SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2006
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: $15,826,000
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 12, 2006 was $4,478,363
As of December 12, 2006, the Registrant had 5,210,950 shares of Common
Stock outstanding.
Documents Incorporated by Reference: Definitive Proxy Statement to be filed.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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. 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
CASEY SYSTEMS. Synergx's principal operating 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.
Transit. Casey designs, develops, manufactures (through third party sources),
and implements sophisticated security and communication solutions for the
transportation sector. Casey's transportation products and services are in use
by agencies such as the MTA - New York City Transit, Long Island Rail Road, New
Jersey Transit and AMTRAK. Casey has invested heavily in a highly skilled team
of engineering professionals who have developed security systems for mass
transit and have positioned itself as a premier supplier of security systems to
MTA - New York City Transit.
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 an 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.
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 conducted 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. In May 2006, General Sounds sold its inventory, property,
trade name, business and operations. For information on the sale and
discontinued operations of General Sound see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION"
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. Due to insufficient cash flow, lack of outside financing, and slow
progress and uncertainty in bringing its product to market, an impairment charge
of $377,264 was recorded to fully reserve for the recovery of the equity
investment and loans made to Secure 724. In addition in 2006, the Company
recorded an adjustment to the equity investment of $60,000 to reflect the
Company's 25% portion of the net loss of Secure 724 LP. The Company is
negotiating to sell its entire interest in Secure 724. However, there can be no
assurance that such sale can be made for an amount and terms acceptable to the
Company.
RESEARCH AND DEVELOPMENT. During the fiscal years ended September 30, 2006 and
2005, Synergx spent approximately $114,000 and $121,000, respectively, for
research and development of Synergx's life safety and communication systems.
CUSTOMERS AND SUPPLIERS. For the fiscal years ended September 30, 2006 and 2005,
no customer accounted for more than 10% of Synergx's revenues. One supplier
accounted for 7% and 10% of Synergx's cost of sales in the years ended September
30, 2006 and 2005, 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, 2006, Synergx and its subsidiaries had 92 full
time employees, including 32 New York hourly employees that are covered by a
Collective Bargaining Agreement expiring March 2009.
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 that was to
expire in June 2007. In 2006, the lease was extended on similar terms to expire
June 30, 2012.The rental schedule provides for monthly rent of $16,600 during
2006 with 3.5% 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.
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, 2006 which quotations were
obtained from the National Association of Securities Dealers Inc.
Common Stock Bid Ask
Quarter Ended High Low High Low
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
December 31, 2005 2.590 1.680 2.610 1.720
March 31, 2006 2.430 1.580 2.450 1.630
June 30, 2006 2.060 1.250 2.090 1.320
September 30, 2006 1.860 1.210 1.890 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 12, 2006, there were 252 record holders of
Synergx's Common Stock.
On December 12, 2006, the closing bid and ask prices for the Common Stock
were $1.69 and $1.70, 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 OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $3 million revolving credit facility with TD Banknorth,
N.A. (formerly, Hudson United Bank) (the "Credit Facility"). This credit
facility has an annual interest rate of prime plus 1/4% and was to expire in
June 2007. On December 26, 2006, the credit facility was extended to expire in
January 2008. 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, 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
September 30, 2006, $929,000 was owed under the Credit Facility.
Net cash used in continuing operations for the year ended September 30,
2006 amounted to $64,000 as compared to cash being provided by continuing
operations of $11,000 for the comparable prior year. The increase in cash being
used in operations was primarily due to a $613,000 loss from continuing
operations in 2006 which is offset by a $437,000 non-cash impairment charge for
the investment in Secure 724 and also a non-cash ($253,000) deferred income
taxes (benefit). In contrast, there was a $50,000 operating profit from
continuing operations in 2005.
In 2006, there was a net $131,000 cash inflow provided by discontinued
operations that resulted from the business being sold in 2006 for $518,000,
which funded the decline in business in 2006 of the discontinued operation. In
contrast, for 2005 the discontinued operation provided a cash inflow of $407,000
from operations.
