UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the quarterly period ended June 30, 2002 |
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from ____________ to ________________ |
Commission File No.: 0-22693
SYSCOMM INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
11-2889809 (I.R.S. Employer Identification No.) |
7 Kingsbridge Road, Fairfield, New Jersey 07004
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (973) 227-8772
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each class of our common equity as of August 9, 2002 is as follows:
| Class of Common Equity Common Stock, par value $.01 |
Number of Shares 4,895,998 |
SYSCOMM INTERNATIONAL CORPORATION
TABLE OF CONTENTS
| Item | Description | Page |
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| PART I – FINANCIAL INFORMATION | |
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| 1. | Condensed Financial Statements | ||
| Consolidated Condensed Balance Sheets – | |||
| June 30, 2002 (unaudited) and September 30, 2001 | 3 | ||
| Consolidated Condensed Statements of Operations – | |||
| Three and Nine Months ended June 30, 2002 and 2001 (unaudited) | 4 | ||
| Consolidated Condensed Statement of Stockholders’ Equity – | |||
| Nine Months ended June 30, 2002 (unaudited) | 5 | ||
| Consolidated Condensed Statements of Cash Flows – | |||
| Nine Months ended June 30, 2002 and 2001 (unaudited) | 6 | ||
| Notes to Consolidated Condensed Financial Statements (unaudited) | 7 | ||
| 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | |
| 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | |
PART II – OTHER INFORMATION |
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| 4. | Submission of Matters to a Vote of Security Holders | 16 | |
| 6. | Exhibits and Reports on Form 8-K | 16 | |
| SIGNATURE | 17 | ||
| EXHIBITS | 18 | ||
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED BALANCE SHEETS |
| (In thousands except par value) |
| Assets | |||||||||
| June 30, 2002 |
September 30, 2001 |
||||||||
| Current Assets | (Unaudited) | ||||||||
| Cash and cash equivalents | $ | 5,377 | $ | 1,811 | |||||
| Accounts receivable (net of allowance for doubtful accounts of | 2,595 | 9,409 | |||||||
| $301 and $414) | |||||||||
| Inventories | 453 | 495 | |||||||
| Notes receivable | 28 | 87 | |||||||
| Deferred tax asset | 171 | 171 | |||||||
| Other current assets | 240 | 502 | |||||||
| Total Current Assets | 8,864 | 12,475 | |||||||
| Property and Equipment, net | 569 | 3,177 | |||||||
| Goodwill, net | 2,154 | 2,154 | |||||||
| Deferred Tax Asset | 980 | 809 | |||||||
| Other Assets | 441 | 456 | |||||||
| Total Assets | $ | 13,008 | $ | 19,071 | |||||
| Liabilities and Stockholders' Equity | |||||||||
| Current Liabilities | |||||||||
| Current maturities of long-term debt and capital lease obligations | $ | 17 | $ | 1,007 | |||||
| Current amounts due to Parent Company | 2,784 | 947 | |||||||
| Accounts payable | 484 | 4,850 | |||||||
| Accrued expenses | 1,371 | 1,177 | |||||||
| Total Current Liabilities | 4,656 | 7,981 | |||||||
| Note Payable - Parent Company | - | 2,398 | |||||||
| Long-Term Debt and Capital Lease Obligations, Net | 33 | 42 | |||||||
| Total Liabilities | 4,689 | 10,421 | |||||||
| Commitments and Contingencies | |||||||||
| Stockholders’ Equity | |||||||||
| Preferred shares: | |||||||||
| Authorized 5,000 shares, no par value; none issued | – | – | |||||||
| Common shares: | |||||||||
| Authorized 80,000 shares of $.01 par value; 5,757 shares issued; 4,896 | |||||||||
| shares outstanding | 58 | 58 | |||||||
| Additional paid-in capital | 6,653 | 6,653 | |||||||
| Retained earnings | 2,526 | 2,857 | |||||||
| Treasury stock (carried at cost, 861 shares) | (918) | (918) | |||||||
| Total Stockholders’ Equity | 8,319 | 8,650 | |||||||
| Total Liabilities and Stockholders' Equity | $ | 13,008 | $ | 19,071 | |||||
| See the accompanying notes to consolidated condensed financial statements. | 3 |
| SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS |
| (In thousands except per share data) (Unaudited) |
| For The Three Months | For The Nine Months | |||||||||||
| Ended June 30, | Ended June 30, | |||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||
| Product revenue | $ | 4,127 | $ | 6,474 | $ | 18,416 | $ | 21,737 | ||||
| Service revenue | 668 | 991 | 2,225 | 2,397 | ||||||||
| Total revenue | 4,795 | 7,465 | 20,641 | 24,134 | ||||||||
| Cost of products sold | 3,412 | 5,992 | 16,206 | 18,785 | ||||||||
| Cost of services sold | 419 | 477 | 1,193 | 1,026 | ||||||||
| Cost of products and services sold | 3,831 | 6,469 | 17,399 | 19,811 | ||||||||
| Gross profit | 964 | 996 | 3,242 | 4,323 | ||||||||
| Selling, general and administrative expenses | 917 | 1,306 | 3,328 | 4,811 | ||||||||
| Depreciation and amortization | 68 | 153 | 206 | 401 | ||||||||
