ANNUAL
REPORT
2007
To The
Stockholders of Synergy Systems Inc
Enclosed
you will find our Annual Report for the Fiscal Year ended September 30, 2007 and
the proxy materials related to our upcoming Annual Meeting of
Stockholders.
During
2007 we were successful in increasing revenues overall and, in particular, in
our growing transit and infrastructure markets while reducing our operating
loss. While we certainly were disappointed to not attain
profitability during the fiscal year, we do
believe that our efforts to improve our efficiencies and reduce costs combined
with our increasing revenues should result in improved results.
During
the fiscal year we had a number of principal operating
objectives:
|
·
|
Rebuild
our reputation and order position as a systems integrator of low voltage
systems for the New York City Transit Authority and other
agencies. To that end we were awarded and are performing our
largest ever contract related to security systems for New York City subway
systems (the “TA”). We continue to secure new work across fire
alarm security, public address, data and other systems for the TA,
Metro-North and other rail transit agencies. We are also
expanding our talented group of transit oriented professionals and adding
to the range and scope of the services we
provide.
|
|
·
|
Improve
the efficiency, productivity and customer service related to our life
safety service operation. While this remains a work in process, during the
fiscal year we were able to increase gross profit in this segment from 46%
to 50% and have seen further improvement since the end of the fiscal
year. We believe with the introduction and improvement of
our training, field monitoring and "on line" service reports we will
continue to increase profit margins while improving our customer
service.
|
|
·
|
Completed
the development of component modernization for our proprietary COMTRAK
1720/2000 Life Safety Systems which will provide building owners and
managers with a cost advantageous method to enhance systems
functions. Final regulatory approvals are expected
shortly. In the meantime, we are rolling out an extensive marketing
program to address a large base of users. From this base we are
in the midst of developing new features and benefits for these
systems.
|
|
·
|
Completed
the upgrade/modernization to our computer and administrative
infrastructure. While no company is ever done with “information
technology” we have rolled out for day to day use a variety of advanced
systems for reporting and tracking field labor, project costing, inventory
management and other key aspects of the business. We have
totally retooled our purchasing, receiving, collections and warehouse
procedures and have begun to see progress toward improvement in inventory
and accounts receivable metrics.
|
We are
hopeful that all of the foregoing combined with more robust marketing and higher
sales will result in a return to profitability and a return on equity for our
Stockholders.
Subsequent
to year-end we secured a renewal of our Credit Facility to January
2009.
We have
reorganized our management team and Board of Directors to better position us to
realize our potential. Our Board of Directors slate reflects
industry, finance and general business experience and going forward will all be
local which will facilitate more intensive Board and committee
activity. The President of our principal operating subsidiary has
resigned to pursue other activities and we are adding to our management group to
fill his responsibilities and go forward with our strategic and tactical
objectives.
During
the fiscal year one of our newest directors, Orhan Sadik-Kahn passed away so we
never really enjoyed the benefits of his vast experience due to this tragic
loss.
We would
like to thank Mark Litwin and Ian Dalrymple, who will not stand for re-election
to the Board, for their many years of service to Synergx.
On behalf
of the Board of Directors, I invite each of you to attend our Annual Meeting of
Stockholders at 11:00 a.m. on March 27, 2008 at the offices of our attorneys
Dolgenos Newman & Cronin LLP, 271 Madison Avenue, 12th Floor,
New York, NY.
We thank
you for your continuing support of Synergx.
Daniel S. Tamkin
Chairman and Chief Executive Officer
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY
AND CAPITAL RESOURCES
The
Company has a $3.5 million revolving credit facility with TD Banknorth, N.A.
(the "Bank")(the
“Credit Facility”). The credit facility had been increased to this level in
August 2007. This credit facility has an annual interest rate of prime plus ¼%
and was to expire in January 2008. On December 26, 2007, the
Company received a letter from the Bank agreeing to extend the Credit Facility
to expire on January 31, 2009. 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, 2007, the Company
did not meet one of its financial covenants related to its debt service coverage
ratio. However, the requirement of this covenant was waived by the
Bank in conjunction with the letter agreement to extend the Credit
Facility. At September 30, 2007 the full amount of the Credit Facility was
available under the borrowing base calculation and $2,071,000 was owed under the
Credit Facility.
Net
cash used in continuing operations for the year ended September 30, 2007
amounted to $883,000 as compared to $64,000 for the comparable prior
year. The increase in cash being used in operations was primarily due
to a $375,000 operating loss from continuing operations in 2007 and from an
increase of $683,000 in operating assets and liabilities in
2007. This increase reflects the requirement to fund the
working capital requirement for a $5.0 million transit project. This additional
working capital (primarily an increase in accounts receivable) was funded in
part by an increase of $390,000 in accounts payable and accrued
expenses that resulted from the extension of payment terms from certain
suppliers.
