U.S. SECURITIES AND EXCHANGE
COMMISSION Washington,
D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal quarter ended June 30, 2003
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-17580
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SYNERGX SYSTEMS INC.
(formerly, Firetector, Inc.)
-----------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 11-2941299
------------------------------------ -----------------------------------
(State or jurisdiction of incorporation (IRS employer identification Number)
or organization)
209 Lafayette Drive, Syosset, New York 11791
(Address of Principal Executive Offices) (Zip code)
(516) 433-4700
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes[ X ] No[
]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 13, 2003, 4,048,850
shares of Registrant's Common Stock were issued and outstanding.
Transitional Small Business Disclosure Format (check one) Yes[ ] No[ X ]
INDEX
Part I - Financial Information (unaudited) Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet at June 30, 2003 3
Condensed Consolidated Statements of Operations for the Three Month
Periods Ended June 30, 2003 and 2002 5
Condensed Consolidated Statements of Operations for the Nine Month
Periods Ended June 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows for the Nine Month
Periods Ended June 30, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings. 18
Item 2. Changes in Securities. 18
Item 3. Defaults Upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Part I - FINANCIAL INFORMATION
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30,
2003
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 140,381
Accounts receivable, principally trade, less allowance
for doubtful accounts of $421,405 5,319,065
Inventories 2,841,731
Deferred taxes 335,800
Prepaid expenses and other current assets 452,488
-----------
TOTAL CURRENT ASSETS 9,089,465
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,343,434 400,336
OTHER ASSETS 622,518
------------
TOTAL ASSETS $10,112,319
============
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30,
2003
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - principally to related party $ 61,732
Accounts payable and accrued expenses 2,694,641
Deferred revenue 503,015
Current portion of capital lease obligations 20,590
-----------
TOTAL CURRENT LIABILITIES 3,279,978
Note payable to bank 1,446,988
Notes payable - principally to related party, less
current portion 52,553
Capital lease obligations, less current portion 28,640
Deferred taxes 11,600
-----------
TOTAL LIABILITIES 4,819,759
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 4,048,850 shares 4,048
Capital in excess of par 5,953,380
Accumulated deficit (664,868)
-----------
TOTAL STOCKHOLDERS' EQUITY 5,292,560
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,112,319
===========
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended June 30,
2003 2002
----------- -----------
Product sales $ 3,442,433 $ 2,838,862
Subcontract sales 65,250 621,850
Service revenue 1,150,175 1,170,698
----------- -----------
Total revenues 4,657,858 4,631,410
----------- -----------
Cost of product sales 2,280,600 1,917,786
Cost of subcontract sales 59,736 506,063
Cost of service 810,267 772,148
Selling, general and administrative 1,367,466 1,349,167
Interest expense 20,191 23,621
Depreciation and amortization 43,530 44,143
----------- -----------
4,581,790 4,612,928
----------- -----------
Income before provision for
income taxes 76,068 18,482
----------- -----------
Provsion for income taxes:
Current 34,000 18,300
Deferred - (11,300)
----------- -----------
34,000 7,000
----------- -----------
Net Income $ 42,068 $ 11,482
=========== ===========
Earnings per common share
Basic earnings per share $ 0.01 $ nil
===== ===
Diluted earnings per share $ 0.01 $ nil
===== ===
Weighted average number of common shares outstanding 3,851,048 3,408,850
Weighted average number of common and dilutive
common shares outstanding 4,519,456 3,668,654
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended June 30,
2003 2002
----------- -----------
Product sales $10,247,462 $ 7,121,896
Subcontract sales 508,433 1,257,252
Service revenue 3,328,246 3,439,830
----------- -----------
Total revenues 14,084,141 11,818,978
----------- -----------
Cost of product sales 6,816,016 4,941,528
Cost of subcontract sales 415,444 1,024,454
Cost of service 2,320,164 2,398,395
Selling, general and administrative 4,103,325 3,903,042
Interest expense 47,583 72,509
Depreciation and amortization 131,104 131,155
---------- -----------
13,833,636 12,471,083
----------- -----------
Income (loss) before provision for
(benefit from) income taxes 250,505 (652,105)
----------- -----------
Provision for (benefit from) income taxes:
Current 122,000 (176,700)
Deferred 3,000 (86,300)
