| UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |
| [X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| [ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| 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) |
(973) 227-8772
(Registrant's telephone number, including area code)
| Common
Stock, par value $.01 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 (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 [ ]
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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of our common stock held by non-affiliates of the registrant as of March 29, 2002 was $1,224,000. For purposes of this calculation only, directors, executive officers and the principal controlling shareholder of the registrant are deemed to be affiliates of the registrant.
The number of shares outstanding of each class of our common equity as of December 17, 2002 is as follows:
| Class of Common Equity Common Stock, par value $.01 |
Number of Shares 4,895,998 |
The information required by Part III of this Form 10-K is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission on or before January 28, 2003.
Table Of Contents
|
Item |
Description |
Page |
|
Part I |
||
|
1. |
Business |
1 |
|
2. |
Properties |
7 |
|
3. |
Legal Proceedings |
7 |
|
4. |
Submission of Matters to a Vote of Security Holders |
7 |
|
Part II |
||
|
5. |
Market for the Registrant's Common Equity and Related Stockholder Matters |
8 |
|
6. |
Selected Financial Data |
9 |
|
7. |
Management's Discussion and Analysis of Financial Condition |
10 |
|
7A. |
Quantitative and Qualitative Disclosures About Market Risk |
16 |
|
8. |
Financial Statements and Supplementary Data |
16 |
|
9. |
Changes in and Disagreements with Accountants on |
16 |
|
Part III |
||
|
10. |
Directors and Executive Officers of the Registrant |
18 |
|
11. |
Executive Compensation |
18 |
|
12. |
Security Ownership of Certain Beneficial Owners and Management |
18 |
|
13. |
Certain Relationships and Related Transactions |
18 |
|
14. |
Controls and Procedures |
18 |
|
15. |
Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
18 |
|
Signatures |
20 |
|
|
Certifications |
21 |
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Annual Report, and the documents incorporated by reference herein, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:
The words "believe", "expect", "anticipate", "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
PART I
ITEM 1. BUSINESS
Recent Developments
(in $'000)
Resignation of Directors
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. Kevin McLaughlin filled the vacancy created by Mr. Swift's resignation on April 12, 2002.
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, before transaction fees, which approximated our carrying value. 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.
Vice President of Sales and Marketing Resigned
On February 8, 2002, John C. Spielberger resigned as our Vice President of Sales and Marketing. In addition to serving as our Vice President of Sales and Marketing, Mr. Spielberger also acted as account manager for two of our major customers. Since Mr. Spielberger's resignation in February 2002, we have not had any significant orders from either of these customers, which has adversely affected our sales volume.
New Chief Executive Officer Appointed
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.
Director of Sales
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.
Potential Merger Terminated
On July 22, 2002, we entered into a letter of intent to merge with VeriChip Corporation, a wholly-owned subsidiary of Applied Digital Solutions, Inc., our principal stockholder. On October 28, 2002, the Board of Directors of Applied Digital Solutions, Inc. voted not to approve the merger, and the merger process ceased.
General
(in $'000)
We are a Delaware corporation incorporated in 1997. Through our two wholly-owned subsidiaries, Information Technology Services, Inc., and InfoTech USA, (formerly Information Products Center, Inc.), which was acquired in December 2000, we are a full service provider of Information Technology, or IT, solutions and products. We specialize in tailoring our approach to the individual customer needs. Doing business as "InfoTech", we provide IT consulting, networking, procurement, deployment, integration, migration and security services and solutions. We also provide on-going system and network maintenance services.
In 2002, we continued our strategy of moving away from a product-driven systems integration business model to a customer-oriented IT solutions-based business model. We built on last year's investment in high quality personnel with industry specific skills by adding more sales and technical staff, seasoned in developing and implementing IT solutions for customers like ours. We further developed our deliverable IT solutions by adding new consulting and service offerings, and increasing the number of strategic alliances with outside technical service firms and manufacturers of high-end IT products.
1
Another important goal in re-engineering our business model in 2002 was to consolidate our operations and centralize them in our headquarters in Fairfield, New Jersey. In the first quarter of 2002, we completed the closing of the Shirley, New York facility and migrated the remaining accounting, purchasing and service operations to our headquarters. By centralizing, we were able to benefit from organizational efficiencies, which improved our procurement and IT services delivery to our customers and reduced costs. With the transition of operations complete, 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, to Parr Research and Marketing, Inc. for a purchase price of $2,500. The sale generated cash of approximately $1,300. We also closed two other small offices, one in Marlton, New Jersey and one in Albany, New York.
A significant percentage of our revenue is derived from sales to customers in educational institutions, the legal and financial community, medical facilities, museums, and New York City agencies. However, our customer base also includes retailers, manufacturers and distributors. Our customers include:
|
American Federation of Arts |
International Council of Shopping Centers |
All of our revenue is derived from US-based customers.
During 2002, three customers, Deutsche Bank, Hackensack University Medical Center and Morgan Stanley, accounted for 16%, 14% and 9% of our consolidated revenues, respectively. In 2001, three customers, Massachusetts Mutual, Liberty Mutual and The City of New York, accounted for 24%, 12% and 10% of our consolidated revenues, respectively. Since February 2002, we have not had any significant orders from Deutsche Bank, Massachusetts Mutual or Liberty Mutual, which has adversely affected our consolidated revenues. The loss of significant orders from these or any of our other customers in the future may continue to have a material adverse effect on our consolidated revenues.
