ANNUAL
REPORT
2002
SYNERGX SYSTEMS INC.
SYNERGX SYSTEMS INC.
SYNERGX SYSTEMS INC.
SYNERGX SYSTEMS INC.
SYNERGX SYSTEMS INC.
SYNERGX SYSTEMS INC.
SYNERGX SYSTEMS INC.
To the Stockholders of Synergx Systems Inc.
Enclosed please find the Annual Report to Stockholders of Synergx Systems Inc.
for the fiscal year ended September 30, 2002 and the proxy materials related to
our upcoming Annual Meeting of Stockholders scheduled for March 26, 2003. We
invite all of you to attend the meeting where we will consider proposals to
elect our Board of Directors, re-appoint our independent auditors and approve
two investments in the technology field.
During 2002, our earnings improved from a serious loss in our first quarter
(effect of Sept. 11th) to a slight profit in the third quarter and a strong
profit in the fourth quarter. This improvement was the direct result of getting
authorization to ship stalled projects from our existing order position and from
our product and marketing diversification over the last several years. Our first
quarter of 2003 started off with a small profit. In addition we also increased
our order position from a low of $7.8million at September 30, 2001 to $12,1
million at September 30, 2002 and $14 million as of the date of this letter.
As set forth in the enclosed proxy materials, we are soliciting stockholder
approval to proceed with two investments; one involves investing equity and
providing loans to a Canadian R&D company which has developed exciting wireless
technology based on the BlackBerry(TM) handheld device with applications in
several of our product lines. The other involves a provider of software to the
independent international investment counseling, portfolio management and
brokerage community.
On behalf of all of our employees, officers and the Board, we would like to
thank you for your support in the past and your continued investment in Synergx.
Very truly yours,
Daniel S. Tamkin Joseph Vitale
Chairman and CEO President and COO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $3 million credit facility with Citizens Business Credit
of Boston (the "Credit Facility") that expires in December, 2004. The Credit
Facility has an interest rate of prime plus 1/4% on outstanding balances.
Advances under the Credit Facility are measured against a borrowing base
calculated on eligible receivables and inventory. The Credit Facility is secured
by all assets of the Company and all of its operating subsidiaries.
The Credit Facility includes various covenants, which among other things,
impose limitations on declaring or paying dividends, acquisitions and capital
expenditures. The Company is also required to maintain certain financial ratios.
Citizens Business Credit of Boston has modified the requirements for one of
these ratios for the fiscal year 2002. At September 30, 2002, the Company was
not in default with any of its financial covenants as a result of this
modification and at such time owed $848,000 under the Credit Facility.
Net cash provided by operations for the twelve months ended September 30,
2002 amounted to $312,000 as compared to $630,000 for the comparable prior
period. The primary reason for the lower amount of cash being provided by
operations was due to a decrease of $1,226,000 in profit before taxes (a
$493,000 loss in 2002 versus a $733,000 profit in 2001). Offsetting this outflow
from the loss was $1.3 million reduction of accounts receivable, which was used
to increase inventory and reduce accounts payable and accrued expenses. In 2002,
the $312,000 cash from operations along with $238,000 of proceeds from the sale
of 170,000 units (comprising one share of common stock and a warrant for one
additional share of common stock) was primarily used to reduce borrowings under
the Company's Credit Facility to the $848,000 level. In 2001, the $630,000 cash
from operations was primarily used to pay off borrowing under a Note Payable to
Mirtronics by $243,000 and reduce borrowings under the Company's Credit Facility
to a level of $1,310,000. The Company anticipates continuation of the
negotiation of certain terms with its customers prior to the beginning of a
project, the monitoring of its terms during a project and completing projects in
timely fashion, resulting in faster final payments. It is the intention of the
Company to closely monitor this program throughout fiscal 2002.
The ratio of the Company's current assets to current liabilities improved
to approximately 2.60 to 1 at September 30, 2002 compared to 2.45 at September
30, 2001.
Synergx's terms of sale are net 30 days. However, the normal receivable
collection period is 60-120 days, exclusive of retainage, because certain
governmental regulations and the Company's frequent status as a subcontractor
(entitled to pro rata payments as the general project is completed) extends the
normal collection period. Synergx believes this is a standard industry practice.
Synergx's receivable experience is consistent with the industry as a whole and
will likely continue. This could be considered an area of risk and concern.
However, due to the proprietary nature of Synergx's systems, many projects
require Synergx's cooperation to secure a certificate of occupancy and/or to
activate/operate a life safety system, thus assisting Synergx's collection of a
significant portion or even total payment, even when Synergx's immediate account
debtor's (contractor) creditors have seized a project.