| Loss from operations | (21) | (463) | (292) | (889) | ||||||||
| Other (income) expense: | ||||||||||||
| Other income | - | (29) | (1) | (75) | ||||||||
| Interest expense | 45 | 76 | 205 | 199 | ||||||||
| Loss before income tax expense (benefit) | (66) | (510) | (496) | (1,013) | ||||||||
| Income tax expense (benefit) | 6 | (186) | (165) | (238) | ||||||||
| Net loss available to common stockholders | $ | (72) | $ | (324) | $ | (331) | $ | (775) | ||||
| Net loss per common share – basic | $ | (0.01) | $ | (0.07) | $ | (0.07) | $ | (0.16) | ||||
| Weighted average number of common | ||||||||||||
| shares outstanding – basic | 4,896 | 4,696 | 4,896 | 4,799 | ||||||||
| See the accompanying notes to consolidated condensed financial statements. | 4 |
| SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months ended June 30, 2002 |
| (In Thousands) (Unaudited) |
| Preferred Stock |
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Total Stockholder's Equity |
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| Number |
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Amount |
Number |
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Amount |
Number |
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Amount |
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| Balance, September 30, 2001 | — | $ | — | 5,757 | $ | 58 | $ 6,653 | $ 2,857 | (861) | $ | (918) | $ 8,650 | ||||||||
| Net loss | — | (331) | (331) | |||||||||||||||||
| Balance, June 30, 2002 | — | $ | — | 5,757 | $ | 58 | $ 6,653 | $ 2,526 | (861) | $ | (918) | $ 8,319 | ||||||||
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| See the accompanying notes to consolidated condensed financial statements. | 5 |
| SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS |
| (In thousands) (Unaudited) |
| For The Nine Months Ended June 30, |
||||||
| 2002 | 2001 | |||||
| Cash flows from operating activities | ||||||
| Net loss | $ | (331) | $ | (775) | ||
| Adjustments to reconcile net loss to cash provided by operating activities | ||||||
| Depreciation and amortization | 206 | 401 | ||||
| Deferred tax benefit | (171) | (326) | ||||
| Change in assets and liabilities: | ||||||
| Decrease in accounts receivable | 6,814 | 8,760 | ||||
| Decrease in inventories | 42 | 513 | ||||
| Decrease (increase) in other current assets | 262 | (5) | ||||
| Decrease in other assets | 15 | 31 | ||||
| Decrease in accounts payable and accrued expenses | (4,241) | (3,629) | ||||
| Net cash provided by operating activities | 2,596 | 4,970 | ||||
| Cash flows from investing activities | ||||||
| Payments for costs of business acquisitions | – | (1,966) | ||||
| Payments for property and equipment | (38) | (89) | ||||
| Payments received on notes receivable | 59 | – | ||||
| Proceeds from disposition of property and equipment | 2,440 | – | ||||
| Net cash provided by (used in) investing activities | 2,461 | (2,055) | ||||
| Cash flows from financing activities | ||||||
| Payments on long-term debt | (999) | (255) | ||||
| Net payments on Parent Company line of credit | (492) | (914) | ||||
| Sale of common stock | – | 82 | ||||
| Purchase of treasury stock | – | (6) | ||||
| Net cash used in financing activities | (1,491) | (1,093) | ||||
| Net increase in cash and cash equivalents | 3,566 | 1,822 | ||||
| Cash and cash equivalents - beginning of period | 1,811 | 1,039 | ||||
| Cash and cash equivalents - end of period | $ | 5,377 | $ | 2,861 | ||
| Supplemental Schedules of Noncash Financing Activities | ||||||
| Acquisition of business: | ||||||
| Notes payable issued for acquisition | $ | - | $ | 2,652 | ||
| See the accompanying notes to consolidated condensed financial statements. | 6 |
| SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) (Unaudited) |
In the opinion of management, the accompanying unaudited consolidated condensed financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of SysComm International Corporation ( the “Company”) and its wholly-owned subsidiaries, as of June 30, 2002, their results of operations for the three and nine months ended June 30, 2002 and 2001, their changes in stockholders' equity for the nine months ended June 30, 2002 and their cash flows for the nine months ended June 30, 2002 and 2001. Information included in the consolidated condensed balance sheet as of September 30, 2001 has been derived from the audited consolidated balance sheet included in the Company's Annual Report on Form 10-K for the year ended September 30, 2001(the "10-K") previously filed with the Securities and Exchange Commission ( the "SEC"). Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these consolidated condensed financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and the other information in the 10-K.
