U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal quarter ended March 31, 2006
-----------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-17580
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SYNERGX SYSTEMS INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2941299
---------------------------------------- -----------------------
(State or jurisdiction of incorporation or (IRS employer
organization) identification Number)
209 Lafayette Drive, Syosset, New York 11791
(Address of Principal Executive Offices) (Zip code)
(516) 433-4700
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that 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 whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act)
Yes[ ] No[ X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 7, 2006, 5,210,950 shares
of Registrant's Common Stock were issued and outstanding.
Transitional Small Business Disclosure Format (check one) Yes[ ] No[ X ]
INDEX
Part I - Financial Information (unaudited) Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet at March 31, 2006 3
Condensed Consolidated Statements of Operations for the Three
And Six Months Ended March 31, 2006 and 2005 5
Condensed Consolidated Statements of Cash Flows for the Three
And Six Months Ended March 31, 2006 and 2005 7
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operations 13
Item 3. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings. 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
2006
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 371,831
Accounts receivable, principally trade, less allowance
for doubtful accounts of $323,523 5,603,006
Inventories, net 2,610,839
Deferred taxes 301,700
Prepaid expenses and other current assets 475,158
-----------
TOTAL CURRENT ASSETS 9,362,534
-----------
PROPERTY AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $1,747,921 811,028
OTHER ASSETS 633,385
-----------
TOTAL ASSETS $10,806,947
===========
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
2006
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - current portion $ 35,995
Accounts payable and accrued expenses 1,881,796
Deferred revenue 807,718
------------
TOTAL CURRENT LIABILITIES 2,725,509
Note payable to bank 1,401,566
Notes payable - less current portion 60,506
Deferred taxes 90,000
------------
TOTAL LIABILITIES 4,277,581
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 2,000,000 shares authorized-
none issued and outstanding --
Common stock, 10,000,000 shares authorized, $.001
par value; issued and outstanding 5,210,950 shares 5,211
Capital in excess of par 6,803,992
Accumulated deficit (279,837)
------------
TOTAL STOCKHOLDERS' EQUITY 6,529,366
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,806,947
============
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31,
2006 2005
----------- -----------
Product sales $ 2,912,466 $ 3,568,295
Subcontract sales 180,388 207,400
Service revenue 1,278,042 1,136,752
----------- -----------
Total revenues 4,370,896 4,912,447
----------- -----------
Cost of product sales 2,097,629 2,333,695
Cost of subcontract sales 147,735 170,385
Cost of service revenue 645,416 745,598
Selling, general and administrative 1,511,514 1,515,400
Interest expense 26,503 14,521
Depreciation and amortization 42,769 44,785
Loss on equity investment 17,000 12,000
----------- -----------
4,488,566 4,836,384
----------- -----------
(Loss) income before (benefit) provision for income taxes (117,670) 76,063
----------- -----------
(Benefit) provision for income taxes:
Current (40,000) 24,000
Deferred (4,000) 12,000
----------- -----------
(44,000) 36,000
----------- -----------
Net (Loss) income $ (73,670) $ 40,063
=========== ===========
(Loss) income per common share
Basic (Loss) income per share $ (0.01) $ 0.01
=========== ===========
Diluted (Loss) income per share $ (0.01) $ 0.01
=========== ===========
Weighted average number of common shares outstanding 5,210,950 5,165,787
Weighted average number of common and dilutive
common share equivalents outstanding 5,210,950 5,216,424
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended March 31,
2006 2005
----------- -----------
Product sales $ 5,839,159 $ 6,816,678
Subcontract sales 303,285 305,533
Service revenue 2,469,635 2,257,139
----------- -----------
Total revenues 8,612,079 9,379,350
----------- -----------
Cost of product sales 4,325,129 4,815,784
Cost of subcontract sales 240,640 250,066
Cost of service revenue 1,350,795 1,466,132
Selling, general and administrative 3,041,624 2,873,591
Interest expense 53,579 37,422
Depreciation and amortization 86,243 89,669
Loss on equity investment 42,000 22,000
----------- -----------
9,140,010 9,554,664
----------- -----------
