ANNUAL
REPORT
2005
SYNERGX SYSTEM INC.
209 Lafayette Drive
Syosset, NY 11791
To The Stockholders of Synergx Systems Inc.
Enclosed you will find our Annual Report for the fiscal year ended
September 30, 2005 and the proxy materials related to our upcoming Annual
Meeting of Stockholders.
While we were not satisfied with our decline in revenues, earnings and
backlog, we believe we were successful in managing our way through a year of
tremendous transition for Synergx.
* At the start of the year we replaced the President of our principal
operating subsidiary in New York and subsequently replaced our managers of
Service, Transit Marketing, Project Management, Sales and Information
Technology. In short, all of our operations managers changed during 2005.
* Entirely replaced our management information systems including all
operating software and most hardware.
* Instituted new aggressive costing, inventory management, project management
and sales management programs to reduce cost and enhance our marketing.
* Subsequent to year-end we hired a new Sales Manager with extensive
experience in marketing and selling life safety and especially security
products and services. We have also just hired a senior technology
executive of a major New York area rail system to enhance our transit
marketing.
* Substantially completed a resdesign and upgrade of our proprietary life
safety system.
* Secured new and broadened existing product line allowing us to offer a
wider area of data communication products and services.
* Hired new and better sales, project management, field service and support
personnel allowing us to implement a major force reduction subsequent to
year-end.
We are confident that the foregoing steps will enable us to accelerate the
building of stockholder value.
I would like to mention again that due to medical reasons, Joseph Vitale,
our long-time President and Chief Operating Officer retired from his position as
an officer of Synergx and its subsidiaries on September 30, 2005 and will step
down from the Board of Directors at the Annual Meeting of Stockholders in March
2006. I want to thank Joe for all of his efforts on behalf of Synergx over the
years and wish him the best of health.
In addition, Dennis McConnell, our outside General Counsel is also stepping
down from our Board of Directors and we thank him for his past and continuing
service to Synergx.
Your Board of Directors has nominated for your consideration, two new
Directors to replace Messrs. Vitale and McConnell; Mitchell Sanders, a Toronto
based corporate and securities attorney and Gary Oreman, an investor with
extensive experience in technology.
On behalf of the Board of Directors, I invite each of you to attend our
Annual Meeting of Stockholders at 11 am on March 15, 2006 at the offices of our
attorneys Dolgenos Newman & Cronin LLP, 271 Madison Avenue, 12th Floor, New
York, NY and thank you for your continuing support of Synergx.
Daniel S. Tamkin,
Chairman and CEO
Report of Independent Registered Public Accounting Firm
To the Audit Committee of the Board of Directors of
Synergx Systems Inc.
We have audited the accompanying consolidated balance sheet of Synergx Systems
Inc. and its subsidiaries (the "Company") as of September 30, 2005 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 2005 and 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor are we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's control over financial reporting.
Accordingly, we express no opinion. An audit also includes examining on a test
basis evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Synergx
Systems Inc. and its subsidiaries as of September 30, 2005 and the consolidated
results of their operations and their cash flows for the years ended September
30, 2005 and 2004, in conformity with accounting principles generally accepted
in the United States of America.