The consolidated results of operations for the three and nine months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year ending September 30, 2002.
Accounting Changes
Effective October 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 142 Goodwill and Other Intangible Assets (FAS 142). FAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. There was no impairment of goodwill upon adoption of FAS 142.
Net loss and loss per share for the three and nine months ended June 30, 2001, adjusted for the assumed exclusion of amortization expense from October 1, 2000, are as follows:
| For The Three | For The Nine | ||||||
| Months Ended | Months Ended | ||||||
| June 30, 2001 | June 30, 2001 | ||||||
| Net loss: | |||||||
| Net loss, as reported | $ | (324) | $ | (775) | |||
| Goodwill amortization | 58 | 127 | |||||
| Net loss, as adjusted | $ | (266) | $ | (648) | |||
| Basic and diluted loss per common share: | |||||||
| Net loss per share, basic and diluted, as reported | $ | (0.07) | $ | (0.16) | |||
| Goodwill amortization | 0.01 | 0.03 | |||||
| Net loss per common share, basic and diluted, as adjusted | $ | (0.06) | $ | (0.13) | |||
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
7
| SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) (Unaudited) |
Inventory at June 30, 2002 and September 30, 2001 consists of:
| June 30, | September 30, | ||||||
| 2002 | 2001 | ||||||
| Finished goods | $ | 546 | $ | 610 | |||
| Allowance for excess and obsolescence | (93) | (115) | |||||
| $ | 453 | $ | 495 | ||||
As further explained in Note 2 of the notes to the Company's audited financial statements included in the Company's Form 10-K for the year ended September 30, 2001 previously filed with the SEC, the Company presents basic earnings (loss) per share and, if appropriate, diluted earnings per share in accordance with the provisions of Statement of Financial Standards No. 128, “ Earnings per Share”.
Since the Company had net losses for the three and nine months ended June 30, 2002 and 2001, the assumed effects of the exercise of employee stock options outstanding at June 30, 2002 and 2001 for the purchase of 5,070 and 3,159, respectively, would have been anti-dilutive.
The following represents acquisitions which occurred in the first nine months of fiscal 2001:
| |
Date of Acquisition |
Percent Acquired |
Acquisition Price |
Cash Consideration |
Notes Issued |
Business Description |
| First Quarter 2001 Acquisitions | ||||||
| InfoTech USA, Fairfield, NJ |
12/15/2000 | 100% | $4,550 | $1,900 | $2,652 | Systems integrator and networking solutions provider |
On December 14, 2000, the Company acquired fifty-one percent (51%) of the outstanding shares of common stock of InfoTech USA (formerly Information Products Center, Inc.), a New Jersey corporation (“InfoTech”), from Applied Digital Solutions, Inc. (“ADSX”). The purchase price for the shares of InfoTech was $2,075, payable $1,821 in cash and $254 by promissory note. On December 15, 2000, the Company acquired the remaining forty-nine percent (49%) of the outstanding shares of common stock of InfoTech for approximately $2,400, payable by promissory note. The purchase price of InfoTech was assigned to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date, which approximated their book values, using the purchase method of accounting. Based upon such allocations, the aggregate purchase price exceeded the estimated fair value of the net assets acquired resulting in goodwill of $2,339 in value, which was being amortized on a straight-line basis over 10 years through September 30, 2001. On October 1, 2001, the Company adopted FAS 142, which resulted in no impairment of goodwill. See Note 1 for further description of the effects of adoption of FAS 142.