RESULTS OF OPERATIONS
Revenues and Gross Profit
For the years ended September 30,
2002 2001
(In thousands)
Product Sales $10,672 $14,073
Subcontract Sales 1,763 1,505
Service Revenue 4,508 4,349
------- --------
Total Revenue $16,943 $19,927
Product Gross Margin $ 3,484 $ 4,782
Subcontract Gross Margin 307 286
Service Gross Margin 1,328 1,213
------- --------
Total Gross Margin $ 5,119 $ 6,281
Gross Profit Product % 33% 34%
Gross Profit Subcontractor % 17% 19%
Gross Profit Service % 29% 28%
Total Gross Profit % 30% 32%
Revenues
The 24% decrease in product revenue was caused by a general slowdown in
economic activity in the Company's principal markets, New York City and Dallas.
In addition, the events of September 11th delayed work on several projects
involving New York City Transit Authority and caused indefinite postponement of
projects at existing customer facilities.
Subcontract revenue increased in 2002 as the Company, acting as prime
contractor, was responsible for electrical installation on several large fire
alarm projects in 2002.
Service revenues increased 4% in 2001 to $4,508,000. This increase in
service revenues resulted from higher call-in maintenance service on fire
systems (replacement parts and service required by buildings affected by
contamination from the events of September 11th) and from increased revenues
related to security systems.
Gross Profit
Gross profit from product revenues decreased 27% to $3,484,000 as a result
of the 24% decline in product sales. Gross profit margin as a percentage of
product revenues was only 33% in 2002 compared to 34% in 2001. This decrease in
gross profit percentage was due to the relative fixed nature of certain overhead
costs which could not be reduced in line with the decline in sales.
Gross profit from subcontract revenues increased in absolute terms as the
Company was responsible for performance of electrical installation
(subcontracted to outside electrical contractors) on two large fire alarm
projects in 2002. However, the gross profit margin was lower during 2002 as one
project was contracted for sale at a lower than normal mark up.
Gross profit and gross profit margin (percentage) on service revenues
increased due to higher call-in maintenance service which resulted in better
utilization of labor costs.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("S G &A") increased by 2% in
2002 over 2001 primarily as a result of the Company's continued expansion of its
marketing programs for new products. During 2002 additional staffing was made to
address the markets for audio/visual and security products. During 2001 the
Company increased staffing in the railcar transit communication group as it
addressed a marketing opportunity for future business over the next 2 to 5
years. However, S G & A expenses as a percentage of sales increased 6% to 32% in
2002 due to the relative fixed nature of these costs, given the Company's
decision to staff for sales of new products in future years.
Income Before Tax
During 2002 the Company's operations resulted in a loss before income tax
of $493,000 compared to income before income taxes of $733,000 in 2001. This
decline in income was primarily due to the loss of gross margin due to the $3.4
million or 24% decline in product revenues caused by the general slowdown in
economic activity and delays and postponements in certain projects caused by the
events of September 11th. Also contributing to the decline in operating income
was the 2% increase in selling, general and administrative expenses to support
higher product sales and expand product territory. Partially offsetting the
increase in SG&A was a $57,000 reduction in interest costs primarily due to
lower interest rates in 2002.
Tax Provisions
The Company's current income tax provision represents Federal, state and
local income taxes. The Company intends to file for a net operating loss
carryback credit for the loss generate during the year ended September 30, 2002.
Deferred taxes represent the net change in deferred tax assets and non current
deferred tax liability as it related to certain timing differences of book and
tax deductions.
Order Position
Synergx's order position, excluding service, increased to $12.1 million at
September 30, 2002 compared to the $7.8 million level at September 30, 2001. The
Company expects to fulfill a significant portion of its backlog over the next
twelve months. This high level of backlog reflects recent large new orders for
several subway complexes which will be deliverable over several years as the
projects are released. In addition, the backlog includes $2.2 million of recent
orders for communication and announcement systems from several transit car
manufacturers, that will be shippable over the next 24 month period. While
quotation activity is brisk, there is no assurance when orders will be received
and whether the order position will increase. Due to the fact that some of the
Company's products are sold and installed as part of larger construction or mass
transit projects, there is typically a delay between the booking of the contract
and its revenue realization. The order position includes, and the Company
continues to bid on, projects that include significant subcontractor labor,
(electrical installation performed by others). The Company expects to be active
in seeking orders where the Company would act as a prime contractor and
responsible for management of the project as well as electrical installation.
Plan of Operations
During fiscal 2003, management intends to continue to focus on its
intensified marketing programs that were begun in 1998 and to continue to
contain or monitor fixed overhead as well as to reduce variable costs through
improved efficiency and productivity. Management anticipates improved demand for
products in 2003 and some improved performance. However, competition remains
severe in many of the Company's product categories and demand remains quite low
in the Dallas market area due to contraction of computer communication and
internet related companies. Longer term, management expects increased demand for
the Company's audio-visual, public address, security and other communication
products. Enhancements in recent years to Synergx's management information
systems and methods of approving and monitoring project costs have improved
management's ability to pinpoint waste and/or third party (supplier or customer)
cost responsibility.
