U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal quarter ended June 30, 2006
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-17580
-------
SYNERGX SYSTEMS INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2941299
(State or jurisdiction of incorporation (IRS employer identification Number)
or organization)
209 Lafayette Drive, Syosset, New York 11791
(Address of Principal Executive Offices) (Zip code)
(516) 433-4700
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes[ X ] No[ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 7, 2006, 5,210,950
shares of Registrant's Common Stock were issued and outstanding.
Transitional Small Business Disclosure Format (check one) Yes[ ] No[ X ]
INDEX
Part I - Financial Information (unaudited) Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet at June 30, 2006 3
Condensed Consolidated Statements of Operations for the Three
And Nine Months Ended June 30, 2006 and 2005 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2006 and 2005 7
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operations 13
Item 3. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings. 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 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 19
Signatures 20
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30,
2006
---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 491,630
Accounts receivable, principally trade, less allowance
for doubtful accounts of $323,523 5,127,722
Inventories, net 2,396,388
Deferred taxes 312,700
Prepaid expenses and other current assets 343,196
Income Tax Receivable 226,000
----------
TOTAL CURRENT ASSETS 8,897,636
----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,537,063 731,731
OTHER ASSETS 590,781
----------
TOTAL ASSETS $10,220,148
==========
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30,
2006
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ 909,138
Notes payable - current portion $15,106
Accounts payable and accrued expenses 2,003,861
Deferred revenue 732,991
----------
TOTAL CURRENT LIABILITIES 3,661,096
Notes payable - less current portion 46,600
Deferred taxes 90,000
----------
TOTAL LIABILITIES 3,797,696
----------
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 5,210,950 shares 5,211
Capital in excess of par 6,803,992
Accumulated deficit (386,751)
----------
TOTAL STOCKHOLDERS' EQUITY 6,422,452
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,220,148
==========
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended June 30,
2006 2005
------ ------
Product sales $2,455,869 $2,919,901
Subcontract sales 126,782 154,600
Service revenue 1,348,117 1,220,456
--------- ---------
Total revenues 3,930,768 4,294,957
--------- ---------
Cost of product sales 1,764,823 1,942,635
Cost of subcontract sales 103,115 126,337
Cost of service revenue 701,758 802,638
Selling, general and administrative 1,426,133 1,286,020
Interest expense 27,610 22,048
Depreciation and amortization 37,461 44,062
Loss on equity investment 18,000 33,000
--------- ---------
4,078,900 4,256,740
--------- ---------
(Loss) income before (benefit) provision for income taxes (148,132) 38,217
--------- ---------
(Benefit) provision for income taxes:
Current 5,000 13,000
Deferred (55,000) 5,000
--------- ---------
(50,000) 18,000
(Loss) income from continuing operations (98,132) 20,217
Discontinued operations (Note 7):
(Loss) income from discontinued operations (12,782) 59,938
Income tax (benefit) provision (4,000) 25,000
--------- ---------
(Loss) income from discontinued operations (8,782) 34,938
Net (Loss) income $ (106,914) $ 55,155
========= =========
(Loss) income per common share
Basic (loss) income from continuing operations $ (0.02) $ 0.00
Basic (loss) income from discontinued operations (0.00) 0.01
Basic (loss) income Per Share ($0.02) $ 0.01
Diluted (loss) income from continuing operations ($0.02) $0.00
Diluted (loss) income from discontinued operations (0.00) 0.01
Diluted (loss) income Per Share $ (0.02) $ 0.01
Weighted average number of common shares outstanding 5,210,950 5,192,118
Weighted average number of common and dilutive
common share equivalents outstanding 5,210,950 5,211,120
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended June 30,
2006 2005
------ ------
Product sales $ 7,122,271 $ 8,574,341
Subcontract sales 430,067 460,133
Service revenue 3,817,752 3,477,595
---------- ----------
Total revenues 11,370,090 12,512,069
---------- ----------
Cost of product sales 5,241,970 5,924,552
Cost of subcontract sales 343,755 376,403
Cost of service revenue 2,052,553 2,268,770
Selling, general and administrative 4,016,175 3,657,021
Interest expense 81,189 61,445
Depreciation and amortization 115,657 132,182
Loss on equity investment 60,000 55,000
---------- ----------
11,911,299 12,475,373
---------- ----------
(Loss) income before (benefit) provision from income taxes (541,209) 36,696
---------- ----------
(Benefit) provision from income taxes:
Current (178,000) 22,000