(Loss) before (benefit) from income taxes (527,931) (175,314)
----------- -----------
(Benefit) from income taxes:
Current (183,000) (55,000)
Deferred (24,000) (5,000)
----------- -----------
(207,000) (60,000)
----------- -----------
Net (Loss) $ (320,931) $ (115,314)
=========== ===========
(Loss) Per Common Share:
Basic (Loss) Per Share $ (0.06) $ (0.02)
=========== ===========
Diluted (Loss) Per Share $ (0.06) $ (0.02)
=========== ===========
Weighted average number of common shares outstanding 5,201,639 5,151,324
Weighted average number of common and dilutive
common share equivalents outstanding 5,201,639 5,151,324
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended March 31,
2006 2005
------------ ------------
OPERATING ACTIVITIES
Net (Loss) $ (320,931) $ (115,314)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation and amortization * 104,665 115,515
Deferred tax (benefit) (24,000) (5,000)
Loss on equity investment 42,000 22,000
Tax benefit from employees stock option exercise 10,000 --
Changes in operating assets and liabilities:
Accounts receivable, net 1,490,111 690,128
Inventories (202,936) 73,035
Prepaid expenses and other current assets (207,264) (201,439)
Other assets (92,475) (5,757)
Accounts payable and accrued expenses (1,029,926) (40,010)
Deferred revenue 253,383 37,898
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,627 571,056
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (182,553) (211,466)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (182,553) (211,466)
----------- -----------
FINANCING ACTIVITIES
Principal payments on notes payable (20,569) (33,463)
Payments and proceeds from note payable bank - net (47,740) (700,000)
Proceeds from exercise of stock options and warrants 9,416 27,628
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (58,893) (705,835)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (218,819) (346,245)
Cash and cash equivalents at beginning of period 590,650 928,507
----------- -----------
Cash and cash equivalents at end of period $ 371,831 $ 582,262
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 44,361 $ 5,455
Interest $ 53,579 $ 40,163
NON-CASH INVESTING AND FINANCING ACTIVITIES
Included in the six months ended March 31, 2006, was the purchase of equipment
for $82,794 through financing.
* Depreciation of $18,422 and $25,846 is included in cost of product sales for
the six months ended March 31, 2006 and 2005, respectively.
See accompanying Notes to the Condensed Consolidated Financial Statements
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary in order not to make the
financial statements misleading have been included. Results for the three and
six months ended March 31, 2006 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2006. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Synergx Systems Inc. ("Synergx" or "the Company") and
Subsidiaries' annual report on Form 10-KSB for the year ended September 30,
2005.
2. REVENUE RECOGNITION
Product sales include sales of systems, which are similar in nature, that
involve fire alarm, life safety and security (CCTV and card access), transit
(train station platforms and on board systems) and communication (paging,
announcement and audio/visual). Product sales represent sales of 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 and 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 the
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 of billings, and billings in excess of costs and
estimated profits. Costs and estimated profits in excess of billing were not
material at March 31, 2006 and 2005 and have been included in accounts
receivable. There were no billings in excess of costs and estimated profits at
March 31, 2006 and 2005.
Subcontract sales principally represent revenue 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. The subcontract revenue element of the contract
(carrying its own gross margin) is also recognized during the entire project
using the percentage-of-completion method of accounting as electrical
installation is performed at the job site.
Service revenue from separate service contracts is recognized on a straight-line
basis over the term 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.
3. RECLASSIFICATION
Certain accounts in the prior period financial statements have be reclassified
for comparison purposes to conform to the presentation in the current period
financial statement. These classifications have no effect on the previously
reported net loss.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INVENTORIES
Inventories are priced at the lower of cost (first-in, first-out) or market and
consist primarily of raw materials and at March 31, 2006 reflects an inventory
allowance of $370,000.
