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, 2005
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 ( )
Indicate by check mark whether the registrant is a shell company (as
defined in rule 12b-2 of the Exchange Act) YES ( ) NO (X)
State issuer's revenues for its most recent fiscal year: $20,787,000
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 14, 2005 was $4,815,231
As of December 14, 2005, the Registrant had 5,192,118 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, energy management, intercom, audio-video
communication 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 in Dallas/Ft. Worth, Texas. Synergx conducts its business
in New York principally through Casey Systems Inc., ("Casey") its wholly owned
subsidiary located in New York City and Long Island, New York and in Texas
through General Sound (Texas) Company its wholly owned subsidiary in Dallas,
Texas ("General Sound").
CASEY SYSTEMS. Synergx's largest subsidiary is Casey Systems. Casey has been in
the business of designing, servicing and maintaining building communication
systems since 1970. Today Casey is a diversified systems integrator which, in
addition to its own proprietary line of life safety and building protection
products, also is a premier low-voltage systems provider for a broad range of
video, teleconferencing/multimedia, audio visual, public address, customer
information, access control, intercoms, security, closed circuit TV (CCTV) and
professional sound systems. In addition, Casey designs, markets and supports
these systems for the rail and mass transit industries.
Fire and Life Safety. For over 30 years Casey has been providing fire and smoke
signaling and detection systems for institutional, municipal, commercial and
residential buildings in the New York City metropolitan area. Casey provides
services primarily as a sub-contractor to electrical and general contractors but
also acts as a general contractor from time to time as well as engages in direct
sales of products and services to building owners, managers and other users. New
and modified systems must be installed and maintained in compliance with local
law requirements. New York City in particular maintains a very comprehensive and
detailed body of regulations to govern the installation and operation of fire
alarm and life safety systems. Casey markets its expertise in putting systems on
line and servicing such systems in compliance with these regulations.
Casey has developed and markets its own proprietary signaling and fire detection
technology known as COMTRAK, and also acts as a strategic distributor for
national manufacturers such as Edwards Systems Technology, a General Electric
company. Casey has installed a number of generations of COMTRAK and other
systems in hundreds of facilities in the New York metropolitan area. COMTRAK and
other such systems sold by Casey control and monitor smoke detectors, pull
stations and other devices, supervise other building systems such as elevators
and fans and provide dedicated audio communication channels for building and
emergency personnel. In many cases after installation and fire department
approval thereof, Casey continues to provide products and services to such
facilities related to the changing requirements of tenants in such buildings
(e.g. smoke detectors and other devices when tenant spaces are altered) or
service contracts to building owners or managers.
Engineered Sound Systems. Casey 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 airline terminals, hospitals, educational
facilities and transit facilities (e.g. commuter terminals and subway stations).
Casey has developed a focused unit with a high level of experience to penetrate
this niche market with significant success as a substantial portion of Casey's
revenues and order position derives from this effort. Casey offers simple analog
paging systems as well as state-of-the-art computerized systems that emphasize
speech intelligibility and high quality music reproduction. Casey is an
authorized dealer for many leading manufacturers.
Audio-Visual. Casey's engineering and sales team work with consultants,
architects and construction managers to design, install and integrate audio
visual systems in buildings in the New York metropolitan areas. These facilities
include museums, auction houses, advertising agencies, houses of worship, health
care and educational facilities, financial institutions and law firms. On these
projects Casey oversees software integration, selects hardware and oversees all
aspects of the project installation and activation. Systems include audio and
video conferencing, video projection systems, media streaming and command and
control centers. Casey is a authorized supplier of numerous high quality
national product lines.
Security. Casey provides integrated security systems for institutional,
municipal, commercial and residential buildings handling design and engineering,
product specification, installation, maintenance and personnel training.
