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 March 31, 2004
--------------
[ ] 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.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2941299
---------------------------- -----------------------------------
(State or jurisdiction of incorporation or (IRS employer identification Number)
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 May 12, 2004, 4,756,862 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 March 31, 2004 3
Condensed Consolidated Statements of Operations for the Three and
Six Month Periods Ended March 31, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows for the Three and
Six Month Periods Ended March 31, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings. 17
Item 2. Changes in Securities. 17
Item 3. Defaults Upon Senior Securities. 17
Item 4. Submission of Matters to a Vote of Security Holders. 17
Item 5. Other Information. 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Part I - FINANCIAL INFORMATION
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
2004
-------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 351,748
Accounts receivable, principally trade, less allowance
for doubtful accounts of $411,541 5,821,865
Inventories 3,121,063
Deferred taxes 315,000
Prepaid expenses and other current assets 598,132
-----------
TOTAL CURRENT ASSETS 10,207,808
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,443,382 363,354
OTHER ASSETS 689,192
-----------
TOTAL ASSETS $11,260,354
===========
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unauditied)
March 31,
2004
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and capital leases payable - current portion $ 34,323
Accounts payable and accrued expenses 3,087,855
Deferred revenue 409,253
-----------
TOTAL CURRENT LIABILITIES 3,531,431
Note payable to bank 1,845,676
Notes and capital leases payable - less current portion 33,377
Deferred taxes 20,300
-----------
TOTAL LIABILITIES 5,430,784
-----------
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 4,747,528 shares 4,747
Capital in excess of par 6,400,825
Accumulated deficit (576,002)
-----------
TOTAL STOCKHOLDERS' EQUITY 5,829,570
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,260,354
===========
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 March 31,
2004 2003
--------- -----------
Product sales $4,160,318 $3,513,724
Subcontract sales 64,600 172,284
Service revenue 1,165,253 1,102,756
---------- ----------
Total revenues 5,390,171 4,788,764
---------- ----------
Cost of product sales 2,815,526 2,271,933
Cost of subcontract sales 54,153 145,194
Cost of service 837,695 782,136
Selling, general and administrative 1,507,778 1,406,716
Interest expense 21,125 17,274
Depreciation and amortization 40,004 42,896
Loss on equity investment 12,000 -
---------- ----------
5,288,281 4,666,149
---------- ----------
Income before provision for
income taxes 101,890 122,615
---------- ----------
Provision for income taxes:
Current 34,400 64,000
Deferred 8,600 (3,000)
---------- ----------
43,000 61,000
---------- ----------
Net Income $ 58,890 $ 61,615
========== ==========
Earnings per common share
Basic earnings per share $0.01 $0.02
===== =====
Diluted earnings per share $0.01 $0.01
===== =====
Weighted average number of common shares outstanding 4,718,991 3,748,850
Weighted average number of common and dilutive
common shares outstanding 5,178,703 4,250,784
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended March 31,
2004 2003
--------- -----------
Product sales $7,179,266 $6,805,029
Subcontract sales 143,535 443,183
Service revenue 2,269,176 2,178,071
---------- ----------
Total revenues 9,591,977 9,426,283
---------- ----------
Cost of product sales 4,918,277 4,535,416
Cost of subcontract sales 119,668 355,708
Cost of service 1,634,977 1,509,897
Selling, general and administrative 2,870,519 2,735,859
Interest expense 40,495 27,392
Depreciation and amortization 88,447 87,574
Loss on equity investment 32,000
---------- ----------
9,704,383 9,251,846
---------- ----------
(Loss) Income before provision for
(benefit from) income taxes (112,406) 174,437
---------- ----------
(Benefit from) Provision for income taxes:
Current (27,800) 88,000
Deferred (17,200) 3,000
---------- ----------
(45,000) 91,000
---------- ----------
Net (Loss) Income $ (67,406) $ 83,437
========== ==========
Earnings Per Common Share
Basic (Loss) Earnings Per Share ($0.02) $0.02
===== =====
Diluted (Loss) Earnings Per Share ($0.01) $0.02
===== =====
Weighted average number of common shares outstanding 4,441,037 3,748,850
Weighted average number of common and dilutive
common share equivalents outstanding 5,129,795 4,115,266
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended March 31,
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net (loss) income $ (67,406) $ 83,437
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 88,447 87,574
Deferred (benefit) tax (17,200) 3,000
Provision for doubtful accounts - (17,483)
Loss on equity investment 32,000
Changes in operating assets and liabilities:
Accounts receivable (27,944) 684,366
Inventories (672,493) (449,349)
Prepaid expenses and other current assets (209,936) (246,335)
Other assets (25,204) (24,600)
Accounts payable and accrued expenses 161,591 65,048
Deferred revenue (25,638) (27,885)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (763,783) 157,773
--------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment (30,004) (102,013)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (30,004) (102,013)
--------- ---------
FINANCING ACTIVITIES
Principal payments on notes payable and capital lease obligations (89,435) (80,362)
Payments and proceeds from revolving line of credit - net 590,174 46,526
Proceeds from exercise of stock options and warrants 351,610
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 852,349 (33,836)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 58,562 21,924
Cash and cash equivalents at beginning of period 293,186 200,201
--------- ---------
Cash and cash equivalents at end of period 351,748 222,125
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 130,519 $ 15,158
Interest $ 48,277 $ 29,421
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended March 31, 2004 and 2003, the Company incurred no
capital lease obligations for the acquisition of equipment.