Strategy
We strive to be a complete IT solutions provider that enables our customers to maximize the return on their technology investments by solving their business problems, improving their productivity and providing a competitive edge. In doing so, we achieve a high level of customer satisfaction by delivering high quality IT solutions on time and on budget. Our team approach provides us flexibility to adapt to our customers' individual needs. We carefully research and analyze our customers' needs and objectives and tailor a comprehensive IT solution that combines high quality IT services and products that will allow them to meet their goals. We work hand-in-hand with our customers throughout the design, procurement, implementation, integration and on-going system maintenance becoming an extension of their IT Department.
Target Market
We primarily target small- to medium-sized businesses. We also continue to focus on building relationships with our larger customers and on searching for new opportunities in the Fortune 1000 market space. We believe the area of the most potential growth will continue to be the small to medium-sized customers seeking expertise they do not have within their organization. We continue to identify those companies that will fit well with our culture and target the vertical markets where we have previously been successful, including Educational Institutions, Legal and Financial Services, Medical Facilities, Museums and New York City agencies. Geographically, we continue to focus on the New York metropolitan area.
2
Solutions
As a full service IT solutions provider, we developed and offer a wide variety of IT services and product offerings that we tailor and integrate to fulfill the unique IT needs of our customers. The following descriptions highlight the primary services we offer.
File Server and Workstation Implementation:
We offer a wide range of file server installation services designed to meet each client's unique office automation environment. Our installation services provide the customer with a choice of service plans ranging from a basic file server set up and testing to a more complex clustered file server redundant environment. Beyond our basic installation services, we offer additional services including de-installation or migration of customers' data from existing hardware to the new system, rack installation, cluster installation, fiber channel, transmission control protocol/internet protocol, or TCP/IP address verification and network login, image installation, asset tagging, integration of third party peripherals and system performance optimization.
Local Area Network/Wide Area Network, or LAN/WAN, Health Audit:
Local area network/wide area network, or LAN/WAN, Health Audits provide an affordable solution to troubleshoot, maintain and manage our customers' networks. This service provides a proactive approach to a comprehensive evaluation of network equipment and infrastructure, pinpointing potential problem areas for our customers. We utilize protocol analyzers to identify, diagnose, and suggest solutions for a variety of LAN/WAN network problems in real time on ethernet, fast ethernet, gigabit and fiber distributed data interface networks.
LAN/WAN Planning and Design:
We provide many network and system design services including specifications needs, requests for proposals, development and distribution evaluation, hardware selection, application and system needs analysis, infrastructure design, disaster recovery planning and contingency planning services, migration services, consolidation strategies and IT technology transfer. Additionally we plan and design cost-effective WAN carrier facilities based on the type of data exchanged and on the existence of voice, fax or video traffic. We select from leased lines, dial-up, frame relay, point to point, automated teller machines, broadband or digital subscriber lines to match the parameters of the network and the customers' needs.
Messaging and Collaboration Services:
Our electronic messaging and collaboration services give our customers the needed expertise in designing and upgrading electronic communication systems. Electronic messaging now means creating, storing and sharing documents and workflow within one reliable system. Our engineers employ an electronic messaging implementation process that entails planning, designing, testing and deploying for all networking projects.
Project Management:
One of the challenges of network systems integration is to deliver implementation solutions on time, within budget, and with minimal impact on day-to-day operations. We utilize a structured team approach for all projects. The team, consisting of an account manager, a project engineer and a representative from our support staff, carefully mange key milestones and deliverable dates to ensure a timely work product of the highest technical quality. The project management team also provides centralized accountability for all financial and management issues and appropriate application of technical skills needed to complete the project.
Product Procurement:
With our product procurement services we analyze our customers' existing procurement policies and identify areas that may be targeted for refinement. Today's IT environment is faced with many issues and new challenges, including diversity in the IT environment, lack of standards, multiple operating system platforms, and continually changing technology and revisions. Our structured procurement policies and processes help to provide our customers with maximum efficiency and cost effectiveness.
Call Center:
A fundamental part of any successful LAN/WAN is support. We offer a variety of telephone support options including call center services, remote support and dial-in support. Our strategy is to provide a support backup
3
mechanism for our customers' network and systems administrators and our telephone support offerings ensure that those administrators get the expert assistance that they require to keep their system on-line. Additionally, all customer and internal support information is documented and maintained on-line to ensure proper leverage and knowledge transfer to all of our technical support staff.
On-Site Support:
We offer the on-site support expertise of technicians and network and systems engineers with real-world expertise ranging from desktop configuration to multi-site, multi-platform enterprise network deployment. Planned on-site services can be arranged to assist with existing or planned network and systems initiatives such as upgrades, network operating system and data migrations, network infrastructure deployment, server integration and remote communication deployment.
Maintenance:
We provide various forms of maintenance services to our customers. Our service agreements provide complete coverage for customers' systems and network infrastructure environments, from server-based technologies, communications devices and management tools to personal computers and all associated peripherals. We offer three types of hardware maintenance contracts to support our client's LAN/WAN environments. These offerings include time blocks, on-site and depot level maintenance services, and IT Maintenance contracts.
Warranty Support:
As an authorized service provider for Hewlett Packard/Compaq, IBM, Lexmark and other manufacturers, we provide warranty support services for installed systems and network computing environments. We honor the manufacturers' warranties during the manufacturers' warranty periods. This service normally includes the repair of hardware components. We seek to diagnose and repair authorized computing systems in a timely manner.