Inflation
The impact of inflation on the Company's business operations has not been
material in the past. Casey's labor costs are normally controlled by union
contracts covering a period of three years and its material costs have remained
relatively stable. However in July of 2002, the Company and its union agreed to
a new three year contract that provides for wage/benefits increases of
approximately 5% in each year. During 2001, under terms of the previous union
contract, certain union members, upon passing certain test requirements, began
moving up to higher paying categories that have multiple salary steps per year
in excess of the 5% contractual level. In addition, the demand for highly
skilled professionals has resulted in the need to assess salary levels in order
to remain competitive. It is expected that required salary adjustments will
exceed normal increases given in the past. The Company will try to mitigate the
effect of these increases in labor costs by price increases, if possible, and
expense reductions.
Report of Independent Auditors
To the Stockholders and Board of Directors of
Synergx Systems Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Synergx Systems
Inc. and its subsidiaries as of September 30, 2002 and the related consolidated
statements of operations, stockholders' equity, and cash flows for years ended
September 30, 2002 and 2001. These 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above present fairly, in
all material respects, the consolidated financial position of Synergx Systems
Inc. and its subsidiaries as of September 30, 2002 and the consolidated results
of their operations and their cash flows for the years ended September 30, 2002
and 2001, in conformity with accounting principles generally accepted in the
United States of America.
December 6, 2002 MARCUM & KLIEGMAN LLP
New York, NY
Part I - FINANCIAL INFORMATION
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents 200,000
Accounts receivable, principally trade, less allowance
for doubtful accounts of $429,000 5,030,000
Inventories 2,437,000
Deferred taxes 339,000
Prepaid expenses and other current assets 394,000
-----------
TOTAL CURRENT ASSETS 8,400,000
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,241,000 372,000
OTHER ASSETS 154,000
-----------
TOTAL ASSETS 8,926,000
===========
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - principally to related party 109,000
Accounts payable and accrued expenses 2,658,000
Deferred revenue 446,000
Current portion of capital lease obligations 24,000
-----------
TOTAL CURRENT LIABILITIES 3,237,000
Note payable to bank 848,000
Notes payable - principally to related party,
less current portion 52,000
Capital lease obligations, less current portion 43,000
Deferred taxes 11,000
-----------
TOTAL LIABILITIES 4,191,000
COMMITMENTS AND CONTINGENCIES -----------
STOCKHOLDERS' EQUITY
Preferred stock, 2,000,000 shares authorized-
none issued and outstanding
Common stock, 10,000,000 shares authorized, $.001
par value; issued and outstanding 1,874,430 shares 2,000
Capital in excess of par 5,524,000
Accumulated Deficit (791,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 4,735,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 8,926,000
===========
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended September 30,
2002 2001
---------- ----------
Product sales 10,672,000 14,073,000
Subcontract sales 1,763,000 1,505,000
Service revenue 4,508,000 4,349,000
---------- ----------
Total revenues 16,943,000 19,927,000
---------- ----------
Cost of product sales 7,188,000 9,291,000
Cost of subcontract sales 1,456,000 1,219,000
Cost of service 3,180,000 3,136,000
Selling, general and administrative 5,374,000 5,252,000
Interest expense 89,000 146,000
Depreciation and amortization expense 149,000 150,000
---------- ----------
17,436,000 19,194,000
---------- ----------
(Loss) Income before (benefit from)
provision for income taxes (493,000) 733,000
(Benefit from) provision for income taxes:
Current (184,000) 334,000
Deferred (16,000) (34,000)
---------- ----------
(200,000) 300,000
----------- ----------
Net (Loss) Income (293,000) 433,000
=========== ==========
Earnings Per Common Share
Basic (Loss) Earnings Per Share ($0.17) $0.25
Diluted (Loss) Earnings Per Share ($0.17) $0.24
===== =====
Weighted Average Number of Common Shares Outstanding 1,704,897 1,704,425
Weighted Average Number of Common and Potential Dilutive
Common Shares Outstanding 1,704,897 1,784,089
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002 and 2001
TOTAL
STOCKHOLDERS' PREFERRED STOCK COMMON STOCK
EQUITY SHARES AMOUNT SHARES AMOUNT
----------------- ----------- ----------- ------------- ---------
Balance at September 30, 2000 4,350,000 0 0 1,704,430 2,000
----------------- ----------- ----------- ------------- ---------
Net Income 433,000
----------------- ----------- ----------- ------------- ---------
Balance at September 30, 2001 4,783,000 0 0 1,704,430 2,000
Issuance of shares from
private placement 238,000 170,000 0
Stock option compensation 7,000
Net (Loss) (293,000)
----------------- ----------- ----------- ------------- ---------
Balance at September 30, 2002 4,735,000 0 0 1,874,430 2,000
================= =========== =========== ============= =========
SYNERGX SYSTEMS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002 and 2001
(continued)
CAPITAL RETAINED
IN EXCESS EARNINGS
OF PAR (DEFICIT)
--------- -----------
Balance at September 30, 2000 5,279,000 (931,000)
--------- -----------
Net Income 433,000
--------- -----------
Balance at September 30, 2001 5,279,000 (498,000)
Issuance of shares from
private placement 238,000
Stock option compensation 7,000
Net (Loss) (293,000)
----------- -----------
Balance at September 30, 2002 5,524,000 (791,000)
=========== ===========
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended September 30,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net (loss) income (293,000) 433,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 149,000 150,000
Stock option compensation 7,000
Deferred tax (16,000) (34,000)
Provision for doubtful accounts 101,000 (21,000)
Changes in operating assets and liabilities:
Accounts receivable 1,326,000 (319,000)
Inventories (146,000) 46,000
Prepaid expenses and other current assets (156,000) (112,000)
Other assets (4,000) (39,000)
Accounts payable and accrued expenses (647,000) 446,000
Deferred revenue (8,000) 80,000
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 313,000 630,000
---------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment (119,000) (148,000)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (119,000) (148,000)
---------- ---------
FINANCING ACTIVITIES
Principal payments on revolving line of credit, long-term
debt, notes payable and capital lease obligations (628,000) (271,000)
Proceeds from revolving line of credit and notes payable 98,000 92,000
Proceeds from private placement 238,000
Notes payable to affiliated companies 0 (243,000)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (292,000) (422,000)
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (98,000) 60,000
Cash and cash equivalents at beginning of period 298,000 239,000
---------- ---------
Cash and cash equivalents at end of period 200,000 299,000
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes 151,000 389,000
Interest 96,000 145,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended September 30, 2002 and 2001, the Company incurred no
capital lease obilgations for the acquisition of equipment.
