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, 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 (IRS employer identification
or organization) Number)
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 4, 2004, 4,896,862
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 June 30, 2004 3
Condensed Consolidated Statements of Operations for the Three and
Nine Month Periods Ended June 30, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows for the Three and
Nine Month Periods Ended June 30, 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)
June 30,
2004
-------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 408,618
Accounts receivable, principally trade, less allowance
for doubtful accounts of $411,541 6,582,537
Inventories 3,220,590
Deferred taxes 307,400
Prepaid expenses and other current assets 520,118
-----------
TOTAL CURRENT ASSETS 11,039,263
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,485,671 358,487
OTHER ASSETS 660,929
-
-
-----------
TOTAL ASSETS $12,058,679
-----------
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unauditied)
June 30,
2004
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and capital leases payable - current portion $ 31,357
Accounts payable and accrued expenses 3,014,238
Deferred revenue 490,604
----------
TOTAL CURRENT LIABILITIES 3,536,199
Note payable to bank 2,180,676
Notes and capital leases payable - less current portion 27,157
Deferred taxes 19,900
----------
TOTAL LIABILITIES 5,763,932
----------
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 4,896,862 shares 4,897
Capital in excess of par 6,564,262
Accumulated deficit (274,412)
----------
6,294,747
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,058,679
===========
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,
2004 2003
---------- -----------
Product sales $4,808,106 $3,442,433
Subcontract sales 117,338 65,250
Service revenue 1,155,628 1,150,175
---------- ----------
Total revenues 6,081,072 4,657,858
---------- ----------
Cost of product sales 3,007,134 2,280,600
Cost of subcontract sales 95,110 59,736
Cost of service 812,035 810,267
Selling, general and administrative 1,579,157 1,367,466
Interest expense 18,823 20,191
Depreciation and amortization 44,223 43,530
Loss on equity investment 20,000
---------- ----------
5,576,482 4,581,790
---------- ----------
Income before provision for
income taxes 504,590 76,068
---------- ----------
Provision for income taxes:
Current 195,800 34,000
Deferred 7,200
---------- ----------
203,000 34,000
---------- ----------
Net Income $ 301,590 $ 42,068
========== ==========
Earnings per common share
Basic earnings per share $0.06 $0.01
===== =====
Diluted earnings per share $0.06 $0.01
===== =====
Weighted average number of common shares outstanding 4,788,312 3,851,048
Weighted average number of common and dilutive
common shares outstanding 5,116,631 4,519,456
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,
2004 2003
---------- -----------
Product sales $11,987,372 $10,247,462
Subcontract sales 260,873 508,433
Service revenue 3,424,804 3,328,246
----------- -----------
Total revenues 15,673,049 14,084,141
----------- -----------
Cost of product sales 7,925,411 6,816,016
Cost of subcontract sales 214,778 415,444
Cost of service 2,447,012 2,320,164
Selling, general and administrative 4,449,676 4,103,325
Interest expense 59,318 47,583
Depreciation and amortization 132,670 131,104
Loss on equity investment 52,000
----------- -----------
15,280,865 13,833,636
----------- -----------
Income before provision for income taxes 392,184 250,505
----------- -----------
Provision for income taxes:
Current 168,000 122,000
Deferred (10,000) 3,000
------------ -----------
158,000 125,000
----------- -----------
Net Income $234,184 $125,505
=========== ===========
Earnings Per Common Share
Basic Earnings Per Share $0.05 $0.03
===== =====
Diluted Earnings Per Share $0.05 $0.03
===== =====
Weighted average number of common shares outstanding 4,555,944 3,782,916
Weighted average number of common and dilutive
common share equivalents outstanding 5,064,697 4,284,851
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,
2004 2003
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OPERATING ACTIVITIES
Net income $ 234,184 $ 125,505
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 132,670 131,104
Deferred (benefit) tax (10,000) 3,000
Provision for doubtful accounts - (7,483)
Loss on equity investment 52,000
Changes in operating assets and liabilities:
Accounts receivable (788,616) (281,962)
Inventories (772,020) (404,535)
Prepaid expenses and other current assets (64,922) (58,208)
Other assets (18,875) (64,288)
Accounts payable and accrued expenses 87,974 36,140
Deferred revenue 55,713 57,175
---------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,091,892) (463,552)
---------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment (67,426) (130,875)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (67,426) (130,875)
---------- ----------
FINANCING ACTIVITIES
Principal payments on notes payable and capital lease obligations (98,620) (122,676)
Payments and proceeds from revolving line of credit - net 925,173
Proceeds from exercise of stock options and warrants 448,197 657,283
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,274,750 534,607
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 115,432 (59,820)
Cash and cash equivalents at beginning of period 293,186 200,201
---------- ----------
Cash and cash equivalents at end of period $ 408,618 $ 140,381
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 130,519 $ 67,476
Interest $ 70,416 $ 48,511
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended June 30, 2004 and 2003, the Company incurred no
capital lease obligations 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 aggregated 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, 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 nine months ended June 30, 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 June 30, 2004 and 2003 and have been included in accounts
receivable. There were no billing in excess of costs and estimated profits at
June 30, 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 term 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, 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 June
30, 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 June 30, 2004, the full amount
of the Credit Facility was available under the borrowing base calculation and
$2,181,000 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 June 30, 2004 the Company was not in
default with any of its financial covenants.