In 2006, the net $612,000 cash inflow from the combination of continuing
operations and discontinued operations (which includes the $518,000 of proceeds
from the sale of the discontinued operation), along with cash on hand was used
to purchase $256,000 of capital assets (primarily for a new management
information system) and to reduce bank borrowings by $520,000.
The ratio of the Company's current assets to current liabilities increased
to approximately 3.04 to 1 at September 30, 2006 compared to 3.01 to 1 at
September 30, 2005.
RESULTS OF OPERATIONS
Revenues and Gross Profit
For the years ended September 30,
2006 2005
(In thousands)
Product Sales ................................ $10,059 $12,358
Subcontract Sales ............................ 665 475
Service Revenue .............................. 5,101 4,798
------- -------
Total Revenue ......................... $15,825 $17,631
------- -------
Product Gross Margin ......................... $ 2,678 $ 3,666
Subcontract Gross Margin ..................... 127 90
Service Gross Margin ......................... 2,363 1,676
------- -------
Total Gross Margin ................... $ 5,168 $ 5,432
------- -------
Gross Profit Product % ....................... 27% 30%
Gross Profit Subcontractor % ................. 19% 19%
Gross Profit Service % ....................... 46% 35%
------- -------
Total Gross Profit % ................ 33% 31%
Revenues
The decrease in product revenues resulted primarily from lower shipments of
transit products that reflected a lower level of orders and the timing of
releases required by customers. Due to the retirement in December 2005 of key
personnel involved in transit work in New York, the Company substantially
overhauled the management structure and marketing strategies for transit
products. The benefit of the restructuring and marketing strategies has not
resulted in shipments during 2006. The Company continues to bid on new orders
and has quotations outstanding for several large transit projects. In addition,
the Company has put into effect certain cost reduction initiatives with a view
towards pricing business aggressively in the New York City metropolitan area.
Subcontract revenue increased during 2006 as the Company was responsible as
prime contractor for more electrical installations in 2006 compared to similar
projects in 2005.
Service revenues increased 6% during 2006 primarily 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 new
customers and higher fees on renewal of contracts compared to 2005. The service
contract base of customers continued to increase in 2006 due to new customers in
our New York City and Long Island, New York areas.
Gross Profit
Gross profit margin from product revenues decreased 27% to $2,678,000 due
to lower product sales (noted above) and related gross margin. Gross profit
margin as a percentage of product revenues was 27% in 2006 compared to 30% in
2005. This decline in gross profit percentage was due to lower sales on which to
absorb overhead, which is relatively fixed in nature.
Gross profit margin related to subcontract revenues for 2006 increased in
absolute terms as the Company was responsible for a larger amount of electrical
installation by third parties (subcontract work).
Gross profit margin from service revenues increased during 2006 due to
higher service revenue which resulted from the increases in call-in and service
contract revenues noted above. Gross profit margin was also favorably affected
by certain reductions in the number of service technicians as the Company
reevaluated its customer support staffing level during 2006.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("S G &A") increased $395,000
in 2006 over 2005 primarily due to $214,000 of expenses to upgrade the Company
sales, marketing, project management and information technology personnel,
systems and procedures. These were higher than normal expenses and include
$29,000 of additional recruitment fees (total of $104,000 in 2006, and $75,000
in 2005 and $13,000 in 2004), $120,000 of budgeted severance costs; $41,000 of
additional computer consulting costs to upgrade the Company's information
technology system, and $24,000 of additional professional fees related to the
sale of the discontinued operations in Dallas and employment compliance
regarding staff reductions. There was also an increase of $123,000 due to higher
sales and marketing personnel expenses which are geared to support higher
product revenues. Consequently, S G & A expenses as a percentage of sales
increased 5.6% to 34.1% in 2006 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, but
management expects S G & A expenses and S G & A as a percentage of sales to
decline in 2007.
Income (Loss) Before Tax
The loss before income taxes during 2006 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
that resulted from higher service revenues (noted above) and a reduction in
service staff. Selling, general and administrative expenses increased $395,000
and remained at a high level geared to support higher product sales. For 2006,
the Company recorded a loss of $437,000 on its equity in the operating loss of
Secure 724 LP compared to a loss of $76,000 in 2005. The loss in 2006 includes
an impairment charge of $377,264 related to the investment in and loans to
Secure 724. These investments were deemed to be impaired because of insufficient
cash flow, lack of outside funding and slow progress and uncertainty on bringing
its product to market. The Company is negotiating to sell its entire interest in
Secure 724. However, there can be no assurance that such sale can be made for an
amount and terms acceptable to the Company.