See accompanying Notes to the Consolidated Financial Statements
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at September 30,
2002, and reported amounts of revenues and expenses during the fiscal year.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Synergx Systems
Inc. (formerly Firetector Inc.) and its subsidiaries, all of which are wholly
owned (the "Company"). The principal operating subsidiaries are: Casey Systems
Inc. ("Casey"), General Sound (Texas) Company ("GenSound"), and Systems Service
Technology Corp. ("SST"). Significant intercompany items and transactions have
been eliminated in consolidation. The Company is a subsidiary of Mirtronics,
Inc. ("Mirtronics"), an Ontario publicly-held corporation.
At the annual meeting of Firetector Inc. stockholders, held on May 22, 2002,
stockholders voted to amend the company's Certificate of Incorporation to change
Firetector's name to Synergx Systems Inc.
Business
The Company operates in one industry segment: the design, manufacture, marketing
and service of a variety of data communications product and systems with
applications in the fire alarm, life safety, transit, security and
communications industry.
Revenue Recognition
Product sales include sale of systems, which are similar in nature, that involve
fire alarm, life safety and security (CCTV and card access), transit (on board
systems) and communication (paging, announcement and audio/visual). Product
sales represent sales of product along with the integration of technical
services at a fixed price under a contract with an electrical contractor or end
user customer (building owner or tenant), or customer agent. Product sales is
allocated using a constant gross profit percentage over the entire contract, and
is recognized, using the percentage-of-completion method of accounting. The
Company utilizes a units-of-work performed method to measure progress towards
completion of the contract. The effects of changes in contract terms are
reflected in the accounting period in which they become known. Contract terms
provide for billing schedules that differ from revenue recognition and give rise
to costs and estimated profits in excess billings, and billings in excess of
costs and estimated profits. Costs and estimated profits in excess of billing
were not material at September 30, 2002 and 2001 and have been included in
accounts receivable. There was no billing in excess of costs and estimated
profits at September 30, 2002 and 2001.
Subcontract sales principally represent revenues related to electrical
installation of wiring and piping performed by others for the Company when the
Company acts as the prime contractor and sells its products along with
electrical installation. Subcontract sales is also recognized during the entire
project using the percentage-of-completion method of accounting as electrical
installation is performed at the job site.
Service revenue from separate maintenance contracts is recognized on a
straight-line basis over the terms of the respective contract, which is
generally one year. Non-contract service revenue is recognized when services are
performed.
Reclassifications
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements. These reclassifications have no effect on previously
reported income.
Inventories
Inventories are priced at the lower of cost (first-in, first-out) or market and
consist primarily of raw materials.
Property and Equipment
Property and equipment are stated at historical cost. Leases meeting the
criteria for capitalization are recorded at the present value of future lease
payments.
Depreciation and amortization of machinery and equipment and furniture and
fixtures are provided primarily by the straight-line method over their estimated
useful lives. The Company depreciates machinery and equipment over periods of 3
to 10 years and amortizes leasehold improvements and assets acquired under
capitalized leases over the life of the lease or their economic useful life,
whichever is shorter.
Other Assets
Other assets are comprised principally of the excess of cost over the fair value
of the assets acquired in the acquisition of certain subsidiaries. The excess of
cost over the fair value of the assets acquired approximates $104,000 (net of
accumulated amortization of $70,000) and relates principally to the 1990
acquisition of GenSound. This amount is being amortized over forty years under
the straight line method.
The Company evaluates the periods of goodwill amortization to determine whether
later events and circumstances warrant revised estimates of useful lives. The
Company also evaluates whether the carrying value of goodwill has become
impaired.
