SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-17580
SYNERGX SYSTEMS INC
(Exact name of Small Business Issuer in its charter)
Delaware 11-2941299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
209 Lafayette Drive, Syosset, New York 11791
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (516) 433-4700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements by reference in Part III of this Form 10-KSB ( )
State issuer's revenues for its most recent fiscal year: $21,790,000
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the average bid and ask prices for the Registrant's
Common Stock, $.001 par value per share, as of December 7, 2004 was $10,092,830
As of December 13, 2004, the Registrant had 5,136,862 shares of Common
Stock outstanding.
Documents Incorporated by Reference: Definitive Proxy Statement to be filed.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company
Synergx Systems Inc. ("Synergx" or the "Company") is a Delaware corporation
organized in October 1988 to acquire controlling interests in companies engaged
in the design, manufacture, distribution, sale and servicing of fire, life
safety security, audio-video, communication energy management, intercom, and
other systems. Reference to Synergx or the Company include operations of each of
its subsidiaries except where the context otherwise requires. Synergx's business
is conducted through subsidiaries in the New York City metropolitan area and
Dallas, Texas.
Synergx conducts its business in New York principally through Casey Systems
Inc. ("Casey") its wholly owned subsidiary located in Long Island, New York and
in Texas through General Sound (Texas) Company ("General Sound") its wholly
owned subsidiary in Dallas, Texas.
Synergx Products
Synergx designs, manufactures, markets and sells its own proprietary life
safety and communication systems and also engineers, distributes, markets and
sells systems and products manufactured by other parties. Synergx's proprietary
product line features the COMTRAK 1720 and 2000 Life Safety Systems and the
TELTRAK Communications System.
In 1973, New York City passed Local Law 5 requiring that all office
buildings of 100 feet or more be outfitted with smoke detectors, manual and
audio communicating systems for life safety and fire reporting purposes. In
anticipation of the demand that this legislation would create for equipment and
systems employing improved technology and design features, Synergx engaged in
extensive research and development which led to its proprietary COMTRAK 1720
Life Safety System which has been installed in numerous buildings since the
early 1980's.
To meet the challenges of more stringent code requirements and a sluggish
market for new construction, Synergx developed its new generation proprietary
COMTRAK 2000 Life Safety System which utilizes the latest technology to not only
meet the current code requirements, and satisfy the "wish list" of current
COMTRAK customers, but many likely future code requirements as well. One of the
improvements incorporated into the COMTRAK 2000 is a Fire Command Station which
offers a color CRT display system along with three sectional displays. These
features provide the operator with a wide variety of pertinent information,
allowing for quicker response, which is critical in an emergency. In addition,
the expanded memory capability of the new Fire Command Station enables a single
station to control multi-building projects and permits simplified operation.
COMTRAK 1720 and 2000 Systems are operating in approximately 100 buildings in
New York City. Synergx has approvals from FM Approvals and various New York City
agencies for the COMTRAK 1720 and COMTRAK 2000 System. Synergx has contracts or
otherwise supports numerous additional buildings featuring third party systems.
Casey is a strategic partner with Edwards Systems Technology ("EST"), a leading
manufacturer of fire and security systems. Most of Casey's new life safety
system sales now feature EST products and systems or interfaced COMTRAK-EST
systems.
FM Approvals is an independent testing and certification laboratory similar
to Underwriters Laboratory. In order for Synergx to sell and maintain their
proprietary fire alarm systems, certification from an approved independent
testing agency is required. Without this certification, Synergx would not be
allowed to produce and maintain its fire systems for its existing customer base,
as well as new customers.
Neither Synergx, nor its officers or directors has any affiliation with FM
Approvals.
TELTRAK Communications Systems. In the early 1980s, Synergx began
investigating the intercom market and the possibilities of utilizing its
computerized multiplex technology for this market. Significant construction of
new high-rise housing occurred in the 1970s and 1980s and increased the
potential demand for technologically advanced intercom systems. To meet this
demand, Synergx developed a micro-processor-based combination intercom and
security system using Casey's multiplex technology. The TELTRAK I intercom and
security system is capable of a variety of accessory functions in addition to
its basic intercom and security function. Synergx added video capabilities to
its TELTRAK I technology and created the TELTRAK II, for installation in luxury
condominium, cooperative and apartment buildings. Over 16,000 TELTRAK I and II
units have been sold. In 1991, the redesigned TELTRAK III intercom/security
station was introduced, with enhanced features to expand its use and
competitiveness in the face of the reduced market for these products. New
features, such as public address, enable important messages to be given to
building occupants either locally or by groups in case of emergency.
Multiplex technology is a term that is used in the industry to define the
systems architecture of the Company's equipment. All multiplex technology has
basically the same concept with variation for specific equipment.
Other Products
In the past eight years Synergx has sought to diversify its product lines
to establish a greater base to absorb product support, R & D and other overhead
and to provide product and customer diversification. To that end, Synergx has
augmented its established position in marketing engineered life safety systems
(proprietary and third party) by developing a significant business in engineered
sound systems for application to a variety of users including, commercial
establishments, hospitals, educational facilities and transit facilities (e.g.
subway stations). Synergx has developed a focused unit with a high level of
experience to penetrate this niche market with significant success as a
substantial portion of Synergx's order position derives from this effort. In
addition, Synergx organized new marketing units to focus on marketing,
engineering and servicing systems and products manufactured by third parties,
particularly national manufacturers. These marketing units are service oriented
organizations which focus on close relationships with customers and key
suppliers. During the last three years, Synergx has added marketing personnel
and new security products from other manufacturers to accelerate its focus into
the security market for the sale of products and services in the New York
Metropolitan area.
In 1993, Synergx acquired assets of a company which manufactured and
marketed sophisticated products and on-board information and communication
systems with applications for municipal transit carriers, long-distance
passenger carriers and bus and train builders. Synergx has integrated this
operation into its New York division and has to date supplied products to
customers such as Bombardier, Nippon Sharyo, Sumitomo, Kawasaki, Motive Power,
Siemens, the New York City Transit Authority and AMTRAK. These customers have
supplied Synergx's equipment to the Baltimore MTA, the Bi-State Development
Agency (St Louis), the Boston MBTA, CONRAIL, the San Diego Trolley, the
Washington Metropolitan Transit Authority (Washington, D.C.), and METRA
(Chicago). Recently Synergx began to integrate its on board communication
products with products supplied by other manufacturers. These integrated
products include electronic signage and automatic announcement systems.