In
2007, the net cash out flow of $883,000 cash
from continuing operations along with the purchases of capital assets
of $281,000 (primarily for a new management information system) was
funded by $1,141,000 of additional bank borrowing.
The
ratio of the Company’s current assets to current liabilities decreased slightly
to approximately 3.01 to 1 at September 30, 2007 compared to 3.04 to 1 at
September 30, 2006.
Management's
Discussion and Analysis of Financial
Condition
and Results of Operations
RESULTS
OF OPERATIONS
Revenues
and Gross Profit
| For the years ended September 30, | ||||||||
|
2007
2006
|
||||||||
|
(In
thousands)
|
||||||||
|
Product
Sales
|
$ |
12,953
|
$ |
10,059
|
||||
|
Subcontract
Sales
|
319
|
665
|
||||||
|
Service
Revenue
|
5,017
|
5,101
|
||||||
|
Total
Revenue
|
$ |
18,289
|
$ |
15,825
|
||||
|
Product
Gross Margin
|
$ |
2,948
|
$ |
2,678
|
||||
|
Subcontract
Gross Margin
|
58
|
127
|
||||||
|
Service
Gross Margin
|
2,485
|
2,363
|
||||||
|
Total
Gross Margin
|
$ |
5,491
|
$ |
5,168
|
||||
|
Gross
Profit Product %
|
23 | % | 27 | % | ||||
|
Gross
Profit Subcontractor %
|
18 | % | 19 | % | ||||
|
Gross
Profit Service %
|
50 | % | 46 | % | ||||
|
Total
Gross Profit %
|
30 | % | 33 | % | ||||
Revenues
The
increase in product revenues resulted primarily from higher shipments of transit
and audio/visual products, particularly a $5.0 million project for a New York
City subway station security system. Revenues of $3.5 million from this project
are included in 2007 product sales. The Company continues to bid on
new orders and has quotations outstanding for several large transit
projects.
Subcontract
revenue decreased during 2007 as the Company was responsible as prime
contractor
for fewer electrical installations in 2007 compared to similar projects in
2006.
Service
revenues decreased 2% during 2007 primarily due to an decrease in call-in
service on fire alarm systems (replacement parts and service required by
buildings).
Management's
Discussion and Analysis of Financial
Condition
and Results of Operations
Gross
Profit
Gross
profit margin from product revenues increased 10% to $2,948,000 due to higher
sales of transit and audio/visual products (noted above) and their related gross
margins. Gross profit margin as a percentage of product revenues was
23% in 2007 compared to 27% in 2006. This decline in gross profit
percentage was due to a shift in product mix to larger projects with lower
margin sales in 2007. While recent audio-visual and transit projects
do involve a lower gross profit percentage than the Company experienced
over the last few years from its product mix, the Company has not
fully begun to benefit from greater revenue levels commensurate with its
increased order position which should result in increased gross margin dollars,
not withstanding the lower gross profit percentage.
Gross
profit margin related to subcontract revenues for 2007 decreased in absolute
terms as the Company was responsible for fewer number of electrical installation
by third parties (subcontract work).
Gross
profit margin from service revenues increased 5% during 2007 primarily due to
certain reductions in the number of service technicians as the Company reduced
its customer support staffing levels during 2007. This improvement was in spite
of the 2% reduction in service revenue caused by lower call-in-service on fire
alarm systems (noted above).
Selling,
General and Administrative Expenses
Selling,
General and Administrative Expenses (“S G &A”)
increased $236,000 in 2007 over 2006 primarily due to
$96,000 of investment banking and legal expenses related to exploring strategic
options, from $33,000 of additional computer consulting costs to
upgrade the Company’s information technology system, from $28,000 of
stock based compensation with respect to the adoption of SFAS No. 123R in 2007
and from $80,000 of outside development costs incurred to modernize components
of the Company’s proprietary Comtrak fire alarm system in 2007. This
program is expected to generate future revenue and is designed to allow a
building owner to enhance the capabilities of its fire alarm system at a
fraction of the cost of a new system replacement and is expected to generate
future revenues to the Company as well as extend the useful life of the
installed base of the Company’s proprietary Comtrak system.
In 2007,
SG&A reflected a high level of sales and marketing personnel
expenses which were geared to support higher product
revenues. However, S G & A expenses as a percentage of
sales declined 3.9% to 30.8% in 2007 due to higher sales volume compared to the
relative fixed nature of these costs. The Company will continue to invest in
staff to secure and support sales of new products in future years, but
management expects S G &
A expenses as a percentage of sales to decline in 2008.
Management's
Discussion and Analysis of Financial
Condition
and Results of Operations
.
(Loss)
Before Tax
The
$67,000 decrease in loss from operations during 2007 was due to a $323,000
improvement in gross profit margin primarily related to higher product
revenues. Partially offsetting the increase in gross profit was
an increase in selling, general and administrative expenses of $236,000 that
remained at a high level geared to support higher product sales and a
$20,000 increase in depreciation expense primarily resulting from a new computer
system.