Product Offerings
We are authorized to sell other manufacturers' personal computer systems, networking, printers and software products including: Nortel, IBM, Intel, Hewlett Packard/Compaq, 3Com, Lexmark, Microsoft, Panasonic, Computer Associates, Cisco, Citrix and Novell. Our agreements with such suppliers require minimum sales quotas in order for us to retain our authorizations. These quotas vary from manufacturer to manufacturer. To date we are in compliance with these agreements and we believe we will continue to meet the minimum quotas, however, there is no assurance that we will continue to meet such quotas. To the extent that we do not comply with such terms, we may lose our status as an authorized reseller for such suppliers.
Growth Strategy
Our strategy is to build upon our position as a leading provider of integrated solutions that add significant and measurable business value to small to medium-sized companies, Global 1000 companies and other organizations. The following are the key elements of our strategy.
Leverage Existing Customers
We must continue to satisfy our existing customers. A strong track record of delivering high quality integrated solutions often increases the amount, scope and sophistication of services requested by such customers. This record reinforces our growing reputation as an innovative provider of integrated solutions. We also believe that maintaining a reputation for delivering innovative business and technology solutions and customer satisfaction will increase our ability to attract new customers through increased revenues and strong references.
We believe that our expertise in specific industry groups and industry-specific solutions considerably enhances our ability to help companies apply the technology experience to gain competitive advantage. In each of our vertical industry groups, we employ industry experts, pursue targeted sales and marketing, develop industry-specific offerings and capitalize on referrals from existing customers. We will continue to emphasize this focus and seek to expand the scope of our industry expertise.
Expansion Through Acquisitionsm
We continue our efforts to acquire IT services and IT related companies that will expand or compliment our position as a full service IT solutions provider in the New York metropolitan area. While we had discussions with several companies during the past fiscal year, we are not currently engaged in discussions with any company.
4
Hire and Retain Skilled Professionals
We believe our ability to deliver sophisticated integrated technology solutions will distinguish us from other professional services providers. To deliver these services, we must continue to hire and retain skilled professionals in all disciplines and continue to foster collaboration among them.
We have a dedicated organizational development team that initiates and oversees the training and development of our professionals. Key organizational development initiatives include a boot camp orientation and training program for all new employees, which provides ongoing technical and project management classes as well as career path management and guidance. We are committed to recruiting and hiring quality professionals and to maintaining a culture that motivates our staff while cultivating collaboration and retention. In 2002, we hired a new Director of Sales and three new sales executives, each with years of IT solutions experience.
Evolving Methodology
We believe that continued evolution of our methodology will strengthen our competitive position. We enhance our methodology by incorporating best practices identified over numerous engagements. Through a continuous improvement program of standardized and comprehensive project launches and project-end review sessions, we continually update project methodologies in real-time. Additionally, trend analyses of project reviews and customer satisfaction surveys provide valuable feedback for process improvements. This enables customers to benefit from our cumulative experience. We will continue to enhance our process by updating the methodologies used to deliver high quality solutions to customers on time and on budget.
Strategic Alliances
We believe our relationships with leading technology partners provide increased visibility and sales opportunities. We currently maintain strategic partnerships and alliances with IBM, Hewlett Packard/Compaq, Cisco, Iridian Technologies and Microsoft. We intend to continue to maintain and develop such relationships with leading technology vendors.
Financing Agreement
(in $'000)
Our business activities are capital intensive and, consequently, we finance our accounts receivable and inventory. Failure to obtain adequate product financing on a timely basis could have a material adverse affect on our business, results of operations, financial condition and cash flows. On January 5, 2001, Information Technology Services, Inc. entered into an Agreement for Wholesale Financing with IBM Credit Corporation, which replaced the Agreement for Wholesale Financing with IBM Credit Corporation dated November 27, 2000. The current agreement allows Information Technology Services, Inc. to finance inventory purchases up to $2,350. Borrowing for purchases is based upon 75% of all eligible receivables due within 90 days and up to 100% of all eligible inventories. The line is subject to temporary increases, thereby increasing the line of credit up to $3,350 when needed for high volume sale opportunities. Additionally, InfoTech USA, Inc. also has an Agreement for Wholesale Financing with IBM Credit Corporation, through the Applied Digital Solutions' credit facility, to finance inventory purchases up to $1,000. Borrowing for purchases is based upon 75% of all eligible receivables due within 90 days and up to 100% of all eligible inventories.
On January 31, 2002, and again on February 27, 2002, Applied Digital Solutions entered into amendments to their prior credit agreement with IBM Credit Corporation. These amendments extended the principal and interest payments, which were currently due, to April 2, 2002, including principal payments that were initially due on July 1, 2001. Effective March 27, 2002, Applied Digital Solutions entered into a new credit agreement with IBM Credit Corporation. Applied Digital Solutions' credit agreement with IBM Credit Corporation contains covenants relating to Applied Digital Solutions' financial position and performance, as well as the financial position and performance of Digital Angel Corporation, an affiliate of Applied Digital Solutions. The principal amount outstanding bears interest at an annual rate of 17% and matures on February 28, 2003. The agreement contains provisions to extend the maturity date beyond February 28, 2003; however, if all amounts are not repaid by February 28, 2003, the unpaid amount will accrue interest at an annual rate of 25%. If all amounts are not repaid by February 28, 2004, the interest rate increases to 35%. In addition, Applied Digital Solutions' shares of our common stock are pledged as collateral for amounts outstanding under the credit agreement. IBM Credit Corporation has a security interest in our receivables and inventories, up to the amount advanced from Applied Digital Solutions under the line of credit. Any amounts we owe to Applied Digital Solutions bear interest at the same rate as paid by Applied Digital Solutions to IBM Credit Corporation.