Deferred (35,000)
---------- ----------
(213,000) 22,000
---------- ----------
(Loss) income from continuing operations (328,209) 14,696
Discontinued operations (Note 7):
Loss from discontinued operations (147,636) (113,855)
Income tax benefit (48,000) (39,000)
---------- ----------
Loss from discontinued operations (99,636) (74,855)
Net (loss) $ (427,845) $ (60,159)
========== ==========
(Loss) Per Common Share:
Basic (loss) income from continuing operations ($0.06) $0.00
Basic (loss) from discontinued operations ($0.02) -$0.01
Basic (loss) Per Share ($0.08) -$0.01
===== =====
Diluted (loss) income from continuing operations ($0.06) $0.00
Diluted (loss) from discontinued operations ($0.02) -$0.01
Diluted (loss) Per Share ($0.08) -$0.01
===== =====
Weighted average number of common shares outstanding 5,204,742 5,164,922
Weighted average number of common and dilutive
common share equivalents outstanding 5,204,742 5,164,922
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended June 30,
2006 2005
------ ------
OPERATING ACTIVITIES
Net (Loss) income from continuing operations $ (328,209) $ 14,696
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization * 126,352 144,265
Deferred tax (benefit) (35,000)
Loss on equity investment 60,000 55,000
Tax benefit from employees stock option exercise 10,000
Changes in operating assets and liabilities:
Accounts receivable, net 1,965,395 1,070,749
Inventories (188,729) (104,220)
Prepaid expenses and other current assets (75,302) (99,244)
Income Tax Receivable (226,000)
Other assets (66,922) (6,025)
Accounts payable and accrued expenses (907,861) (297,885)
Deferred revenue 178,656 23,377
--------- ---------
Net cash provided by continuing operations 512,380 800,713
Net cash (used by) operating activities of discontinued operation (369,462) (53,941)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 142,918 746,772
--------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment (198,463) (269,185)
--------- ---------
Net cash (used in) continuing operations (198,463) (269,185)
Proceeds from sale of discontinued operations 518,000
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 319,537 (269,185)
--------- ---------
FINANCING ACTIVITIES
Principal payments on notes payable (30,723) (41,159)
Payments and proceeds from note payable bank - net (540,168) (490,712)
Proceeds from exercise of stock options and warrants 9,416 27,628
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (561,475) (504,243)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (99,020) (26,656)
Cash and cash equivalents at beginning of period 590,650 928,507
--------- ---------
Cash and cash equivalents at end of period $ 491,630 $ 901,851
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 45,070 $ 6,995
Interest $ 82,150 $ 62,211
NON-CASH INVESTING AND FINANCING ACTIVITIES
Included in the nine months ended June 30, 2006, was the purchase of
equipment for $54,716 through financing.
* Depreciation of $10,695 and $12,083 is included in cost of product sales for
the nine months ended June 30, 2006 and 2005, respectively.
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 not to make the
financial statements misleading have been included. Results for the three and
nine months ended June 30, 2006 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2006. 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,
2005.
2. REVENUE RECOGNITION
Product sales include sales 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 and 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 the
contract. The effects of changes in contract terms are reflected in the
accounting period in which they become known. Contract terms provide for billing
schedules that differ from revenue recognition and give rise to costs and
estimated profits in excess of billings, and billings in excess of costs and
estimated profits. Costs and estimated profits in excess of billing were not
material at June 30, 2006 and 2005 and have been included in accounts
receivable. There were no billings in excess of costs and estimated profits at
June 30, 2006 and 2005.
Subcontract sales principally represent 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. The subcontract revenue element of the contract
(carrying its own gross margin) 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 service contracts is recognized on a straight-line
basis over the term 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.
3. RECLASSIFICATION
Certain accounts in the prior period financial statements have be reclassified
for comparison purposes to conform to the presentation in the current period
financial statements. These classifications have no effect on the previously
reported net loss.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INVENTORIES
Inventories are priced at the lower of cost (first-in, first-out) or market and
consist primarily of raw materials and at June 30, 2006 reflects an inventory
allowance of $370,000.