Interest
expense increased during 2007 due to the effect of both higher interest rates
and higher borrowing levels.
During
2007, the Company sold its investment in Secure 724 LP and reported a gain of
$98,398 on the sale. In contrast during 2006, the Company reported a loss of
$437,000 related to it’s investment in Secure 724 LP that consisted of a full
impairment charge of $377,000 (due to insufficient cash flow, lack of outside
funding and slow progress and uncertainty on bringing its product to market) and
the equity in the operating loss of Secure 724 LP through the date of sale of
$60,000.
Tax
Provision
The
Company’s current income tax 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. Deferred
tax expense in 2007 is net of and resulted from a $80,000 valuation allowance
regarding future tax benefits of the capital loss of Secure 724 LP and a
$250,000 valuation allowance for future utilization of the Company’s deferred
tax asset.
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 an 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
remained responsible for all existing liabilities which have been paid as of
September 30, 2007.
Management's
Discussion and Analysis of Financial
Condition
and Results of Operations
The operations of General Sound are reported as discontinued for the year ended
September 30, 2006 in the accompanying Consolidated Financial
Statements.
The
results of the discontinued operations for the year ended September 30, 2006 are
as follows:
|
Sales
|
$ |
1,398,809
|
||
|
Cost
of Sales
|
1,113,211
|
|||
|
Operating
expenses
|
684,584
|
|||
|
Operating
(loss)
|
$ | (398,986 | ) | |
|
Gain
on sale of assets
|
197,901
|
|||
|
(Loss)
before taxes
|
$ | (201,085 | ) |
Order
Position
Synergx’s
order position, excluding service was $11.2 million at September 30,
2007 compared to $8.0 million level at September 30, 2006. 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 2008, management intends to
continue to focus on it’s 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
Management's
Discussion and Analysis of Financial
Condition
and Results of Operations
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 2008.
Management
will be reviewing inventory levels with a view towards generally reducing
inventory levels in 2008. 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, 2007, 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 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 resources or significant
components of revenue or expenses.
Report of
Independent Registered Public Accounting Firm
To the
Audit Committee, Board of Directors and Shareholders 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, 2007 and
the related consolidated statements of
operations, stockholders' equity, and cash flows for
the years ended September 30, 2007 and 2006. These
financial statements are the responsibility of the
Company's management. Our responsibility is to express
an opinion on
these consolidated financial statements based
on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated
financial statements are free of
material misstatement. 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, 2007 and
the consolidated results of their
operations and their cash flows for the years ended
September 30, 2007 and 2006, in conformity with accounting
principles generally accepted in the United States of America.
/s/
MARCUM & KLIEGMAN LLP
New York,
New York
December
26, 2007
|
SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
|
||||
|
CONSOLIDATED
BALANCE SHEET
|
||||
|
September
30,
|
||||
|
2007
|
||||
|
ASSETS
|
||||
|
CURRENT
ASSETS
|
||||
|
Cash
|
$ |
253,000
|
||
|
Accounts
receivable, principally trade, less allowance
|
||||
|
for
doubtful accounts of $350,000
|
6,466,000
|
|||
|
Inventories,
net
|
2,042,000
|
|||
|
Deferred
taxes
|
330,000
|
|||
|
Prepaid
expenses and other current assets
|
888,000
|
|||
|
|
||||
|
TOTAL
CURRENT ASSETS
|
9,979,000
|
|||
|
|
||||
|
PROPERTY
AND EQUIPMENT -at cost, less
|
||||
|
accumulated
depreciation and amortization of $1,837,000
|
831,000
|
|||
|
OTHER
ASSETS
|
233,000
|
|||
|
TOTAL
ASSETS
|
$ |
11,043,000
|
||
|
|
||||
|
See
accompanying Notes to the Consolidated Financial
Statements
|
||||
|
|
||||
|
SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
|
||||
|
CONSOLIDATED
BALANCE SHEET
|
||||
|
September
30,
|
||||
|
2007
|
||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
|
CURRENT
LIABILITIES
|
||||
|
Notes
payable - current portion