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 2004
(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 six months ended March 31, 2004
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2004. For further information, refer to the
consolidated financial statements and footnotes thereto included in Synergx
Systems Inc. ("Synergx" or "the Company") and Subsidiaries' annual report on
Form 10-KSB for the year ended September 30, 2003.
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 March 31, 2004 and 2003 and have been included in accounts
receivable. There were no billing in excess of costs and estimated profits at
March 31, 2004 and 2003.
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
SIX MONTHS ENDED MARCH 31, 2004
(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
On October 9, 2003, the Company entered into a new $3 million revolving credit
facility with Hudson United Bank (the "Credit Facility"). The Credit Facility
has an interest rate of prime plus 1/4% on outstanding balances (4.25% at March
31, 2004) and expires in October 2005. The Credit Facility is secured by all
assets of the Company and all of its operating subsidiaries. Advances under this
Credit Facility are measured against a borrowing base calculated on eligible
receivables and inventory.
Initial proceeds from the new Credit Facility were used to pay off a former
credit facility with Citizens Business Credit. At March 31, 2004 the full amount
of the Credit Facility was available under the borrowing base calculation and
$1,846,000 was outstanding under this facility.
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 and tangible net worth covenants. At March 31, 2004 the Company was not
in default with any of its financial covenants.
5. EXERCISE OF WARRANTS AND STOCK OPTIONS
Mirtronics the largest stockholder of the Company had outstanding warrants to
purchase 620,000 shares of the Company's Common Stock, which were issued in
1998, and were exercisable at any time until December 31, 2003 at an exercise
price of $.51 per share. Mirtronics exercised these warrants in December 2003
for a total consideration of $316,200.
During the six months ending March 31, 2004, employee stock options to purchase
66,384 shares of Common Stock were exercised for a total consideration of
$35,410.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
SIX MONTHS ENDED MARCH 31, 2004
(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 option
plan and warrants. The Company did not have stock based compensation for the
three and six months ended March 31, 2004 or 2003.