5. EXERCISE OF WARRANTS AND STOCK OPTIONS
Genterra Inc. (formerly Mirtronics Inc.) 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. Genterra exercised
these warrants in December 2003 for a total consideration of $316,200.
On June 15, 2004, an unaffiliated investor exercised warrants to purchase
100,000 shares of the Company's Common Stock at an exercise price of $70,000.
These warrants were part of a private placement of 340,000 units sold for $.70
per Unit. Each unit consists of one share of Common Stock and one warrant to
purchase an additional share of Common Stock at $.70 per share for a period of
24 months from September 30, 2002. The remaining 240,000 warrants are
outstanding as of June 30, 2004.
During the nine months ending June 30, 2004, employees exercised stock options
to purchase 115,718 shares of Common Stock for a total consideration of $61,997.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NINE MONTHS ENDED JUNE 30, 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 nine months ended June 30, 2004 or 2003.
Three Months ended June 30, Nine Months ended June 30,
Basic EPS Computation 2004 2003 2004 2003
------------------------------------- ----------------------------------
Net Income available to common
stockholders $301,590 $42,068 $234,184 $125,505
Weighted average outstanding shares 4,788,312 3,851,048 4,555,944 3,782,916
Basic EPS $.06 $.01 $.05 $.03
==== ==== ==== ====
Diluted EPS Computation
Net Income available to common
stockholders $301,590 $42,068 $234,184 $125,505
======== ======= ======== ========
Weighted-average shares-basic 4,788,312 3,851,048 4,555,944 3,782,916
--------- --------- --------- ---------
Plus: Incremental shares from
assumed conversions
Employee Stock Options * 87,863 122,795 125,746 96,135
Warrants 240,456 545,613 383,007 405,800
------- ------- ------- -------
Dilutive potential common shares 328,319 668,408 508,753 501,935
------- ------- ------- -------
Adjusted weighted average shares diluted 5,116,631 4,519,456 5,064,697 4,284,851
--------- --------- --------- ---------
Diluted EPS $.06 $.01 $.05 $.03
==== ==== ==== ====
*50,000 warrants were antidilutive in the nine month period ending June 30, 2003
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, 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 June 30, 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
nine months ended June 30, 2004, a $20,000 and $52,000, respectively, an
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.
Secure 724 LP is proceeding with the UL certification process and developing a
GSM/GPRS version for communication with any standard monitoring station as well
as all functionality of the 724 interactive.
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").
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NINE MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
8. OTHER EVENTS (Continued)
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 of
NSCH. Management believes that the revised structure and consideration are
within the scope of the stockholder approval received at the annual meeting in
March 2003.
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. 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 June 30, 2004,
there were 75,580 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 June 30, 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 June
30, 2004, $2,181,000 was owed under the Credit Facility.
Net cash used by operations for the nine months ended June 30, 2004 amounted to
$1,091,890 as compared to cash used by operations of $463,552 for the comparable
prior year period. The increase in cash being used by operations was due to an
increase in working capital requirements in order to fund an increase in
accounts receivable that resulted from significantly higher sales in 2004 and
from an increase in inventory for projects expected to be shipped after June 30,
2004. The net cash outflow of $1,091,890 from operations during 2004 coupled
with equipment purchases of $67,426 were funded by an increase of $925,176 in
bank borrowing and from $316,200 of proceeds from exercise of warrants to
purchase common stock by Genterra Inc. (formerly Mirtronics Inc.), $70,000 of
proceeds from exercise of warrants to purchase common stock by an unaffiliated
investor and $61,997 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 3.12 to 1 at June 30, 2004 compared to 2.77 to 1 at June 30, 2003.