----------- -----------
125,000 (263,000)
----------- -----------
Net Income (Loss) $ 125,505 $ (389,105)
=========== ===========
Earnings Per Common Share
Basic Earnings (Loss) Per Share $ 0.03 $ (0.11)
====== ======
Diluted Earnings (Loss) Per Share $ 0.03 $ (0.11)
====== ======
Weighted average number of common shares outstanding 3,782,916 3,408,850
Weighted average number of common and dilutive
common shares outstanding 4,284,851 3,408,850
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended June 30,
2003 2002
--------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 125,505 $ (389,105)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 131,104 131,155
Deferred tax 3,000 (86,000)
Provision for doubtful accounts (7,483) 33,898
Changes in operating assets and liabilities:
Accounts receivable (281,962) 1,589,132
Inventories (404,535) (186,228)
Prepaid expenses and other current assets (58,208) (212,417)
Other assets (64,288) (3,841)
Accounts payable and accrued expenses 36,140 (816,088)
Deferred revenue 57,175 12,265
--------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (463,552) 72,771
--------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment (130,875) (35,808)
--------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES (130,875) (35,808)
--------- ----------
FINANCING ACTIVITIES
Principal payments on revolving line of credit, long-term
debt, notes payable and capital lease obligations (122,676) (190,536)
Proceeds from revolving line of credit and notes payable 657,283 30,729
--------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 534,607 (159,807)
--------- ----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (59,820) (122,844)
Cash and cash equivalents at beginning of period 200,201 298,420
--------- ----------
Cash and cash equivalents at end of period $ 140,381 $ 175,576
========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 67,476 $ 151,234
Interest $ 48,511 $ 76,993
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended June 30, 2003 and 2002, the Company incurred no
capital lease obilgations for the acquisition of equipment.
In the quarter ended June 30, 2003, Synergx purchased from Nafund Inc. a 24.99%
investment in Secure 724 in exchange for 300,000 shares of Common Stock and
warrants to purchase 50,000 shares of Common Stock, with an aggragate market
value of $432,500, which is included in OTHER ASSETS (See Note 7)
See accompanying Notes to the Condensed Consolidated Financial Statements.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary in order to make the financial statements not misleading
have been included. Results for the three and nine months ended June 30, 2003
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in Synergx
Systems Inc. (formerly Firetector Inc.) ("Synergx" or "the Company") and
Subsidiaries' annual report on Form 10-KSB for the year ended September 30,
2002.
2. 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 or customer agent. Product sales are allocated using a constant
gross profit percentage over the entire contract, and 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 of billings, and billings in excess of costs and
estimated profits. Costs and estimated profits in excess of billing were not
material at June 30, 2003 and 2002 and have been included in accounts
receivable. Billing in excess of costs and estimated profits was $42,000 at June
30, 2003 and is included in deferred revenue (principally unearned service
revenue); there was none at June 30, 2002.
Subcontract sales principally represents revenue 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 revenue 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.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NINE MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
3. INVENTORIES
Inventories are priced at the lower of cost (first-in, first-out) or market and
consist primarily of raw materials.
4. LONG TERM DEBT
The Company has a revolving Credit Facility with Citizens Business Credit
Company of Boston, Massachussetts, (the "Credit Facility"). The Credit Facility
provides for a $3,000,000 revolving line of credit which expires in December
2004. The Credit Facility provides for interest at prime rate (4.00% at June 30,
2003) plus 1/4% on outstanding balances. At June 30, 2003, $1,446,988 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 had modified the requirement
of one of the ratios. At June 30, 2003, the Company was not in default of any of
its covenants as a result of this modification.
5. 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.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NINE MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
6. EARNINGS (LOSS) PER SHARE
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which 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.