5. NOTE PAYABLE TO BANK
The Company has a $3 million revolving credit facility with Hudson United Bank
(the "Credit Facility"). The Credit Facility carries an annual interest rate of
prime plus 1/4% on outstanding balances (8.25% at June 30, 2006) and expires
June 1, 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 trade receivables and
inventories.
At June 30, 2006, the full amount of the Credit Facility was available under the
borrowing base calculation and $909,138 was outstanding under this facility.
The Credit Facility includes certain restrictive covenants, which among other
things, impose limitations on declaring or paying dividends, acquisitions, and
capital expenditures. The Company is also required to maintain certain financial
ratios and tangible net worth covenants. At June 30, 2006 the Company was not in
default with any of its financial covenants.
6. STOCK OPTIONS
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 Stock Option Plan. The stock options
vest ratably over five years and are exercisable at $2.50 per share, which
exercise price was above market at the time of grant. There were no stock
options granted during the three and nine months ended June 30, 2006.
In December 2005, employees exercised stock options to purchase 18,832 shares of
common stock at an exercise price of $.50 per share for a total consideration of
$9,416. Stock options for 1,492 shares were not exercised and expired on
December 29, 2005.
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standard ("SFAS") 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.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
6. STOCK OPTIONS (CONTINUED)
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 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 loss and diluted net loss per share as if the fair value-based method
had been applied to all awards.
Three Months Nine Months
Ended June 30, Ended June 30,
2006 2005 2006 2005
---- ---- ---- ----
Net (Loss) income as reported ($106,914) $55,155 ($427,845) $(60,159)
Less: Fair Value of Options Issued to
Employees and Directors (4,713) -- (14,139) --
------- ----- ------- -------
Pro Forma Net (Loss) Income ($111,627) $55,155 $(441,984) $(60,159)
========= ======= ========= =======
Weighted Average Basic Shares 5,210,950 5,192,118 5,204,742 5,164,922
Weighted Average Diluted Shares 5,210,950 5,192,120 5,204,742 5,164,922
Basic Net (Loss) Earnings Per Share as Reported $(.02) $.01 $(.08) $(.01)
Basic Pro Forma Net (Loss) Earnings Per Share $(.02) $.01 $(.08) $(.01)
Diluted Net (Loss) Earnings Per Share as Reported $(.02) $.01 $(.08) $(.01)
Diluted Pro Forma Net (Loss) Earnings Per Share $(.02) $.01 $(.08) $(.01)
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 three and nine months ended June 30,
2006. 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:
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
6. STOCK OPTIONS (CONTINUED)
Assumptions:
Risk-free interest rate 3.58%
Dividend 0%
Expected life in years 5 years
Expected volatility 84%
7. DISCONTINUED OPERATIONS
On May 31, 2006, the Company's wholly owned subsidiary, General Sound (Texas)
Company ("General Sound") that operated in Dallas/Ft. Worth, Texas sold its
inventory, property, trade name, business and operations to LCR Sound, a Texas
company. The operations of General Sound are reported as discontinued for all
periods presented in the Condensed Consolidated Financial Statements. Under
terms of the Asset Purchase Agreement, General Sound received cash proceeds from
the buyer of $518,000 for its inventory, property and equipment resulting in a
gain of $267,042. The buyer assumed responsibility for the remaining term of the
lease for its office and warehouse space. General Sound retained cash and all
accounts receivable and remains responsible for all existing liabilities, which
have substantially been paid as of June 30, 2006.
The results of the discontinued operations for the three and nine months ended
June 30, 2006 and 2005 are as follows:
Three Months ended June 30, Nine Months ended June 30,
2006 2005 2006 2005
---- ---- ---- ----
Sales $ 225,024 $ 853,872 $ 1,397,781 $ 2,016,110
Cost of Sales 273,991 532,247 1,110,681 1,348,324
Operating expenses 230,857 261,687 701,778 781,641
----------- ----------- ----------- -----------
Operating (loss) income $ (279,824) $ (59,938) $ (414,678) $ (113,855)
Gain on sale of assets 267,042 -0- 267,042 -0-
----------- ----------- ----------- -----------
(Loss) income before taxes $ (12,782) $ (59,938) $ (147,636) $ (113,855)
=========== =========== =========== ===========
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
8. EARNINGS (LOSS) PER SHARE
The Financial Accounting Standards Board issued "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.