5. LONG TERM DEBT
The Company has a $3 million revolving credit facility with Hudson United Bank
(the "Credit Facility"). The Credit Facility carries an annual interest rate of
prime plus 1/4% on outstanding balances (7.5% at March 31, 2006) and expires
June 1, 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 trade receivables and
inventories.
At March 31, 2006, the full amount of the Credit Facility was available under
the borrowing base calculation and $1,401,566 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 March 31, 2006 the Company was not
in default with any of its financial covenants.
6. STOCK OPTIONS
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 Stock Option Plan. The stock options
vest ratably over five years and are exercisable at $2.50 per share, which
exercise price was above market at the time of grant. There were no stock
options granted during the three and six months ended March 31, 2006.
In December 2005, employees exercised stock options to purchase 18,832 shares of
common stock at an exercise price of $.50 per share for a total consideration of
$9,416. Stock options for 1,492 shares were not exercised and expired on
December 29, 2005.
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standard ("SFAS") 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.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
6. STOCK OPTIONS (CONTINUED)
On December 31, 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure". SFAS
No. 148 amends SFAS No. 123, to provide an alternative method of transition to
SFAS No. 123's fair value method of accounting for stock based employee
compensation. SFAS No.148 also amends the disclosure provisions of SFAS No. 123
and APB Opinion 28, "Interim Financial Reporting," to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the statement does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 123 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 loss and diluted net loss per share as if the fair value-based method
had been applied to all awards.
Three Months Six Months
Ended March 31, Ended March 31,
2006 2005 2006 2005
---- ---- ---- ----
Net (Loss) income as reported $ (73,670) $ 40,063 $ (320,931) $ (115,314)
Less: Fair Value of Options Issued to
Employees and Directors, Net of Income Tax (4,713) (5,237) (9,426) (5,237)
----------- ----------- ----------- -----------
Pro Forma Net (Loss) Income $ (78,383) $ 34,826 $ (330,357) $ (120,551)
=========== =========== =========== ===========
Weighted Average Basic Shares 5,210,950 5,165,787 5,201,639 5,151,324
Weighted Average Diluted Shares 5,210,950 5,165,787 5,201,639 5,151,324
Basic Net (Loss) Earnings Per Share as Reported $ (.01) $ .01 $ (.06) $ (.02)
Basic Pro Forma Net (Loss) Earnings Per Share $ (.02) $ .01 $ (.06) $ (.02)
Diluted Net (Loss) Earnings Per Share as Reported $ (.01) $ .01 $ (.06) $ (.02)
Diluted Pro Forma Net (Loss) Earnings Per Share $ (.02) $ .01 $ (.06) $ (.02)
The Black-Scholes option valuation model was used to estimate the fair value of
the options granted during the year ended September 30, 2005. There were no
options granted to employees during the three and six months ended March 31,
2006. The model includes subjective input assumptions that can materially affect
the fair value estimates. The model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and that are fully
transferable. The expected volatility is estimated based on the most recent
historical period of time equal to the weighted average life of the options
granted. Principal assumptions used in applying the Black-Scholes model along
with the results from the model for the year ended September 30, 2005 were as
follows:
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
6. STOCK OPTIONS (CONTINUED)
Assumptions:
Risk-free interest rate 3.58%
Dividend 0%
Expected life in years 5 years
Expected volatility 84%
7. EARNINGS (LOSS) PER SHARE
The Financial Accounting Standards Board issued "SFAS" No. 128, "Earnings Per
Share," which 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.