5
At June 30, 2002, Applied Digital Solutions and Digital Angel Corporation were not in compliance with certain covenants and other provisions under the credit agreement. On August 21, 2002, IBM Credit Corporation provided Applied Digital Solutions with a waiver of such non-compliance. On September 30, 2002 and again on November 1, 2002, Applied Digital Solutions entered into amendments to its credit agreement with IBM Credit Corporation, which amendments revised certain financial covenants related to the financial performance of Applied Digital Solutions and the financial position and performance of Digital Angel Corporation. At September 30, 2002, Applied Digital Solutions and Digital Angel Corporation were in compliance with the revised covenants under the IBM Credit Corporation Agreement. Applied Digital Solutions believes that they and Digital Angel Corporation will be able to maintain compliance with the revised covenants; however, there can be no assurance that these covenants will be met. The failure of Applied Digital Solutions or Digital Angel Corporation to meet the amended covenants constitutes an event of default under the credit agreement. If an event of default occurs under the credit agreement, IBM Credit Corporation would be entitled to accelerate the maturity of all the amounts due to them by Applied Digital Solutions, including any amounts advanced to us by Applied Digital Solutions. Additionally, the credit agreement further prohibits Applied Digital Solutions from borrowing funds from other lenders and does not provide for any additional advances from IBM Credit Corporation. Due to these circumstances, future borrowings may not be available to us from Applied Digital Solutions.
We believe that our present Agreement for Wholesale Financing with IBM Credit Corporation and current cash position will be sufficient to fund our operations and capital expenditures for at least twelve months without utilizing any additional loans from IBM Credit Corporation through the Applied Digital Solutions credit facility. Our long-term capital needs may require additional sources of credit, however, any change in financing arrangements requires the consent of Applied Digital Solutions and IBM Credit Corporation. There can be no assurances that these consents will be given, or that we will be successful in our ability to negotiate additional sources of credit. Our inability to have continuous access to such financing at reasonable costs would materially and adversely impact our long-term financial condition, results of operations and cash flows.
Sales and Marketing
Our sales and marketing activities have made great strides in the past year. Our marketing efforts have included the development of collateral material for our sales force, telemarketing campaigns to generate appointments and sales leads, and a completely overhauled website. Additionally, we have designed a new company brochure to continue to develop the InfoTech brand and bring a higher level of professionalism to our sales and marketing team. The collateral material we developed clearly defines our service offerings, giving specific descriptions, deliverables and customer benefits for each service in order to clearly communicate to our customers the value we add.
Improvements in our sales force include the hiring of a new Director of Sales and new sales executives seasoned in the IT solutions environment. Additionally we implemented a new customer relationship management software resulting in improved customer contact, customer satisfaction and trackability. We have also reorganized our sales team's geographic territories allowing our sales executives to have better coverage, efficiency and effectiveness. We have employed the use of IT "consulting conferences" with our customers. Our sales executives are paired with one of our top engineers and schedule meetings with our customers to discuss their current IT systems, concerns and future goals. These consulting appointments have been very successful in providing our customers with a venue, to explore improvements that may need to be made while providing us with new service opportunities.
Competition
We compete in a highly competitive market with IT products and solutions providers that vary greatly in their size and technical expertise. Our primary competitors are Manchester Technologies, Inc., AlphaNet Solutions, Inc., En Pointe Technologies, Inc., Micros-to-Mainframes, Inc. and Pomeroy Computer Resources. Additionally, we expect to face further competition from new market entrants and possible alliances between competitors in the future
Certain of our current and potential competitors have greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sales of their services than us. No assurance can be given that we will be able to compete successfully against current and future competitors.
6
Our ability to compete successfully depends on a number of factors such as breadth of product and service offerings, sales and marketing efforts, pricing, quality and reliability of services, technical personnel and other support capabilities. While there can be no assurance that we will be able to continue to compete successfully with existing or new competition, we believe that we currently compete favorably due to our focus and expertise in network integration and technical services.
EMPLOYEES
As of December 17, 2002, we employed 40 full-time employees and 1 part-time employee. We have no collective bargaining agreements and believe our relations with our employees are good.
BACKLOG
Customers typically do not place recurring "long-term" orders with us, resulting in a limited order backlog at any point in time. Our failure to receive orders from customers on a continuous basis would have a material adverse effect on our financial condition, results of operations and cash flows given our lack of recurring orders.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Federal, state, and local laws or regulations which have been enacted or adopted regulating the discharge of materials into the environment have not had, and under present conditions we do not foresee that they will have, a material adverse effect on our capital expenditures, earnings, cash flows or our competitive position. We will continue to monitor our operations with respect to potential environmental issues, including changes in legally mandated standards.
ITEM 2. PROPERTIES
(in $'000)
We lease 601 square feet of general office space in New York City pursuant to a one year lease at an annual rental of $82. This lease expires on October 31, 2003. This location adequately serves our needs and is approximately 85% utilized.
