stock-based compensation plans
been determined consistent with FAS 123, net loss and loss per share would
be increased to the pro forma amounts indicated below:
2000 1999
------------ ------------
Net loss
As reported $(1,960,060) $ (400,325)
Pro forma (2,036,061) (480,008)
Loss per share - basic
As reported $ (0.42) $ (0.08)
Pro forma (0.43) (0.10)
Loss per share - diluted
As reported $ (0.42) $ (0.08)
Pro forma (0.43) (0.10)
NOTE 9 - 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, 2000, 1999 and 1998, the Company
incurred 401(k) costs totaling $7,796, $21,411 and $19,945, respectively.
NOTE 10 - 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.
F-16
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CONCENTRATION OF CREDIT RISK (continued)
Major Customers
- ---------------
Computer sales encompass markets wherein the demands of any one customer may
vary greatly due to changes in technology. For the year ended September 30,
2000, one customer comprised 25% of sales. This customer comprised 14% of
accounts receivable at September 30, 2000. No single customer comprised more
than 10% of sales for the years ended September 30, 1999 and 1998. Two
customers comprised 14% and 11%, respectively, of accounts receivable as of
September 30, 2000. In comparison, three customers comprised 19%, 18% and
14% of accounts receivable as of September 30, 1999.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Purchases
- ---------
In 1998 and 1997, the Company purchased a majority of its products from
International Business Machines Corporation (IBM). In 1999, the Company
began purchasing more products from other vendors and less from IBM.
Purchases from IBM represented approximately 16%, 9% and 85% of total
purchases for each of the years ended September 30, 2000, 1999 and 1998,
respectively. Four other vendors were major suppliers in 2000. Purchases
from these suppliers represented approximately 40%, 21%, 10% and 5% of total
purchases for the year ended September 30, 2000 and 35%, 1%, 0% and 12%,
respectively, of accounts payable at September 30, 2000.
Leases
- ------
The Company has operating leases on real property and equipment expiring
through the year 2003. 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 $296,304, $201,655 and $387,837 for
the years ended September 30, 2000, 1999 and 1998, respectively.
The future minimum rental commitments are as follows:
September 30, 2001 $ 150,704
2002 54,460
-----------
$ 205,164
===========
Employment Agreements
- ---------------------
Effective June 17, 1997, the Company entered into two-year employment
agreements with four senior executives. The employment agreements expired in
1999 and were not renewed. No other long-term employment agreements exist as
of September 30, 2000.
F-17
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SUBSEQUENT EVENTS
Change in Control
- -----------------
On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement,
as amended, between the selling shareholders described below and Applied
Digital Solutions, Inc., a Missouri corporation, Applied Digital Solutions
acquired approximately 55% of the issued and outstanding common shares of the
Company, resulting in a change in control of the Company. Shares of the
Company's common stock were sold by the following persons and in the
following amounts:
Number of Percent
Shares Held Ownership
------------- -----------
John H. Spielberger 1,920,000 41%
Catherine Spielberger 50,000 1%
Bearpen Limited Partnership 600,000 13%
------------- -----------
Total 2,570,000 55%
============= ===========
Applied Digital Solutions acquired the shares listed above for $4.5 million
by issuing approximately 1.7 million shares of its common stock valued at
approximately $2.75 million to the selling shareholders listed above and upon
payment of an aggregate amount of cash equal to approximately $1.75 million to
the selling shareholders listed above.
As a condition to the closing of the transactions, John H. Spielberger,
John C. Spielberger, Lee Adams and Cornelia Eldridge resigned as officers
and directors of the Company. Garrett A. Sullivan, David A. Loppert and
Anat Ebenstein were appointed to fill the vacancies on the board of directors
created by such resignations, and the following persons become the officers
of the Company:
David A. Loppert Chief Executive Officer, Assistant
Secretary and Assistant Treasurer
Anat Ebenstein President, Chief Operating Officer
Michael Krawitz Vice President, Secretary
J. Robert Patterson Vice President, Chief Financial Officer and
Treasurer
John C. Spielberger Vice President, Sales and Marketing
Acquisition of Assets
- ---------------------
On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement,
as amended, between the Company and Applied Digital Solutions, the Company
acquired fifty-one percent (51%) of the outstanding shares of common stock
of Information Products Center, Inc., a New Jersey corporation ("IPC").