Advertising Costs
Advertising Costs are expensed as incurred during the year. Advertising Costs
for the years ended September 30, 2002 and 2001 amounted to $23,000 and $26,000,
respectively.
Research and Development Cost
Research and development costs are expensed as incurred during the year.
Research and development costs for the years ended September 30, 2002 and 2001
amounted to $149,000 and $142,000, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS No. 109, the
asset and liability method is used to determine deferred tax assets and
liabilities based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Earnings Per Share
SFAS No. 128 "Earnings Per Share" requires companies to report basic and diluted
earnings per share ("EPS") computations. Basic EPS excludes dilution and is
based on the weighted-average common shares outstanding and diluted EPS gives
effect to potential dilution of securities that could share in the earnings of
the Company. Diluted EPS reflects the assumed issuance of shares with respect to
the Company's employee stock options, non-employee stock options, and warrants.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company's operations are located in two large U.S. cities (New York City,
New York and Dallas, Texas), each of which is an independent market. The Company
grants credit to its customers, principally all of which are general or
specialized construction contractors, none of which individually constitutes a
significant portion of outstanding receivables. Approximately 84% of such
outstanding receivables at September 30, 2002 are due from customers in New
York.
At September 30, 2002, the Company had approximately $73,000 based on checks
that had not cleared the financial institutions that are subject to insured
amount limitations. The Company does not require collateral to support financial
instruments subject to credit risk.
Stock Options and Similar Equity Instruments
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity instruments (collectively,
"Options") issued to employees; however, the Company will continue to apply the
intrinsic value based method of accounting for options issued to employees
prescribed by Accounting Principles Board ("APB") Opinion 25, "Accounting for
Stock Issues to Employees," rather than the fair value based method of
accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions
in which an entity issues its equity instruments to acquire goods or services
from non-employees. Those transactions must be accounted for based on the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured. (see Note 9).
2. Transactions with Related Parties
Mirtronics is the largest stockholder of the Company. In 1994 and 1995,
Mirtronics provided financial assistance to the Company by way of a Letter of
Credit in support of the Company's credit facility, further advances to the
Company, and an exchange of debt for equity. In connection with this financial
assistance, the Company has outstanding warrants to purchase 310,000 shares of
the Company's Common Stock, which were issued in 1998, and are exercisable at
any time until December 31, 2003 at an exercise price of $1.02 per share.
Notes Payable Principally to Related Party includes $59,000 due to a former
officer/director of the Company under a seven year installment promissory note
dated January 1, 1997 that bears interest at 4% per annum.
3. Property and Equipment
Property and equipment (including those arising from capital leases) are
summarized as follows:
September 30,
2002
--------------
Machinery and equipment $1,422,000
Furniture and fixtures 152,000
Leasehold improvements 39,000
--------------
1,613,000
Less accumulated depreciation and amortization 1,241,000
--------------
$372,000
==============
Annual amortization of equipment under capital leases is included with
depreciation and amortization expense.
Depreciation and amortization expense related to these assets were $133,000 and
$129,000 for the years ended September 30, 2002 and 2001, respectively.
4. Long-Term Debt
In 1998, the Company entered into a revolving credit facility with Citizens
Business Credit Company of Boston, Massachusetts (the "Credit Facility"). The
Credit Facility was revised in September 2000 and provides for a $3,000,000
revolving line of credit through December 2004 and carries an interest rate of
prime plus 1/4% on outstanding balances (5% at September 30, 2002). The Credit
Facility limits capital expenditures to $250,000 in each year. At September 30,
2002, $848,000 was outstanding under this facility. Advances under the Credit
Facility are measured against a borrowing base calculated on eligible
receivables and inventory. The Credit Facility is secured by all of the assets
of the Company and all of its operating subsidiaries.
The Credit Facility includes certain restrictive covenants, which among other
things, impose limitations on declaring or paying dividends, acquisitions and
capital expenditures. The Company is also required to maintain certain financial
ratios. Citizens Business Credit Company of Boston has modified the requirement
of one of the ratios for fiscal 2002. At September 30, 2002, the Company was not
in default of any of its financial covenants as a result of this modification.
Annual maturities of Loans and Notes Payable are as follows:
Bank Other Notes Total
Loan Payable
------------------------------------------------------------
2003 $ -- $109,000 $109,000
2004 -- 36,000 36,000
2005 848,000 16,000 864,000
-------------------------------------------------------------
Total $ 848,000 $161,000 $1,009,000
5. Leases
The Company leases certain office and warehouse space under noncancelable
operating leases expiring at various times through 2010. In February 2000, the
Company signed a new lease for office, manufacturing and warehouse space in
Syosset, New York. This lease expires in June 2007.
The Company had a lease for its service center in New York City that was set to
expire in August 2003. The Company was able to exercise a six month termination
option and terminated its lease in New York City by giving six months notice,
which became effective December 5, 2002. The Company entered into a new lease
for office and warehouse space in New York City. The new lease became effective
August 2002 and runs thru December 31, 2009. The new lease provides for yearly
rental of $84,000 during the first year plus expenses with yearly escalation of
2% each year thereafter. Total cost of space over the life of the lease will
approximate $631,000.