Three Months ended March 31, Six Months ended March 31,
Basic EPS Computation 2004 2003 2004 2003
------------------------------------- ------------------------------------
Net Income (Loss) available to common
stockholders $ 58,890 $ 61,615 $ (67,406) $ 83,437
Weighted average outstanding shares 4,718,991 3,748,850 4,441,037 3,748,850
Basic EPS (Loss) $.01 $.02 $(.02) $.02
==== ==== ====== =====
Diluted EPS Computation
Net Income (Loss) available to common
stockholders $ 58,890 $ 61,615 $ (67,406) $ 83,437
======= ======= ========= ========
Weighted-average shares-basic 4,718,991 3,748,850 4,441,037 3,748,850
--------- --------- ---------- ---------
Plus: Incremental shares from
assumed conversions
Employee Stock Options 147,680 96,134 153,707 74,128
Warrants 312,032 405,800 535,051 292,288
-------- ------- ------- --------
Dilutive potential common shares 459,712 501,934 688,758 366,416
------- ------- ------- -------
Adjusted weighted average shares diluted 5,178,703 4,250,784 5,129,795 4,115,266
--------- --------- --------- ---------
Diluted EPS (Loss) $.01 $.01 $(.01) $.02
==== ==== ====== ====
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
SIX MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
7. INVESTMENT IN SECURE 724 L.P.
On May 29, 2003, the Company (through a special purpose Nova Scotia subsidiary)
acquired 25% of the equity of Secure 724 LP ("Secure 724 LP"), an Ontario
limited partnership, from Nafund Inc. ("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 $229,000 U.S. at March 31, 2004) to Secure
724 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 LP 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 is 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 $73,000; resulting in goodwill of approximately $359,500;
which will not be amortized but will be tested for impairment. For the three and
six months ended March 31, 2004, a $12,000 and $32,000, respectively, adjustment
to the equity investment was recorded to reflect the Company's 25% portion of
the operating loss of Secure 724 LP.
In connection with initial capital contribution per the partnership agreement,
the Company advanced $18,158 (Cdn$25,000) to Secure 724 LP in May 2003 and upon
reaching milestones advanced $125,089 (Cdn$175,000) in August 2003. These notes
receivable bear interest at a rate of 4% and mature in May 2006 and August 2006,
respectively.
This transaction was submitted to the stockholders of Synergx (as two directors
of Synergx are directors of Secure 724 LP) and approved at its Annual Meeting on
March 26, 2003.
There can be no assurance that the investment in Secure 724 LP will be
profitable.
8. OTHER EVENTS
RePort Business Solutions
On November 20, 2003, the Company's Board of Directors approved entering into a
revised agreement to organize a new Ontario limited partnership to acquire and
operate the business of RePort Business Solutions ("RePort") in partnership with
NSC Holdings Inc. ("NSCH") and Nafund Inc. ("Nafund").
This transaction was originally submitted to the stockholders of Synergx for
approval at its Annual Meeting on March 26, 2003 because two directors of
Synergx are directors of Nafund and one is also a director and principal
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
SIX MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
8. OTHER EVENTS (Continued)
of NSCH. Management believes that the revised structure and consideration are
within the scope of the stockholder approval.
Pursuant to the revised agreement (which is subject to approval by NSCH's bank
and completion of definitive documentation), the Company, through a subsidiary,
would acquire from Nafund, 25% of the Class B equity units of RePort in
consideration of the issuance to Nafund of 150,000 shares of Common Stock.
RePort which is currently a division of NSCH, provides software to the
independent international investment counseling, portfolio management and
brokerage community. Located in Toronto, Ontario, RePort's software links
external or outsourced trading, custodian, broker and bank systems in internal
diverse security and asset management systems and contact information systems
and electronic filing and documentation systems. RePort will provide these and
related back office services to NSCH (which is an investment counselor/money
manager) and to other third party investment counselors, money managers, funds
and similar entities.
There can be no assurance however that this transaction will take place.
9. STOCK SPLIT
On July 7, 2003, the Company's Board of Directors declared a 2-for-1 stock split
of its outstanding common 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 retroactively
adjusted to reflect this stock split.
10. 2004 NON-QUALIFIED STOCK OPTION PLAN
At the Company's annual meeting of stockholders on March 10, 2004 the Company
and its stockholders adopted a new nonqualified stock option plan ("2004 Plan").
Under the 2004 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 the discretion
of the Board of Directors at such time as the options are granted. Issuances
under the new 2004 Plan are to be reduced by options outstanding under a 1997
nonqualified stock option plan (replaced by the new 2004 Plan). Options
outstanding under the 1997 Plan will expire from June 2004 though December 31,
2005. As of March 31, 2004, there were 124,914 options outstanding under the
1997 Plan and none outstanding under the 2004 Plan.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
In October 2003, the Company entered into a new $3 million revolving credit
facility with Hudson United Bank. (the "Credit Facility") This credit facility
has an interest rate of prime plus 1/4% and expires in October 2005. Initial
proceeds from the new credit facility were used to pay off a credit facility
with Citizens Business Credit. 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
and tangible net worth covenants. At March 31, 2004, the Company was not in
default with any of its financial covenants and at such time the full amount of
the Credit Facility was available under the borrowing base calculation. At March
31, 2004, $1,846,000 was owed under the Credit Facility.