Three Months ended June 30, Nine Months ended June 30,
---------------------------- ---------------------------
2006 2005 2006 2005
-------------------------------- ------------------------------
Net (loss) income from continuing
operations available to common
stockholders $(98,132) $20,217 $(328,209) $14,696
Net (loss) income from discontinued
operations available to common
stockholders (8,782) 34,938 (99,636) (74,855)
--------- --------- --------- ---------
Net (loss) income available to common $(106,914) $55,155 $(427,845) $(60,159)
Stockholders
Basic EPS Computation
Weighted average outstanding shares 5,210,950 5,192,118 5,204,742 5,164,922
--------- --------- --------- ---------
Basic (Loss) Income Per Share
from continuing operation ($.02) $.00 ($.06) $.00
Basic (Loss) Income Per Share
from discontinued operations (.00) .01 (.02) (.01)
Basic net (loss) income per basic share ($.02) $.01 ($.08) ($.01)
====== ==== ====== ======
Diluted EPS Computation
Weighted-average shares-basic 5,210,950 5,192,118 5,204,742 5,164,922
--------- --------- ----------- ---------
Plus: Incremental shares from
assumed conversions
Employee Stock Options* 12,563
Warrants* 6,439
------
Dilutive common shares 19,002
------
Adjusted weighted average shares diluted 5,210,950 5,211,120 5,204,742 5,164,922
--------- --------- --------- ---------
Diluted (Loss) Income Per Share ($.02) $.00 ($.06) ($.00)
from continuing operations
Diluted (Loss) Income per share (.00) .01 (.02) (.01)
from discontinued operations
Diluted net (loss) income per share ($.02) $.01 ($.08) ($.01)
====== ==== ====== =======
* All options and warrants were antidilutive in the three and nine months ended
2006.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
9. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), "Share-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.
In July 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" (FIN 48). Fin 48 clarifies the
accounting and reporting for uncertainties in income tax law. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This Interpretation shall
be effective for fiscal years beginning after December 15, 2006. Earlier
adoption is permitted as of the beginning of an enterprise's fiscal year,
provided the enterprise has not yet issued financial statements, including
financial statements for any interim period for that year. The cumulative
effect, if any, of applying this Interpretation will be recorded as an
adjustment to retained earnings as of the beginning of the period of adoption.
The Company has commenced the process of evaluating the expected effect of FIN
48 on its Consolidated Financial Statements and is currently not yet in a
position to determine such effects.
Item 2. Management's Discussion and Analysis or Plan of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $3 million revolving credit facility with TD Bank North
(formerly Hudson United Bank) (the "Credit Facility"). This credit facility
carries an interest rate of prime plus 1/4% and expires June 1, 2007. Advances
under the Credit Facility are measured against a borrowing base calculated on
eligible trade receivables and inventories. The Credit Facility is secured by
all assets of the Company and all of its operating subsidiaries.
The Credit Facility includes various covenants, which among other things,
impose limitations on declaring or paying dividends, acquisitions and capital
expenditures. The Company is also required to maintain certain financial ratios
and tangible net worth covenants. At June 30, 2006, the Company was not in
default with any of its financial covenants and at such time the full amount of
the Credit Facility was available under the borrowing base calculation. At June
30, 2006, $909,138 was owed under the Credit Facility.
Net cash provided by continuing operations for the nine months ended June
30, 2006 amounted to $512,380 as compared to $800,713 for the comparable prior
year. The decrease in cash provided by operations was primarily due to a
$342,905 increase in the net loss incurred during the nine months of 2006 and
from a $53,718 increase in cash inflows related to changes in operating assets
and liabilities in 2006. These changes in operating assets and liabilities
reflect $894,646 increased collection of accounts receivable, $23,942 decrease
in prepaid expenses and other current assets and from a $155,279 increase in
deferred revenue. The increase in deferred revenue relates to a change in
billing for service contracts to a quarterly basis rather than a monthly basis.