|
$ |
21,000
|
||
|
Accounts
payable and accrued expenses
|
2,466,000
|
|||
|
Deferred
revenue
|
830,000
|
|||
|
TOTAL
CURRENT LIABILITIES
|
3,317,000
|
|||
|
OTHER
LIABILITIES
|
||||
| Note payable to Bank | 2,071,000 | |||
|
Notes
payable - less current portion
|
68,000
|
|||
|
TOTAL
LIABILITIES
|
5,456,000
|
|||
|
|
||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||
|
STOCKHOLDERS'
EQUITY
|
||||
|
Preferred
stock, 2,000,000 shares authorized- none issued and
outstanding
|
||||
|
Common
stock, 10,000,000 shares authorized, $.001 par value; issued and
outstanding 5,210,950 shares
|
5,000 | |||
|
Additional
Paid in Captal
|
6,832,000
|
|||
|
Accumulated
deficit
|
(1,250,000 | ) | ||
|
|
||||
|
TOTAL
STOCKHOLDERS' EQUITY
|
5,587,000
|
|||
|
|
||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ |
11,043,000
|
||
|
|
||||
|
See
accompanying Notes to the Consolidated Financial
Statements
|
||||
|
|
||||
|
SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
|
For
the years ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Product
sales
|
$ |
12,953,000
|
$ |
10,059,000
|
||||
|
Subcontract
sales
|
319,000
|
665,000
|
||||||
|
Service
revenue
|
5,017,000
|
5,101,000
|
||||||
|
|
|
|||||||
|
Total
revenues
|
18,289,000
|
15,825,000
|
||||||
|
|
|
|||||||
|
Cost
of product sales
|
10,005,000
|
7,381,000
|
||||||
|
Cost
of subcontract sales
|
261,000
|
538,000
|
||||||
|
Cost
of service revenue
|
2,532,000
|
2,738,000
|
||||||
|
Selling,
general and administrative
|
5,625,000
|
5,389,000
|
||||||
|
Depreciation
and amortization
|
198,000
|
178,000
|
||||||
|
|
|
|||||||
|
Total
operating expenses
|
18,621,000
|
16,224,000
|
||||||
|
(Loss)
from operations
|
(332,000 | ) | (399,000 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Interest
expense
|
(142,000 | ) | (106,000 | ) | ||||
|
Gain/(loss)
on equity investment
|
98,000
|
(437,000 | ) | |||||
|
|
|
|||||||
| (44,000 | ) | (543,000 | ) | |||||
|
(Loss)
before provision (benefit) from income taxes
|
(376,000 | ) | (942,000 | ) | ||||
|
|
|
|||||||
|
(Benefit)
provision for income taxes from continuing operations:
|
||||||||
|
Current
|
11,000
|
(76,000 | ) | |||||
|
Deferred
|
159,000
|
(253,000 | ) | |||||
|
|
|
|||||||
|
170,000
|
(329,000 | ) | ||||||
|
|
|
|||||||
|
(Loss)
from continuing operations
|
(546,000 | ) | (613,000 | ) | ||||
|
Discontinued
operations (Note 8):
|
||||||||
|
(Loss)
from discontinued operations
|
--
|
(201,000 | ) | |||||
|
Current
income tax (benefit)
|
--
|
(69,000 | ) | |||||
|
|
|
|||||||
|
(Loss)
from discontinued operations
|
--
|
(132,000 | ) | |||||
|
Net
(loss)
|
$ | (546,000 | ) | $ | (745,000 | ) | ||
|
(Loss)
Per Common Share:
|
||||||||
|
Basic
and diluted (loss) from continuing operations
|
$ | (0.10 | ) | $ | (0.12 | ) | ||
|
Basic
and diluted (loss) from discontinued operations
|
--
|
$ | (0.02 | ) | ||||
|
Basic
and diluted (loss) per Share
|
$ | (0.10 | ) | $ | (0.14 | ) | ||
|
Basic
and diltued weighted average number of common
|
||||||||
|
shares
outstanding
|
5,210,950
|
5,206,453
|
||||||
|
See
accompanying Notes to the Consolidated Financial
Statements
|
||||||||
|
|
||||||||
|
SYNERGX
SYSTEMS INC. and SUBSIDIARIES
|
||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
||||||||||||||||||||
|
FOR
THE YEARS ENDED SEPTEMBER 30, 2007 and 2006
|
||||||||||||||||||||
|
(ACCUMULATED
|
||||||||||||||||||||
|
TOTAL
|
ADDITIONAL
|
DEFICIT)/
|
||||||||||||||||||
|
STOCKHOLDERS'
|
COMMON STOCK
|
PAID
IN
|
RETAINED
|
|||||||||||||||||
|
EQUITY
|
SHARES
|
AMOUNT
|
CAPITAL
|
EARNINGS
|
||||||||||||||||
|
|
|
|
|
|
||||||||||||||||
|
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
|
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 | ) | ||||||||||||||
|
Net
(Loss)
|
(546,000 | ) | (546,000 | ) | ||||||||||||||||
|
Stock-based
compensation
|
28,000
|
28,000
|
||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||
|
Balance
at September 30, 2007
|
$ |
5,587,000
|
5,210,950
|
$ |
5,000
|
$ |
6,832,000
|
$ | (1,250,000 | ) | ||||||||||
|
|
|
|
|
|
||||||||||||||||
|
See
accompanying Notes to the Consolidated Financial
Statements
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
For
the Years Ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
OPERATING
ACTIVITIES
|
||||||||
|
Net (Loss)
from continuing operations
|
$ | (546,000 | ) | $ | (613,000 | ) | ||
|
Adjustments
to reconcile net (loss) to net cash (used
in)
|
||||||||
|
provided
by operating activities:
|
||||||||
|