Tax Provision
The Company's current income tax (benefit) provision represents federal,
state and local income taxes. Deferred taxes represents the net change in
current and noncurrent deferred tax assets and noncurrent deferred tax liability
as it related to certain timing differences of book and tax deductions.
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, and goodwill resulting in a gain of $197,901. 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 September 30, 2006.
The operations of General Sound are reported as discontinued for all
periods presented in the accompanying Consolidated Financial Statements.
The results of the discontinued operations for the years ended September 30,
2006 and 2005 are as follows:
Years ended September 30,
2006 2005
----------- -----------
Sales $ 1,398,809 $ 3,156,761
Cost of Sales 1,113,211 2,013,639
Operating expenses 684,584 1,009,286
----------- -----------
Operating (loss) income ($ 398,986) 133,836
Gain on sale of assets 197,901 -0-
----------- -----------
(Loss) income before taxes ($ 201,085) $ 133,836
=========== ===========
Order Position
Synergx's order position, excluding service, was $8.0 million at September
30, 2006 compared to $7.9 million at September 30, 2005. The order position has
been adjusted to exclude the discontinued operations. 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 the booking of the
contract and its revenue realization. The order position from time to time
includes, and the Company continues to bid on, projects that include
subcontractor labor, (electrical installation performed by others). The Company
expects to be active in seeking orders where the Company would act as a prime
contractor and responsible for management of the project as well as electrical
installation.
Plan of Operations
During fiscal 2007, 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. Management will concentrate 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. However, competition remains severe in many of the Company's
product categories. 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
2007.
Management will be reviewing inventory levels with a view towards generally
reducing inventory levels in 2007. The Company will be assessing the use of
third party vendors to procure and manufacture products and to reduce its
inventory levels of products distributed to and held for customer service.
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 efficiency initiatives, expense reductions
and, if possible, price increases.
Off-Balance Sheet Arrangements
As of September 30, 2006, the Company did not have any off-balance sheet
debt nor did it have any transactions, arrangements, obligations (including
contingent obligations) or other relationships with any unconsolidated entities
or other persons, other than as disclosed in Note 6, that may have a material
current or future effect on financial condition, changes in financial condition,
results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses.
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, 2006 F2 - F3
Consolidated Statements of Operations
Years Ended September 30, 2006 and 2005 F4
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 2006 and 2005 F5
Consolidated Statements of Cash Flows
Years Ended September 30, 2006 and 2005 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 Officers, Promoters, Control Persons and Corporate
Governance; 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 2006 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 2006 Annual Meeting of Stockholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item is incorporated by reference from our
definitive Proxy Statement for the 2006 Annual Meeting of Stockholders.
Item 12. Certain Relationships and Related Transactions, and Director
Independence
The information required by this Item is incorporated by reference from our
definitive Proxy Statement for the 2006 Annual Meeting of Stockholders.
ITEM 13. EXHIBITS
(a) Exhibits
Exhibit No. Description of Exhibit
3.1 Certificate of Incorporation of the Company, as amended (6)
3.2 By-Laws of the Company (2)
4.1 Specimen Common Stock Certificate (2)
10.1 Credit Facility dated October 9, 2003 between Synergx Systems Inc. as
borrower and Hudson United Bank as lender. (5)
10.2 Employment Agreement between Casey Systems Inc. and Al Koenig dated as of
February 17, 2005 (7)
10.3 Employment Agreement between Synergx Systems Inc. and Daniel S. Tamkin
dated as of October 1, 2005. (7)
10.4 Second Amendment to Revolving Loan Agreement, Promissory Note and Other
Loan Documents, between Synergx Systems Inc. and TD Banknorth, N.A., dated
as of September 29, 2006.*
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 *
23.1 Consent of Marcum & Kliegman LLP Independent Registered Public Accounting
Firm *
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.