The Company leases an office and warehouse facility in Richardson, Texas, a
suburb of Dallas, pursuant to a lease that was extended in August, 2002 to
expire on June 30, 2010 providing for annual rent on a net basis of $50,152
escalating annually to $64,016 in the final year of the lease.
The Company also leases certain office equipment and vehicles under
noncancelable capital and operating leases expiring in various years through
fiscal 2005.
The following is a schedule of future minimum payments, by year and in the
aggregate, under non cancelable capital and operating leases with initial or
remaining terms of one year or more at September 30, 2002:
Capital Leases Operating Leases Total
2003 $31,000 $398,000 $429,000
2004 26,000 323,000 349,000
2005 22,000 333,000 355,000
2006 343,000 343,000
2007 300,000 300,000
2008 155,000 155,000
2009 159,000 159,000
2010 24,000 24,000
----------------------------------------------
Total minimum lease payments $79,000 $2,035,000 $2,114,000
Less amount representing interest 12,000 =============================
---------
Present value of net minimum lease payments (including current
portion of $24,000) $67,000
=========
Rental expense amounted to $366,000 and $343,000 for 2002 and 2001,
respectively.
6. Significant Customers
During fiscal 2002 and 2001, no customer accounted for more than 10% of sales.
7. Income Taxes
During the year ended September 30, 2002, the Company recorded a tax benefit of
($200,000) compared to a tax provision of $300,000 for the year ended September
30, 2001. A reconciliation of such with the amounts computed by applying the
statutory federal income tax rate is follows:
Year ended September 30,
2002 2001
--------------------------
Statutory federal income tax rate 34% 34%
Computed expected tax from income ($168,000) $249,000
(Decrease)Increase in taxes resulting from:
State and local income taxes, net of Federal tax benefit (22,000) 53,000
Nondeductible expenses 8,000 8,000
(Decrease) in taxes resulting from
benefit of future tax deductible items (18,000) (10,000)
(Benefit) Provision ($200,000) $300,000
The Company provided $13,000 and $14,000 for state and local franchise and
capital taxes for the years ended September 30, 2002 and 2001, respectively.
These expenses have been included in selling, general and administrative
expenses for each of the years presented.
The Company has recorded a current deferred tax asset and a non current deferred
tax liability at September 30, 2002 and a current and non current deferred tax
asset at September 30, 2001 related to certain accelerated tax deductions or
book provisions to be deducted in future tax returns. Management anticipates
profitable operations to continue at a level that will result in the utilization
of the entire deferred tax asset.
The components of deferred tax assets and liabilities at September 30, 2002 and
2001 consist of the following:
Deferred Tax Assets 2002 2001
------------------- ---- ----
Allowance for doubtful accounts $172,000 $131,000
Inventory reserve 120,000 120,000
Depreciation and amortization 60,000
Net operating loss carryforward 47,000 ---
--------- -----------
Total deferred tax asset $339,000 $311,000
======== ===========
Deferred Tax Liabilities
Depreciation and amortization $11,000 $ ---
------- -----------
Total deferred tax liability $11,000 $ ---
======= ===========
8. Earnings Per Share
Shown below is a table that presents for 2002 and 2001 the computation of basic
earnings per share, diluted earnings per share, weighted shares outstanding, and
weighted average shares after potential dilution.
Year Ended
Basic EPS Computation 2002 2001
--------------------- -------------------------
Net (loss) Income available to common
stockholders $(293,000) $433,000
Weighted average outstanding shares 1,704,897 1,704,425
Basic (loss) EPS $(.17) $.25
======= =======
Diluted EPS Computation
(Loss) Income available to common
stockholders $(293,000) $433,000
Weighted-average shares 1,704,897 1,704,425
Plus: Incremental shares from
assumed conversions
Employee Stock Options* 18,640
Warrants* 61,024
------
Dilutive potential common shares N/A 79,664
--------- ---------
Adjusted weighted-average shares 1,704,897 1,784,089
--------- ---------
Diluted (loss) EPS ($.17) $.24
========== =========
*All warrants and options were antidilutive in 2002 and 16,667 warrants were
antidilutive in 2001.
9. Stockholders' Equity
On September 30, 2002, the Company sold 170,000 units ("Units") in a private
placement to an unaffiliated investor for $1.40 per Unit. Each Unit consists of
one share of Common Stock and one warrant (the "Warrant") to purchase an
additional share of Common Stock at $1.40 for a period of 24 months from
September 30, 2002.
The Units, Common Stock, Warrants and Common Stock issue able upon exercise of
the warrants will be restricted and may not be sold or transferred without
registration under or exemption from applicable securities laws. The purchaser
will be granted one-time piggyback registration rights.