Depreciation
and amortization *
|
226,000
|
193,000
|
||||||
|
Deferred
tax (benefit)
|
190,000
|
(253,000 | ) | |||||
|
Share-based
compensation
|
28,000
|
|||||||
|
Gain
on sale of investment
|
(98,000 | ) | ||||||
|
Loss
on equity investment
|
437,000
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable, net
|
(447,000 | ) |
290,000
|
|||||
|
Inventories
|
(1,000 | ) |
167,000
|
|||||
|
Prepaid
expenses and other current assets
|
(605,000 | ) |
43,000
|
|||||
|
Income
tax receivable
|
80,000
|
(82,000 | ) | |||||
|
Other
assets
|
(26,000 | ) |
24,000
|
|||||
|
Accounts
payable and accrued expenses
|
390,000
|
(464,000 | ) | |||||
|
Deferred
revenue
|
(74,000 | ) |
194,000
|
|||||
|
|
|
|||||||
|
Net
cash (used in) provided by continuing operations
|
(883,000 | ) | (64,000 | ) | ||||
|
Net
cash provided by operating activities of discontinued
operation
|
|
158,000
|
||||||
|
|
|
|||||||
|
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(883,000 | ) |
94,000
|
|||||
|
|
|
|||||||
|
INVESTING
ACTIVITIES
|
||||||||
|
Proceeds
from sale of equity investment
|
9,000
|
|||||||
|
Proceeds
from note receivable
|
21,000
|
|||||||
|
Purchases
of property and equipment
|
(281,000 | ) | (256,000 | ) | ||||
|
|
|
|||||||
|
Net
cash (used in) investing activities of continuing
operations
|
(251,000 | ) | (256,000 | ) | ||||
|
Proceeds
from sale of discontinued operations
|
518,000
|
|||||||
|
|
|
|||||||
|
NET
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
(251,000 | ) |
262,000
|
|||||
|
|
|
|||||||
|
FINANCING
ACTIVITIES
|
||||||||
|
Principal
payments on notes payable
|
(27,000 | ) | (11,000 | ) | ||||
|
Payments
and proceeds from note payable bank - net
|
1,141,000
|
(520,000 | ) | |||||
|
Proceeds
from exercise of stock options and warrants
|
9,000
|
|||||||
|
|
|
|||||||
|
Net
cash provided by (used in) continuing operations
|
1,114,000
|
(522,000 | ) | |||||
|
Net
cash (used in) financing activities of discontinued
operations
|
|
(27,000 | ) | |||||
|
|
|
|||||||
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
1,114,000
|
(549,000 | ) | |||||
|
NET (DECREASE)
IN CASH
|
(20,000 | ) | (193,000 | ) | ||||
|
Cash
at beginning of the year
|
273,000
|
466,000
|
||||||
|
|
|
|||||||
|
Cash at
end of the year
|
$ |
253,000
|
$ |
273,000
|
||||
|
|
|
|||||||
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Income
taxes
|
$ |
13,000
|
$ |
48,000
|
||||
|
Interest
|
$ |
146,000
|
$ |
105,000
|
||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
||||||||
|
Note
receivable in amount of $73,000 obtained in consideration for sale of
equity investment .
|
||||||||
|
Included
in the year ended September 30, 2006, was the purchase of equipment for
$116,000 through financing.
|
||||||||
|
*
Depreciation of $27,000 and $15,000 is included in cost of product and
service sales for the years ended September 30, 2007
|
||||||||
|
and
2006, 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 (Texas) 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 Comco
Technologies Inc., a subsidiary that held the investment in Secure 724 LP, which
was sold in March 2007 (see Note 4). Significant intercompany items
and transactions have been eliminated in consolidation.
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 $464,000 at September 30, 2007 and have been included in other
current assets. Billings in excess of costs and estimated profits
were $99,000 at September 30, 2007 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, 2007 reflects an inventory
allowance of $419,000.
Property
and Equipment
Property
and equipment are stated at historical cost.
Depreciation
of machinery and equipment and furniture and fixtures is provided primarily by
the straight–line method over their estimated useful lives (3 to 10 years).
Amortization
of leasehold improvements is provided by 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, goodwill
related to the acquisition of Casey Systems of approximately $34,000, and
deferred costs of $26,000 related to required independent approval for the
upgrade to the Company’s Comtrak fire alarm system, which will be amortized over
the estimated period of sales 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 an annual basis
each fiscal year end. The Company has determined that there was no impairment of
goodwill at September 30, 2007.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs for the years ended September
30, 2007 and 2006 amounted to $11,000 and $45,000, respectively.