Three Months ended June 30, Nine Months Ended June 30,
Basic EPS Computation 2003 2002 2003 2002
----------------------------- -------------------------------
Net Income (Loss) available to common
stockholders $ 42,068 $ 11,482 $ 125,505 $ (389,105)
Weighted average outstanding shares 3,851,048 3,408,850 3,782,916 3,408,850
Basic EPS (Loss) $.01 $ nil $.03 $(.11)
==== ===== ==== ======
Diluted EPS Computation Three Months ended June 30, Nine Months ended June 30,
2003 2002 2003 2002
------------------------------- -------------------------------
Net Income (Loss) available to common
stockholders $ 42,068 $ 11,482 $ 125,505 $ (389,105)
======= ======== ========= ==========
Weighted-average shares 3,851,048 3,408,850 3,782,916 3,408,850
--------- --------- --------- ---------
Plus: Incremental shares from
assumed conversions
Employee Stock Options* 122,795 61,404 96,135
Warrants* 545,613 198,400 405,800
------- ------- -------
Dilutive potential common shares 668,408 259,804 501,935
------- ------- -------
N/A
Adjusted weighted-average shares 4,519,456 3,668,654 4,284,851 3,408,850
--------- --------- --------- ---------
Diluted EPS (Loss) $.01 $ nil $.03 $(.11)
===== ====== ===== ======
*50,000 warrants were anitidilutive in the nine month period ending June 30,
2003 and all warrants and options were antidilutive for the nine month period
ended June 30, 2002 and therefore not included in the above calculation.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NINE MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
7. INVESTMENT IN SECURE 724 L.P.
In connection with a letter of intent signed by the Company in January 2003,
Nafund Inc., a Toronto based private equity fund ("Nafund") and Avante Security
Inc. ("Avante") finalized the organization of an Ontario limited partnership
known as Secure 724 L.P. ("Secure LP") to exploit the Secure 7-24 technology
solution. Avante is a Canadian corporation which designs, develops and installs
security systems and devices in Canada. Utilizing the wireless technology of the
BlackBerry(TM) wireless handheld system developed by Research in Motion (RIM),
Avante has developed the Secure 7-24 solution. The Secure 7-24 solution uses
wireless technology to transmit alarm and other data from a secured site to the
Avante Command Centre and to multiple RIM pagers or cellular phones.
Applications include transit, security response vehicles, corporate facilities
management, manufacturing, distribution, secured neighborhoods and residential
owners.
On May 29, 2003, the Company (through a special purpose Nova Scotia subsidiary)
acquired 25% of Secure LP's equity from Nafund in consideration of (a) 300,000
shares of Common Stock; (b) warrants to purchase 50,000 shares of Common Stock
at $1.15 per share for 24 months; (c) agreeing to provide secured loans of up to
Cdn$300,000 (which was approximately $220,000 U.S. at June 30, 2003) to Secure
LP pro rata with equity/loans to be provided by Nafund and tied to certain
development milestones and (d) 150,000 shares of Common Stock to be issued in
the future upon Secure 724 satisfying the milestones and Nafund providing the
funding. Either the Company and/or Nafund can elect not to provide all or any
part of the above funding (regardless of whether the milestones are attained).
If milestones are attained and either the Company and/or Nafund elects not to
provide all or part of the above funding it would have its equity reduced based
on a formula.
The 25% investment in Secure 724 L.P. for 300,000 shares of Common Stock and
warrants to purchase 50,000 shares of Common Stock was valued at $432,500. This
investment will be accounted for utilizing the equity method and is included in
OTHER ASSETS. The underlying equity of this investment on the date of the
transaction was approximately $78,000; resulting in goodwill of approximately
$354,500; which will not be amortized but will be tested for impairment. For the
period ending June 30, 2003, no adjustment to the equity investment was recorded
because the initial operating loss of Secure 724LP was insignificant.
In connection with initial capital contribution per the partnership agreement,
the Company advanced $25,000 to Secure LP in May 2003. The note payable in
connection with this advance bears interest at a rate of 4% and matures in May
2006.
There can be no assurance that the investment in Secure 724 will be profitable.