Service
Synergx continues to put an increasing priority on the development of an
integrated and efficient service organization. Sales personnel have been
dedicated to securing service contracts and are intensifying efforts to market
service to COMTRAK, EST and other Synergx projects coming out of warranty and
the renewal of such contracts. To improve customer service, Synergx maintains an
office in New York City which houses its New York service management.
General Sound (Texas) Company
Synergx conducts business in Texas through its subsidiary, General Sound
(Texas) Company, which distributes, services, installs and designs a variety of
sound, fire alarm, intercom and security systems in the Dallas/Ft. Worth, Texas
area. General Sound concentrates its sales effort on the commercial market and
schools. General Sound provides its customers, primarily electrical contractors,
with engineered systems, assistance in design, installation support and
post-installation service.
General Sound has non-exclusive distribution agreements for the Dallas/Ft.
Worth area with Notifier, Dukane, and other manufacturers. The product mix and
dependence on individual suppliers varies from year to year depending on
customer requirements and market trends.
Secure 724 LP
Synergx has a 25% investment in Secure 724 LP a Canadian research,
development and marketing group which has developed technology to transmit alarm
and other data from a secured site to a command center and to multiple
Blackberry wireless handheld devices and/or cellular phones and to transmit
commands or programming instructions to a wide variety of building systems.
Casey is evaluating methods of integrating this technology into its existing
products and systems to offer customers a wireless communication solution.
Research and Development
During the fiscal years ended September 30, 2004 and 2003, Synergx spent
approximately $160,000 and $155,000, respectively, for research and development
of Synergx's life safety and communication systems.
Customers and Suppliers
For the fiscal years ended September 30, 2004 and 2003, no customer
accounted for more than 10% of Synergx's revenues. One supplier accounted for 9%
and 11% of Synergx's cost of sales in the years ended September 20, 2004 and
2003, respectively.
Regulations
Synergx believes that it is in compliance with applicable building codes,
zoning ordinances, occupational, safety and hazard standards and other Federal,
state and local ordinances and regulations governing its business activities.
Competition
Synergx business is competitive; some of Synergx's competitors may have
greater financial resources and may offer a broader line of fire and life safety
products. Synergx also faces competition in the servicing of systems which it
sells. Accordingly, even though Synergx may sell and install a fire and life
safety control and communications system, it may not receive the contract to
service that system. Synergx, however, believes that it can effectively compete
with any entity which conforms with applicable rules and regulations.
Employees
Synergx and its subsidiaries have 128 full time employees, including 41 New
York hourly employees that are covered by a Collective Bargaining Agreement
expiring July 2005.
Business Conditions
Synergx believes that its labor and material sources are sufficient and
that other than normal competitive factors, and what is discussed above or under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION", Synergx's operations and industry do not have any special
characteristics which may have a material impact upon its future financial
performance.
Patents and Trademarks
The Company does not have any patents on its systems, but, it uses
proprietary technology which it seeks to protect as trade secrets. The
"Firetector", "Casey Systems" and "COMTRAK" trademarks are registered with the
United States Patent and Trademark Office.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 15,700 square feet of office,
manufacturing and warehouse space in Syosset, New York under a seven year lease
expiring June 2007. The rental schedule provides for monthly rent of $13,966
during the first and second years of the initial term and with 3.3% yearly
increases for the third through seventh years.
The Company has a lease for its service center in New York City that became
effective August 2002 and runs through December 31, 2009. The lease is for
office and warehouse space and provides for yearly rental of $84,000 during the
first year plus expenses with yearly escalation of 2% each year thereafter.
The Company leases a 7,700 square foot office and warehouse facility in
Richardson, Texas, a suburb of Dallas, pursuant to a lease that was extended in
October, 1997 and extended again in August, 2002 to expire on June 30, 2010
providing for annual rent on a net basis of $50,152 escalating annually to
$64,016 in the final year of the lease.
Management believes there is sufficient space at these facilities for its
current and intended business.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its operations, the Company has been or, from time
to time, may be named in legal actions seeking monetary damages. While the
outcome of these matters cannot be estimated with certainty, Management does not
expect, based upon consultation with legal counsel, that they will have a
material effect on the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Synergx's Common Stock has been traded on the National Association of
Securities Dealer's Inc. Automated Quotation System ("NASDAQ") since April 11,
1989 under the "FTEC" symbol and since May 2002 under the "SYNX" symbol. The
following table shows the high and low bid and ask quotations for each fiscal
quarter from December 31, 2002 through September 30, 2004 which quotations were
obtained from the National Association of Securities Dealers Inc. (adjusted for
a 2 for 1 stock split in July 2003)
Common Stock Bid Ask
Quarter Ended High Low High Low
December 31, 2002 .725 .500 .750 .565
March 31, 2003 1.225 .570 1.275 .580
June 30, 2003 1.500 1.100 1.550 1.125
September 30, 2003 4.175 2.550 4.350 2.650
December 31, 2003 4.000 2.860 4.000 2.970
March 31, 2004 6.010 2.470 6.100 2.700
June 30, 2004 9.820 2.810 9.950 2.830
September 30, 2004 4.090 1.750 4.110 1.810
The above quotations represent prices between dealers, do not include
retail markups, markdowns or commissions and may not represent actual
transactions. As of December 13 2004, there were 442 record holders of Synergx's
Common Stock.
On December 7, 2004, the closing bid and ask prices for the Common Stock
were $3.850 and $3.790, respectively.
The Company has not paid any cash dividends on its Common Stock. Payment of
cash dividends in the foreseeable future is not contemplated by the Company.