Research
and Development Costs
Research
and development costs are expensed as incurred. Research and
development costs for the years ended September 30, 2007 and 2006 amounted to
$304,000 and $114,000, 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.
Loss Per
Share
SFAS No.
128 “Earnings Per Share” requires companies to report basic and diluted earnings
(loss) per share computations. The basic calculation excludes
dilution and is based on the weighted-average common shares outstanding and the
diluted calculation gives effect to potential dilution of securities that could
share in the results of the Company. For the years ended
September 30, 2007 and 2006, the impact of employees’ options was anti-dilutive,
therefore these options were excluded from the diluted weighted average common
shares.
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 (see Note 5), the Company has
on deposit $125,000 that is restricted as to use and 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. However, on certain public works projects the Company can
proceed against bonds if payment is not forthcoming from its
customers.
At
September 30, 2007, the Company had cash of approximately $80,000, that is in
excess of insured amount limitations.
Stock
Options and Similar Equity Instruments
Through
September 30, 2006 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 applied 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.
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 was 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 illustrates the effect on the
net loss and basic net loss per share if the Company had applied the fair
value recognition provisions of SFAS 123R to stock-based employee
compensation for the year ended September 30, 2006, as follows:
|
Net
(Loss)
|
$ | (745,000 | ) | |
|
Less:
Fair Value of Options issued to
employees
and directors, net of income tax
|
(16,000 | ) | ||
|
Pro
Forma Net (loss)
|
$ | (761,000 | ) | |
|
Weighted
Average Basic Shares
|
5,206,493
|
|||
|
Weighted Average Diluted Shares
|
5,206,493
|
|||
|
Basic
Net Loss Per Share as Reported
|
$ | (.14 | ) | |
|
Basic
Pro Forma Net Loss per share
|
$ | (.15 | ) |
Effective
October 1, 2006, the Company adopted the fair value recognition provision of
Statement of Financial Accounting Standards (“SFAS”) No. 123R “Accounting for
Share-Based Payment Compensation,” (Revised 2004), disclosure requirements of
SFAS No. 123R, using the modified-prospective-transition method for stock
options and similar equity instruments (collectively, “Options”) issued to
employees. As a result, the Company recorded stock based compensation
of $27,785 during year ended September 30, 2007.
On
January 22, 2007 10,000 stock options were granted at an exercise price of $1.70
per share to be vested ratably over five years.
The
Black-Scholes option valuation model was used to estimate the fair value of the
options
granted. 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 are as follows:
Assumptions:
Risk-free
interest
rate 4.77%
Dividend 0
Expected life
in
years 5
years
Expected
volatility 154%
2.
Property and Equipment
Property
and equipment at September 30, 2007 are summarized as
follows:
|
Machinery
and equipment
|
$ |
2,363,000
|
||
|
Furniture
and fixtures
|
171,000
|
|||
|
Leasehold
improvements
|
134,000
|
|||
|
2,668,000
|
||||
|
Less
accumulated depreciation and amortization
|
1,837,000
|
|||
| $ |
831,000
|
Depreciation
and amortization expense related to these assets were $226,000 and $189,000 for
the years ended September 30, 2007 and 2006, 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 the year ended September 30, 2006 in the Consolidated Financial Statements.
Under terms of an 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 been paid as of
September 30, 2007.
The
results of the discontinued operations for the year ended September 30, 2006 is
as follows:
2006
Sales
$1,398,809
Cost
of
Sales
1,113,211
Operating
expenses
684,584
Operating
(loss)
($398,986)
Gain
on sale of
assets
197,901
(Loss)
income before taxes ($201,085)
4. Sale
of the Investment in Secure 724 LP
The
Company had a 25% equity investment in and loans to Secure 724 LP which were
determined to be impaired at September 30, 2006 and a charge of $377,264 was
recorded to fully reserve for recovery of these investments. In March
2007, the company sold its entire interest in Secure 724 LP to Avante Security
(the general managing partner of Secure 724 LP) for consideration of
$97,323. The Company received cash of $9,218 and a note receivable of
$88,105 on the closing date. The note was payable with interest
beginning April 30, 2007 with principal payments of $3,673 per month through
August 31, 2007 and a final payment at September 30, 2007. The
$68,182 final payment of the note was made in October 2007 and is included in
prepaid expenses and other current assets.
The sales
agreement also provides for an additional variable payment based on sales of
Secure 724 LP product up to a maximum additional payment of
$73,455. This additional payment, if any, will be earned
when, and if Secure 724 LP generates revenues. The Company
received $1,075 of the variable payment during 2007.
Total
sale proceeds of $97,323 plus the $1,075 variable payment made through September
30, 2007 was recorded as a $98,398 gain on sale of equity investment during the
year ended September 30, 2007.