8. OTHER EVENTS
In January 2003, the Company also signed a letters of intent to acquire minority
interest in another technology limited partnerships in partnership with Nafund
Inc., a Toronto based private equity fund ("Nafund").
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NINE MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
8. OTHER EVENTS (Continued)
Under this agreement, Nafund would organize Re:Port Business Solution
("Re:Port"). Re:Port is a provider of software to the independent international
investment counseling, portfolio management and brokerage community. Located in
Toronto, Ontario, Re:Port software links external or outsourced trading,
custodian, broker and bank systems to internal diverse security and asset
management system and contact information systems and electronic filing and
documentation systems. Utilizing the software and systems it has developed which
are scaleable and able to provide cost-effective solutions, Re:Port and Nafund
will organize a new entity to offer the types of back office services that have
previously been available only to the largest investment counselors and money
managers. Re:Port would secure a contract to provide such services to a Toronto
based investment management firm which will hold equity in Re:Port. One of
Synergx's Directors is the principal in Re:Port. Synergx would acquire 25% of
the Class B Participating Units (Class B Participating Units will receive
distributions of all free cash flow after the Class A Units have been redeemed)
in exchange for (i) 350,000 shares of Common Stock and (ii) warrants to purchase
50,000 shares of Common Stock at $1.15 per share for 24 months.
The parties are negotiating modifications to the structure of the proposed
Re:Port transaction and there can be no assurance that the investment in Re:Port
described immediately above will be consummated or that it will prove to be
profitable to Synergx. The Re:Port transaction is subject to the completion of a
due diligence investigation and the negotiation and execution of definitive
documentation satisfactory to Synergx; until said investigation and definitive
documentation is completed and executed, Synergx's Board of Directors retains
the right to withdraw from the transaction.
The Company's stockholders approved investment in Secure 247 LP and the Re:Port
transaction at the Annual Meeting of Stockholders held on March 26, 2003. The
transactions were submitted to the Annual Meeting of Stockholders inasmuch as
two Directors of the Company, Messrs. Litwin and Dalrymple are Directors of
Nafund. Mr. Litwin is the President of Nafund. Mr. Dalrymple is the principal of
NSC Holdings, a Toronto based financial services group that would have a
significant interest in and manage Re:Port. Messr Litwin and Dalrymple have
recused themselves from the vote by the Board of Directors that approved these
transactions.
9. STOCK SPLIT
On July 7, 2003, the Company's Board of Directors declared a 2-for-1 stock split
of its outstanding stock. The stock split took the form of a dividend whereby
the Company issued on July 25th to each shareholder of record at the close of
business on July 18, 2003 one additional share for every share held on that
date. The financial statements and footnotes have been adjusted to reflect this
stock split.
10. NEW ACCOUNTING PRONOUNCEMENT
On December 31, 2002, the FASB issued SFAS No. 148 ("SFAS 148"), Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS 148 amends SFAS No. 123
("SFAS 123"), Accounting for Stock -Based Compensation, to provide an
alternative method of transition to SFAS 123's fair value method of accounting
for stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 and Accounting Principles Board ("APB") Opinion No. 28,
Interim Financial Reporting, to require disclosure
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NINE MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
10. NEW ACCOUNTING PRONOUNCEMENT (Continued)
in the summary of significant accounting polices of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the statement does not amend SFAS 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions of
SFAS are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS 123, or the intrinsic value method of APB Opinion No. 25. The
Company will continue to account for stock based compensation according to APB
Opinion No. 25. The adoption of SFAS 148 did not have an impact on net income or
proforma net income applying the fair value method as the Company did not have
stock based compensation for the nine months ended June 30, 2003 or 2002.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses certain financial instruments that, under previous guidance, could be
accounted for as equity, but now must be classified as liabilities in statements
of financial position. These financial instruments include: 1) mandatorily
redeemable financial instruments, 2) obligations to repurchase the issuer's
equity shares by transferring assets, and 3) obligations to issue a variable
number of shares. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
is evaluating the impact that the adoption of SFAS No. 150 will have on its
consolidated financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The Company has a $3 million credit facility with Citizens Business Credit
Company 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 had modified the requirements for one of these ratios.