Customers include commercial and apartment buildings, transportation and
educational facilities and medical centers. Products include indoor-outdoor,
perimeter, pan-tilt-zoom cameras, monitors, wireless command and remote control
and transmission technology. Casey designs and installs a full range of card
access control systems including scrambled pad-biometrics, smart cards, swipe
cards and proximity readers. Casey has worked with many network technologies
including encrypted networks.
Transit. Casey designs, manufactures (through third party sources), markets and
services sophisticated information and communication systems with applications
for transit facilities and carriers. Casey's transit products and services are
in use by agencies such as the New York City Transit Authority, AMTRAK,
Baltimore MTA, the Bi-State Development Agency (St Louis), the Boston MBTA, New
Jersey Transit, the San Diego Trolley, the Washington Metropolitan Transit
Authority (Washington, D.C.), and METRA (Chicago).
Service. Casey 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 to market service of COMTRAK and
other projects coming out of warranty and the renewal of such contracts. To
provide efficient and productive customer service, Casey maintains an office in
New York City which houses its New York service management offering 24/7
customer support with over 30 manufacturer-trained field service technicians.
GENERAL SOUND. 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
and school markets. 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 holds 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, 2005 and
2004, Synergx spent approximately $121,000 and $160 ,000, respectively, for
research and development of Synergx's life safety and communication systems.
CUSTOMERS AND SUPPLIERS. For the fiscal years ended September 30, 2005 and 2004,
no customer accounted for more than 10% of Synergx's revenues. One supplier
accounted for 10% and 9% of Synergx's cost of sales in the years ended September
30, 2005 and 2004, 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 and/or 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. As of September 30, 2005, Synergx and its subsidiaries had 122 full
time employees, including 39 New York hourly employees that are covered by a
Collective Bargaining Agreement expiring March 2009. In November 2005, certain
personnel cost reduction initiatives were implemented that resulted in 112 full
time employees with 33 New York hourly employees covered by the collective
bargaining agreement. The goal of this cost reduction initiative is to achieve
annualized savings of $650,000.
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 16,400 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 $16,026
during 2005 with 3.3% yearly increases through the remainder of the term of the
lease.
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 such actions 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, 2003 through September 30, 2005 which quotations were
obtained from the National Association of Securities Dealers Inc.
Common Stock Bid Ask
Quarter Ended High Low High Low
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
December 31, 2004 4.370 2.490 4.470 2.690
March 31, 2005 3.580 1.440 3.680 1.460
June 30, 2005 1.670 1.000 1.680 1.200
September 30, 2005 6.250 1.240 6.250 1.310
The above quotations represent prices between dealers, do not include
retail markups, markdowns or commissions and may not represent actual
transactions. As of December 14 2005, there were 439 record holders of Synergx's
Common Stock.
On December 14, 2005, the closing bid and ask prices for the Common Stock
were $1.82 and $1.83, 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.
Registration of Shares of Common Stock
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
The Company has a $3 million revolving credit facility with Hudson United
Bank (the "Credit Facility"). This credit facility has an annual interest rate
of prime plus 1/4% and expires in June 2007. 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, 2005, 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, 2005, $1,449,000 was owed under the Credit Facility.
Net cash provided by operations for the year ended September 30, 2005
amounted to $418,000 as compared to cash used by operations of $319,000 for the
comparable prior year. The increase in cash being provided by operations was
primarily due to a reduction in the working capital component in 2005 as funding
requirements declined to $99,000 in line with lower sales in 2005. In contrast,
the working capital component increased in 2004 by $1.1 million to fund an
increase in accounts receivable resulting from higher sales in 2004 and from an
increase in inventory from projects expected to be shipped after September 30,
2004. The net cash inflow of $418,000 from operations during 2005 along with
cash on hand was used to purchase $288,000 of capital assets (primarily for a
new management information system) and to reduce bank borrowings by $466,000. In
addition, 2005 financing activities included $28,000 from exercise of stock
options by employees to purchase common stock under the Company's stock option
plan. In contrast, in 2004, financing activities included $316,000 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.