December 9, 2005 /s/ MARCUM & KLIEGMAN LLP
New York, NY
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2005
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 590,000
Accounts receivable, principally trade, less allowance
for doubtful accounts of $324,000 7,093,000
Inventories 2,408,000
Deferred taxes 278,000
Prepaid expenses and other current assets 268,000
-----------
TOTAL CURRENT ASSETS 10,637,000
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,656,000 641,000
OTHER ASSETS 596,000
-----------
TOTAL ASSETS $11,874,000
===========
See accompanying Notes to the Consolidated Financial Statements.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2005
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and capital leases payable - current portion $ 32,000
Accounts payable and accrued expenses 2,912,000
Deferred revenue 554,000
-----------
TOTAL CURRENT LIABILITIES 3,498,000
Note payable to bank 1,449,000
Notes and capital leases payable - less current portion 6,000
Deferred taxes 90,000
-----------
TOTAL LIABILITIES 5,043,000
-----------
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 5,192,118 shares 5,000
Capital in excess of par 6,785,000
Retained earnings 41,000
-----------
TOTAL STOCKHOLDERS' EQUITY 6,831,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,874,000
===========
See accompanying Notes to the Consolidated Financial Statements.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30,
2005 2004
----------- -----------
Product sales $15,517,000 $16,720,000
Subcontract sales 475,000 590,000
Service revenue 4,795,000 4,480,000
----------- -----------
Total revenues 20,787,000 21,790,000
----------- -----------
Cost of product sales * 10,691,000 11,090,000
Cost of subcontract sales 385,000 484,000
Cost of service revenue 3,122,000 3,189,000
Selling, general and administrative 6,000,000 5,989,000
Interest expense 84,000 87,000
Depreciation and amortization 189,000 171,000
Loss on equity investment 76,000 52,000
----------- -----------
20,547,000 21,062,000
----------- -----------
Income before provision for income taxes 240,000 728,000
----------- -----------
Provison for income taxes:
Current 103,000 225,000
Deferred 7,000 83,000
----------- -----------
110,000 308,000
----------- -----------
Net Income $130,000 $420,000
=========== ===========
Earnings Per Common Share:
Basic Earnings Per Share $0.03 $0.09
===== =====
Diluted Earnings Per Share $0.03 $0.09
===== =====
Weighted average number of common shares outstanding 5,171,721 4,671,701
Weighted average number of common and dilutive
common share equivalents outstanding 5,193,276 4,912,203
*Excludes depreciation and amortization of $40,000 and $51,000 for the years
ended September 30, 2005 and 2004, respectively
See accompanying Notes to the Consolidated Financial Statements.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004
(ACCUMULATED
TOTAL CAPITAL DEFICIT)/
STOCKHOLDERS' COMMON STOCK IN EXCESS RETAINED
EQUITY SHARES AMOUNT OF PAR EARNINGS
---------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 $5,466,000 4,061,144 $ 4,000 $5,971,000 ($ 509,000)
Exercise of employee stock options 62,000 115,718 62,000
Exercise of warrants 554,000 960,000 1,000 553,000
Tax benefit of stock option exercise 146,000 146,000
Net earnings 420,000 420,000
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2004 6,648,000 5,136,862 5,000 6,732,000 (89,000)
Exercise of employee stock options 28,000 55,256 28,000
Tax benefit of stock option exercise 25,000 25,000
Net Income 130,000 130,000
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2005 $6,831,000 5,192,118 $ 5,000 $6,785,000 $ 41,000
========== ========== ========== ========== ==========
See accompanying Notes to the Consolidated Financial Statements.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
2005 2004
----------- ------------
OPERATING ACTIVITIES
Net income $ 130,000 $ 420,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 189,000 171,000
Deferred taxes 7,000 83,000
Provision for doubtful accounts -- (88,000)
Provision for inventory allowance 90,000 --
Loss on equity investment 76,000 52,000
Tax benefit from employee stock option exercise 25,000 146,000
Changes in operating assets and liabilities:
Accounts receivable (700,000) (511,000)
Inventories 164,000 (213,000)
Prepaid expenses and other current assets 11,000 154,000
Other assets (27,000) (38,000)
Accounts payable and accrued expenses 405,000 (566,000)
Deferred revenue 48,000 71,000
----------- -----------
NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES 418,000 (319,000)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (288,000) (232,000)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (288,000) (232,000)
----------- -----------
FINANCING ACTIVITIES
Principal payments on notes payable and capital lease obligations (29,000) (90,000)
Payments and proceeds from note payable bank - net (467,000) 660,000
Proceeds from exercise of stock options and warrants 28,000 616,000
----------- -----------
NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES (468,000) 1,186,000
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (338,000) 635,000
Cash and cash equivalents at beginning of the year 928,000 293,000
----------- -----------
Cash and cash equivalents at end of the year $ 590,000 $ 928,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 7,000 $ 266,000
Interest $ 89,000 $ 95,000
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 and
in Dallas/Ft. Worth, Texas.
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"), General Sound (Texas)
Company ("General Sound"), and Systems Service Technology Corp. ("SST"). In
addition the Company has a payroll disbursing subsidiary FT Clearing Inc. and a
subsidiary that holds the investment in Secure 724 LP, Comco Technologies Inc.
Significant intercompany items and transactions have been eliminated in
consolidation.