(6) Reference is made to the correspondingly numbered Exhibit to the Company's
Amendment to Annual Report on Form 10-KSB/A for the Fiscal Year Ended
September 30, 2002 which Exhibit is incorporated herein by reference.
(7) 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, 2005
which Exhibit is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from our
definitive Proxy Statement for the 2006 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 26, 2006
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.
Name Title Date
/s/ Daniel S. Tamkin Chairman of the Board; December 26, 2006
------------------------- Chief Executive Officer; and
Daniel S. Tamkin Director
/s/ John A. Poserina Chief Financial Officer December 26, 2006
------------------------- (Principal Accounting and
John A. Poserina. Financial Officer), Secretary
And Director
/s/ Harris Epstein Director December 26, 2006
-------------------------
Harris Epstein
/s/ Mitchell J. Sanders Director December 26, 2006
-------------------------
Mitchell J. Sanders
/s/ Mark Litwin Director December 26, 2006
--------------------------
Mark Litwin
/s/ J. Ian Dalrymple Director December 26, 2006
--------------------------
J. Ian Dalrymple
/s/ Gary Oreman Director December 26, 2006
--------------------------
Gary Oreman
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, 2006 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 2006 and 2005. 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, 2006 and the consolidated
results of their operations and their cash flows for the years ended September
30, 2006 and 2005, in conformity with accounting principles generally accepted
in the United States of America.
/s/ MARCUM & KLIEGMAN LLP
New York, NY
December 12, 2006 except for Note 5 which is as of December 26, 2006
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2006
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 273,000
Accounts receivable, principally trade, less allowance
for doubtful accounts of $352,685 6,019,000
Inventories, net 2,040,000
Deferred taxes 516,000
Prepaid expenses and other current assets 213,000
Income Tax Receivable 82,000
-----------
TOTAL CURRENT ASSETS 9,143,000
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,611,000 776,000
OTHER ASSETS 207,000
DEFERRED TAXES 4,000
-----------
TOTAL ASSETS $10,130,000
===========
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2006
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - current portion $ 27,000
Accounts payable and accrued expenses 2,075,000
Deferred revenue 904,000
-----------
TOTAL CURRENT LIABILITIES 3,006,000
Note payable to bank 929,000
Notes payable - less current portion 90,000
-----------
TOTAL LIABILITIES 4,025,000
-----------
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 5,000
Additional Paid in Capital 6,804,000
Accumulated deficit (704,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 6,105,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,130,000
===========
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Yeasr Ended September 30,
2006 2005
---- ----
Product sales $ 10,059,000 $ 12,358,000
Subcontract sales 665,000 475,000
Service revenue 5,101,000 4,798,000
------------ ------------
Total revenues 15,825,000 17,631,000
------------ ------------
Cost of product sales 7,381,000 8,692,000
Cost of subcontract sales 538,000 384,000
Cost of service revenue 2,738,000 3,122,000
Selling, general and administrative 5,389,000 4,993,000
Depreciation and amortization 178,000 147,000
------------ ------------
Total operating expenses 16,224,000 17,338,000
(Loss) income from operations (399,000) 293,000
Other expenses:
Interest expense (106,000) (111,000)
(Loss) on equity investment (437,000) (76,000)
------------ ------------
Total other expenses (543,000) (187,000)
------------ ------------
(Loss) income before (benefit) provision for income taxes (942,000) 106,000
------------ ------------
(Benefit) provision for income taxes:
Current (76,000) 49,000
Deferred (253,000) 7,000
------------ ------------
(329,000) 56,000
------------ ------------
(Loss) income from continuing operations (613,000) 50,000
Discontinued operations (Note 3):
(Loss) income from discontinued operations (201,000) 134,000
Deferred income tax (benefit) provision (69,000) 54,000
------------ ------------
(Loss) income from discontinued operations (132,000) 80,000
Net (loss) income $ (745,000) $ 130,000
============ ============
(Loss) Per Common Share:
Basic (loss) income from continuing operations $ (0.12) $ 0.01
Basic (loss) income from discontinued operations $ (0.02) $ 0.02
------------ ------------
Basic (loss) income Per Share $ (0.14) $ 0.03
============ ============
Diluted (loss) income from continuing operations $ (0.12) $ 0.01
Diluted (loss) income from discontinued operations $ (0.02) $ 0.02