5. Note
Payable to Bank
The
Company has a $3.5 million revolving credit facility with TD
Banknorth (the “Credit Facility”). The Credit
Facility has an annual interest rate of prime plus ¼% on outstanding balances
(8.50% at September 30, 2007) and was to expire in June 2007. On
December 26, 2007, the credit facility was extended to expire on January
31, 2009. 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, 2007, the full amount of the Credit Facility was available under
the borrowing base calculation and $2,071,000 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, 2007, the Company did not meet one of its financial covenants
related to its debt service coverage ratio. However, the requirement of this
covenant was waived by TD Banknorth in conjunction with the agreement to extend
the Credit Facility.
6. Long
Term Debt – Notes Payable
As of
September 30, 2007, the Company had notes payable associated with purchases of
certain assets of which their annual maturities are as follows:
|
Notes
Payable
|
||||
|
2008
|
22,000
|
|||
|
2009
|
22,000
|
|||
|
2010
|
22,000
|
|||
|
2011
|
23,000
|
|||
|
Total
|
$ |
89,000
|
||
7. 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 and in 2006, the
lease was extended on similar terms to expire June 30,
2012. The lease provides for monthly rent of $17,800
during 2007 with 3.3% yearly increases through the expiration of the lease in
June 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, 2007:
|
Total
Operating Leases
|
||||
|
2008
|
310,000
|
|||
|
2009
|
344,000
|
|||
|
2010
|
232,000
|
|||
|
2011
|
241,000
|
|||
|
2012
|
186,000
|
|||
|
Total
minimum lease payments
|
$ |
1,313,000
|
||
Rental
expense amounted to $334,000 and $299,000, for the years ended
September 30, 2007 and 2006, respectively.
8.
Significant Customers and Suppliers
During
fiscal 2007, one customer accounted for more than 10% of sales and one supplier
accounted for more than 10% of the Company’s cost of sales in
2007. At September 30, 2007, one customer accounted for more than 10%
of accounts receivable.
During
fiscal 2006, no customer accounted for more than 10% of sales and no one
supplier accounted for more than 10% of the Company’s cost of
sales.
9 Income
Taxes
A
reconciliation of the provision (benefit) for income taxes with the amounts
computed by applying the statutory federal income tax rate is as
follows:
|
Year
Ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Statutory
federal income tax rate
|
34 | % | 34 | % | ||||
|
Computed
expected tax (benefit) from income (loss) from continuing operations
before income tax
|
$ | (128,000 | ) | $ | (320,000 | ) | ||
|
Increase
(decrease)in taxes resulting from:
|
||||||||
|
State
and local income tax (benefit), net of Federal income tax
|
9,000
|
(72,000 | ) | |||||
|
Nondeductible
expenses
|
2,000
|
3,000
|
||||||
|
Valuation
allowance
|
330,000
|
|||||||
|
Other
|
(43,000 | ) |
60,000
|
|||||
|
Income
tax expense (benefit) from continuing operations
|
$ |
170,000
|
$ | (329,000 | ) | |||
The
Company did not have state and local franchise and capital taxes for the years
ended September 30, 2007 and provided $4,000 (minimum taxes) for the year ended
September 30, 2006. These expenses have been included in selling, general and
administrative expenses for each of the years presented.
The
Company has recorded a net current deferred tax asset at September 30,
2007. This deferred tax asset relates to certain accelerated tax
deductions or book provisions to be deducted in future tax returns and
utilization of the 2007 and 2006 net operating loss
carryforwards. Management anticipates profitable operations to resume
at a level that will result in the utilization of a portion of the
deferred tax assets. Accordingly, a partial valuation allowance in the amount of
$330,000 was recorded in the year ended and as of September 30,
2007.
The
components of deferred tax assets and liabilities at September 30, 2007 consist
of the following:
|
Deferred Tax
Assets
|
|||
|
Allowance
for doubtful accounts
|
$ |
140,000
|
|
|
Inventory
reserve
|
148,000
|
||
|
Net
operating loss carryforward (through 2026)
|
292,000
|
||
|
Total
Deferred Tax Asset
|
580,000
|
||
|
Valuation
allowance
|
(250,000 | ) | |
|
Net
Deferred Tax Asset
|
$ |
330,000
|
|
|
Non Current Deferred
Tax Asset/Liability
|
|||
|
Net
operating loss carryforward (through 2026)
|
$ |
63,000
|
|
|
Capital
loss carryforward (through 2012)
|
95,000
|
||
|
Depreciation
and amortization
|
(90,000 | ) | |
|
Other
|
12,000
|
||
|
Total
Non Current Deferred Tax Asset
|
80,000
|
||
|
Valuation
allowance
|
(80,000 | ) | |
|
Net
Non Current Deferred Tax Asset
|
$ |
0
|
|
10. STOCK
OPTIONS
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.
On
January 22, 2007, 10,000 stock options were granted at an exercise price of
$1.70 per share to be vested ratably over five years.