Revenue Recognition
Product sales include sale of systems, which are similar in nature, that involve
fire alarm, life safety and security (CCTV and card access), transit (train
station platforms and on board systems) and communication (paging, announcement
and audio/visual). Product sales represent sales of product along with the
integration of technical services at a fixed price under a contract with an
electrical contractor or end user customer (building owner or tenant), or
customer agent. Product sales are allocated using a constant gross profit
percentage over the entire contract, and are recognized, using the
percentage-of-completion method of accounting. The Company utilizes a
units-of-work performed method to measure progress towards completion of a
contract. The effects of changes in contract terms are reflected in the
accounting period in which they become known. Contract terms provide for billing
schedules that differ from revenue recognition and give rise to costs and
estimated profits in excess billings, and billings in excess of costs and
estimated profits. Costs and estimated profits in excess of billing were not
material at September 30, 2005 and 2004 and have been included in accounts
receivable. There were no billings in excess of costs and estimated profits at
September 30, 2005 and 2004.
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. Subcontract sales are also recognized during the entire
project using the percentage-of-completion method of accounting as electrical
installation is performed at the job site.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Revenue Recognition (continued)
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, 2005 reflects an
inventory allowance of $370,000.
Property and Equipment
Property and equipment are stated at historical cost. Leases meeting the
criteria for capitalization are recorded at the present value of future lease
payments.
Depreciation and amortization of machinery and equipment and furniture and
fixtures are provided primarily by the straight-line method over their estimated
useful lives. The Company depreciates machinery and equipment over periods of 3
to 10 years and amortizes leasehold improvements and assets acquired under
capitalized leases utilizing the straight-line method over the life of the lease
or the economic useful life, whichever is shorter.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Other Assets
Other assets consist principally of the investment in Secure 724 LP which is
comprised of notes receivable of $163,000 and a 25% ownership in Secure 724 LP
of $432,500, less the 25% equity in the operating losses of Secure 724 LP of
$163,000. (see Note 3 - Investment in Secure 724 LP) Also included in other
assets is the excess of cost over the fair value of the assets acquired in the
1990 acquisition of General Sound of approximately $103,000.
The Company does not amortize goodwill but evaluates whether the carrying value
of goodwill has become impaired. This evaluation is performed on annual basis
each fiscal year end.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the years
ended September 30, 2005 and 2004 amounted to $35,000 and $25,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs for the years ended September 30, 2005 and 2004 amounted to
$121,000 and $160,000, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
the asset and liability method is used to determine deferred tax assets and
liabilities based on the differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Earnings Per Share
SFAS No. 128 "Earnings Per Share" requires companies to report basic and diluted
earnings per share ("EPS") computations. Basic EPS excludes dilution and is
based on the weighted-average common shares outstanding and diluted EPS gives
effect to potential dilution of securities that could share in the earnings of
the Company. Diluted EPS reflects the assumed issuance of shares with respect to
the Company's employee stock options, non-employee stock options, and warrants.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Cash Equivalents
The Company considers all investments with original maturities of three months
or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company's operations are located in two large U.S. cities (New York City,
New York and Dallas, Texas), each of which is an independent market. 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. Approximately 88% of such
outstanding receivables at September 30, 2005 are due from customers in New
York. The Company does not require collateral to support financial instruments
subject to credit risk.
At September 30, 2005, the Company had cash of approximately $265,000, that is
in excess of insured amount limitations.
Stock Options and Similar Equity Instruments
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," for stock options and similar equity instruments
(collectively, "Options") issued to employees; however, the Company will
continue to apply the intrinsic value based method of accounting for options
issued to employees prescribed by Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issues to Employees," rather than the fair value based
method of accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
On December 31, 2002, the Financial Accounting Standards Board issued SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No.
148 amends SFAS No. 123, to provide an alternative method of transition to SFAS
No. 123's fair value method of accounting for stock based employee compensation.
SFAS 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
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Stock Options and Similar Equity Instruments (continued)
value method, the disclosure provisions of SFAS No. 123 are applicable to all
companies with stock based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS No. 123, or
the intrinsic value method of APB Opinion 25. As required under SFAS No. 148,
the following table presents pro forma net income and diluted net earnings per
share as if the fair value-based method had been applied to all awards.