At June 30, 2003, the Company was not in default with any of its financial
covenants as a result of this modification and at such time owed $1,446,988
under the Credit Facility.
Net cash (used) by operations for the nine months ended June 30, 2003 amounted
to $(463,552) as compared to cash being provided by operations of $72,771 for
the comparable prior year period. The primary reason for cash being used by
operations was due to an increase in working capital requirements from funding
$2.3 million of higher sales in 2003 and higher inventory due to purchases being
made ahead of requirements in order to obtain special purchase price discounts
from a vendor and from increased prepaid expenses due to higher insurance
premiums for property and general liability coverage. In addition, as of June
2003, certain payments of accounts payable where made in advance in order to
obtain payment discounts. The net cash outflow of $(463,552) from operations
during 2003 coupled with equipment purchases where funded by an increase in bank
borrowing.
The ratio of the Company's current assets to current liabilities increased to
approximately 2.77 to 1 at June 30, 2003 compared to 2.70 to 1 at June 30, 2002.
The increase in the current ratio is due to an improvement in cash flow since
June 30, 2002 due to the return to profitable operations and from an increase in
2003 of inventory related to purchases being made ahead of schedule (to obtain
special purchase price discounts) that were funded by an increase in bank
borrowing. Working capital increased to a high level of $5.8 million at June 30,
2003 compared to $5.2 million at June 30, 2002 while bank borrowing increased by
only $207,000 since June 30, 2002.
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Revenues and Gross Profit
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(In thousands of dollars)
Product Revenue $ 3,443 $ 2,839 $10,248 $ 7,122
Subcontract Revenue 65 622 508 1,257
Service Revenue 1,150 1,170 3,328 3,440
Total Revenue 4,658 4,631 14,084 11,819
Gross Profit Product 1,161 921 3,431 2,180
Gross Profit Subcontract 5 116 93 233
Gross Profit Service 340 398 1,008 1,043
Total Gross Profit 1,506 1,435 4,532 3,455
Gross Profit Product % 34% 32% 33% 31%
Gross Profit Subcontract % 8% 19% 18% 19%
Gross Profit Service % 30% 34% 30% 30%
Revenues
The Company's product revenues during the three and nine months ended June 30,
2003 increased from the comparable prior year periods, representing increases of
21% and 44% for the respective periods. These increases in product revenue
resulted from a gradual improvement in economic activity in the Company's
principal New York City market. The prior year periods were impacted by the
events of September 11th which delayed work on several projects involving New
York City Transit Authority and reduced tenant revenue as tenants relocated out
of New York City or consolidated into existing space uptown. The product revenue
improvement in 2003 is primarily related to the New York City market area and
relates to the following: 1) release of projects that have been delayed by the
events of September 11th, 2) from a gradual improvement in tenant activity, 3)
higher sales of railcar communication products as we begin to see the release of
new orders for shipment. Product revenues in our Dallas, Texas market area for
the three and nine month periods were significantly below 2002 levels.
Management believes the Dallas, Texas market has not recovered from the slowdown
in economic activity and, accordingly, we have implemented certain cost
reduction initiatives in that market area while we continue to quote business
aggressively. As a consequence, new order bookings improved and product sales
for the three months ended June 30, 2003 increased over the two previous
quarterly periods of fiscal 2003.
Subcontract revenue decreased during the current three and nine month periods as
the Company was responsible for a smaller amount of electrical installation as
one large fire alarm project was completed and another was at a reduced level of
activity in 2003.
Service revenues decreased during the current three and nine month periods
primarily due to lower call-in service and material for maintenance of fire
alarm systems.
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Gross Profit
Gross profit on product revenues for the three months and nine months ended June
30, 2003, increased 26% and 57% from the respective prior year periods. The
increase in absolute gross profit during both periods is primarily related to
higher product sales (noted above) and related gross margin The increase in
gross profit percentage during the current three and nine month periods is due
to the effect of higher sales in which to absorb certain fixed overhead costs.