Whether dividends are paid in the future will depend on the Company's earnings,
capital requirements, financial condition along with economic and market
conditions, industry standard and other factors considered relevant to the
Company's Board of Directors. Payment of dividends is restricted in certain
cases by the Company's credit facilities. Accordingly, no assurance can be given
as to the amount or timing of future dividend payments, if any.
On September 30, 2002, the Company sold 340,000 units ("Units") in a
private placement to an unaffiliated investor for $.70 per Unit. Each Unit
consists of one share of Common Stock and one warrant (the "Warrant") to
purchase an additional share of Common Stock at $.70 for a period of 24 months
from September 30, 2002. These warrants were exercised in August and September
2004.
On May 29, 2003 the Company acquired 25% of Secure 724 LP by issuing to
Nafund Inc., a Toronto based private equity fund affiliated with two of the
Company's Directors, 300,000 shares of Common Stock and warrants to purchase
50,000 shares of Common Stock at $1.15 share until May 29, 2005. The acquisition
also called for the issuance of an additional 150,000 shares of Common Stock if
Secure 724 LP satisfies certain development milestones by a target date and
Nafund provides certain funding. The requirement to issue these additional
shares expired as the milestones were not achieved by the target date.
Registration of Shares of Common Stock
The Company filed a Form S-3 registration statement, which became effective
June 27, 2003. The registration statement was for an aggregate of 1,220,000
shares which provided for the registration of 680,000 in the private placement
noted above and for 200,000 shares in connection the investment in Secure 724
LP, and 340,000 shares to two other private investors.
The Company filed a Form S-8 registration statement, which became effective
July 22, 2003. The registration statement provided for the registration of
404,885 shares issueable under the 1997 Non-Qualified Stock Option Plan.
ITEM 6. 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 September 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
September 30, 2004, $1,916,000 was owed under the Credit Facility.
Net cash used by operations for the year ended September 30, 2004 amounted
to $319,000 as compared to cash provided by operations of $57,000 for the
comparable prior year. The increase in cash being used by operations was
primarily due to an increase in working capital requirements to fund an increase
in accounts receivable resulting from significantly higher sales in 2004 and
from an increase in inventory for projects expected to be shipped after
September 30, 2004. The net cash outflow of $319,000 from operations during 2004
coupled with equipment purchases of $232,000 were funded by an increase of
$660,000 in bank borrowing. In addition, financing activities included $316,200
of proceeds from exercise of warrants to purchase common stock by Genterra Inc.,
$238,000 of proceeds from exercise of warrants to purchase common stock by an
unaffiliated investor and $62,000 from exercise of stock options by employees to
purchase common stock under the Company's stock option plan.
The ratio of the Company's current assets to current liabilities increased
to approximately 3.45 to 1 at September 30, 2004 compared to 2.65 to 1 at
September 30, 2003. The increase in the current ratio is due to an improvement
in cash flow due to continued profitable operations in 2004 from $616,000 of
proceeds from the exercise of warrants and employees stock options, and from a
$599,000 increase in accounts receivable in 2004. Working capital increased by
$1.8 million to $7.5 million at September 30, 2004 compared to $5.7 million at
September 30, 2003 (including $635,000 from an increase in cash); while bank
borrowing increased by only $660,000 since September 30, 2004.
RESULTS OF OPERATIONS
Revenues and Gross Profit
For the years ended September 30,
2004 2003
(In thousands)
Product Sales $16,720 $14,720
Subcontract Sales 590 643
Service Revenue 4,480 4,451
------ -------
Total Revenue $21,790 $19,814
Product Gross Margin $ 5,630 $ 5,081
Subcontract Gross Margin 106 116
Service Gross Margin 1,291 1,298
----- -----
Total Gross Margin $ 7,027 $ 6,495
Gross Profit Product % 34% 35%
Gross Profit Subcontractor % 18% 18%
Gross Profit Service % 29% 29%
--- ---
Total Gross Profit % 32% 33%
Revenues
The increase in product revenues resulted from improved economic activity
in both the Company's principal New York City market and its Dallas, Texas
market. The majority of the increase came from our Dallas, Texas market as the
Company experienced exceptionally strong product revenues compared to very low
2003 levels, improved product revenues from New York City transit projects that
resulted from releases from our customers, and from higher sales of railcar
communication products. In the Dallas, Texas market, higher product revenues
resulted from certain cost reduction initiatives implemented during the last two
years, which allowed the Company to price aggressively in that competitive
market. The Company is continuing to quote business aggressively in both the
Dallas, Texas and New York City metropolitan area.
Subcontract revenue decreased during 2004 as the Company was responsible
for various small electrical installations in 2004 which in the aggregate
accounted for less revenue than two large electrical installation projects
generated in 2003.
Service revenues increased 1% during 2004 primarily due to higher service
revenue from service contracts which offset a decrease in call-in service on
fire alarm systems (replacement parts and service required by buildings). Lower
call-in service resulted in part from certain customers converting to "all in"
contracts that covers call-in service.
Gross Profit
Gross profit margin from product revenues increased 11% to $5,630,000 due
to higher product sales (noted above) and related gross margin. Gross profit
margin as a percentage of product revenues was 34% in 2004 compared to 35% in
2003. This decline in gross profit percentage was due to aggressive pricing
necessary to obtain higher sales.
Gross profit margin related to subcontract revenues for 2004 decreased in
absolute terms as the Company was responsible for a smaller amount of electrical
installation by third parties (subcontract work).
Gross profit margin from service revenues decreased slightly during 2004
due to lower call-in service revenue. Gross profit is normally higher on call in
maintenance service for fire alarm systems.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("S G &A") increased by 5% in
2004 over 2003 primarily as a result of the Company's continued expansion of its
marketing programs for new products and from higher insurance costs. During the
last two years additional staffing was added to address the markets for
audio/visual and security products. Previously in 2001 the Company increased
staffing in the railcar transit communication group as it addressed a marketing
opportunity for future business over the next several years. These marketing
initiatives helped to improve total sales in 2004. Consequently, S G & A
expenses as a percentage of sales decreased 2% to 27% in 2004 due to higher
sales volume compared to the relative fixed nature of these costs. The Company
will continue to invest in staff to secure and support sales of new products in
future years.