The ratio of the Company's current assets to current liabilities decreased
to approximately 3.04 to 1 at September 30, 2005 compared to 3.45 to 1 at
September 30, 2004. Working capital decreased by approximately $400,000 to $7.1
million at September 30, 2005 compared to $7.5 million at September 30, 2004.
The decrease in the current ratio and working capital is primarily due to the
use of cash flow to reduce bank borrowings (a non current liability) by
$466,000.
RESULTS OF OPERATIONS
Revenues and Gross Profit
For the years ended September 30,
2005 2004
(In thousands)
Product Sales $15,517 $16,720
Subcontract Sales 475 590
Service Revenue 4,795 4,480
Total Revenue $20,787 $21,790
Product Gross Margin $ 4,826 $ 5,630
Subcontract Gross Margin 91 106
Service Gross Margin 1,673 1,291
Total Gross Margin $ 6,590 $ 7,027
Gross Profit Product % 31% 34%
Gross Profit Subcontractor % 19% 18%
Gross Profit Service % 35% 29%
Total Gross Profit % 32% 32%
Revenues
The decrease in product revenues resulted primarily from slow economic
activity in the Company's Dallas, Texas market as the Company experienced
significantly lower product revenues compared to strong 2004 levels. The Company
has put into effect certain cost reduction initiatives with a view towards
pricing business aggressively in both the Dallas/Ft Worth, Texas and New York
City metropolitan area.
Subcontract revenue decreased during 2005 as the Company was responsible as
prime contractor for less electrical installations in 2005 compared to similar
projects in 2004.
Service revenues increased 7% during 2005 primarily due to higher service
revenue from new service contracts which offset a decrease in call-in service on
fire alarm systems as certain customers converted to (all in) contracts to cover
call in service (replacement parts and service required by buildings). The
service contract base of customers has increased due to new customers in our New
York City and Long Island, New York area.
Gross Profit
Gross profit margin from product revenues decreased 14% to $4,826,000 due
to lower product sales (noted above) and related gross margin. Gross profit
margin as a percentage of product revenues was 31% in 2005 compared to 34% in
2004. This decline in gross profit percentage was due to aggressive pricing
necessary to obtain sales.
Gross profit margin related to subcontract revenues for 2005 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 increased during 2005 due to
higher service revenue which resulted from an increase in service contracts base
noted above. Gross profit margin was also favorably affected by certain
reductions in the number of service technicians and a decrease in the use of
overtime in 2005.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("S G &A") increased slightly
($11,000) in 2005 over 2004 primarily as a result of the Company's continued
expansion of its marketing programs for new products. This increase is net of
certain reductions in salary related costs for non sales personnel. During the
last two years additional staffing was added to address the markets for
audio/visual and security products. Consequently, S G & A expenses as a
percentage of sales increased 1.4% to 28.9% in 2005 due to lower 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 decline in income before income taxes during 2005 is primarily due to
the decrease in gross profit caused by lower product revenues. Partially
offsetting the decrease in gross profit from product revenues was an increase in
gross profit from service revenues noted above. While selling, general and
administrative expenses remained basically the same in 2005, these expenses
remain at a level geared to support higher product sales. In addition,
unfavorably affecting income before income taxes was an increase in depreciation
expense in 2005 related to the recent investment in a new computer and
management information system. For 2005, the Company also recorded a loss of
$76,000 on its equity in the operating loss of Secure 724 LP compared to a loss
of $52,000 in 2004.
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 $8.8 million at
September 30, 2005 compared to the $12.8 million level at September 30, 2004.
The Company expects to fulfill a significant portion of its order position over
the next twelve months. 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 theooking 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 responsible for management of the project as
well as electrical installation.
Plan of Operations
During fiscal 2006, management intends to continue to focus on its
intensified marketing programs 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 President has recently been appointed 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.
Certain personnel cost reduction initiatives were implemented in November 2005
with a goal of annualized savings of $650,000 per year. 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. Recent enhancements 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 2006.