------------ ------------
Diluted (loss) income Per Share $ (0.14) $ 0.03
============ ============
Weighted average number of common shares outstanding-basic 5,206,453 5,171,721
Weighted average number of common and
common shares equivalents outstanding-diluted 5,206,453 5,193,276
See accompanying Notes to the Consolidated Financial Statements
SYNERGX SYSTEMS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2006 and 2005
(ACCUMULATED
TOTAL ADDITIONAL DEFICIT)/
STOCKHOLDERS' COMMON STOCK PAID IN RETAINED
EQUITY SHARES AMOUNT CAPITAL EARNINGS
----------- ----------- ----------- ----------- -----------
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 0 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
Exercise of employee stock options $ 9,000 18,832 0 $ 9,000
Tax benefit of stock option exercise $ 10,000 $ 10,000
Net (Loss) (745,000) (745,000)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2006 $ 6,105,000 $ 5,210,950 5,000 $ 6,804,000 $ (704,000)
=========== =========== =========== =========== ===========
See accompanying Notes to the Consolidated Financial Statements.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
2006 2005
----- -----
OPERATING ACTIVITIES
Net (Loss) income from continuing operations $(613,000) $ 50,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization * 193,000 161,000
Deferred tax (benefit) (253,000) 32,000
Loss on equity investment 437,000 76,000
Changes in operating assets and liabilities:
Accounts receivable, net 290,000 (884,000)
Inventories 167,000 255,000
Prepaid expenses and other current assets 43,000 (9,000)
Income Tax Receivable (82,000)
Other assets 24,000 (27,000)
Accounts payable and accrued expenses (464,000) 275,000
Deferred revenue 194,000 82,000
--------- ---------
Net cash (used in) provided by continuing operations (64,000) 11,000
Net cash provided by operating activities of discontinued operation 158,000 407,000
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 94,000 418,000
--------- ---------
INVESTING ACTIVITIES
Restricted cash (51,000)
Purchases of property and equipment (256,000) (280,000)
--------- ---------
Net cash (used in) continuing operations (256,000) (331,000)
Net cash (used in) provided by investing activies of discontinued operations 518,000 (8,000)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 262,000 (339,000)
--------- ---------
FINANCING ACTIVITIES
Principal payments on notes payable (11,000) (8,000)
Payments and proceeds from note payable bank - net (520,000) (466,000)
Proceeds from exercise of stock options and warrants 9,000 28,000
--------- ---------
Net cash (used in) continuing operations (522,000) (446,000)
Net cash (used in) financing activites of discontinued operations (27,000) (21,000)
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (549,000) (467,000)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (193,000) (388,000)
Cash and cash equivalents at beginning of the year 466,000 854,000
--------- ---------
Cash and cash equivalents at end of the year $ 273,000 $ 466,000
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 48,000 $ 7,000
Interest $ 105,000 $ 89,000
NON-CASH INVESTING AND FINANCING ACTIVITIES
Included in the year ended September 30, 2006, was the purchase of equipment
for $116,000 through financing.
Tax benefits of $10,000 and $25,000 from employees stock options exercise were
recorded in the years ended September 30, 2006 and 2005, respectively.
* Depreciation of $15,000 and $14,000 is included in cost of product sales for
the years ended September 30, 2006 and 2005, respectively.
See accompanying Notes to the Consolidated Financial Statements
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.
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"), and Systems Service
Technology Corp. ("SST"). And General Sound (Texa) Company ("General Sound"),
which was sold in May 2006 and is reflected as a discontinued operation. See
Note 3 Discontinued Operations. 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.
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 income.
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 products 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 for long term contracts are recognized, using
the percentage-of-completion method of accounting. 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 $47,000 at September 30, 2006 and have been included
in other current assets. Billings in excess of costs and estimated profits were
$109,000 at September 30, 2006
Revenue Recognition (continued)
and have been included in deferred revenue. Product sales for short term
contracts are recognized when the services are preformed or the product has been
delivered, which is when title to the product and risk of loss have been
substantially transferred to the customer and collection is reasonably assured.