Net cash (used) by operations for the six months ended March 31, 2004 amounted
to ($763,783) as compared to cash being provided by operations of $157,773 for
the comparable prior year period. The increase in cash being used by operations
was due to a ($112,400) operating loss in the 2004 six month period compared to
an operating profit of $174,400 in the comparable 2003 period and due to an
increase in working capital requirements in order to fund an increase in
inventory for projects expected to be shipped after March 31, 2004. The net cash
outflow of ($763,783) from operations during 2004 coupled with equipment
purchases of ($30,004) were funded by an increase of $590,176 in bank borrowing
and from $316,200 of proceeds from exercise of warrants to purchase common stock
by Mirtronics and $35,410 from exercise of stock options by employees to
purchase common stock.
The ratio of the Company's current assets to current liabilities increased to
approximately 2.88 to 1 at March 31, 2004 compared to 2.62 to 1 at March 31,
2003. The increase in the current ratio is due to an improvement in cash flow
since March 31, 2003 due to the return to profitable operations through
September 30, 2003, from $351,610 of proceeds from the exercise of warrants and
employees stock options, and from a increase of $1.5 million of accounts
receivable in 2004. Working capital increased by $1.4 million to $6.6 million at
March 31, 2004 compared to $5.2 million at March 31, 2003; while bank borrowing
increased by $961,000 since March 31, 2003.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Revenues and Gross Profit
Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
(In thousands of dollars)
Product Revenue $4,160 $3,514 $7,179 $6,805
Subcontract Revenue 65 172 144 443
Service Revenue 1,165 1,103 2,269 2,178
Total Revenue 5,390 4,789 9,592 9,426
Gross Profit Product 1,345 1,242 2,261 2,270
Gross Profit Subcontract 10 27 24 87
Gross Profit Service 328 321 634 668
Total Gross Profit 1,683 1,590 2,919 3,025
Gross Profit Product % 32% 35% 31% 33%
Gross Profit Subcontract % 15% 16% 17% 20%
Gross Profit Service % 28% 29% 28% 31%
Revenues
The Company's product revenues during the three and six months ended March 31,
2004 increased from the comparable prior year periods, representing increases of
18% and 6% for the respective periods. These increases in product revenues
resulted from an improvement in economic activity in both the Company's
principal New York City market and its Dallas, Texas market. The product revenue
increase during current quarter reflects strong improvement in Dallas and
revenues from New York City transit projects where approvals for production and
shipment were delayed last quarter and were released in the current period.
However, the increase in product revenues still reflects softness in the
Company's New York City market for its other products. Product revenues in our
Dallas, Texas market area improved significantly from very low 2003 levels. In
the Dallas, Texas market, higher product revenues resulted from certain costs
reduction initiatives implemented during the last fifteen months, which allowed
the Company to price aggressively in that competitive market. We are continuing
to quote business aggressively in both that area and in the New York City
metropolitan area.
Subcontract revenue decreased during the current three and six month periods as
the Company was responsible for various small electrical installations during
the 2004 periods which in the aggregate were less than two large electrical
installation projects in 2003.
Service revenues increased during the current three and six month periods of
2004. The increase in both periods is primarily due to an increase in service
contracts as the Company expanded its service base into the Long Island, NY
market for fire alarm systems. In addition, the 2004 periods benefited from
call-in service related to several new customers added during the current
quarter.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Gross Profit
Gross profit on product revenues for the three months ended March 31, 2004,
increased 8% compared to the respective prior year period. The increase in
absolute gross profit is primarily related to higher product sales (noted above)
and related gross margin. However, gross profit on product revenues for the six
months ended March 31, 2004 decreased 1% even though products revenues increased
6% for this period. The decrease in absolute gross profit during the current six
months period reflects lower profit margins resulting from aggressive pricing
and from an increase in certain overhead costs. Over the last two years certain
project engineers were added to support product expansion in a effort to
increase products sales to a higher level. While the Company's fixed overhead
cost base increased the product revenue increase did not occur by March 31,
2004. The decrease in gross profit percentage during the current three and six
month periods is due to a combination of lower than anticipated sales with
increased overhead, and aggressive pricing (particularly in the Dallas market
area) in order to book new business.
Gross profit related to subcontract revenues for the three and six months ended
March 31, 2004 decreased in absolute terms as the Company was responsible for a
smaller amount of electrical installation. However, the gross profit percentage
was lower during the three and six months of 2004 as markups on electrical
installation were lower due to the competitive environment during this period.