We lease 9,661 square feet of general office space in Fairfield, New Jersey for $157 per year pursuant to a five and a half year lease expiring on December 27, 2005. This location adequately serves our needs and is approximately 95% utilized.
ITEM 3. LEGAL PROCEEDINGS
On October 22, 2002 Anat Ebenstein, our former Chief Executive Officer, filed a complaint against us, Applied Digital Solutions and certain officers and directors in connection with the termination of her employment. The complaint filed in the Superior Court of New Jersey, Mercer County, seeks compensatory and punitive damages of an unspecified amount arising from an alleged improper termination.
We are not subject to any environmental or governmental proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the over-the-counter bulletin board under the symbol "SYCM.OB". The following table shows, for the periods indicated, the high and low bid quotations per share of the common stock based on published financial sources. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
|
High |
Low |
|||
| 2001 | ||||
| First Quarter | $ 1.13 | $ 0.47 | ||
| Second Quarter | 0.88 | 0.47 | ||
| Third Quarter | 0.60 | 0.42 | ||
| Fourth Quarter | 0.57 | 0.29 | ||
| 2002 | ||||
| First Quarter | $ 0.35 | $ 0.15 | ||
| Second Quarter | 0.25 | 0.18 | ||
| Third Quarter | 0.41 | 0.25 | ||
| Fourth Quarter | 0.80 | 0.17 |
Dividends
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The decision whether to apply legally available funds to the payment of dividends on our common stock may be made by our Board of Directors from time to time in the exercise of its business judgment. Our financing agreement with IBM Credit Corporation contains restrictions on our ability to declare and pay dividends.
Holders
As of December 17, 2002, there were 57 holders of record of our common stock. We believe that there are a substantially greater number of beneficial owners of shares of our common stock.
Recent Sales of Unregistered Securities
None.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below, insofar as they relate to the five years ended September 30, 2002, are derived from, and are qualified by reference to, our audited consolidated financial statements and should be read in conjunction with those consolidated financial statements and the notes thereto. The selected consolidated financial data as of September 30, 1998, 1999 and 2000 and for the years ended September 30, 1998 and 1999 are derived from audited consolidated financial statements not included herein. Results for past periods are not necessarily indicative of results that may be expected for future periods.
| Consolidated Statement of | For the Year Ended September 30, |
||||||||||||||||
| Operations Data | 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||
| (amounts in thousands except per share amounts) | |||||||||||||||||
| Net sales | $ 25,182 | $ 36,261 | $ 40,690 | $ 69,683 | $ 98,303 | ||||||||||||
| Cost of sales | 20,765 | 30,076 | 36,117 | 62,731 | 89,048 | ||||||||||||
| Inventory write-down | - | - | - | - | 658 | ||||||||||||
| Gross Profit | 4,417 | 6,185 | 4,573 | 6,952 | 8,597 | ||||||||||||
| Operating expenses | 4,447 | 6,879 | 6,719 | 7,250 | 8,194 | ||||||||||||
| (Loss) income from operations | (30) | (694) | (2,146) | (298) | 403 | ||||||||||||
| Interest expense | (274) | (272) | (147) | (217) | (881) | ||||||||||||
| Other (expense) income | (223) | 102 | 102 | 3 | (241) | ||||||||||||
| Loss before income taxes | (527) | (864) | (2,191) | (512) | (719) | ||||||||||||
| Benefit for income taxes | 115 | 159 | 231 | 112 | 272 | ||||||||||||
| Net loss | $ (412) | $ (705) | $ (1,960) | $ (400) | $ (447) | ||||||||||||
| Per Share Data: | |||||||||||||||||
| Loss – basic | $ (0.08) | $ (0.15) | $ (0.42) | $ (0.08) | $ (0.10) | ||||||||||||
| Weighted average number | |||||||||||||||||
| of shares outstanding – basic | 4,896 | 4,823 | 4,694 | 4,750 | 4,593 | ||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||
| As of September 30, |
|||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||
| Working capital | $ 4,081 | $ 4,494 | $ 6,063 | $ 9,078 | $ 9,314 | ||||||||||||
| Total assets | 9,757 | 19,071 | 15,630 | 19,302 | 27,857 | ||||||||||||
| Short term debt | 148 | 1,954 | 279 | 96 | 3,115 | ||||||||||||
| Long term debt | 21 | 2,440 | 999 | 1,610 | 1,611 | ||||||||||||
| Stockholders' equity | 8,238 | 8,650 | 9,208 | 11,207 | 11,552 | ||||||||||||
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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, which yields higher than average gross profit margins.