Years Ended September 30,
2005 2004
Net Income
$130,000 $420,000
Less: Fair Value of Options issued to
employees and directors, net of income tax (13,000) --
-------- ---------
Pro Forma Net Income $117,000 $420,000
======== =========
Weighted Average Basic Shares 5,171,721 4,671,701
Weighted Average Diluted Shares 5,193,276 4,912,203
Basic Net Income Per Share as Reported $.03 $.09
Basic Pro Forma Net Income per share $.02 $.09
Diluted Net Income Per Share as Reported $.03 $.09
Diluted Pro Forma Net Income per share $.02 $.09
The Black-Scholes option valuation model was used to estimate the fair value of
the options granted during the year ended September 30, 2005. There were no
options granted to employees during the year ended September 30, 2004. The model
includes subjective input assumptions that can materially affect the fair value
estimates. The model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and that are fully
transferable. The expected volatility is estimated based on the most recent
historical period of time equal to the weighted average life of the options
granted. Principal assumptions used in applying the Black-Scholes model along
with the results from the model for the year ended September 30, 2005 were as
follows:
Assumptions:
Risk-free interest rate 3.58%
Dividend 0
Expected life in years 5 years
Expected volatility 84%
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Property and Equipment
Property and equipment (including $3,000 arising from capital leases) are
summarized as follows:
September 30,
2005
----------
Machinery and equipment $2,052,000
Furniture and fixtures 176,000
Leasehold improvements 69,000
----------
2,297,000
Less accumulated depreciation and amortization
1,656,000
----------
$ 641,000
==========
Annual amortization of equipment under capital leases of $300 is included with
depreciation and amortization expense.
Depreciation and amortization expense related to these assets were $157,000 and
$141,000 for the years ended September 30, 2005 and 2004, respectively.
3. Investment in Secure 724 L.P.
On May 29, 2003, the Company acquired 25% of the equity of Secure 724 LP
("Secure 724 LP"), an Ontario limited partnership. The investment in Secure 724
L.P. for 300,000 shares of Common Stock and warrants to purchase 50,000 shares
of Common Stock was valued at $432,500. This investment is accounted for
utilizing the equity method and is included in OTHER ASSETS. The underlying
equity of this investment on the date of the transaction was approximately
$73,000; resulting in goodwill of approximately $359,500; which will not be
amortized but will be tested for impairment. For the years ended September 30,
2005 and 2004, an adjustment to the equity investment of $76,000 and $52,000,
respectively was recorded to reflect the Company's 25% portion of the net loss
of Secure 724 LP. The cumulative impact that was recorded for the 25% portion of
the net loss from inception amounts to $163,000.
In connection with the initial capital contribution per the partnership
agreement, the Company advanced $18,000 ($25,000CA) to Secure 724 LP in May 2003
and upon reaching milestones advanced $125,089 ($175,000CA) in August 2003.
Additional advances were made to Secure 724 LP in October 2004 of $7,969
($10,000CA) and in December 2004 of $12,140 ($15,000CA). These notes receivable
bear interest at a rate of 4% per annum and mature in May 2006, August 2006, and
October 2007, respectively.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Investment in Secure 724 L.P.(continued)
There can be no assurance that the investment in Secure 724 LP will be
profitable.
4. Long-Term Debt
The Company has a $3 million revolving credit facility with Hudson United Bank
(the "Credit Facility"). The Credit Facility has an annual interest rate of
prime plus 1/4% on outstanding balances (6.75% at September 30, 2005) and
expires in June 2007. The Credit Facility is secured by all assets of the
Company and all of its operating subsidiaries. Advances under this Credit
Facility are measured against a borrowing base calculated on eligible accounts
receivable and inventories.
At September 30, 2005, the full amount of the Credit Facility was available
under the borrowing base calculation and $1,449,000 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, 2005 the Company was
not in default with any of its financial covenants.
Annual maturities of Notes Payable to Bank and Notes and Capital Leases Payable
are as follows:
Note Payable Other Notes and Total
Bank Capital Leases Payable
----------------------------------------------------------------
2006 $32,000 $ 32,000
2007 $1,449,000 6,000 1,455,000
----------------------------------------------------------------
Total $1,449,000 $38,000 $1,487,000
================================================================
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Lease Commitments
The Company leases certain office and warehouse space under non cancelable
operating leases expiring at various times through 2010. In February 2000, the
Company signed a lease for office, manufacturing and warehouse space in Syosset,
New York. An additional 700 square feet of space was added to the lease in
August 2004. The rental schedule provides for monthly rent of $16,000 during
2005 with 3.3% yearly increases through the expiration of the lease in June
2007.