These positive changes in operating assets were offset by a $84,509 increase in
inventory to take advantage of certain trade discounts, incentive awards, and to
purchase material ahead of price increases, and by a $226,000 increase in income
tax receivable resulting from the operating losses, by a $607,977 decrease in
accounts payable and accrued expense reflecting pay down of balances due to
several subcontractors and vendors and by a $60,897 increase in other assets
which represents capitalized cost of development of a new interface board for a
proprietary fire alarm system. The increase in cash used by operating activities
of the discontinued operation is primarily due to an increase in an operating
loss caused by a decline in product revenue. The net cash inflow of $142,920
from operations during the 2006 period along with cash on hand and $518,000 of
proceeds of sales from discontinued operations was used for equipment purchases
of $198,463 and to decrease bank borrowing by $540,168.
The ratio of the Company's current assets to current liabilities decreased
to approximately 2.43 to 1 at June 30, 2006 compared to 3.49 to 1 at June 30,
2005. The decrease in the current ratio is due to our bank debt being a current
liability in 2006 and being a long term liability in 2005. Had our bank debt
remained a long term liability in 2006, the current ratio would have been 3.23
to 1. The company will be discussing with its bank for the extension of the
credit facility beyond its June 2007 maturity date. The effect of the extension
will be to return the credit facility to a long term liability.
Item 2. Management's Discussion and Analysis or Plan of Operations
Results of Operations
Revenues and Gross Profit
The operations of General Sound are excluded from the table below and are
reported as discontinued for all periods presented in the Condensed Consolidated
Financial Statements.
Three Months Ended Nine Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
(In thousands of dollars)
Product Revenue $ 2,456 $ 2,920 $ 7,122 $ 8,574
Subcontract Revenue 127 155 430 460
Service Revenue 1,348 1,220 3,818 3,478
------ ------ ------ ------
Total Revenue $ 3,931 $ 4,295 $11,370 $12,512
====== ====== ====== ======
Gross Profit Product 691 978 1.880 2,650
Gross Profit Subcontract 24 29 86 84
Gross Profit Service 646 417 1,766 1,209
------- ------- ------- -------
Total Gross Profit $ 1,361 $ 1,424 $ 3,732 $ 3,943
======= ======= ======= =======
Gross Margin Product % 28% 33% 26% 31%
Gross Margin Subcontract % 19% 19% 20% 18%
Gross Margin Service % 48% 34% 46% 35%
Revenues
The Company's product revenues during the three and nine months ended June 30,
2006 decreased 16% and 17% from the respective 2005 periods. These decreases in
product revenues primarily resulted from lower shipments with respect to transit
products which reflects a lower level of orders and the timing of releases
required by customers. Due to the retirement of key personnel in December, 2005
and related changes in the process for securing transit work in New York, the
Company had to substantially overhaul the management structure and marketing
strategies for transit products. The Company continues to actively bid new
orders and has quotations outstanding for several large projects that resulted
from the changes noted above. The Company has also added sales personnel and
products to its life safety, security, and audio visual product lines.
Subcontract revenue decreased during the current three and nine month periods as
the Company was responsible for various small electrical installation projects
in both the 2006 and 2005 periods.
Service revenues increased during the three and six month periods of 2006. The
increase in both periods is due to an increase in call-in service on fire alarm
systems (replacement parts and service required by buildings) and from an
increase in service contract revenue related to additional customers and higher
fees on renewal of contracts compared to the prior year periods.
Item 2. Management's Discussion and Analysis or Plan of Operations
Gross Profit
Gross profit on product revenues for the three and nine months ended June 30,
2006 decreased compared to the respective 2005 periods. The decrease in absolute
gross profit is primarily related to the declines in product sales (noted
above). The decrease in gross margin percentage during the current three month
and nine periods in 2006 is related to lower sales on which to absorb overhead,
which is relatively fixed in nature.
Gross profit related to subcontract revenues for the three months ended June 30,
2006, decreased in absolute terms due to the decrease in revenue related to
electrical installation during this period. For the nine month period ended June
30, 2006 higher markups were obtained on electrical installations than in the
prior year period.