The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items in our consolidated statements of operations.
|
Years Ended September 30, |
|||||||
|
2002 |
2001 |
2000 |
|||||
|
% |
% |
% |
|||||
|
Net sales |
100.0 |
100.0 |
100.0 |
||||
|
Cost of goods sold |
-82.5 |
-82.9 |
-88.8 |
||||
|
Gross profit |
17.5 |
17.1 |
11.2 |
||||
|
Operating expenses |
-17.6 |
|
-19.0 |
|
-16.5 |
||
|
Loss from operations |
-0.1 |
-1.9 |
-5.3 |
||||
|
Interest expense |
-1.1 |
-0.8 |
-0.4 |
||||
|
Other (expense) income |
-0.9 |
0.3 |
0.3 |
||||
|
Loss before income taxes |
-2.1 |
-2.4 |
-5.4 |
||||
|
Income tax benefit |
0.5 |
0.4 |
0.6 |
||||
|
Net loss |
-1.6 |
|
-2.0 |
|
-4.8 |
||
Fiscal Year 2002 Compared to Fiscal Year 2001
(in $'000 unless otherwise noted)
Sales for fiscal year 2002 decreased approximately 30.6%, or $11,079, to $25,182 from $36,261 in fiscal year 2001. The decrease in revenue was primarily a result of lower product sales, which declined by $10,507, or 32.1%, to $22,266 from $32,773. Service revenue also fell $572, or 16.4%, to $2,916 from $3,488 in 2001. The decrease in product and service sales was a result of an industry wide soft market that existed throughout the year. Additionally, our product sales declined as a result of our decision in April 2002 to cease selling some of our lower margin computer hardware and focus on the higher margin products and related technical services.
Gross profit declined by 28.6%, or $1,768, in fiscal year 2002 to $4,417 from $6,185 in fiscal year 2001. The decrease in gross profit was primarily due to the overall decrease in revenue resulting from the soft market in the IT industry. However, overall gross margin increased from 17.1% in 2001 to 17.5% in 2002. Product gross profit percentage was 13.7% in 2002 compared to 12.8% in 2001. Service gross profit percentage was 46.4% in fiscal year 2002 compared to 57.2% in fiscal year 2001.
Selling, general and administrative expenses decreased $2,070, or 33.1%, to $4,179 for fiscal year 2002, compared to $6,249 in fiscal year 2001. The reduction in expense was due to several cost savings measures taken in 2002. We completed the centralization of our service and administrative operations in our headquarters in Fairfield, New Jersey and closed our Shirley, New York facility. We also closed two other small sales offices in Marlton, New Jersey and Albany, New York, and we relocated our New York City office to more economical and suitable space. Additionally, we had an overall reduction in our workforce and reduced sales commissions both of which were related to the decline in our sales volume.
Depreciation and amortization expense for fiscal year 2002 decreased $267, or 49.9%, from $535 in fiscal 2001. The decrease was primarily due to the adoption of SFAS 142, which took effect October 1, 2001. The adoption of SFAS 142 requires the testing of goodwill for impairment at least annually eliminating the need for monthly amortization of goodwill. Accordingly, the goodwill amortization associated with the acquisition of InfoTech USA was not recorded during the current fiscal year. Goodwill amortization in 2001 was $185. Also, the annual valuation analysis of InfoTech USA that was conducted in order to test for goodwill impairment did not result in any goodwill impairment. Additionally, depreciation on the building and equipment of our Shirley facility ceased September 2001 as a result of management's decision to cease use of that facility and offer it for sale. The assets
10
were impaired in the fourth quarter of 2001 when we determined that the net book value of the land, building, and equipment to be offered for sale exceeded its fair value, less costs to sell. The carrying value of these assets, prior to impairment, was approximately $2.5 million. At the time the expected sales proceeds were estimated at $2.4 million. This resulted in an asset impairment of $95 being charged in the fourth quarter of fiscal year 2001. Depreciation associated with the Shirley, New York facility was approximately $84 in 2001.
Loss from operations decreased significantly. The decrease in the loss of $664, or 95.7%, to $30 in fiscal year 2002 from a loss of $694 in fiscal year 2001, resulted from a combination of reduced selling, general and administrative expense and reduced depreciation and amortization expense.
Other expense (income) increased $325 from income of $102 in 2001 to an expense of $223 in 2002. This increase was primarily due to $274 of expenses related to the attempted VeriChip Corporation merger, which was terminated in October of 2002.
Interest expense of $274 and $272 in fiscal year 2002 and 2001, respectively, was comparable.
Our net loss for fiscal year 2002 decreased 41.6%, or $293, to $412 from $705 in fiscal year 2001 primarily due to the combination of reduced selling, general and administrative expense and reduced depreciation and amortization expense.
Fiscal Year 2001 Compared to Fiscal Year 2000
(in $'000 unless otherwise noted)
Sales for fiscal year 2001 decreased approximately 10.9%, or $4,429, to $36,261 from $40,690 in fiscal year 2000. The decrease in revenue was a result of lower product sales, which declined by $7,917, or 19.5%, to $32,773 from $40,690. This decrease was somewhat offset by increased service revenue of $3,488 primarily from InfoTech USA (formerly Information Products), acquired in December 2000. Service revenue in fiscal year 2000 was negligible. The decrease in product sales was a result of the pending change in control of the company in the first quarter and the reduction in sales staff resulting in substantially lower revenue during the first quarter of 2001. Additionally, the industry has suffered from a very soft market, which began in February of 2001. This was somewhat offset by the 10 months of incremental sales contributed by InfoTech USA.
Gross profit and gross profit as a percentage of sales both increased in fiscal year 2001 compared to fiscal year 2000. Gross profit increased by $1,612 to $6,185 in fiscal year 2001 compared to $4,573 in fiscal year 2000, an increase of 35.3%. Gross profit as a percentage of sales rose to 17.1% in fiscal year 2001 from 11.2% in fiscal year 2000. Product gross profit percentage was 12.8% in 2001 compared to 11.2% in 2000. Service gross profit percentage was 57.2% in fiscal year 2001. Service revenue in fiscal year 2000 was negligible. The substantial increase in the gross profit and the gross profit percentage, despite lower revenue, was primarily attributable to the acquisition of InfoTech USA in December 2000. InfoTech USA's product and services business produced a significantly higher margin during the period than we historically experienced.