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. Revenue is recognized when these services are preformed
at the job site.
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, 2006 reflects an
inventory allowance of $392,000.
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.
Other Assets
Other assets consist of security deposits of $48,000 and goodwill related to the
acquisition of Casey Systems of approximately $34,000 and restricted cash on
deposit with the Company's bank of $125,000.
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. The Company has determined that there was no impairment of
goodwill at September 30, 2006.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the years
ended September 30, 2006 and 2005 amounted to $45,000 and $35,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs for the years ended September 30, 2006 and 2005 amounted to
$114,000 and $121,000, 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.
Cash Equivalents
The Company considers all investments with original maturities of three months
or less when purchased to be cash equivalents.
Restricted Cash
In connection with the Credit Facility with its bank, the Company has on deposit
$125,000 that is restricted as to use that has been included in other assets.
Concentration of Credit Risk
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. The Company does not require
collateral to support financial instruments subject to credit risk.
At September 30, 2006, the Company had cash of approximately $92,000, 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 Stock Options and Similar Equity Instruments (continued)
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
income and diluted net earnings per share as if the fair value-based method had
been applied to all awards.
Years Ended September 30,
2006 2005
Net (Loss) Income $ (745,000) $ 130,000
Less: Fair Value of Options issued to
employees and directors, net of income tax (16,000) (13,000)
----------- -----------
Pro Forma Net (loss) Income $ (761,000) $ 117,000
=========== ===========
Weighted Average Basic Shares 5,206,493 5,171,721
Weighted Average Diluted Shares 5,206,493 5,193,276
Basic Net Income Per Share as Reported $ (.14) $ .03
Basic Pro Forma Net Income per share $ (.15) $ .02
Diluted Net Income Per Share as Reported $ (.14) $ .03
Diluted Pro Forma Net Income per share $ (.15) $ .02
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, 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:
Assumptions:
Risk-free interest rate 3.58%
Dividend 0
Expected life in years 5 years
Expected volatility 84%
2. Property and Equipment
Property and equipment at September 30, 2006 are summarized as follows:
Machinery and equipment $2,112,000
Furniture and fixtures 164,000
Leasehold improvements 111,000
------------
2,387,000
Less accumulated depreciation and amortization
1,611,000
------------
$ 776,000
============
Depreciation and amortization expense related to these assets were $189,000 and
$129,000 for the years ended September 30, 2006 and 2005, respectively.
3. 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 Consolidated Financial Statements. Under terms of the
asset purchase agreement, General Sound received cash proceeds from the buyer of
$518,000 for its inventory ($203,215), property and equipment ($47,744) and
goodwill ($69,140) resulting in a gain of $197,901. 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 September 30, 2006.
3. DISCONTINUED OPERATIONS (continued)
The results of the discontinued operations for the years ended September 30,
2006 and 2005 are as follows:
Years ended September 30,
2006 2005
Sales $1,398,809 $3,156,761
Cost of Sales 1,113,211 2,013,639
Operating expenses 684,584 1,009,286
------- ---------
Operating (loss) income ($398,986) 133,836
---------
Gain on sale of assets 197,901 -0-
------- ---------
(Loss) income before taxes $ (201,085) $ 133,836
========== ========
4. Investment in Secure 724 L.P.
In May 2003, the Company acquired a 25% equity interest in Secure 724 LP
("Secure 724 LP"), an Ontario limited partnership. The investment in Secure 724
L.P. was valued at $432,500 and the investment is accounted for utilizing the
equity method. The underlying equity of this investment on the date of the
transaction was approximately $73,000; resulting in goodwill of approximately
$360,000. For the years ended September 30, 2006 and 2005, an adjustment to the
equity investment of $60,000 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 approximately $223,000.
In connection with the initial capital contribution per the partnership
agreement, the Company also entered into note agreements and advanced $18,000 to
Secure 724 LP in May 2003 and upon reaching milestones advanced $125,089 in
August 2003. Additional advances were made to Secure 724 LP in October 2004 of
$7,969 in December 2004 of $12,140 and July 2006 of $4,407. These notes
receivable bear interest at a rate of 4% per annum and matures in May 2006,
August 2006, October 2007, December 2007 and on demand, respectively.