8
| SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) (Unaudited) |
Unaudited pro forma results of operations for the nine months ended June 30, 2001 are included below. Such pro forma information assumes that the above transaction occurred as of October 1, 2000.
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| Nine Months Ended June 30, 2001 |
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| Revenues | $ 29,868 | ||
| Net loss | $ (721) | ||
| Loss per common share – basic | $ (0.15) | ||
| Loss per common share – diluted | $ (0.15) |
On December 14, 2000, ADSX acquired approximately 55% of our issued and outstanding common shares, resulting in a change in control of the Company. ADSX acquired the shares for $4,500 by issuing approximately 1.7 million shares of its common stock, valued at approximately $2,750, to the selling shareholders and upon payment of an aggregate amount of cash equal to approximately $1,750 to the selling shareholders.
The disproportionate provision for income tax expense (benefit) for the three and nine months ended June 30, 2002 and 2001 was primarily attributable to prior period accruals for state income taxes in 2002 and goodwill amortization in 2001.
8. Sale of Assets
On January 28, 2002, the Company sold its 40,000 square foot facility including approximately 7.4 acres located at 20 Precision Drive, Shirley, New York, for a purchase price of $2,500. The sale generated cash of approximately $1,300 after repaying the related mortgage and other transaction fees. The Company has centralized all back office and warehousing operations in its Fairfield, New Jersey location, which has become the new corporate headquarters.
On July 22, 2002, the Company entered into a non-binding letter of intent to merge with VeriChip Corporation, a wholly-owned subsidiary of Applied Digital Solutions, Inc. Upon completion of the merger, Applied Digital Solutions will own more than 90% of the Company's issued and outstanding common stock, as a result of the issuance of additional common shares to Applied Digital Solutions. Applied Digital Solutions currently owns approximately 53% of the Company's issued and outstanding common stock. The merger is subject to the approval of the Company's board of directors and stockholders, as well as our completion of due diligence and obtaining all required governmental and third-party consents, including the consent of the Company's senior lender, IBM Credit Corporation. Accordingly, the potential merger with VeriChip Corporation remains subject to a variety of risks and uncertainties, which may affect our ability to complete the transaction.
On June 28, 2002 the Board of Directors approved a grant of 2,200,000 stock options at an option price of $0.28 (the fair market value of the Company's common stock on the date of grant) primarily to the officers and directors of the Company. The options are exercisable June 28, 2003 and expire June 28, 2010. Additionally, the Board of Directors approved a grant of 375,000 stock options under the same terms to be used as employee incentives.
9
This discussion should be read in conjunction with the accompanying consolidated condensed financial statements and related notes in Item 1 of this report as well as our Annual Report on Form 10-K for the year ended September 30, 2001. Certain statements made in this report may contain forward-looking statements. For a description of risks and uncertainties relating to such forward-looking statements, see the Forward-Looking Statements and Associated Risk section later in this Item.
RECENT
DEVELOPMENTS
(in $'000 unless otherwise noted)
On July 22, 2002, we entered into a non-binding letter of intent to merge with VeriChip Corporation, a wholly-owned subsidiary of Applied Digital Solutions, Inc. Upon completion of the merger, Applied Digital Solutions will own more than 90% of our issued and outstanding common stock, as a result of the issuance of additional common shares to Applied Digital Solutions. Applied Digital Solutions currently owns approximately 53% of our issued and outstanding common stock. The merger is subject to the approval of our board of directors and stockholders, as well as our completion of due diligence and obtaining all required governmental and third-party consents, including the consent of our senior lender, IBM Credit Corporation. Accordingly, the potential merger with VeriChip Corporation remains subject to a variety of risks and uncertainties, which may affect our ability to complete the transaction.