Selling, general and administrative expenses were $6,249 for fiscal year 2001, down $162, or 2.5%, from $6,411 in fiscal year 2000. The reduction in expense was primarily due to layoffs at Information Technology Services, Inc. and other cost control programs, reduced commissions on lower sales, and staff reductions associated with redirecting marketing efforts implemented in the 4th quarter of 2000. In addition, we received approximately $230 in reimbursements from Applied Digital Solutions for services provided by our officers to other subsidiaries of Applied Digital Solutions. These reimbursements were primarily for salaries of certain officers. These reimbursements were recorded as an offset to selling, general and administrative expenses in the period the expenses were incurred. We do not anticipate receiving future reimbursements from Applied Digital Solutions due to the restructuring of their operations. This was offset somewhat by additional selling, general and administrative expenses from InfoTech USA.
Depreciation and amortization expense for fiscal year 2001 was $535, an increase of $227, or 73.7%, over the $308 in fiscal 2000. The increase was primarily due to the amortization of goodwill associated with the acquisition of InfoTech USA in December 2000, as well as the additional depreciation expense from InfoTech USA.
Asset impairment of $95 in fiscal year 2001 was a result of the plan to dispose of our Shirley, New York facility (see Note 4 of our Consolidated Financial Statements). There was no asset impairment in fiscal year 2000.
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Interest expense increased $125 to $272 in 2001 compared to $147 in 2000, an increase 85.0%. The increase in interest expense was primarily due to the debt associated with the acquisition of InfoTech USA.
Loss before income tax benefit decreased significantly. The decrease in the loss of $1,327 to $864 in fiscal year 2001, from a loss of $2,191 in fiscal year 2000, was decrease of 60.6%. The improved operating results before income taxes resulted primarily from the improved gross profit stemming from an improved mix of services and products offered by the company in fiscal year 2001.
Our effective tax rate was 18.4% in fiscal year 2001 and 10.5% in fiscal year 2000. Differences in the effective income tax rate from the statutory federal rate arise from non-deductible goodwill amortization and state taxes net of federal benefit.
Our net loss for fiscal year 2001 decreased $1,255 to $705 from $1,960 in fiscal year 2000 primarily due to improved gross profit discussed above.
Liquidity and Capital Resources
(in $'000)
Cash provided by operating activities in fiscal 2002 was $3,364 compared to $3,235 in fiscal year 2001, and cash used in operating activities of $458 in fiscal year 2000. The cash provided by operating activities during 2002 was primarily a result of a large reduction in accounts receivable and inventories. This was somewhat offset by a reduction in accounts payable and the net loss for the year. The cash provided by operating activities during 2001 was primarily a result of a large reduction in accounts receivable and a reduction in inventory. This was somewhat offset by a reduction in accounts payable and the net loss for the year. The cash used in operating activities in fiscal 2000 was primarily as a result of the net loss for the year and reductions in payable, which was offset by reductions in accounts receivable and other current assets.
Cash provided by investing activities of $2,448 in fiscal year 2002 was primarily the result of the sale of the Shirley, New York facility. The cash used in investing activities of $2,012 in fiscal year 2001 was primarily to acquire our interest in InfoTech USA in the first quarter of 2001. The use of cash in 2000 of $300 was primarily for financing capital expenditures.
Net cash used in financing activities was $4,225, $451 and $467 for the fiscal years 2002, 2001 and 2000, respectively. The net cash used in 2002 was primarily related to the repayment of the notes payable to Applied Digital Solutions for the purchase of InfoTech USA. The net cash used in 2001 was primarily due to InfoTech USA paying down its line of credit with Applied Digital Solutions. Other net cash used in financing during 2001 and 2000 was for payments on notes payable and long-term debt and the re-purchase of our common stock.
Our business activities are capital intensive and, consequently, we finance our accounts receivable and inventory. Failure to obtain adequate product financing on a timely basis could have a material adverse affect on our business, results of operations, financial condition and cash flows. On January 5, 2001, Information Technology Services, Inc. entered into an Agreement for Wholesale Financing with IBM Credit Corporation, which replaced the Agreement for Wholesale Financing with IBM Credit Corporation dated November 27, 2000. The current agreement allows Information Technology Services, Inc. to finance inventory purchases up to $2,350. Borrowing for purchases is based upon 75% of all eligible receivables due within 90 days and up to 100% of all eligible inventories. The line is subject to temporary increases, thereby increasing the line of credit up to $3,350 when needed for high volume sale opportunities. Additionally, InfoTech USA, Inc. also has an Agreement for Wholesale Financing with IBM Credit Corporation, through the Applied Digital Solutions' credit facility, to finance inventory purchases up to $1,000. Borrowing for purchases is based upon 75% of all eligible receivables due within 90 days and up to 100% of all eligible inventories.