Income Before Tax
The improvement in income before income taxes during 2004 is primarily due
to the increase in gross profit caused by higher product revenues. Partially
offsetting the improvement in overall gross profit was an increase in selling,
general and administrative expenses of 5% during 2004 from additional management
and sales staff to support product expansion directed at increased sales levels
and from higher insurance costs. Unfavorably affecting income before income
taxes were increases in interest expense of 34% in 2004 due to higher borrowing
levels during 2004 and from higher depreciation and amortization. For 2004, the
Company also recorded a loss of $52,000 on its equity in the operating loss of
Secure 724 LP compared to a loss of $35,000 in 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 noncurrent deferred tax liability as it related to certain timing
differences of book and tax deductions.
Order Position
Synergx's order position, excluding service, decreased to $12.8 million at
September 30, 2004 compared to the $16.5 million level at September 30, 2003.
The Company expects to fulfill a significant portion of its order position over
the next twelve months. The order position reflects recent large new orders for
several subway complexes, which will be deliverable over several years as the
projects are released. The order position includes $1.6 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 some of the Company's
products are sold and installed as part of larger construction or mass transit
projects, there is typically a delay between the booking of the contract and its
revenue realization. The order position from time to time includes, and the
Company continues to bid on, projects that include 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 is
responsible for management of the project as well as electrical installation.
Plan of Operations
During fiscal 2005, management intends to continue to focus on its
intensified marketing programs that were begun in 1998 and to continue to
contain or monitor fixed overhead as well as to reduce variable costs through
improved efficiency and productivity. Specifically management is pursuing a
strategy of aggressive marketing of products and systems to drive more revenue
through established channels of distribution. A new General Manager has recently
been added to our management staff to focus on these initiatives with a focus on
reducing costs thereby enhancing the Company's competitiveness which combined
with improved sales and marketing techniques should result in increased revenues
over time. Management is analyzing how to integrate the Secure 724 technology
into its marketing efforts by offering a wireless feature to augment existing
new products and systems. However, competition remains severe in many of the
Company's product categories and demand remains sporadic in the Dallas market
area. Longer term, management expects increased demand for the Company's
audio-visual, public address, security and other communication products.
Enhancements in recent years to Synergx's management information systems and
methods of approving and monitoring project costs have improved management's
ability to pinpoint waste and/or third party (supplier or customer) cost
responsibility. Further enhancements in theses areas will be in progress during
2005.
The Company will continue to evaluate the performance and potential of its
investment in Secure 724. Secure 724 currently has a very low overhead
structure, however to fully capitalize and realize on its technology, Secure 724
must accelerate into the marketing phase of its development which will require
additional staff, product development and production. Secure 724 is pursing
various routes to finance this stage including possible new investors and/or
strategic relationships with prospective customers. There can be no assurance
that Secure724 will secure the funding its requires to fully capitalize on its
technology or that the Company's investment in Secure 724 will be profitable.
Inflation
The impact of inflation on the Company's business operations has not been
material in the past. Casey's labor costs are normally controlled by union
contracts covering a period of three years and its material costs have remained
relatively stable. However in July of 2002, the Company and its union agreed to
a new three year contract that provides for wage/benefits increases of
approximately 5% in each year. During 2001, under terms of the previous union
contract, certain union members, upon passing certain test requirements, began
moving up to higher paying categories that have multiple salary steps per year
in excess of the 5% contractual level. In addition, the demand for highly
skilled professionals has resulted in the need to assess salary levels in order
to remain competitive. It is expected that required salary adjustments will
exceed normal increases given in the past. The Company will try to mitigate the
effect of these increases in labor costs by price increases, if possible, and
expense reductions.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements together with accompanying notes and the report of
Marcum & Kliegman LLP, our independent registered public accounting firm, are
set forth on the pages indicated below.
Independent Registered Public Accounting Firm's Report F1
Audited Consolidated Financial Statements
Consolidated Balance Sheet September 30, 2004 F2 - F3
Consolidated Statements of Operations
Years Ended September 30, 2004 and 2003 F4
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 2004 and 2003 F5
Consolidated Statements of Cash Flows
Years Ended September 30, 2004 and 2003 F6
Notes to Consolidated Financial Statements F7 - F24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 8A. Controls and Procedures
Evaluation of disclosure controls and procedures. At the period end of this
Annual Report on Form 10-KSB, 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 fiscal year 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
reporting that have materially affected, or is reasonably likely to materially
affect the Company's internal controls over financial reporting during the
period covered by the Annual Report.
PART III
Item 9. Directors, Executive Officer, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act.
The information required by this Item is incorporated by reference from our
definitive Proxy Statement for the 2005 Annual Meeting of Stockholders.
Item 10. Executive Compensation
The information required by this Item is incorporated by reference from our
definitive Proxy Statement for the 2005 Annual Meeting of Stockholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from our
definitive Proxy Statement for the 2005 Annual Meeting of Stockholders.
Item 12. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from our
definitive Proxy Statement for the 2005 Annual Meeting of Stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
3.1 Certificate of Incorporation of the Company, as amended
3.2 By-Laws of the Company (2)
4.1 Specimen Common Stock Certificate (2)
10.1 Credit Facility dated October 9, 2003 between Synergx Systems Inc. as
borrower and Hudson United Bank as lender. (5)
10.8 Form of Lease dated February, 2000 between Casey Systems as Tenant and
First Industrial L.P. as Landlord (3)
10.9 Form of Lease dated July 23rd, 2002 between Systems Service Technology Corp
as Tenant and Balbo Realty LLC as Landlord(4)
10.10Form of Subscription Agreement and Investment Letter dated September 30,
2002 between Synergx Systems and Investors Money Management (4)
10.11Form of Limited Parnership Agreement dated May 29, 2003 between 3077118
Nova Scotia ULC (a Synergx Systems owned company) and Secure 724 LP (5)
22.1 Subsidiaries of the Registrant (Exhibit 22.1)(1)
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 Certification of Daniel S. Tamkin and John A. Poserina pursuant to Section
906 of the Sarbanes-Oxley Act of 2002*
- --------
* filed herewith
(1) Reference is made to the correspondingly numbered Exhibit to Amendment
No. 1 to the Company's Registration Statement on Form S-2, Registration No.