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 Company leases an office and warehouse facility under a non-cancelable
operating lease in Richardson, Texas, a suburb of Dallas, pursuant to a lease
that was extended in August 2002 to expire on June 30, 2010 providing for annual
rent on a net basis of $50,000 escalating annually to $64,000 in the final year
of the lease.
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, 2005:
Total Operating
Leases
2006 $352,000
2007 307,000
2008 155,000
2009 159,000
2010 73,000
----------
Total minimum lease payments $1,046,000
==========
Rental expense amounted to $361,000 and $346,000, for 2005 and 2004,
respectively.
6. Significant Customers and Suppliers
During fiscal 2005 and 2004, no customer accounted for more than 10% of sales.
One supplier accounted for 10% and 9% of the Company's cost of sales during
fiscal 2005 and 2004, respectively.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Income Taxes
During the years ended September 30, 2005 and 2004, the Company recorded a tax
provision of $110,000 and $308,000, respectively. A reconciliation of such
provision with the amounts computed by applying the statutory federal income tax
rate is as follows:
Year Ended September 30,
2005 2004
-------------------------------
Statutory federal income tax rate 34% 34%
Computed expected tax from income $82,000 $247,000
Increase in taxes resulting from:
State and local income taxes, net of Federal tax benefit 25,000 51,000
Nondeductible expenses 2,000 2,000
Other 1,000 8,000
------------------------------
Provision $110,000 $308,000
==============================
The Company provided $6,000 and $12,000 for state and local franchise and
capital taxes for the years ended September 30, 2005 and 2004, respectively.
These expenses have been included in selling, general and administrative
expenses for each of the years presented.
The Company has recorded a current deferred tax asset and a non current deferred
tax liability at September 30, 2005 and 2004 related to certain accelerated tax
deductions or book provisions to be deducted in future tax returns. Management
anticipates profitable operations to continue at a level that will result in the
utilization of the entire deferred tax asset.
The components of deferred tax assets and liabilities at September 30, 2005 and
2004 consist of the following:
Deferred Tax Assets 2005 2004
Allowance for doubtful accounts $130,000 $130,000
Inventory reserve 148,000 112,000
Net operating loss carryforward 18,000
------- -------
Total deferred tax asset $278,000 $260,000
======= =======
Deferred Tax Liabilities
Depreciation and amortization $ 90,000 $ 65,000
Total deferred tax liability $ 90,000 $ 65,000
======= =======
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Earnings Per Share
The computation of basic earnings per share, diluted earnings per share,
weighted shares outstanding, and weighted average shares after potential
dilution is as follows:
Year Ended September 30
Basic EPS Computation 2005 2004
-------- --------
Net income $130,000 $420,000
Weighted average outstanding shares 5,171,721 4,671,701
Basic earnings per share $.03 $.09
==== ====
Diluted EPS Computation
Net income $ 130,000 $420,000
Weighted average outstanding shares 5,171,721 4,671,701
Plus: Incremental shares from
assumed conversions
Employee Stock Options 14,036 73,872
Warrants 7,520 166,630
------ -------
Dilutive common shares 21,555 240,502
------ -------
Adjusted weighted-average shares 5,193,276 4,912,203
Diluted earnings per share $.03 $.09
==== ====
9. Employee Stock Options and Warrants
In March 2004, the Company and its stockholders adopted a nonqualified stock
option plan ("2004 Plan"), which will expire March 10, 2009, except as to
options outstanding under a prior 1997 Plan. Under the 2004 Plan, the Board of
Directors may grant options to eligible employees at exercise prices not less
than 100% of the fair market value of the common shares at the time the options
are granted. The number of shares of Common Stock that may be issued shall not
exceed an aggregate of up to 10% of the Compnay'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.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Employee Stock Options and Warrants (continued)
In February 2005, the Board of Directors approved a grant of 130,000 stock
options with a fair market value of $157,094 to certain employees, officers and
directors of the Company under the 2004 Plan. The stock options vest ratably
over five years and are exercisable at $2.50 per share, which exercise price was
above the market price at the time of grant. There were no stock options granted
during the year ended September 30, 2004.