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. 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. Secure
724 is pursing various routes to finance this stage including possible new
investors and/or strategic relationships with prospective customers. In December
2005, Secure 724 entered into a license agreement in a foreign country which
will provide license fees. There can be no assurance that Secure724 will secure
all the funding it 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 2005, the Company and its union agreed to
a new three year nine month contract that provides for wage/benefits increases
of approximately 4% in each year. Under terms of previous union contracts,
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 4% 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.
Report of Independent Registered Public Accounting Firm F1
Audited Consolidated Financial Statements
Consolidated Balance Sheet September 30, 2005 F2 - F3
Consolidated Statements of Operations
Years Ended September 30, 2005 and 2004 F4
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 2005 and 2004 F5
Consolidated Statements of Cash Flows
Years Ended September 30, 2005 and 2004 F6
Notes to Consolidated Financial Statements F7 - F19
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
(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)
5.1 Opinion of Dolgenos Newman & Cronin LLP as to the legality of the shares
being registered*
10.1 Credit Facility dated October 9, 2003 between Synergx Systems Inc. as
borrower and Hudson United Bank as lender. (5)
10.2 Employment Agreement between Casey Systems Inc. and Al Koenig dated as of
February 17, 2005
10.3 Employment Agreement between Synergx Systems Inc. and Daniel S. Tamkin
dated as of October 1, 2005.
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)
10.10 Form 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)
23.1 Consent of Marcum & Kliegman LLP, Independent Registered Public Accounting
Firm
23.2 Consent of Dolgenos Newman & Cronin LLP (Included in Exhibit 5.1)*
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 20, 2005
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 20, 2005
/s/Daniel S. Tamkin Chief Executive Officer
Daniel S. Tamkin and Director
/s/John A. Poserina Chief Financial Officer December 20, 2005
John A. Poserina (Principal Accounting and
Financial Officer), Secretary,
and Director
/s/Joseph Vitale Director December 20, 2005
Joseph Vitale
/s/Harris Epstein Director December 20, 2005
Harris Epstein
/s/Dennis P. McConnell Director December 20, 2005
Dennis P. McConnell
/s/Mark Litwin Director December 20, 2005
Mark Litwin
/s/J. Ian Dalrymple Director December 20, 2005
J. Ian Dalrymple
Report of Independent Registered Public Accounting Firm
To the Audit Committee of the Board of Directors of
Synergx Systems Inc.
We have audited the accompanying consolidated balance sheet of Synergx Systems
Inc. and its subsidiaries (the "Company") as of September 30, 2005 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 2005 and 2004. 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 financial
statements are free of material misstatement. The Company is not required to
have, nor are we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's control over financial reporting.
Accordingly, we express no opinion. An audit also includes examining on a test
basis evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial 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, 2005 and the consolidated
results of their operations and their cash flows for the years ended September
30, 2005 and 2004, in conformity with accounting principles generally accepted
in the United States of America.
December 9, 2005 /s/ MARCUM & KLIEGMAN LLP
New York, NY
F1
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2005
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 590,000
Accounts receivable, principally trade, less allowance
for doubtful accounts of $324,000 7,093,000
Inventories 2,408,000
Deferred taxes 278,000
Prepaid expenses and other current assets 268,000
-----------
TOTAL CURRENT ASSETS 10,637,000
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,656,000 641,000
OTHER ASSETS 596,000
-----------
TOTAL ASSETS $11,874,000
===========
See accompanying Notes to the Consolidated Financial Statements.
F2
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2005
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and capital leases payable - current portion $ 32,000
Accounts payable and accrued expenses 2,912,000
Deferred revenue 554,000
-----------
TOTAL CURRENT LIABILITIES 3,498,000
Note payable to bank 1,449,000
Notes and capital leases payable - less current portion 6,000
Deferred taxes 90,000
-----------
TOTAL LIABILITIES 5,043,000
-----------
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 5,192,118 shares 5,000
Capital in excess of par 6,785,000
Retained earnings 41,000
-----------
TOTAL STOCKHOLDERS' EQUITY 6,831,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,874,000
===========
See accompanying Notes to the Consolidated Financial Statements.