The purchase price for the shares of IPC was $2.075 million, payable $1.821
million in cash and $0.254 million by promissory note.
On December 15, 2000, pursuant to the terms of a Stock Purchase Agreement,
between the Company and Applied Digital Solutions, the Company acquired
forty-nine percent (49%) of the outstanding shares of common stock of
IPC. The purchase price for the shares of IPC was approximately $2.4
million, payable by promissory note.
F-18
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SUBSEQUENT EVENTS (continued)
Financing Arrangements
- ----------------------
Financing arrangements between the Company and one of its lenders, Chase
Manhattan Bank, were revised as a result of the Stock Purchase Agreements.
After the closing of the transactions, a principal payment in the amount of
$158,000 was made and the final payment due date was changed from December
2012 to March 2002 resulting in a balloon payment due at that time. The
interest rate of 7.16% and monthly installments of $14,979 remain the same
through March 2002.
Financing arrangements between the Company and another of its lenders, IBM
Credit Corporation, are in the process of being revised but have not been
finalized. The Company is continuing to operate under the current terms and
conditions of the IBM Credit Corp. agreement in place at September 30, 2000.
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data (rounded to the nearest 000 except for per share
data) for the years ended September 30, 2000, 1999 and 1998 follow:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- -------------- -------------- --------------
For the year ended September 30, 2000:
Net sales $ 11,725,000 $ 9,338,000 $ 10,832,000 $ 8,795,000
Gross profit 1,282,000 1,313,000 1,034,000 944,000
Loss from operations (952,000) (535,000) (538,000) (122,000)
Net loss (748,000) (470,000) (530,000) (213,000)
Net loss per share:
Basic (0.16) (0.10) (0.11) (0.05)
Diluted (0.16) (0.10) (0.11) (0.05)
For the year ended September 30, 1999:
Net sales $ 27,329,000 $ 14,355,000 $ 14,018,000 $ 13,982,000
Gross profit 2,839,000 1,921,000 1,218,000 974,000
Income (loss) from operations 938,000 368,000 (777,000) (827,000)
Net income (loss) 511,000 172,000 (478,000) (605,000)
Net income (loss) per share:
Basic 0.11 0.04 (0.10) (0.13)
Diluted 0.11 0.04 (0.10) (0.13)
For the year ended September 30, 1998:
Net sales $ 28,062,000 $ 22,228,000 $ 26,417,000 $ 21,596,000
Gross profit 2,814,000 1,873,000 2,500,000 1,410,000
Income (loss) from operations 809,000 (151,000) 432,000 (687,000)
Net income (loss) 317,000 (196,000) 89,000 (657,000)
Net income (loss) per share:
Basic 0.07 (0.04) 0.02 (0.15)
Diluted 0.06 (0.04) 0.02 (0.14)
F-19
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
--------------------------
Balance at Charged Charged Balance
Beginning to Costs and to Other at End
Deducted from Assets of Period Expenses Accounts Deductions of Period
- ------------------------------------- ---------- ------------ --------- ---------- ---------
Allowance for Doubtful Accounts:
Year ended September 30, 1998 $108,343 $151,000 $ -0- $142,737 (a) $116,606
Year ended September 30, 1999 116,606 78,000 -0- 25,556 (a) 169,050
Year ended September 30, 2000 169,050 131,640 -0- 167,690 (a) 133,000
Allowance for Sales Returns:
Year ended September 30, 1998 $ 37,389 $ -0- $ -0- $ -0- $ 37,389
Year ended September 30, 1999 37,389 72,611 -0- -0- 110,000
Year ended September 30, 2000 110,000 -0- -0- 85,000 25,000
Allowance for Inventory
Obsolescence:
Year ended September 30, 1998 $ -0- $657,491 $ -0- $373,491 (b) $284,000
Year ended September 30, 1999 284,000 -0- -0- 119,580 (b) 164,420
Year ended September 30, 2000 164,420 85,580 -0- 250,000
Deferred Tax Valuation Allowance
Year ended September 30, 1998 $ -0- $ -0- $ -0- $ -0- $ -0-
Year ended September 30, 1999 -0- -0- -0- -0- -0-
Year ended September 30, 2000 -0- 573,530 -0- -0- 573,530
(a) Amounts written off, net of recoveries.
(b) Realized loss on sale of inventory.
S-1