33-51472, filed with the Commission on December 23, 1992, which is incorporated
herein by reference.
(2) Reference is made to the correspondingly numbered Exhibit to Amendment
No. 1 to the Company's Registration Statement on Form S-1, Registration No.
22-26050, filed with the Commission on January 23, 1989, which is incorporated
herein by reference.
(3) Reference is made to the correspondingly numbered Exhibit to the
Company's Annual Report on Form 10-KSB for the Fiscal Year Ended September 30,
2001, which Exhibit is incorporated herein by reference.
(4) Reference is made to the correspondingly numbered Exhibit to the
Company's Annual Report on Form 10-KSB for the Fiscal Year Ended September 30,
2002, which Exhibit is incorporated herein by reference.
(5) Reference is made to the correspondingly numbered Exhibit to the
Company's Annual Report on Form 10-KSB for the Fiscal Year Ended September 30,
2003 which Exhibit is incorporated herein by reference.
(b) Reports on Form 8-K
none
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from our
definitive Proxy Statement for the 2005 Annual Meeting of Stockholders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, hereunto duly authorized.
SYNERGX SYSTEMS INC.
(Registrant)
By: /s/ Daniel S. Tamkin
Daniel S. Tamkin,
Chief Executive Officer and Director
Dated: December 16, 2004
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
Chairman, December 16, 2004
/s/ Daniel S. Tamkin Chief Executive Officer
Daniel S. Tamkin and Director
/s/ Joseph Vitale President, Chief Operating
Joseph Vitale Officer and Director December 16, 2004
/s/ John A. Poserina Chief Financial Officer December 16, 2004
-------------------- (Principal Accounting and
John A. Poserina Financial Officer), Secretary,
and Director
/s/ Henry Schnurbach Director December 16, 2004
--------------------
Henry Schnurbach
/s/ Dennis P. McConnell Director December 16, 2004
-----------------------
Dennis P. McConnell
/s/ Mark Litwin Director December 16, 2004
---------------
Mark Litwin
/s/ J. Ian Dalrymple Director December 16, 2004
--------------------
J. Ian Dalrymple
Report of Independent Registered Public Accounting Firm
To the Audit Committee of the Board of Directors of
Synergx Systems Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Synergx Systems
Inc. and its subsidiaries as of September 30, 2004 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended September 30, 2004 and 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated statements referred to above present fairly, in
all material respects, the consolidated financial position of Synergx Systems
Inc. and its subsidiaries as of September 30, 2004 and the consolidated results
of their operations and their cash flows for the years ended September 30, 2004
and 2003, in conformity with U. S. generally accepted accounting principals.
December 2, 2004 /s/ MARCUM & KLIEGMAN LLP
New York, NY
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 929,000
Accounts receivable, principally trade, less allowance
for doubtful accounts of $324,000 6,393,000
Inventories 2,662,000
Deferred taxes 260,000
Prepaid expenses and other current assets 278,000
-----------
TOTAL CURRENT ASSETS 10,522,000
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,499,000 509,000
OTHER ASSETS 678,000
-----------
TOTAL ASSETS $11,709,000
===========
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and capital leases payable - current portion $ 47,000
Accounts payable and accrued expenses 2,507,000
Deferred revenue 506,000
------------
TOTAL CURRENT LIABILITIES 3,060,000
Note payable to bank 1,916,000
Notes and capital leases payable - less current portion 20,000
Deferred taxes 65,000
------------
TOTAL LIABILITIES 5,061,000
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 2,000,000 shares authorized-
none issued and outstanding -
Common stock, 10,000,000 shares authorized, $.001
par value; issued and outstanding 5,136,862 shares 5,000
Capital in excess of par 6,732,000
Accumulated deficit (89,000)
------------
TOTAL STOCKHOLDERS' EQUITY 6,648,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,709,000
============
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended September 30,
2004 2003
----------- -----------
Product sales $16,719,000 $14,720,000
Subcontract sales 590,000 643,000
Service revenue 4,481,000 4,451,000
----------- -----------
Total revenues 21,790,000 19,814,000
----------- -----------
Cost of product sales 11,090,000 9,639,000
Cost of subcontract sales 484,000 527,000
Cost of service 3,189,000 3,154,000
Selling, general and administrative 5,989,000 5,729,000
Interest expense 87,000 64,000
Depreciation and amortization 171,000 154,000
Loss on equity investment 52,000 35,000
----------- -----------
21,062,000 19,302,000
----------- -----------
Income before provision for income taxes 728,000 512,000
----------- -----------
Provision for income taxes:
Current 225,000 180,000
Deferred 83,000 50,000
----------- -----------
308,000 230,000
----------- -----------
Net Income $ 420,000 $ 282,000
=========== ===========
Earnings Per Common Share
Basic Earnings Per Share $ 0.09 $ 0.07
=========== ===========
Diluted Earnings Per Share $ 0.09 $ 0.06
=========== ===========
Weighted average number of common shares
outstanding 4,671,701 3,850,811
Weighted average number of common and dilutive
common share equivalents outstanding 4,912,203 4,433,735
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2004 and 2003
TOTAL CAPITAL
STOCKHOLDERS' COMMON STOCK IN EXCESS ACCUMULATED
EQUITY SHARES AMOUNT OF PAR (DEFICIT)
--------- --------- ---------- ---------- ------------
Balance at October 1, 2002 $4,734,000 3,748,860 $ 4,000 $5,521,000 ($ 791,000)
Issuance of shares from
investment in Secure 724 405,000 300,000 405,000
Issuance of warrants for investment
in Secure 724 28,000 28,000
Exercise of employee stock options 6,000 12,284 6,000
Tax benefit of stock option exercise 11,000 11,000
Net earnings 282,000 282,000
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2003 5,466,000 4,061,144 4,000 5,971,000 (509,000)
Exercise of employee stock options 62,000 115,718 62,000
Exercise of warrants 554,000 960,000 1,000 553,000
Tax benefit of stock option exercise 146,000 146,000
Net earnings 420,000 420,000
========== ========== ========== ========== ==========
Balance at September 30, 2004 $6,648,000 5,136,862 $ 5,000 $6,732,000 ($ 89,000)
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended September 30,
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net income $ 420,000 $ 282,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 171,000 154,000
Deferred tax 83,000 49,000
Provision for doubtful accounts (88,000) (17,000)
Loss on equity investment 52,000 35,000
Tax benefit from employee stock plans 146,000 6,000
Changes in operating assets and liabilities:
Accounts receivable (511,000) (747,000)
Inventories (213,000) (11,000)
Prepaid expenses and other current assets 154,000 85,000
Other assets (38,000) (41,000)
Accounts payable and accrued expenses (566,000) 273,000
Deferred revenue 71,000 (11,000)
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (319,000) 57,000
----------- -----------
INVESTING ACTIVITIES
Notes receivable from Secure 724 LP (143,000)
Purchases of property and equipment (232,000) (164,000)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (232,000) (307,000)
----------- -----------
FINANCING ACTIVITIES
Principal payments on notes payable and capital lease obligations (90,000) (149,000)
Proceeds from notes payable and capital lease obligations 79,000
Payments and proceeds from revolving line of credit - net 660,000 407,000
Proceeds from exercise of stock options and warrants 617,000 6,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,187,000 343,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 636,000 93,000
Cash and cash equivalents at beginning of period 293,000 200,000
----------- -----------
Cash and cash equivalents at end of period $ 929,000 $ 293,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes $ 266,000 94,000
Interest $ 95,000 67,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In the year ended September 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 Consolidated Financial Statements
SYNERGX SYSTEMS INC.