F3
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30,
2005 2004
----------- -----------
Product sales $15,517,000 $16,720,000
Subcontract sales 475,000 590,000
Service revenue 4,795,000 4,480,000
----------- -----------
Total revenues 20,787,000 21,790,000
----------- -----------
Cost of product sales * 10,691,000 11,090,000
Cost of subcontract sales 385,000 484,000
Cost of service revenue 3,122,000 3,189,000
Selling, general and administrative 6,000,000 5,989,000
Interest expense 84,000 87,000
Depreciation and amortization 189,000 171,000
Loss on equity investment 76,000 52,000
----------- -----------
20,547,000 21,062,000
----------- -----------
Income before provision for income taxes 240,000 728,000
----------- -----------
Provison for income taxes:
Current 103,000 225,000
Deferred 7,000 83,000
----------- -----------
110,000 308,000
----------- -----------
Net Income $130,000 $420,000
=========== ===========
Earnings Per Common Share:
Basic Earnings Per Share $0.03 $0.09
===== =====
Diluted Earnings Per Share $0.03 $0.09
===== =====
Weighted average number of common shares outstanding 5,171,721 4,671,701
Weighted average number of common and dilutive
common share equivalents outstanding 5,193,276 4,912,203
*Excludes depreciation and amortization of $40,000 and $51,000 for the years
ended September 30, 2005 and 2004, respectively
See accompanying Notes to the Consolidated Financial Statements.
F4
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004
(ACCUMULATED
TOTAL CAPITAL DEFICIT)/
STOCKHOLDERS' COMMON STOCK IN EXCESS RETAINED
EQUITY SHARES AMOUNT OF PAR EARNINGS
---------------------------------------------------------------------------------------------------------------
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)
Exercise of employee stock options 28,000 55,256 28,000
Tax benefit of stock option exercise 25,000 25,000
Net Income 130,000 130,000
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2005 $6,831,000 5,192,118 $ 5,000 $6,785,000 $ 41,000
========== ========== ========== ========== ==========
See accompanying Notes to the Consolidated Financial Statements.
F5
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
2005 2004
----------- ------------
OPERATING ACTIVITIES
Net income $ 130,000 $ 420,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 189,000 171,000
Deferred taxes 7,000 83,000
Provision for doubtful accounts -- (88,000)
Provision for inventory allowance 90,000 --
Loss on equity investment 76,000 52,000
Tax benefit from employee stock option exercise 25,000 146,000
Changes in operating assets and liabilities:
Accounts receivable (700,000) (511,000)
Inventories 164,000 (213,000)
Prepaid expenses and other current assets 11,000 154,000
Other assets (27,000) (38,000)
Accounts payable and accrued expenses 405,000 (566,000)
Deferred revenue 48,000 71,000
----------- -----------
NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES 418,000 (319,000)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (288,000) (232,000)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (288,000) (232,000)
----------- -----------
FINANCING ACTIVITIES
Principal payments on notes payable and capital lease obligations (29,000) (90,000)
Payments and proceeds from note payable bank - net (467,000) 660,000
Proceeds from exercise of stock options and warrants 28,000 616,000
----------- -----------
NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES (468,000) 1,186,000
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (338,000) 635,000
Cash and cash equivalents at beginning of the year 928,000 293,000
----------- -----------
Cash and cash equivalents at end of the year $ 590,000 $ 928,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 7,000 $ 266,000
Interest $ 89,000 $ 95,000
See accompanying Notes to the Consolidated Financial Statements.