10. Employee Stock Options, Options, and Warrants
On April 30, 1997, the Company and its stockholders adopted a nonqualified stock
option plan ("1997 Plan"), which was to expire September 30, 2002, except as to
options outstanding under the 1997 Plan. Under the 1997 Plan, the Board of
Directors may grant options to eligible employees at exercise prices not less
than 100% of the fair market value of the common shares at the time the option
is granted. The number of shares of Common Stock that may be issued shall not
exceed an aggregate of up to 10% of its issued and outstanding shares from time
to time. Options vest at a rate of 20% per year commencing one year after date
of grant. Issuances under the 1997 Plan are to be reduced by options outstanding
under a 1990 nonqualified stock option plan (replaced by the 1997 Plan). In
September 2002, the stock option plan was extended to expire on December 31,
2005.
The Company applies the intrinsic value base method of accounting for options
issued to employees rather than the fair value based method of accounting. On
September 19, 2002, options on 24,083 shares of common stock were extended to
December 31, 2005 and the option price remained at $1.00 per share. On December
29, 2000, options on 43,375 shares of common stock were extended for five more
years and the option price was reset from $1.00 to $1.03 per share. Stock option
compensation expense of $6,743 and $0 for years ended September 30, 2002 and
2001, respectively was recorded to General and Administrative expense in
connection with the extension of these options. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed by SFAS 123,
the Company's net (loss) income and net (loss) income per share for 2002 and
2001 would be reduced to the pro forma amounts indicated below: 2002 2001 Net
(Loss) Income: As reported $(293,000) $433,000 Pro forma (300,000) 404,000
(Loss) earnings per common share:
As reported
($0.17) $0.25
Basic ($0.17) $0.24
====== =====
Diluted
Pro forma
Basic ($0.18) $0.24
Diluted ($0.18) $0.23
====== =====
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period for purposes of future pro forma disclosures, and additional
options may be granted in future years. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for 2002 and 2001, repectively:
dividend yield of zero; expected volatility of 45% and 75%, respectively and
expected life of 3.25 and 5 years, respectively. The weighted average risk fee
interest rates for 2002 and 2001 were 3.22% and 4.64%, respectively. The
weighted average fair value of options granted (extended) 2002 and 2001, was
$.56 and $.66, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected price volatility. Because the
Company's employees' stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's'
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
10. Employee Stock Options, Options, and Warrants (continued)
Transactions involving stock options are summarized as follows:
Weighted Average
Exercise Price of
Stock Options Outstanding Options Outstanding
Balance September 30, 2000 107,958 1.04
Options granted (extended) 43,375 1.03
Options expired (43,375) 1.00
Balance September 30, 2001 107,958 1.05
Options granted (extended) 24,083 1.00
Option expired (30,250) 1.00
Balance September 30, 2002 101,791 1.06
There were 94,791 exercisable options at September 30, 2002 and 93,958
exercisable options at September 30, 2001.
..
The following table summarizes information concerning currently outstanding and
exercisable stock options.
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 2002 Contractual Life September 30, 2002
1.13 35,000 2.0 years 28,000
1.03 42,708 3.3 years 42,708
1.00 24,083 3.3 years 24,083
In 1998, the Company granted Mirtronics warrants to purchase 310,000 shares of
the Company's Common Stock which are exercisable at a price of $1.02 per share
at any time until December 31, 2003. (See Note 2 - Transactions with Related
parties)
In May 1995, the Company granted Judson Enterprises, Ltd. 33,334 options to
purchase common stock at a price of $3.00 per share in exchange for investment
banking services. In April 1997, the Company entered into an agreement to
exchange 16,667 of these options for 16,667 new options to purchase common stock
at a price of $4.50. These options expired in April 2002 and 16,667 options had
expired in May 2000.
On September 30, 2002, the Company issued 170,000 warrants in connection with a
private placement. (See Note - 9)
Transactions involving non-employee stock options and warrants are summarized as
follows:
Weighted Average
Options and Warrants Exercise Price of
Outstanding Options Outstanding
Balance September 30, 2000 326,667 $1.20
Balance September 30, 2001 326,667 1.20
Warrants expired 16,667 4.50
Warrants issued 170,000 1.40
Balance September 30, 2002 480,000 $1.15
All of these options and warrants were exercisable at the end of the periods
indicated in the above schedule.
The following table summarizes information concerning currently outstanding and
exercisable non-employee warrants.
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 2002 Contractual Life September 30, 2002
1.02 310,000 1.3 years 310,000
1.40 170,000 2.0 years 170,000
11. Contingencies
In the normal course of its operations, the Company has been or, from time to
time, may be named in legal actions seeking monetary damages. Management does
not expect, based upon consultation with legal counsel, that any material item
exists that will affect the Company's business or financial condition.
12. Other
Approximately 32% of the Company's employees are covered by collective
bargaining agreements. On July 20, 2002, the union representing hourly employees
and the Company ratified a Collective Bargaining Agreement expiring July 9,
2005, providing for an increase in salaries and benefits averaging approximately
4 1/2% per year over the life of the contract.