Notes to Consolidated Finanacial Statements
1. Summary of Significant Accounting Policies
Business
The Company operates in one industry segment: the design, manufacture,
distribution, marketing and service of a variety of data communications product
and systems with applications in the fire alarm, life safety, transit, security
and communications industry. The Company conducts its business principally in
the New York Metropolitan area and in Dallas, Texas.
Principles of Consolidation
The consolidated financial statements include the accounts of Synergx Systems
Inc. and its subsidiaries, all of which are wholly owned (the "Company"). The
principal operating subsidiaries are: Casey Systems Inc. ("Casey"), General
Sound (Texas) Company ("GenSound"), and Systems Service Technology Corp.
("SST"). Significant intercompany items and transactions have been eliminated in
consolidation.
Revenue Recognition
Product sales include sale of systems, which are similar in nature, that involve
fire alarm, life safety and security (CCTV and card access), transit (on board
systems) and communication (paging, announcement and audio/visual). Product
sales represent sales of product along with the integration of technical
services at a fixed price under a contract with an electrical contractor or end
user customer (building owner or tenant), or customer agent. Product sales are
allocated using a constant gross profit percentage over the entire contract, and
is recognized, using the percentage-of-completion method of accounting. The
Company utilizes a units-of-work performed method to measure progress towards
completion of the contract. The effects of changes in contract terms are
reflected in the accounting period in which they become known. Contract terms
provide for billing schedules that differ from revenue recognition and give rise
to costs and estimated profits in excess billings, and billings in excess of
costs and estimated profits. Costs and estimated profits in excess of billing
were not material at September 30, 2004 and 2003 and have been included in
accounts receivable. There was no billing in excess of costs and estimated
profits at September 30, 2004 and 2003.
Subcontract sales principally represent revenues related to electrical
installation of wiring and piping performed by others for the Company when the
Company acts as the prime contractor and sells its products along with
electrical installation. Subcontract sales are also recognized during the entire
project using the percentage-of-completion method of accounting as electrical
installation is performed at the job site.
Revenue Recognition (continued)
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. The unearned service revenue from these contracts is
included in current liabilities as deferred revenue. Non-contract service
revenue is recognized when services are performed.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
September 30, 2004, and reported amounts of revenues and expenses during the
fiscal year. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable are reported net of an allowance for doubtful accounts. The
allowance was determined by management to be adequate based on a periodic review
of the status of the individual accounts receivable.
Inventories
Inventories are priced at the lower of cost (first-in, first-out) or market and
consist primarily of raw materials.
Property and Equipment
Property and equipment are stated at historical cost. Leases meeting the
criteria for capitalization are recorded at the present value of future lease
payments.
Depreciation and amortization of machinery and equipment and furniture and
fixtures are provided primarily by the straight-line method over their estimated
useful lives. The Company depreciates machinery and equipment over periods of 3
to 10 years and amortizes leasehold improvements and assets acquired under
capitalized leases utilizing the straight line method over the life of the lease
or their economic useful life, whichever is shorter.
Other Assets
Other assets consists principally of the 2003 investment in Secure 724 LP which
is comprised of notes receivable of $143,000 and 25% ownership in Secure 724 LP
of $432,500, less the 25% equity in the operating loss of Secure 724 LP of
$87,000. This investment includes the excess of cost over the fair value of the
assets acquired on the date of acquisition of $359,500. (see Note 3 - Investment
in Secure 724 LP) Also included in other assets is the excess of cost over the
fair value of the assets acquired in the 1990 acquisition of General Sound of
approximately $103,000.
The Company does not amortize goodwill but evaluates whether the carrying value
of goodwill has become impaired.
Advertising Costs
Advertising Costs are expensed as incurred during the year. Advertising Costs
for the years ended September 30, 2004 and 2003 amounted to $25,000 and $27,000,
respectively.
Research and Development Costs
Research and development costs are expensed as incurred during the year.