F6
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Business
Synergx Systems Inc. and Subsidiaries (the "Company") operates in one industry
segment: the design, manufacture, distribution, marketing and service of a
variety of data communications products 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/Ft. Worth, 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 principal
operating subsidiaries are: Casey Systems Inc. ("Casey"), General Sound (Texas)
Company ("General Sound"), and Systems Service Technology Corp. ("SST"). In
addition the Company has a payroll disbursing subsidiary FT Clearing Inc. and a
subsidiary that holds the investment in Secure 724 LP, Comco Technologies Inc.
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 (train
station platforms and 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 are recognized, using the
percentage-of-completion method of accounting. The Company utilizes a
units-of-work performed method to measure progress towards completion of a
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, 2005 and 2004 and have been included in accounts
receivable. There were no billings in excess of costs and estimated profits at
September 30, 2005 and 2004.
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.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 accounting principles
generally accepted 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 the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable are reported net of an allowance for doubtful accounts. The
adequacy of the allowance is determined by management 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 and at September 30, 2005 reflects an
inventory allowance of $370,000.
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 the economic useful life, whichever is shorter.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Other Assets
Other assets consist principally of the investment in Secure 724 LP which is
comprised of notes receivable of $163,000 and a 25% ownership in Secure 724 LP
of $432,500, less the 25% equity in the operating losses of Secure 724 LP of
$163,000. (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. This evaluation is performed on annual basis
each fiscal year end.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the years
ended September 30, 2005 and 2004 amounted to $35,000 and $25,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs for the years ended September 30, 2005 and 2004 amounted to
$121,000 and $160,000, 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 the 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.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Cash Equivalents
The Company considers all investments with original 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 88% of such
outstanding receivables at September 30, 2005 are due from customers in New
York. The Company does not require collateral to support financial instruments
subject to credit risk.
At September 30, 2005, the Company had cash of approximately $265,000, that is
in excess of 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 Financial Accounting Standards Board issued SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No.
148 amends SFAS No. 123, to provide an alternative method of transition to SFAS
No. 123's fair value method of accounting for stock based employee compensation.
SFAS No.148 also amends the disclosure provisions of SFAS No. 123 and APB
Opinion 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 No. 123 to require companies to account for
employee stock options using the fair
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Stock Options and Similar Equity Instruments (continued)
value method, the disclosure provisions of SFAS No. 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 No. 123, or
the intrinsic value method of APB Opinion 25. As required under SFAS No. 148,
the following table presents pro forma net income and diluted net earnings per
share as if the fair value-based method had been applied to all awards.
Years Ended September 30,
2005 2004
Net Income
$130,000 $420,000
Less: Fair Value of Options issued to
employees and directors, net of income tax (13,000) --
-------- ---------
Pro Forma Net Income $117,000 $420,000
======== =========
Weighted Average Basic Shares 5,171,721 4,671,701
Weighted Average Diluted Shares 5,193,276 4,912,203
Basic Net Income Per Share as Reported $.03 $.09
Basic Pro Forma Net Income per share $.02 $.09
Diluted Net Income Per Share as Reported $.03 $.09
Diluted Pro Forma Net Income per share $.02 $.09
The Black-Scholes option valuation model was used to estimate the fair value of
the options granted during the year ended September 30, 2005. There were no
options granted to employees during the year ended September 30, 2004. The model
includes subjective input assumptions that can materially affect the fair value
estimates. The model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and that are fully
transferable. The expected volatility is estimated based on the most recent
historical period of time equal to the weighted average life of the options
granted. Principal assumptions used in applying the Black-Scholes model along
with the results from the model for the year ended September 30, 2005 were as
follows:
Assumptions:
Risk-free interest rate 3.58%
Dividend 0
Expected life in years 5 years
Expected volatility 84%
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Property and Equipment
Property and equipment (including $3,000 arising from capital leases) are
summarized as follows:
September 30,
2005
----------
Machinery and equipment $2,052,000
Furniture and fixtures 176,000
Leasehold improvements 69,000
----------
2,297,000
Less accumulated depreciation and amortization
1,656,000
----------
$ 641,000
==========
Annual amortization of equipment under capital leases of $300 is included with
depreciation and amortization expense.