Effective January 1, 1996, the Board of Directors instituted a 401K plan for
nonunion employees. The plan includes a profit sharing provision at the
discretion of the Board of Directors. No profit sharing contribution was
authorized in 2002. In 2001 a profit sharing contribution of $44,000 was
authorized and charged to expense.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For certain financial instruments, including cash and cash equivalents, trade
receivables and payables, and short-term debt, it was assumed that the carrying
amount approximated fair value because of the near term maturities of such
obligations. The fair value of long-term debt was determined based on current
rates at which the Company could borrow funds with similar remaining maturities,
which amount approximates its carrying value.
14. Authoritative Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations". SFAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS No. 141 did not
have a significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which was effective for the Company commencing October 1, 2002. SFAS
No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairment of goodwill. The impact of the adoptions of SFAS No. 142 will result
in the Company discontinuing goodwill amortization.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 changes the accounting for
long-lived assets to be held and used by eliminating the requirement to allocate
goodwill to long-lived assets to be tested for impairment, by providing a
probability weighted cash flow estimation approach to deal with situations in
which alternative courses of action to recover the carrying amount of possible
future cash flows and by establishing a primary-asset approach to determine the
cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for long-lived assets to be held and used.
SFAS No. 144 changes the accounting for long-lived assets to be disposed of
other than by sale by requiring that the depreciable life of a long-lived asset
to be abandoned be revised to reflect a shortened useful life and by requiring
the impairment loss to be recognized at the date a long-lived asset is exchanged
for a similar productive asset or distributed to owners in a spin-off if the
carrying amount of the asset exceeds its fair value. SFAS No. 144 changes the
accounting for long-lived assets to be disposed of by sale by requiring that
discontinued operations no longer be recognized on a net realizable value basis
(but at the lower of carrying amount or fair value less costs to sell), by
eliminating the recognition of future operating losses of discontinued
components before they occur and by broadening the presentation of discontinued
operations in the income statement to include a component of an entity rather
than a segment of a business. A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally, and for financial
reporting purposes, from the rest of the entity. The effective date for SFAS No.
144 is for fiscal years beginning after December 15, 2001. The Company expects
that the adoption of the SFAS No. 144 will not have a significant impact on its
financial statements.
On April 30, 2002 the FASB issued SFAS No. 145, "Rescission of FASB No.4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS No. 145
eliminates the requirement that gains and losses from the extinguishment of debt
be aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect and eliminates an inconsistency between the accounting
for sale-leaseback transactions and certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. SFAS No. 145
is effective for transactions occurring after May 15, 2002. The adoption of SFAS
No. 145 did not have a material effect on the Company's operation.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", provides guidance on the recognition and measurement of liabilities
for cost associated with exit or disposal activities. The provisions of the
Statement are effective for exit or activities that are initiated after December
31, 2002. The Company does not expect that the adoption of SFAS No. 146 will
have a material effect on its operations.
SECURITIES TRADING
Common Stock Nasdaq symbol - SYNX
TRADING RANGES of COMMON STOCK
Quarter Ending High Low
December 31, 2000 1.438 0.844
March 31, 2001 1.719 1.000
June 30, 2001 1.469 1.170
September 30, 2001 1.780 1.180
December 31, 2001 2.000 1.200
March 31, 2002 2.950 1.470
June 30, 2002 1.850 1.250
September 30, 2002 1.550 1.160
The above quotations represent inter-dealer prices, without adjustment for
retail mark-ups, mark-downs or commissions and do not necessarily represent
actual transactions.
RECORD HOLDERS
As of December 14, 2002, there were 463 record holders of Common Stock.
DIVIDENDS
Synergx Systems Inc. has never paid any cash dividends on its Common Stock and
the payment of cash dividends is not expected in the foreseeable future.
Synergx's loan agreements prevent the payment of dividends. The payment of
future dividends will depend on earnings, capital requirements, financial
conditions and other factors considered relevant by the Board of Directors.
TRANSFER AGENT OF ALL CLASSES
American Stock Transfer & Trust Company
GENERAL COUNSEL
Dolgenos Newman & Cronin LLP
Annual Report on Form 10-KSB
Synergx Systems Inc.'s Report on Form 10-KSB as filed with the Securities and
Exchange Commission on December 20, 2002 will provide additional information
about Synergx Systems Inc. A copy of the report is available without charge to
Stockholders upon request to:
Corporate Secretary
Synergx Systems Inc.
209 Lafayette Drive
Syosset, New York 11791
(516) 433-4700
INDEPENDENT AUDITORS
Marcum & Kliegman LLP
DIRECTORS AND EXECUTIVE OFFICERS
Daniel S. Tamkin, Chairman of the Board, Chief Executive Officer, General
Counsel, Audit Committee; Executive Vice President of Forum Financial
Corporation
Joseph Vitale, President, Director
John A. Poserina, Chief Financial Officer, Secretary, Treasurer and Director
Dennis P. McConnell, Director, Audit Committee; Dolgenos Newman & Cronin LLP
Henry Schnurbach, Director, Audit Committee, President of Cantar/ Polyair Inc.
J. Ian Dalrymple, Director
Mark Litwin, Director