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 December 31, 2004
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-17580
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SYNERGX SYSTEMS INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2941299
----------------------------- -----------------------
(State or jurisdiction of incorporation or (IRS employer identification
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 February 4, 2005, 5,140,196
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 December 31, 2004 3
Condensed Consolidated Statements of Operations for the Three Month
Periods Ended December 31, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended December 31, 2004 and 2003 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings. 18
Item 2. Changes in Securities. 18
Item 3. Defaults Upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 20
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31,
2004
---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 626,737
Accounts receivable, principally trade, less allowance
for doubtful accounts of $323,523 5,449,421
Inventories 2,663,935
Deferred taxes 277,200
Prepaid expenses and other current assets 290,103
----------
TOTAL CURRENT ASSETS 9,307,396
----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,549,064 580,721
OTHER ASSETS 645,227
----------
TOTAL ASSETS $10,533,344
==========
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31,
2004
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ 1,215,676
Notes and capital leases payable - current portion 34,584
Accounts payable and accrued expenses 2,212,648
Deferred revenue 496,632
-----------
TOTAL CURRENT LIABILITIES 3,959,540
Notes and capital leases payable - less current portion 15,560
Deferred taxes 65,500
-----------
TOTAL LIABILITIES 4,040,600
-----------
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 5,137
Capital in excess of par 6,732,022
Accumulated deficit (244,415)
-----------
TOTAL STOCKHOLDERS' EQUITY 6,492,744
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,533,344
============
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 December 31,
2004 2003
------- -------
Product sales $3,248,383 $3,018,948
Subcontract sales 98,133 78,935
Service revenue 1,120,387 1,103,923
---------- ----------
Total revenues 4,466,903 4,201,806
---------- ----------
Cost of product sales 2,469,216 2,102,751
Cost of subcontract sales 79,681 65,515
Cost of service 720,534 797,282
Selling, general and administrative 1,358,191 1,362,741
Interest expense 22,901 19,370
Depreciation and amortization 57,757 48,443
Loss on equity investment 10,000 20,000
---------- ---------
4,718,280 4,416,102
---------- ---------
(Loss) before (benefit) from income taxes (251,377) (214,296)
---------- ---------
(Benefit) from income taxes:
Current (79,000) (62,200)
Deferred (17,000) (25,800)
---------- ----------
(96,000) (88,000)
---------- ----------
Net (Loss) $ (155,377) $ (126,296)
========== ==========
(Loss) per common share
Basic (loss) per share $(0.03) $(0.03)
======== ========
Diluted (loss) per share $(0.03) $(0.03)
======== ========
Weighted average number of common shares outstanding 5,136,862 4,166,103
Weighted average number of common and dilutive
common shares outstanding 5,136,862 4,166,103
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Month Ended December 31,
2004 2003
-------- --------
OPERATING ACTIVITIES
Net (loss) $(155,377) $(126,296)
Adjustments to reconcile net (loss)to net cash
provided by(used in) operating activities:
Depreciation and amortization 57,757 48,443
Deferred tax (benefit) (17,000) (25,800)
Provision for doubtful accounts - 4,000
Loss on equity investment 10,000 20,000
Changes in operating assets and liabilities:
Accounts receivable 943,411 489,339
Inventories (2,117) (224,373)
Prepaid expenses and other current assets (11,429) (2,712)
Other assets 14,252 (35,752)
Accounts payable and accrued expenses (294,062) (589,584)
Deferred revenue (9,368) (57,500)
--------- ----------
NET CASH PROVIDED BY(USED IN)OPERATING ACTIVITIES 536,067 (500,235)
--------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment (121,070) (9,321)
--------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES (121,070) (9,321)
--------- ----------
FINANCING ACTIVITIES
Principal payments on notes payable and capital lease obligations (16,767) (69,326)
Payments and proceeds from revolving line of credit - net (700,000) 305,176
Proceeds from exercise of stock options and warrants 319,325
--------- ----------
NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES (716,767) 555,175
--------- ----------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (301,770) 45,619
Cash and cash equivalents at beginning of period 928,507 293,186
--------- ----------
Cash and cash equivalents at end of period $ 626,737 $ 338,805
========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $5,455 $130,519
Interest $22,902 $27,200
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary in order to make the financial statements not misleading
have been included. Results for the three months ended December 31, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2005. 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, 2004.