A summary
of the option activity and changes during the years ended September 30, 2007 and
2006 are presented below:
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Weighted
Average
Grant
Date
Intrinsic
Value
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||||||
|
Outstanding
October 1, 2005
|
150,324
|
$ |
2.23
|
4.4
Yrs
|
-0-
|
1.21
|
|||||||||
|
Exercised
|
(18,832 | ) |
.50
|
.3
Yrs
|
-0-
|
1.21
|
|||||||||
|
Forfeited
|
(23,492 | ) |
2.37
|
4.4
Yrs
|
-0-
|
1.21
|
|||||||||
|
Outstanding
October 1, 2006
|
108,000
|
$ |
2.50
|
3.4
Yrs
|
-0-
|
1.21
|
|||||||||
|
Granted
|
10,000
|
1.70
|
5.0
Yrs
|
-0-
|
1.50
|
||||||||||
|
Forfeited
|
(2,000 | ) |
2.50
|
3.0
Yrs
|
-0-
|
1.21
|
|||||||||
|
Outstanding
September 30, 2007
|
116,000
|
2.43
|
2.8
Yrs
|
-0-.
|
1.24
|
||||||||||
|
Exercisable
at September 30, 2007
|
42,400
|
2.50
|
2.4
Yrs
|
-0-
|
1.21
|
||||||||||
A summary
of the option activity of nonvested shares at September 30, 2006 and 2007, and
changes during the years ended September 30, 2006 and 2007 is presented
below:
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||
|
Nonvested
at October 1, 2005
|
131,931
|
$ |
1.21
|
|||||
|
Vested
|
(23,531 | ) |
1.21
|
|||||
|
Forfeited
|
(22,000 | ) |
1.21
|
|||||
|
Nonvested
at October 1, 2006
|
86,400
|
1.21
|
||||||
|
Vested
|
(21,600 | ) |
1.21
|
|||||
|
Granted
|
10,000
|
1.50
|
||||||
|
Forfeited
|
(1,200 | ) |
1.21
|
|||||
|
Nonvested
at September 30, 2007
|
73,600
|
$ |
1.25
|
|||||
The
Company has $72,733 of deferred stock based compensation expense remaining to be
expensed over the period from October 2007 through January 2012.
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 2007 and 2006.
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 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
February 2007, the FASB, issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The
Company does not expect SFAS 159 to have a material impact on the Company’s
financial position or results of operations.
SYNERGX SYSTEMS
INC.
CORPORATE DATA
SECURITIES
TRADING
Common
Stock Nasdaq symbol - SYNX
TRADING RANGES of COMMON
STOCK
Common
Stock
Bid
Quarter
Ended
High
Low
December
31,
2005
2.66
1.72
March 31,
2006
2.34
1.63
June 30,
2006
1.93 1.30
September
30,
2006 1.79
1.25
December
31,
2006
1.93
1.36
March 31,
2007
2.32
1.54
June 30,
2007
2.21
1.91
September
30,
2007 2.28
1.85
The above
quotations represent inter-dealer prices, without adjustment for retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions.
RECORD HOLDERS
As of
December 12, 2007, there were 246 record holders of Common Stock.
DIVIDENDS
Synergx
Systems Inc. has never paid any cash dividends on its Common Stock and the
payment of cash dividends is not expected in the foreseeable future. Synergx's
loan agreements prevent the payment of dividends. The payment of future
dividends will depend on earnings, capital requirements, financial conditions
and other factors considered relevant by the Board of Directors.
TRANSFER AGENT OF ALL
CLASSES
American
Stock Transfer & Trust Company
GENERAL COUNSEL
Dolgenos
Newman & Cronin LLP
Annual Report on Form
10-KSB
Synergx
Systems Inc.’s Report on Form 10-KSB as filed with the Securities and Exchange
Commission on December 27, 2007 (and amended January 28, 2008) will provide
additional information about Synergx Systems Inc. A copy of the report is
available without charge to Stockholders upon request to:
Corporate
Secretary
Synergx
Systems Inc.
209
Lafayette Drive
Syosset,
New York 11791
(516)
433-4700
INDEPENDENT
AUDITORS
Marcum
& Kliegman LLP
DIRECTORS AND EXECUTIVE
OFFICERS
Daniel S.
Tamkin, Chairman of the Board, Chief Executive Officer, General Counsel,
President of The Cambridge Towel Corporation
John A.
Poserina, Chief Financial Officer, Secretary, Treasurer and
Director
Harris
Epstein, Director, Audit Committee
Peter Barotz, Director
Ronald P. Fetzer, Director, Audit Committee
J. Ian
Dalrymple, Director*
Mark
Litwin, Director*
EXECUTIVE OFFICERS OF KEY
SUBSIDIARIES
Albert
Koenig, President Casey Systems Inc.**
* Not
standing for re-election by stockholders
** Resigned, effective February 13, 2008