Gross profit on service revenues for the three months ended March 31, 2004
increased due to the increase in service contract revenues. Gross profit from
service revenues during the six months ended March 31, 2004 decreased in spite
of an increase in service revenues. The gross profit decline for this period was
due to an increase in technicians to support higher service revenues, salary
increases, and technicians moving up to higher paying categories. These cost
increases could not be fully absorbed by price increases to service contracts or
by additional call-in service revenue.
Income Before Tax
The decline in income before income taxes during the three and six months ended
March 31, 2004 is primarily due to the decrease in gross lower profit margins
resulting from aggressive pricing in Dallas to obtain business and from an
increase in certain overhead costs to support product expansion in New York in
an effort to increase product sales to a higher level. This decline in income
before tax was also caused by lower gross profit from subcontract revenues
(three and six months of 2004) and from lower gross profit on service revenues
during the six months of 2004. In addition, selling, general and administrative
expenses increased (7% and 5% during the three and six months of 2004,
respectively) due to higher insurance costs in 2004 and from additional
management and sales staff to support product expansion directed at increased
levels. Interest expense increased during 2004 due to higher borrowing levels.
For the three and six month periods of 2004 the Company recorded a loss of
$12,000 and $32,000, respectively, on its equity in the operating loss of Secure
724 LP.
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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Order Position
The Company's order position, excluding service, at March 31, 2004 amounted to
$15,800,000 as compared to $16,500,000 at September 30, 2003 and $14,100,000 at
March 31, 2003. These historically high levels of order position 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 our Dallas, Texas Market area.. In addition, the backlog includes
$2.5 million of 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 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
Evaluation of disclosure controls and procedures. At the period end of this
Quarterly Report on Form 10-QSB, the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded, as of the end of the quarter covered
by this report, that:
The Company's disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified.
That Company's disclosure controls and procedures are effective to ensure that
such information is accumulated and communicated to the Company's management,
and made known to the Company's Chief Executive Officer and Chief Financial
Officer, to allow timely decision regarding the required disclosure.
There have been no changes in the Company's internal controls over financial
report that have materially affected, or is reasonably likely to materially
affect the Company's internal controls over financial reporting during the
period covered by this Quarterly Report.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities.
Mirtronics the largest stockholder of the Company had outstanding warrants
to purchase 620,000 shares of the Company's Common Stock, which were issued in
1998, and were exercisable at any time until December 31, 2003 at an exercise
price of $.51 per share. Mirtronics exercised these warrants in December 2003
for a total consideration of $316,200.
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
The Registrant's Annual Meeting of Stockholders was held on March 10, 2004.
At the meeting, Stockholders considered and voted upon:
(1) the election of seven (7) directors to Synergx's Board of Directors,
(2) the selection of Marcum & Kleigman LLP as Synergx's independent
auditiors for the fiscal year ending September 2004
(3) to adopt the 2004 Non-Qualified Stock Option Plan.
The seven nominees for director were unopposed and were, accordingly
elected by the Stockholders. The following table details the votes cast for,
against and abstained from voting on each matter considered by the Stockholders.
MATTER FOR AGAINST ABSTAINED
-------------------------------------------------------------------------------------------------------
Daniel Tamkin 4,446,866 3,828 0
John Poserina 4,446,866 3,828 0
Henry Schnurbach 4,446,866 3,828 0
Joseph Vitale 4,446,866 3,828 0
Dennis McConnell 4,446,800 3,894 0
J Ian Dalrymple 4,446,824 3,870 0
Mark I. Litwin 4,446,824 3,870 0
--------------------------------------------------------------------------------------------------------
Auditors 4,444,597 2,068 4,029
--------------------------------------------------------------------------------------------------------
Adoption 2004 Non-Qualified Stock 2,701,781 47,840 15,650
Option Plan
--------------------------------------------------------------------------------------------------------
Item 5. Other Information.
On January 30, 2004, the Company filed a post-effective amendment No.
1 to Form S-8 Registration Statement (Reoffer Prospectus) for 86,322 shares of
Common Stock which provides for the sales thereof by certain executive officers
and directors.
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
31.2 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 pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certifications of John A. Poserina pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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: May 12, 2004