The increase in the current ratio is due to an improvement in cash flow since
June 30, 2003 due to the continued profitable operations through June 30, 2004,
from $448,197 of proceeds from the exercise of warrants and employees stock
options, and from a increase of $789,000 of accounts receivable in 2004. Working
capital increased by $1.7 million to $7.5 million at June 30, 2004 compared to
$5.8 million at June 30, 2003; while bank borrowing increased by only $734,000
since June 30, 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 Nine Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(In thousands of dollars)
Product Revenue $ 4,808 $ 3,443 $11,987 $10,248
Subcontract Revenue 117 65 261 508
Service Revenue 1,156 1,150 3,425 3,328
Total Revenue 6,081 4,658 15,673 14,084
Gross Profit Product 1,801 1,161 4,062 3,431
Gross Profit Subcontract 22 5 46 93
Gross Profit Service 344 340 978 1,008
Total Gross Profit 2,167 1,506 5,086 4,532
Gross Profit Product % 37% 34% 34% 33%
Gross Profit Subcontract % 18% 8% 18% 18%
Gross Profit Service % 30% 30% 29% 30%
Revenues
The Company's product revenues during the three and nine months ended June 30,
2004 increased 40% and 17% respectively from the comparable prior year periods
due to improved economic activity in both the Company's principal New York City
market and its Dallas, Texas market. The Company experienced exceptionally
strong improvement in Dallas compared to very low 2003 levels and higher
revenues from New York City transit projects that resulted from product releases
from our customers. In the Dallas, Texas market, higher product revenues
resulted from certain costs reduction initiatives implemented during the last
eighteen 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 increased during the current three month period due to an
increase in the number of small jobs where the Company was responsible for
electrical installation. Subcontract revenue decreased during the current nine
month period as the Company was responsible for various small electrical
installations during the 2004 period which in the aggregate were less than two
large electrical installation projects in 2003.
Service revenues increased slightly during the current three and nine month
periods of 2004 due to an increase in service contracts as the Company expanded
its fire alarm service base into the Long Island, NY market. The Company also
secured several new fire alarm customers in the New York City market. These
increases in service contract revenue more than offset a decrease in call-in
service revenue.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Gross Profit
Gross profit on product revenues for the three and nine months ended June 30,
2004, increased 55% and 18%, respectively, compared to the respective prior year
periods. The increase in absolute gross profit 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 primarily
due to higher sales on which to absorb overhead in both our Dallas and New York
City market areas. The higher sales in Dallas resulted from aggressive pricing
in order to book new business.
Gross profit related to subcontract revenues for the three months ended June 30,
2004 increased in absolute terms as the Company was responsible for a larger
amount of electrical installations. In contrast, the three months of 2003 had a
lower gross profit percentage due to the competitive environment during this
period. However, gross profit for the nine months ended June 30, 2004 declined
due to the reduction in subcontract work (electrical installation by others).
The gross profit percentage during the three and nine months of 2004 were back
to normal markups on electrical installation.
Gross profit on service revenues for the three months ended June 30, 2004 was
basically unchanged as service revenues were only up slightly compared to the
prior year period. Gross profit and the gross profit percentage from service
revenues during the nine months ended June 30, 2004 decreased in spite of an
increase in service revenues. The gross profit decline 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 due to competitive market pricing.
Income Before Tax
The increase in income before income taxes during the three and nine months
ended June 30, 2004 of 563 % and 57%, respectively, is primarily due to the
higher gross profit margins resulting from increased product sales in New York
and Dallas. In addition, selling, general and administrative expenses increased
(15% and 8% during the three and nine 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 sales levels. Interest expense
increased during 2004 due to higher borrowing levels. For the three and nine
month periods of 2004 the Company recorded a loss of $20,000 and $52,000,
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 June 30, 2004 amounted to
$15,155,000 as compared to $16,500,000 at September 30, 2003 and $14,800,000 at
June 30, 2003. These strong 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 $2.1
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.
Genterra Inc (formerly Mirtronics Inc) 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. Genterra Inc.exercised
these warrants in December 2003 for a total consideration of $316,200.
On June 15, 2004, an unaffiliated investor exercised warrants to purchase
100,000 shares of the Company's Common Stock at an exercise price of $70,000.
These warrants were part of a private placement of 340,000 units sold for $.70
per Unit. Each unit consists of one share of Common Stock and one warrant to
purchase an additional share of Common Stock at $.70 per share for a period of
24 months from September 30, 2002. The remaining 240,000 warrants are
outstanding as of June 30, 2004.
During the nine months ending June 30, 2004, employees exercised stock
options to purchase 115,718 shares of Common Stock for a total consideration of
$61,997.
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
None
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
31.2 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 and 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: August 4, 2004