Research and development costs for the years ended September 30, 2004 and 2003
amounted to $160,000 and $155,000, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS No. 109, the
asset and liability method is used to determine deferred tax assets and
liabilities based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Earnings Per Share
SFAS No. 128 "Earnings Per Share" requires companies to report basic and diluted
earnings per share ("EPS") computations. Basic EPS excludes dilution and is
based on the weighted-average common shares outstanding and diluted EPS gives
effect to potential dilution of securities that could share in the earnings of
the Company. Diluted EPS reflects the assumed issuance of shares with respect to
the Company's employee stock options, non-employee stock options, and warrants.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company's operations are located in two large U.S. cities (New York City,
New York and Dallas, Texas), each of which is an independent market. The Company
grants credit to its customers, principally all of which are general or
specialized construction contractors, none of which individually constitutes a
significant portion of outstanding receivables. Approximately 84% of such
outstanding receivables at September 30, 2004 are due from customers in New
York. The Company does not require collateral to support financial instruments
subject to credit risk.
At September 30, 2004, the Company had cash of approximately $768,000, that is
subject to insured amount limitations.
Stock Options and Similar Equity Instruments
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," for stock options and similar equity instruments
(collectively, "Options") issued to employees; however, the Company will
continue to apply the intrinsic value based method of accounting for options
issued to employees prescribed by Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issues to Employees," rather than the fair value based
method of accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
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, 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 in the
summary of significant accounting policies 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 123 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
adoption of SFAS 148 did not have an impact on net income or pro forma net
income applying fair value method as the Company did not have stock based
compensation for the years ended September 30, 2004 and 2003.
2. Property and Equipment
Property and equipment (including those arising from capital leases) are
summarized as follows:
September 30,
2004
--------------
Machinery and equipment $1,770,000
Furniture and fixtures 176,000
Leasehold improvements 62,000
--------------
2,008,000
Less accumulated depreciation and amortization
1,499,000
--------------
$509,000
==============
Annual amortization of equipment under capital leases is included with
depreciation and amortization expense.
Depreciation and amortization expense related to these assets were $141,000 and
$138,000 for the years ended September 30, 2004 and 2003, respectively.
3. 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 $231,000 U.S. at September 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 by a target
date. Either the Company and/or Nafund could have elected to provide all or any
part of the above funding (regardless of whether the milestones are attained).
The milestones were not attained by the target date. Accordingly, there is no
futher obligation to issue the 150,000 shares of Common Stock.
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 years
ended September 30, 2004 and 2003, respectively, a $52,000 and $35,000
adjustment to the equity investment was recorded to reflect the Company's 25%
portion of the net loss of Secure 724 LP.
In connection with initial capital contribution per the partnership agreement,
the Company advanced $18,000 (Cdn$25,000) to Secure 724 LP in May 2003 and upon
reaching milestones advanced $125,089 (Cdn$175,000) in August 2003. Subsequent
to September 30, 2004 an additional advance of $8,000 (Cdn$10,000) was made to
Secure 724 LP. These notes receivable bear interest at a rate of 4% and mature
in May 2006, August 2006, and October 2007, 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.
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 (4.75% at
September 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 Company. At September 30, 2004,
the full amount of the Credit Facility was available under the borrowing base
calculation and $1,916,000 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 September 30, 2004 the Company was
not in default with any of its financial covenants.
Annual maturities of Loans and Notes and Capital Leases Payable are as follows:
Bank Other Notes and Total
Loan Capital Leases Payable
---------- ---------------------- -----------
2005 $47,000 $47,000
2006 $1,916,000 20,000 1,936,000
---------- ---------------------- -----------
Total $1,916,000 $67,000 $1,983,000
========== ====================== ===========
5. Leases
The Company leases certain office and warehouse space under non cancelable
operating leases expiring at various times through 2010. In February 2000, the
Company signed a lease for office, manufacturing and warehouse space in Syosset,
New York. The rental schedule provides for monthly rent of $14,000 during the
first and second years of the initial term and with 3.3% yearly increases for
the third through seventh years. This lease expires in June 2007.
The Company has a lease for its service center in New York City that became
effective August 2002 and runs through December 31, 2009. The lease is for
office and warehouse space and provides for yearly rental of $84,000 during the
first year plus expenses with yearly escalation of 2% each year thereafter.
The Company leases an office and warehouse facility in Richardson, Texas, a
suburb of Dallas, pursuant to a lease that was extended in August 2002 to expire
on June 30, 2010 providing for annual rent on a net basis of $50,000 escalating
annually to $64,000 in the final year of the lease.
The following is a schedule of future minimum payments, by year and in the
aggregate, under operating leases with initial or remaining terms of one year or
more at September 30, 2004:
Total Operating
Leases
2005 333,000
2006 343,000
2007 300,000
2008 155,000
2009 159,000
2010 73,000
-----------------
Total minimum lease payments $1,363,000
=================
Rental expense amounted to $346,000 and $314,000 for 2004 and 2003,
respectively.
6. Significant Customers and Suppliers
During fiscal 2004 and 2003, no customer accounted for more than 10% of sales.
One supplier accounted for 9% and 11% of the Company's cost of sales during
fiscal 2004 and 2003, respectively.
7. Income Taxes
During the years ended September 30, 2004 and 2003, the Company recorded a tax
provision of $308,000 and $230,000, respectively. A reconciliation of such
provision with the amounts computed by applying the statutory federal income tax
rate is as follows:
Year Ended September 30,
2004 2003
---------------------------------
Statutory federal income tax rate 34% 34%
Computed expected tax from income $247,000 $174,000
Increase in taxes resulting from:
State and local income taxes, net of Federal tax benefit 51,000 47,000
Nondeductible expenses 2,000 11,000
Other 8,000 (2,000)
---------------------------------
Provision $308,000 $230,000
=================================
The Company provided $12,000 and $13,000 for state and local franchise and
capital taxes for the years ended September 30, 2004 and 2003, respectively.
These expenses have been included in selling, general and administrative
expenses for each of the years presented.
The Company has recorded a current deferred tax asset and a non current deferred
tax liability at September 30, 2004 and 2003 related to certain accelerated tax
deductions or book provisions to be deducted in future tax returns. Management
anticipates profitable operations to continue at a level that will result in the
utilization of the entire deferred tax asset.