Due to insufficient cash flow, lack of outside financing, and slow progress and
uncertainty of bringing its product to market, the 25% equity investment, and
loans to Secure 724 were deemed to be impaired at September 30, 2006 and an
impairment
4. Investment in Secure 724 L.P )continued)
charge of $377,264 was recorded to fully reserve for recovery of these
investments. The Company is negotiating to sell its entire interest in Secure
724. However, there can be no assurance that such sale can be made for an amount
and terms acceptable to the Company.
5. Long-Term Debt
The Company has a $3 million revolving credit facility with TD Banknorth
(formerly Hudson United Bank) (the "Credit Facility"). The Credit Facility has
an annual interest rate of prime plus 1/4% on outstanding balances (8.50% at
September 30, 2006) and was to expire in June 2007. On December 26, 2006, the
credit facility was extended to expire in January 2008. 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, 2006, the full amount of the Credit Facility was available
under the borrowing base calculation and $929,000 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, 2006 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
---------------- ------------------ -------------
2007 $ 27,000 $ 27,000
2008 $929,000 23,000 952,000
2009 23,000 23,000
2010 23,000 23,000
2011 21,000 21,000
---------------- ------------------ -------------
Total $929,000 $ 117,000 $1,046,000
================ ================== =============
6. Lease Commitments
The Company leases certain office and warehouse space under non cancelable
operating leases expiring at various times through 2012 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 $16,600 during
2006 with 3.3% yearly increases through the expiration of the lease in June
2012. In 2006, the lease was extended on similar terms to expire June 30, 2012.
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 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, 2006:
Total Operating
Leases
2007 301,000
2008 310,000
2009 344,000
2010 232,000
2011 241,000
2012 186,000
------------------
Total minimum lease payments $1,614,000
==================
Rental expense amounted to $299,000 and $305,000, for 2006 and 2005,
respectively.
7. Significant Customers and Suppliers
During fiscal 2006 and 2005, no customer accounted for more than 10% of sales.
One supplier accounted for 7% and 10% of the Company's cost of sales during
fiscal 2006 and 2005, respectively.
8 Income Taxes
During the years ended September 30, 2006 and 2005, the Company recorded a tax
(benefit)/provision of $(329,000) and $56,000, 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,
2006 2005
---------------------------
Statutory federal income tax rate 34% 34%
Computed expected tax (benefit) from income (loss) from continuing
operations before income tax ($320,000) $ 36,000
Increase (decrease)in taxes resulting from:
State and local income tax (benefit), net of Federal income tax (72,000) 12,000
Nondeductible expenses 3,000 2,000
Other 60,000 6,000
-----------------------
Income tax (benefit) expense ($329,000) $ 56,000
=======================
The Company provided $4,000 and $6,000 for state and local franchise and capital
taxes for the years ended September 30, 2006 and 2005, 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 asset at September 30, 2006 and a current deferred tax asset and a current
deferred tax liability at September 30, 2005. These deferred tax assets and
liabilities relate to certain accelerated tax deductions or book provisions to
be deducted in future tax returns and utilization of the 2006 net operating loss
carryforward. Management anticipates profitable operations to resume 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, 2006
consist of the following:
Deferred Tax Assets
-------------------
Allowance for doubtful accounts $141,000
Inventory reserve 157,000
Net operating loss carryforward 218,000
-------
Total deferred tax asset $516,000
Non Current Deferred Tax Asset/Liability
-----------------------------------------
Impairment of equity investment and
Notes receivable in Secure 724 150,000
Depreciation and amortization (146,000)
---------
Total Non Current Deferred Tax Asset/Liability $ 4,000
=========
9. 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 2006 2005
--------------------------
Net (loss) income from continuing
operations $ (613,000) $ 50,000
Net (loss) income from discontinued
operations (132,000) 80,000
----------- -------------
Net (loss) income ($ 745,000) $ 130,000
=========== =============
Basic EPS Computation
Weighted average outstanding shares 5,206,453 5,171,721
----------- -------------
Basic (Loss) Income Per Share
from continuing operation $ (.12) $ .01
Basic (Loss) Income Per Share
from discontinued operations $ (.02) $ .02
----------- -------------
Basic net (loss) income per basic share $ (.14) $ .03
=========== =============
Diluted EPS Computation
Weighted-average shares-basic 5,206,453 5,171,721
Plus: Incremental shares from
assumed conversions
Employee Stock Options* 14,036
Warrants* 7,520
-------------
Dilutive common shares 21,555
-------------
adjusted weighted average shares diluted 5,206,453 5,193,276
----------- -------------
Diluted (Loss) Income Per Share $ (.12) $ .01
from continuing operations
Diluted (Loss) Income per share $ (.02) $ .02
----------- -------------
from discontinued operations
Diluted net (loss) income per share $ (.14) $ .03
=========== =============
* All options and warrants were antidilutive in the year ended September
2006.