On January 31, 2002, and again on February 27, 2002, Applied Digital Solutions entered into amendments to their prior credit agreement with IBM Credit Corporation. These amendments extended the principal and interest payments, which were currently due, to April 2, 2002, including principal payments that were initially due on July 1, 2001. Effective March 27, 2002, Applied Digital Solutions entered into a new credit agreement with IBM Credit Corporation. Applied Digital Solutions' credit agreement with IBM Credit Corporation contains covenants relating to Applied Digital Solutions financial position and performance, as well as the financial position and performance of Digital Angel Corporation, an affiliate of Applied Digital Solutions. The principal amount outstanding bears interest at an annual rate of 17% and matures on February 28, 2003. The agreement contains provisions to extend the
12
maturity date beyond February 28, 2003; however, if all amounts are not repaid by February 28, 2003, the unpaid amount will accrue interest at an annual rate of 25%. If all amounts are not repaid by February 28, 2004, the interest rate increases to 35%. In addition, Applied Digital Solutions' shares of our common stock are pledged as collateral for amounts outstanding under the credit agreement. IBM Credit Corporation has a security interest in our receivables and inventories, up to the amount advanced from Applied Digital Solutions under the line of credit. Any amounts we owe to Applied Digital Solutions bear interest at the same rate as paid by Applied Digital Solutions to IBM Credit Corporation.
At June 30, 2002, Applied Digital Solutions and Digital Angel Corporation were not in compliance with certain covenants and other provisions under the credit agreement. On August 21, 2002, IBM Credit Corporation provided Applied Digital Solutions with a waiver of such non-compliance. On September 30, 2002 and again on November 1, 2002, Applied Digital Solutions entered into amendments to its credit agreement with IBM Credit Corporation, which amendments revised certain financial covenants related to the financial performance of Applied Digital Solutions and the financial position and performance of Digital Angel Corporation. At September 30, 2002, Applied Digital Solutions and Digital Angel Corporation were in compliance with the revised covenants under the IBM Credit Corporation Agreement. Applied Digital Solutions believes that they and Digital Angel Corporation will be able to maintain compliance with the revised covenants; however, there can be no assurance that these covenants will be met. The failure of Applied Digital Solutions or Digital Angel Corporation to meet the amended covenants constitutes an event of default under the credit agreement. If an event of default occurs under the credit agreement, IBM Credit Corporation would be entitled to accelerate the maturity of all the amounts due to them by Applied Digital Solutions, including any amounts advanced to us by Applied Digital Solutions. Additionally, the credit agreement further prohibits Applied Digital Solutions from borrowing funds from other lenders and does not provide for any additional advances from IBM Credit Corporation. Due to these circumstances, future borrowings may not be available to us from Applied Digital Solutions.
We believe that our present Agreement for Wholesale Financing with IBM Credit Corporation and current cash position will be sufficient to fund our operations and capital expenditures for at least twelve months without utilizing any additional loans from IBM Credit Corporation through the Applied Digital credit facility. Our long-term capital needs may require additional sources of credit, however, any change in financing arrangements requires the consent of Applied Digital Solutions and IBM Credit Corporation. There can be no assurances that these consents will be given, or that we will be successful in our ability to negotiate additional sources of credit. Our inability to have continuous access to such financing at reasonable costs would materially and adversely impact our long-term financial condition, results of operations and cash flows.
The table below summarizes our long term debt, consisting of a capitalized lease, our operating lease commitments and our consulting agreements as of September 30, 2002:
| Payments Due By Period | ||||||||||||||||
| Less than | 1 - 3 | 4 - 5 | After 5th | |||||||||||||
| Total | 1 Year | Years | Years | Year | ||||||||||||
| Capital Lease Relative to software | ||||||||||||||||
| including 18% interest | $ | 50 | $ | 27 | $ | 23 | - | - | ||||||||
| Leases – Premises | 600 | 240 | 321 | $ | 39 | - | ||||||||||
| Consulting Agreement | 390 | 120 | 240 | 30 | - | |||||||||||
| Total | $ | 1,040 | $ | 387 | $ | 584 | $ | 69 | - | |||||||
Seasonality and Quarterly Fluctuations
We have historically experienced, and expect to continue to experience, fluctuations in our net sales, income (loss) from operations and net income (loss) due to the size and timing of system sales transactions. Due to the fact that a significant portion of our overhead is fixed, our results of operations may be adversely affected if revenues were to fall below our expectations.
13
The following table sets forth certain quarterly information for the periods indicated:
| First | Second | Third | Fourth | ||||||||||||
| Quarter | Quarter | Quarter | Quarter | ||||||||||||
| (Amounts in thousands) | |||||||||||||||
| For the year ended | |||||||||||||||
| September 30, 2002: | |||||||||||||||
| Net sales | $ | 5,341 | $ | 10,505 | $ | 4,795 | $ | 4,541 | |||||||
| Gross profit | 910 | 1,365 | 964 | 1,178 | |||||||||||
| (Loss) income from operations | (380) | 107 | (21) | 264 | |||||||||||
| Net (loss) income | (281) | 21 | (72) | (80) | |||||||||||
| For the year ended | |||||||||||||||
| September 30, 2001: | |||||||||||||||
| Net sales | $ | 7,428 | $ | 9,240 | $ | 7,465 | $ | 12,128 | |||||||
| Gross profit | 1,741 | 1,666 | 996 | 1,782 | |||||||||||
| (Loss) income from operations | (387) | (41) | (463) | 197 | |||||||||||
| Net (loss) income | (353) | (100) | (324) | 72 | |||||||||||
| For the year ended | |||||||||||||||
| September 30, 2000: | |||||||||||||||
| Net sales | $ | 11,725 | $ | 9,338 | |||||||||||