Gross profit on service revenues for the three and nine months ended June 30,
2006, increased due to the increase in call-in service and from higher service
contract revenue (noted above). The improvement in absolute gross profit and
gross margin percent was primarily related to the additional revenue and was
also aided by a decrease in technical staff as the Company reevaluated its
customer support staffing level and implemented staff reductions.
Income Before Tax
The decline in income and increase in loss before income taxes during the three
and nine months ended June 30, 2006 is primarily due to the decrease in gross
profit caused by anticipated lower product revenue. The decrease in product
gross profit was partially offset by higher gross profit from service revenues.
The improvement in service gross profit was attributed to higher revenue and, in
part, by a decrease in technical staff. For the three months ended June 30,
2006, selling, general and administrative expenses increased $140,000 primarily
due to $120,000 of budgeted severance payments. Otherwise, the increase in
selling, general and administrative costs was minimal compared to the prior year
three month period as the Company benefited from certain reductions in work
force that were implemented in the first quarter of fiscal 2006. For the nine
months ended June 30, 2006, selling, general and administrative expenses
increased $359,000 over the prior year period as the Company incurred $66,000 of
additional recruitment costs (which total $97,000 as the Company retools its
sales, marketing, and project management disciplines) from $185,000 of increases
related to additional staff to develop and strengthen our sales and marketing
(which is geared to support higher product revenues) and from the $120,000 of
budgeted severance cost noted above. Additional severance costs of $56,000 were
included in product and service costs for the nine months ended June 30, 2006.
Interest expense increased during 2006 due to both higher interest rates and
higher average borrowing levels. For the three and nine months of 2006, the
Company recorded a loss of $18,000 and $60,000, respectively, on its equity in
the operating loss of Secure 724 LP.
Tax Provision
The Company's current income tax provision represents the benefit from a 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 is a
non-current deferred tax liability as it relates to differences between
financial reporting and tax bases of assets and liabilities.
2. Management's Discussion and Analysis or Plan of Operations
Discontinued Operations
On May 31, 2006, the Company's wholly owned subsidiary, General Sound (Texas)
Company ("General Sound") that operated in Dallas/Ft. Worth, Texas sold its
inventory, property, trade name, business and operations to LCR Sound, a Texas
company. Under terms of the Asset Purchase Agreement, General Sound received
cash proceeds from the buyer of $518,000 for its inventory, property and
equipment resulting in a gain of $267,042. The buyer assumed responsibility for
the remaining term of the lease for its office and warehouse space. General
Sound retained cash and all accounts receivable and remains responsible for all
existing liabilities which have substantially been paid as of June 30, 2006.
The operations of General Sound are reported as discontinued for all periods
presented in the Condensed Consolidated Financial Statements.
For the three and nine months ended June 30, 2006 and 2005, the loss from
discontinued operations consists of the following:
Three months ended June 30, Nine months ended June 30,
2006 2005 2006 2005
---- ---- ---- ----
Operating (Loss) income ($279,824) ($59,938) ($414,678) ($113,855)
Gain on sales of assets 267,042 -- 267,042 --
---------- --------- ------- --------
(Loss) income before taxes ($12,782) ($59,938) ($147,636) ($113,855)
---------- --------- --------- --------
Order Position
The Company's order position, excluding service, at June 30, 2006 was $7,007,000
as compared to $7,972,000 at September 30, 2005 and $9,719,000 at June 30, 2005.
The order position has been restated to exclude the discontinued operations.
This order position includes large orders received for several subway complexes
which will be deliverable over several years as the projects are released. 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 is actively seeking orders where
the Company would act as a prime contractor and be responsible for management of
the project as well as electrical installation. The Company is also looking for
potential acquisitions that would enable it to add incremental products and
customers to over absorb fixed overheads.
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
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 this Quarterly Report.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control systems
are met. Because of the inherent limitations in all control systems no
evaluation of control can provide absolute assurance that all control issues, if
any, within a company have been detected. Such limitations include the fact that
human judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
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.
None
Item 6. Exhibits
(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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SYNERGX SYSTEMS INC
(Registrant)
/S/ John A. Poserina
------------------------------
John A. Poserina,
Chief Financial Officer
(Principal Accounting and
Financial Officer), Secretary
And Director
Date: August 11, 2006