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 December 31, 2004 and 2003 and have been included in accounts
receivable. There were no billing in excess of costs and estimated profits at
December 31, 2004 and 2003.
Subcontract sales principally represents revenue related to electrical
installation of wiring and piping performed by others for the Company when the
Company acts as the prime contractor and sells its products along with
electrical installation. Subcontract revenue is also recognized during the
entire project using the percentage-of-completion method of accounting as
electrical installation is performed at the job site.
Service revenue from separate maintenance contracts is recognized on a
straight-line basis over the 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
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
3. INVENTORIES
Inventories are priced at the lower of cost (first-in, first-out) or market and
consist primarily of raw materials.
4. LONG TERM DEBT
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 (5.5% at
December 31, 2004) and expires in October 2005. The Company will be discussing
with its bank for an extension in its credit facility beyond its October 2005
due date. 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.
At December 31, 2004, the full amount of the Credit Facility was available under
the borrowing base calculation and $1,215,676 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 December 31, 2004 the Company was
not in default with any of its financial covenants.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
5. 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 months ended December 31, 2004 or 2003.
For the Three Months ended December 31,
Basic EPS Computation 2004 2003
---- ----
Net (Loss) available to common stockholders $ (155,377) $(126,296)
Weighted average outstanding shares 5,136,862 4,166,103
Basic (Loss) per share $(.03) $(.03)
====== ======
Diluted EPS Computation
(Loss) available to common stockholders
and assumed conversions $(155,377) $(126,296)
---------- ----------
Weighted-average shares 5,136,862 4,166,103
--------- ----------
Plus: Incremental shares from assumed conversions
Employee Stock Options*
Warrants*
Dilutive potential common shares N/A N/A
---- ----
Adjusted weighted-average shares 5,136,862 4,166,103
========= =========
Diluted (Loss) per share $(.03) $(.03)
====== ======
*All warrants and options were antidilutive in 2004 and 2003.
6. RECENT ACCOUNTING PRONOUNCEMENT
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Shared-Based
Payment" SFAS 123 (Revised) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. SFAS 123 (Revised) requires an entity
to recognize the grant-date fair-value of stock options and other equity-based
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
6. RECENT ACCOUNTING PRONOUNCEMENT (continued)
compensation issued to employees in the income statement. The revised statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB 25, which was permitted under SFAS No. 123, as originally issued.
The revised statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
SFAS No. 123 (Revised) is effective for small business issuers financial
statement for the first interim or annual reporting period that begins after
December 15, 2005, with early adoption encouraged.
The Company is currently evaluating the impact that this statement will have on
its financial condition or results of operations.
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 December 31, 2004, the Company was not in
default with any of its financial covenants and at such time the full amount of
the Credit Facility was available under the borrowing base calculation. At
December 31, 2004, $1,215,676 was owed under the Credit Facility.
Net cash provided by operations for the three months December 31, 2004
amounted to $536,067 as compared to cash used in operations of $500,235 for the
comparable prior year. The increase in cash provided by operations was primarily
due to a $454,072 increase in collection of accounts receivable and from a
$295,522 decrease in payments of accounts payable and accrued expenses. The net
cash inflow of $536,067 from operations during the 2004 period along with cash
on hand was used for equipment purchases of $121,070 and to decrease bank
borrowing by $700,000. During the prior year three month period financing
activities included $316,200 of proceeds from exercise of warrants to purchase
common stock by Genterra Inc. and $3,125 from the 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 decreased
to approximately 2.35 to 1 at December 31, 2004 compared to 3.20 to 1 at
December 31, 2003. The decrease in the current ratio is due to our bank debt
being a current liability in 2004 and a long term liability in 2003. Had our
bank debt remained a long term liability in 2004, the current ratio would have
increased to 3.40 to 1. The Company will be discussing with its bank extending
the credit facility beyond its October 2005 due date. The effect of an extension
will be to return the credit facility to a long term liability.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Revenues and Gross Profit
Three Months Ended
December 31,
------------
2004 2003
(In thousands of dollars)
Product Revenue $3,249 $3,019
Subcontract Revenue 98 79
Service Revenue 1,120 1,104
----- -----
Total Revenue $4,467 $4,202
Gross Profit Product $779 $ 916
Gross Profit Subcontract 18 13
Gross Profit Service 400 307
----- -----
Total Gross Profit $1,197 $1,236
Gross Profit Product % 24% 30%
Gross Profit Subcontract % 18% 16%
Gross Profit Service % 36% 28%
Total Gross Profit % 27% 29%
Revenues
The Company's product revenues during the three months ended December 31, 2004
were $3,249,000 compared to $3,019,000 for the prior year period. This increase
of 8% reflected increased shipments with respect to New York City Transit
projects compared to last year when the Company experienced delays in securing
approvals for production and shipment. However, product revenues in our Dallas,
Texas market area declined significantly from a very high level in 2003 due to a
very competitive market environment.