In addition, the nine month period of 2003 benefited from certain purchase
discounts received from a supplier.
Gross profit related to subcontract revenues for the three and nine months ended
June 30, 2003 decreased in absolute terms as the Company was responsible for a
smaller amount of electrical installation as one fire alarm project was
completed in 2003 and another was at a reduced level. However, the gross profit
percentage was lower during the three months of 2003 as one project was
contracted for sale at a lower than normal mark up.
Gross profit from service revenues decreased during the three months ended June
30, 2003 due to lower call-in service revenue. The gross profit percentage was
higher during the prior year period because of significantly higher call in
maintenance service on fire alarm systems as replacement parts and service were
needed in certain buildings affected by contamination from the events of
September 11th. Gross profit on service revenues for the nine months ended June
30, 2003 decreased due to the lower call-in service revenue.
Income Before Tax
The improvement in income before income taxes during the three and nine months
ended June 30, 2003 is primarily due to the increase in gross profit caused by
higher product revenues and from improved margins due to the relative fixed
nature of certain overhead costs (noted above). This improvement in product
gross profit was mitigated by lower gross profit from subcontract revenues.
Partially offsetting the improvement in overall gross profit was an increase in
selling, general and administrative expenses (1% and 5% during the three and
nine months of 2003, respectively) to support higher product sales and from
higher insurance costs. Favorably affecting income before income taxes were
declines in interest expense (15% and 34% for the three and nine months of 2003,
respectively) due to lower interest rates during the 2003 periods and from lower
borrowing levels during the nine month period of 2003.
Tax Provision
The Company's current income tax provision represents federal, state and local
income taxes. 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
The Company's order position, excluding service, at June 30, 2003 increased to
$14,800,000 as compared to $12,105,000 at September 30, 2002 and $14,700,000 at
June 30, 2002. This is a record backlog and the increase in order position since
September 30, 2002, reflects recent large new orders received for several subway
complexes which will be deliverable over several years as the projects are
released and reflects recent increased new orders in
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
our Dallas, Texas market area. In addition, the backlog includes $1.8 million of
orders for communication and announcement systems from several transit car
manufacturers, that will be shippable over the next 15 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 the Company's
products are sold and installed as part of larger mass transit construction
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 might 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 be responsible for
management of the project as well as electrical installation.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and procedures
Based on their evaluation of our disclosure controls and procedures conducted
within 90 days of the date of filing this report on Form 10-QSB, our Chief
Executive Officer and the Chief Financial Officer has concluded that our
disclosure controls and procedures (as defined in Rules 13a - 14(c) and 15(d)
promulgated under the Securities Exchange Act of 1934 are effective.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities.
In June 2003, in connection with the Secure 724 transaction noted in Item 6
below, the Company issued 300,000 shares of Common Stock pursuant to Section a
4(2) exemption from registration requirement of the Securities Act of 1933, as
amended.
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Item 6. Exhibits and Reports on form 8-K.
(a) Exhibits
31.1 Certification of Daniel S. Tamkin pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1 Certification of John A. Poserina pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications of Daniel S. Tamkin and John A. Poserina Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Reports on Form 8-K dated June 3, 2003 reported purchase of investment in
Secure 724 L.P. from Nafund Inc. in consideration of the issuance by the Company
of 300,000 shares of Common Stock and a warrant to purchase 50,000 shares of
Common Stock at $1.15 per share for 24 months. The Company would also issue an
additional 150,000 shares of Common Stock if certain development milestones are
satisfied and would also provide Secure 724 L.P. with up to Cdn$300,000 of
financing against satisfaction of certain development milestones.
Other
The information in Item 2 and Item 6 regarding shares of Common Stock have
been adjusted for a 2 for 1 stock split that took the form of a dividend that
was distributed on July 25, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SYNERGX SYSTEMS INC
(Registrant)
/s/ John A. Poserina
------------------------------
John A. Poserina,
Chief Financial Officer
(Principal Accounting and
Financial Officer), Secretary
And Director
Date: August 13, 2003