Depreciation and amortization expense related to these assets were $157,000 and
$141,000 for the years ended September 30, 2005 and 2004, respectively.
3. Investment in Secure 724 L.P.
On May 29, 2003, the Company acquired 25% of the equity of Secure 724 LP
("Secure 724 LP"), an Ontario limited partnership. The 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,
2005 and 2004, an adjustment to the equity investment of $76,000 and $52,000,
respectively was recorded to reflect the Company's 25% portion of the net loss
of Secure 724 LP. The cumulative impact that was recorded for the 25% portion of
the net loss from inception amounts to $163,000.
In connection with the initial capital contribution per the partnership
agreement, the Company advanced $18,000 ($25,000CA) to Secure 724 LP in May 2003
and upon reaching milestones advanced $125,089 ($175,000CA) in August 2003.
Additional advances were made to Secure 724 LP in October 2004 of $7,969
($10,000CA) and in December 2004 of $12,140 ($15,000CA). These notes receivable
bear interest at a rate of 4% per annum and mature in May 2006, August 2006, and
October 2007, respectively.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Investment in Secure 724 L.P.(continued)
There can be no assurance that the investment in Secure 724 LP will be
profitable.
4. Long-Term Debt
The Company has a $3 million revolving credit facility with Hudson United Bank
(the "Credit Facility"). The Credit Facility has an annual interest rate of
prime plus 1/4% on outstanding balances (6.75% at September 30, 2005) and
expires in June 2007. 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 accounts
receivable and inventories.
At September 30, 2005, the full amount of the Credit Facility was available
under the borrowing base calculation and $1,449,000 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, 2005 the Company was
not in default with any of its financial covenants.
Annual maturities of Notes Payable to Bank and Notes and Capital Leases Payable
are as follows:
Note Payable Other Notes and Total
Bank Capital Leases Payable
----------------------------------------------------------------
2006 $32,000 $ 32,000
2007 $1,449,000 6,000 1,455,000
----------------------------------------------------------------
Total $1,449,000 $38,000 $1,487,000
================================================================
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Lease Commitments
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. An additional 700 square feet of space was added to the lease in
August 2004. The rental schedule provides for monthly rent of $16,000 during
2005 with 3.3% yearly increases through the expiration of the lease in June
2007.
The Company has a non-cancelable 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 under a non-cancelable
operating lease 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, 2005:
Total Operating
Leases
2006 $352,000
2007 307,000
2008 155,000
2009 159,000
2010 73,000
----------
Total minimum lease payments $1,046,000
==========
Rental expense amounted to $361,000 and $346,000, for 2005 and 2004,
respectively.
6. Significant Customers and Suppliers
During fiscal 2005 and 2004, no customer accounted for more than 10% of sales.