Sale of Assets
On January 28, 2002, we sold our 40,000 square foot facility including approximately 7.4 acres located at 20 Precision Drive, Shirley, New York, for a purchase price of $2,500. The sale generated cash of approximately $1,300 after repaying the related mortgage and other transaction fees. We have centralized all back office and warehousing operations in our Fairfield, New Jersey location, which has become our new corporate headquarters.
On January 11, 2002 Garrett A. Sullivan retired and subsequently resigned as our Chairman of the Board. Our Board of Directors elected Jerome C. Artigliere to fill the vacancy created on the Board of Directors as a result of Mr. Sullivan's resignation.
On February 27, 2002, Donald H. Swift resigned as our director. Our Board of Directors is currently seeking a replacement to fill the vacancy left by Mr. Swift.
On April 12, 2002, our Board of Directors named Kevin McLaughlin as Chief Executive Officer replacing Anat Ebenstein. Additionally, the Board of Directors appointed Kevin McLaughlin to the Board of Directors.
On February 8, 2002, John C. Spielberger resigned as our Vice President of Sales and Marketing. We are in the process of seeking a replacement for his position. Mr. Spielberger was the account manager for two of our major accounts and while we continue to work with these accounts, we could experience a temporary adverse affect on our sales volume.
On June 24, 2002, we hired Robert C. Bellis as our new Director of Sales. Mr. Bellis brings with him over 22 years of sales and industry related experience.
10
BUSINESS
DESCRIPTION
(in $'000 unless otherwise noted)
We are a Delaware corporation incorporated in 1997. Through our two wholly-owned subsidiaries, Information Technology Services, Inc. and InfoTech USA, Inc. (formerly Information Products Center, Inc.), which was acquired in December 2000, we provide professional services in the area of systems integration, information technology (IT) procurement and logistics, and technology strategy. Doing business as "InfoTech", we provide integrated eBusiness strategy and technology implementation services on a regional basis to enterprise and small to medium businesses who want to fully leverage eBusiness technologies as part of their overall business strategy. Our service offering includes technology strategy and due diligence consulting, systems architecture and design, application and technology infrastructure deployment, enterprise security, IT product procurement and logistics, and provisioning. Our services are designed to improve a client's competitive and financial position and increase efficiency through the development of pragmatic and innovative business strategies enabled by the integration of emerging and existing technologies.
As described in Notes 5 and 6 of the consolidated condensed financial statements included in Item 1, on December 14, 2000, Applied Digital Solutions, Inc. acquired approximately 55% of our issued and outstanding common shares, resulting in a change in control. Simultaneously, we acquired from Applied Digital Solutions fifty-one percent (51%) of the outstanding shares of common stock of InfoTech USA. The purchase price for the shares of InfoTech USA was $2,075, payable $1,821 in cash and $254 by promissory note. On December 15, 2000, we acquired the remaining forty-nine percent (49%) of the outstanding shares of common stock of InfoTech USA. The purchase price for the shares of InfoTech USA was approximately $2,400, payable by promissory note.
We operate in a highly competitive industry, which in turn places constant pressures on maintaining gross profit margins. Many of our sales are high volume equipment sales, which produce lower than average gross profit margins, but are often accompanied by a service arrangement that yields higher than average gross profit margins.
The following table sets forth, for the periods indicated, the percentage relationship to total revenue of certain items in our consolidated condensed statements of operations.
| Relationship to Revenue |
||||||||
| Three Months Ended | Nine Months Ended | |||||||
| June 30, | June 30, | |||||||
| 2002 | 2001 | 2002 | 2001 | |||||
| % | % | % | % | |||||
| Product revenue | 86.1 | 86.7 | 89.2 | 90.1 | ||||
| Service revenue | 13.9 | 13.3 | 10.8 | 9.9 | ||||
| Total revenue | 100.0 | 100.0 | 100.0 | 100.0 | ||||
| Cost of products sold | 71.2 | 80.3 | 78.5 | 77.8 | ||||
| Cost of services sold | 8.7 | 6.4 | 5.8 | 4.3 | ||||
| Total cost of products and services sold | 79.9 | 86.7 | 84.3 | 82.1 | ||||
| Gross profit | 20.1 | 13.3 | 15.7 | 17.9 | ||||
| Selling, general and administrative expenses | 19.1 | 17.5 | 16.1 | 19.9 | ||||
| Depreciation and amortization | 1.4 | 2.0 | 1.0 | 1.7 | ||||