Subcontract revenue increased slightly during the current three month period to
$98,000 from $79,000 in the comparable prior year period. The Company was
responsible for various small electrical installations during both the 2004 and
2003 periods.
Service revenues increased during the current three month period primarily due
to an increase in service contracts resulting from the addition of new service
customers and from certain customers converted to "all in" contracts that cover
call-in service. Accordingly, there was a decrease in call-in service on fire
alarm systems (replacement parts and service required by buildings) .
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Gross Profit
Gross profit on product revenues for the three months ended December 31, 2004,
decreased 15% to $779,000 compared to $916,000 for the prior year period. This
decrease in absolute gross profit is primarily related to a change in the mix of
product revenues with more revenue derived from products with lower gross
margin. In particular there was a decline in higher margin revenue from tenants.
The decrease in gross profit percentage in 2004 to 24% compared to 30% in 2003
also reflects the change in product mix (noted above) and the inability to
absorb fixed overhead costs at our Dallas facility due to a decline in sales in
that market area.
Gross profit related to subcontract revenues for the three months ended December
31, 2004 increased in absolute terms due to the increase in revenue related to
electrical installation. In addition, the gross profit percentage was higher
during the three months of 2004 as mark ups on electrical installations were
higher.
Gross profit from service revenues increased during the three months ended
December 31, 2004 due to the increase in service revenue. The absolute gross
profit and gross margin percent increases were due in part from a decrease in
technical staff as the Company reevaluated its customer support staffing level.
Income Before Tax
The increase in loss before income taxes during the three months ended December
31, 2004 was consistent with budget due to the decrease in gross profit caused
by a change in mix of product revenues and from unabsorbed fixed overhead in
Dallas. The decrease in product gross margin was offset by higher gross margin
from subcontract and service revenues. The increase in service gross margin was
caused in part by a decrease in technical staff. In addition, selling, general
and administrative expenses remained at approximately the same level as the
prior year and supported higher product revenues during 2004. Interest expense
increased during 2004 due to higher interest rates. Depreciation and
amortization increased as the Company upgraded its management information
equipment and systems. For 2004, the Company also recorded a loss of $10,000 on
its equity in the operating loss of Secure 724 LP compared to a loss of $20,000
in 2003.
Tax Provision
The Company's current income tax benefit represents the benefit from net
operating loss carryback as it relates to 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.
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Order Position
The Company's order position, excluding service, at December 31, 2004 was
$11,568,000 as compared to $12,814,000 at September 30, 2004 and $16,157,000 at
December 31, 2003. This order position includes large orders received for
several subway complexes which will be deliverable over several years as the
projects are released. In addition, the backlog includes $1.3 million of orders
for communication and announcement systems from several transit car
manufacturers, that will be shipped over the next 15 month period. While
quotation activity is brisk, there is no assurance when orders will be received
and whether the order position will increase. Due to the fact that the Company's
products are sold and installed as part of larger mass transit construction
projects, there is typically a delay between the booking of the contract and its
revenue realization. The order position includes, and the Company continues to
bid on projects that might include significant subcontractor labor (electrical
installation performed by others). The Company expects to be active in seeking
orders where the Company would act as a prime contractor and be responsible for
management of the project as well as electrical installation.
Item 3. Controls and Procedures
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. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable
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
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: February 11, 2005