One supplier accounted for 10% and 9% of the Company's cost of sales during
fiscal 2005 and 2004, respectively.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Income Taxes
During the years ended September 30, 2005 and 2004, the Company recorded a tax
provision of $110,000 and $308,000, 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,
2005 2004
-------------------------------
Statutory federal income tax rate 34% 34%
Computed expected tax from income $82,000 $247,000
Increase in taxes resulting from:
State and local income taxes, net of Federal tax benefit 25,000 51,000
Nondeductible expenses 2,000 2,000
Other 1,000 8,000
------------------------------
Provision $110,000 $308,000
==============================
The Company provided $6,000 and $12,000 for state and local franchise and
capital taxes for the years ended September 30, 2005 and 2004, 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, 2005 and 2004 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, 2005 and
2004 consist of the following:
Deferred Tax Assets 2005 2004
Allowance for doubtful accounts $130,000 $130,000
Inventory reserve 148,000 112,000
Net operating loss carryforward 18,000
------- -------
Total deferred tax asset $278,000 $260,000
======= =======
Deferred Tax Liabilities
Depreciation and amortization $ 90,000 $ 65,000
Total deferred tax liability $ 90,000 $ 65,000
======= =======
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Earnings Per Share
The computation of basic earnings per share, diluted earnings per share,
weighted shares outstanding, and weighted average shares after potential
dilution is as follows:
Year Ended September 30
Basic EPS Computation 2005 2004
-------- --------
Net income $130,000 $420,000
Weighted average outstanding shares 5,171,721 4,671,701
Basic earnings per share $.03 $.09
==== ====
Diluted EPS Computation
Net income $ 130,000 $420,000
Weighted average outstanding shares 5,171,721 4,671,701
Plus: Incremental shares from
assumed conversions
Employee Stock Options 14,036 73,872
Warrants 7,520 166,630
------ -------
Dilutive common shares 21,555 240,502
------ -------
Adjusted weighted-average shares 5,193,276 4,912,203
Diluted earnings per share $.03 $.09
==== ====
9. 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 options
are granted. The number of shares of Common Stock that may be issued shall not
exceed an aggregate of up to 10% of the Compnay's 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 the prior 1997 nonqualified stock option plan.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Employee Stock Options and Warrants (continued)
In February 2005, the Board of Directors approved a grant of 130,000 stock
options with a fair market value of $157,094 to certain employees, officers and
directors of the Company under the 2004 Plan. The stock options vest ratably
over five years and are exercisable at $2.50 per share, which exercise price was
above the market price at the time of grant. There were no stock options granted
during the year ended September 30, 2004.
Transactions involving stock options are summarized as follows:
Weighted Average
Stock Options Exercise Price of
Outstanding Options Outstanding
Balance September 30, 2003 191,298 $ .52
Options exercised (115,718) .54
Balance September 30, 2004 75,580 .51
Options granted 130,000 2.50
Options exercised (55,256) .50
Balance September 30, 2005 150,324 2.23
There were 20,324 exercisable options at September 30, 2005 and 75,580
exercisable options at September 30, 2004.
During the years ended September 30, 2005 and 2004, employees exercised stock
options to purchase 55,256 and 115,718 shares of Common Stock, respectively, for
total consideration of $28,000 and $62,000, respectively.
Outstanding and exercisable stock options are as follows:
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 2005 Contractual Life September 30, 2005
$ .52 10,668 .3 years 10,668
.50 9,656 .3 years 9,656
2.50 130,000 4.5 years -
In 1998, the Company granted Genterra Inc. (an Ontario publicly-held
corporation) ("Genterra") 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.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Employee Stock Options and Warrants (continued)
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. 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 expired in May 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, 2003 1,010,000 $.61
Warrants exercised (960,000) .58
Balance September 30, 2004 50,000 1.15
Warrants expired (50,000) 1.15
Balance September 30, 2005 0
===
10. 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 item exists
that will have a significant impact on the Company's business or financial
condition.
11. Other
Approximately 32% of the Company's employees are covered by collective
bargaining agreements. On July 10, 2005, the union representing hourly employees
and the Company ratified a Collective Bargaining Agreement expiring March 9,
2009, providing for an increase in salaries and benefits averaging approximately
4% 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 2005 and 2004. a profit
sharing contribution of $41,000 and $43,000, respectively, was authorized and
charged to expense.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. 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.
The carrying amount of cash and cash equivalents, trade receivables and
payables, and short-term debt, approximates 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.
13 New Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), "Shared-Based Payment," which 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 No. 123 (revised 2004) requires an entity to recognize the grant-date
fair-value of stock options and other equity-based compensation issued to
employees in the income statement. SFAS No. 123 (revised 2004) generally
requires that an entity account for such 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
also 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 2004) is effective for small
business issuers for the first annual reporting period that begins after
December 15, 2005. The Company is currently evaluating the impact that this
statement will have on its financial condition, results of operations and cash
flows.