The components of deferred tax assets and liabilities at September 30, 2004 and
2003 consist of the following:
Deferred Tax Assets 2004 2003
------------------- ---- ----
Allowance for doubtful accounts $130,000 $165,000
Inventory reserve 112,000 112,000
Net operating loss carryforward 18,000 18,000
-------- --------
Total deferred tax asset $260,000 $295,000
======== ========
Deferred Tax Liabilities
Depreciation and amortization $65,000 $18,000
------- -------
Total deferred tax liability $65,000 $18,000
======= =======
8. Earnings Per Share
Shown below is a table that presents for 2004 and 2003 the computation of basic
earnings per share, diluted earnings per share, weighted shares outstanding, and
weighted average shares after potential dilution.
Year Ended September 30
Basic EPS Computation 2004 2003
---------------------
Net income available to common
stockholders $ 420,000 $282,000
Weighted average outstanding shares 4,671,701 3,850,811
Basic earnings per share $.09 $.07
==== ====
Diluted EPS Computation
-----------------------
Income available to common
stockholders $ 420,000 $282,000
Weighted-average shares 4,671,701 3,850,811
Plus: Incremental shares from
assumed conversions
Employee Stock Options 73,872 106,453
Warrants 166,630 476,471
Dilutive common shares 240,502 582,924
------- -------
Adjusted weighted-average shares 4,912,203 4,433,735
--------- ---------
Diluted earnings per share $.09 $.06
==== ====
9. Stockholders' Equity
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 25, 2003 to each stockholder of record at the close
of business on July 18, 2003 one additional share for every share held on that
date.
The Company filed a Form S-3 registration statement, which became effective June
27, 2003. The registration statement provided for the registration of the
1,220,000 shares that covered 680,000 shares that were issued in a private
placement in 2002 of 340,000 units to an unaffiliated investor 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 until September 30, 2004), and for
200,000 shares in connection the investment in Secure 724 LP (see footnote 3),
and 340,000 shares to two other private investors. The warrants were exercised
in August and September 2004 for $238,000.
The Company filed a Form S-8 registration statement, which became effective July
22, 2003. The registration statement provided for the registration of 404,885
shares issueable under the 1997 Non-Qualified Stock Option Plan.
10. Employee Stock Options and Warrants
In March 2004, the Company and its stockholders adopted a nonqualified stock
option plan ("2004 Plan"), which will expire March 10, 2009, except as to
options outstanding under a prior 1997 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 a rate of 20% per year commencing one year after date
of grant. Issuances under the 2004 Plan are to be reduced by options outstanding
under prior 1997 nonqualified stock option plan.
Transactions involving stock options are summarized as follows:
Weighted Average
Exercise Price of
Stock Options Outstanding Options Outstanding
Balance September 30, 2002 203,582 .53
Options exercised (12,284) .52
---------
Balance September 30, 2003 191,298 .52
Options exercised (115,718) .54
---------
Balance September 30, 2004 75,580 .51
There were 75,580 exercisable options at September 30, 2004 and 178,073
exercisable options at September 30, 2003.
.
During the years ended September 30, 2004 and 2003 employees exercised stock
options to purchase 115,718 and 6,334 shares, of Common Stock, respectively, for
a total consideration of $62,000 and $14,000, respectively.
The following table summarizes information concerning currently outstanding and
exercisable stock options.
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 2004 Contractual Life September 30, 2004
-------------- ------------------ ---------------- ------------------
.52 42,922 1.3 years 42,922
.50 32,658 1.3 years 32,658
In 1998, the Company granted Genterra Inc.("Genterra") (formerly Mirtronics,
Inc. an Ontario publicly-held corporation) warrants to purchase 620,000 shares
of the Company's Common Stock at an exercise price of $.51 per share at any time
until December 31, 2003. In December 2003, Genterra exercised these warrants for
$316,200.
On September 30, 2002, the Company issued 340,000 warrants in connection with a
private placement that were exercisable at $.70 per share of Common Stock until
September 30, 2004. (See Note - 9 Stockholders Equity) All of these warrants
were exercised in August and September 2004 for $238,000.
In May 2003, the Company issued 50,000 warrants in connection with its 25%
investment in Secure 724 LP. The warrants are exercisable at $1.15 per share of
Common Stock until May 29, 2005. (See Note 3 - Investment in Secure 724 LP)
Transactions involving non-employee stock warrants are summarized as follows:
Weighted Average
Warrants Exercise Price of
Outstanding Warrants Outstanding
Balance September 30, 2002 960,000 .58
Warrants issued 50,000 1.15
-----------
Balance September 30, 2003 1,010,000 .61
Warrants exercised (960,000) .58
------------
Balance September 30, 2004 50,000 1.15
All of these warrants were exercisable at the end of the periods indicated in
the above schedule.
The following table summarizes information concerning currently outstanding and
exercisable non-employee warrants.
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 2004 Contractual Life September 30, 2004
-------------- ------------------ ---------------- -------------------
1.15 50,000 .7 years 50,000
11. Contingencies
In the normal course of its operations, the Company has been or, from time to
time, may be named in legal actions seeking monetary damages. Management does
not expect, based upon consultation with legal counsel, that any material item
exists that will affect the Company's business or financial condition.
12. Other
Approximately 24% of the Company's employees are covered by collective
bargaining agreements. On July 20, 2002, the union representing hourly employees
and the Company ratified a Collective Bargaining Agreement expiring July 9,
2005, providing for an increase in salaries and benefits averaging approximately
4 1/2% per year over the life of the contract.
Effective January 1, 1996, the Board of Directors instituted a 401K plan for
nonunion employees. The plan includes a profit sharing provision at the
discretion of the Board of Directors. In September 2004 and 2003. a profit
sharing contribution of $43,000 and $29,000, respectively, was authorized and
charged to expense.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For certain financial instruments, including cash and cash equivalents, trade
receivables and payables, and short-term debt, it was assumed that the carrying
amount approximated fair value because of the near term maturities of such
obligations. The fair value of long-term debt was determined based on current
rates at which the Company could borrow funds with similar remaining maturities,
which amount approximates its carrying value.
14. Report Business Solutions
The Company's Board of Directors approved, in November 2003, to enter into an
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"). The Company has terminated
these discussions and will not proceed with the investment.