Transactions involving stock options are summarized as follows:
Weighted Average
Stock Options Exercise Price of
Outstanding Options Outstanding
Balance September 30, 2003 191,298 $ .52
Options exercised (115,718) .54
Balance September 30, 2004 75,580 .51
Options granted 130,000 2.50
Options exercised (55,256) .50
Balance September 30, 2005 150,324 2.23
There were 20,324 exercisable options at September 30, 2005 and 75,580
exercisable options at September 30, 2004.
During the years ended September 30, 2005 and 2004, employees exercised stock
options to purchase 55,256 and 115,718 shares of Common Stock, respectively, for
total consideration of $28,000 and $62,000, respectively.
Outstanding and exercisable stock options are as follows:
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 2005 Contractual Life September 30, 2005
$ .52 10,668 .3 years 10,668
.50 9,656 .3 years 9,656
2.50 130,000 4.5 years -
In 1998, the Company granted Genterra Inc. (an Ontario publicly-held
corporation) ("Genterra") warrants to purchase 620,000 shares of the Company's
common stock at an exercise price of $.51 per share at any time until December
31, 2003. In December 2003, Genterra exercised these warrants for $316,200.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Employee Stock Options and Warrants (continued)
On September 30, 2002, the Company issued 340,000 warrants in connection with a
private placement that were exercisable at $.70 per share of Common Stock until
September 30, 2004. All of these warrants were exercised in August and September
2004 for $238,000.
In May 2003, the Company issued 50,000 warrants in connection with its 25%
investment in Secure 724 LP. The warrants expired in May 2005. (See Note 3 -
Investment in Secure 724 LP)
Transactions involving non-employee stock warrants are summarized as follows:
Weighted Average
Warrants Exercise Price of
Outstanding Warrants Outstanding
Balance September 30, 2003 1,010,000 $.61
Warrants exercised (960,000) .58
Balance September 30, 2004 50,000 1.15
Warrants expired (50,000) 1.15
Balance September 30, 2005 0
===
10. 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.
11. Other
Approximately 32% 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
nonunion employees. The plan includes a profit sharing provision at the
discretion of the Board of Directors. In September 2005 and 2004. a profit
sharing contribution of $41,000 and $43,000, respectively, was authorized and
charged to expense.
Synergx Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. 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.
13 New Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), "Shared-Based Payment," which addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123 (revised 2004) requires an entity to recognize the grant-date
fair-value of stock options and other equity-based compensation issued to
employees in the income statement. SFAS No. 123 (revised 2004) generally
requires that an entity account for such transactions using the fair-value-based
method, and eliminates the intrinsic value method of accounting in APB 25, which
was permitted under SFAS No. 123, as originally issued. The revised statement
also requires entities to disclose information about the nature of the
share-based payment transactions and the effects of those transactions on the
financial statements. SFAS No. 123 (revised 2004) is effective for small
business issuers for the first annual reporting period that begins after
December 15, 2005. The Company is currently evaluating the impact that this
statement will have on its financial condition, results of operations and cash
flows.
SYNERGX SYSTEMS INC.
CORPORATE DATA
SECURITIES TRADING
Common Stock Nasdaq symbol - SYNX
TRADING RANGES of COMMON STOCK
Bid Price
Quarter Ending High Low
-------------- -------------------
December 31, 2003 4.000 2.860
March 31, 2004 6.010 2.470
June 30, 2004 9.820 2.810
September 30, 2004 4.090 1.750
December 31, 2004 4.370 2.490
March 31, 2005 3.580 1.440
June 30, 2005 1.670 1.000
September 30, 2005 6.250 1.240
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 14, 2005, there were 439 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 22, 2005 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, Audit Committee; President of Camtx Corporation
Joseph Vitale, President, Director
John A. Poserina, Chief Financial Officer, Secretary, Treasurer and Director
Dennis P. McConnell, Director, Audit Committee; Dolgenos Newman & Cronin LLP
Harris Epstein, Director, Audit Committee
J. Ian Dalrymple, Director
Mark Litwin, Director
EXECUTIVE OFFICERS OF KEY SUBSIDIARIES
Albert Koenig, President Casey Systems Inc.
Joe A. Durham, President General Sound(Texas) Company