10. Employee Stock Options and Warrants
In March 2004, the Company and its stockholders adopted a nonqualified stock
option plan ("2004 Plan"), which will expire March 10, 2009, except as to
options outstanding under a prior 1997 Plan. Under the 2004 Plan, the Board of
Directors may grant options to eligible employees at exercise prices not less
than 100% of the fair market value of the common shares at the time the 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 Company'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.
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, 2006.
Transactions involving stock options are summarized as follows:
Weighted Average
Stock Options Exercise Price of
Outstanding Options Outstanding
Balance September 30, 2004 75,580 .50
Options granted 130,000 2.50
Options exercised (55,256) .50
-------
Balance September 30, 2005 150,324 2.23
=======
Options exercised (18,832) .50
Options expired (23,492) 2.37
-------
Balance September 30, 2006 108,000 2.50
=======
There were 21,600 exercisable options at September 30, 2006 and 20,324
exercisable options at September 30, 2005.
..
During the years ended September 30, 2006 and 2005, employees exercised stock
options to purchase 18,832 and 55,256 shares of Common Stock, respectively, for
total consideration of $9,000 and $28,000, respectively.
10. Employee Stock Options and Warrants (continued)
Outstanding and exercisable stock options are as follows:
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 2005 Contractual Life September 30, 2006
-------------- ------------------ ---------------- ------------------
2.50 108,000 3.5 years 21,600
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 4 -
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, 2004 50,000 1.15
Warrants expired (50,000) 1.15
----------
Balance September 30, 2005 - 0 -
Balance September 30, 2006 - 0 -
11. Contingencies
In the normal course of its operations, the Company has been, or from time to
time may be, named in legal actions seeking monetary damages. Management does
not expect, based upon consultation with legal counsel, that any item exists
that will have a significant impact on the Company's business or financial
condition.
12. Other
Approximately 34% 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
non-union employees. The plan includes a profit sharing provision at the
discretion of the Board of Directors. There was no profit sharing contribution
in 2006 and for 2005 a profit sharing contribution of $41,000 was authorized and
charged to expense.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
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.
14 New Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board issued Statement of
Accounting Financial Standards ("SFAS") No. 123R (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 123R 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 123R 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 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. 123R is effective for small business issuers for the first
annual reporting period that begins after December 15, 2005. The Company plans
to adopt SFAS No. 123R as of October 1, 2006 using the modified prospective
transition method. As a result of adopting SFAS 123R the Company will recognize
approximately $65,000 of compensation costs that will be expensed over the
remaining vesting period.
In July 2006, the Financial Acoounting Standard Board ("FASB") released FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109" ("FIN 48"). FIN 48 clarifies the accounting and
reporting for uncertainties in income tax law. FIN 48 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. FIN 48 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 fiscal year. The
cumulative effects, if any, of applying FIN 48 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
financial position and results of operations and has not yet determined such
effects.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). This statement defines fair value, establishes a framework for
measuring fair value in accordance with accounting principles generally accepted
in the United States ("GAAP"), and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements.
However, for some entities, the application of SFAS 157 will change current
practice. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years, with earlier application permitted. The Company does not expect SFAS 157
to have a material impact on the Company's financial position or results of
operations.
In September 2006, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108 ("SAB 108") which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 becomes effective in fiscal 2007. Adoption of SAB 108 is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or cash flows.