Three Months ended March 31, Six Months ended March 31,
Basic EPS Computation 2006 2005 2006 2005
----------------------------------------------- ------------------------------------
Net (loss) Income available to common
stockholders $ (73,670) $ 40,063 $ (320,931) $ (115,314)
Weighted average outstanding shares 5,210,950 5,165,787 5,201,639 5,151,324
Basic Earnings (Loss) Income Per Share ($.01) $.01 ($.06) ($.02)
=========== =========== =========== ===========
Diluted EPS Computation
Net Income (Loss) Income available to common
stockholders $(73,670) $40,063 $ (320,931) $ (115,314)
=========== =========== =========== ===========
Weighted-average shares-basic 5,210,950 5,165,787 5,201,639 5,151,324
----------- ----------- ----------- -----------
Plus: Incremental shares from
assumed conversions
Employee Stock Options* 33,123
Warrants* 17,514
-----------
Dilutive common shares 50,637
-----------
Adjusted weighted average shares diluted 5,210,950 5,216,424 5,201,639 5,151,324
----------- ----------- ----------- -----------
Diluted Earning (Loss) Per Share ($.01) $.01 ($.06) ($.02)
=========== =========== =========== ===========
* All options and warrants were antidilutive in the three and six months ended
2006.
SYNERGX SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
8. RECENT ACCOUNTING PRONOUNCEMENT
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), "Share-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.
Item 2. Management's Discussion and Analysis or Plan of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $3 million revolving credit facility with Hudson United
Bank (the "Credit Facility"). This credit facility carries an interest rate of
prime plus 1/4% and expires June 1, 2007. Advances under the Credit Facility are
measured against a borrowing base calculated on eligible trade receivables and
inventories. The Credit Facility is secured by all assets of the Company and all
of its operating subsidiaries.
The Credit Facility includes various covenants, which among other things,
impose limitations on declaring or paying dividends, acquisitions and capital
expenditures. The Company is also required to maintain certain financial ratios
and tangible net worth covenants. At March 31, 2006, the Company was not in
default with any of its financial covenants and at such time the full amount of
the Credit Facility was available under the borrowing base calculation. At March
31, 2006, $1,401,566 was owed under the Credit Facility.
Net cash provided by operations for the six months ended March 31, 2006
amounted to $22,627 as compared to $571,056 for the comparable prior year. The
decrease in cash provided by operations was primarily due to a $205,617 increase
in the net loss incurred during the six months of 2006 and a $342,962 reduction
in cash inflows related to changes in operating assets and liabilities in 2006.
These changes in operating assets and liabilities reflect $799,983 increased
collection of accounts receivable and from a $215,485 increase in deferred
revenue. The increase in deferred revenue relates to a change in billing for
service contracts to a quarterly basis rather than a monthly basis. These
positive charges in operating assets were offset by a $275,971 increase in
inventory to take advantage of certain trade discounts, incentive awards, and to
purchase material ahead of price increases, and by a $5,825 increase in prepaid
expenses and other current assets, by a $989,916 decrease in accounts payable
and accrued expense reflecting pay down of balances due to several
subcontractors and vendors and by a $86,718 increase in other assets which
represents capitalized cost of development of a new interface board for a
proprietary fire alarm system. The net cash inflow of $22,627 from operations
during the 2006 period along with cash on hand was used for equipment purchases
of $182,553 and to decrease bank borrowing by $47,740.
The ratio of the Company's current assets to current liabilities increased
to approximately 3.43 to 1 at March 31, 2006 compared to 3.17 to 1 at March 31,
2005.
Item 2. Management's Discussion and Analysis or Plan of Operations
Results of Operations
Revenues and Gross Profit
Three Months Ended Six Months Ended
March 31, March 31,
2006 2005 2006 2005
---- ---- ---- ----
(In thousands of dollars)
Product Revenue $2,913 $3,568 $5,839 $6,817
Subcontract Revenue 180 207 303 306
Service Revenue 1,278 1,137 2,470 2,257
------ ------ ------ ------
Total Revenue $4,371 $4,912 $8,612 $9,380
====== ====== ====== ======
Gross Profit Product 815 1,235 1,514 2,001
Gross Profit Subcontract 32 37 62 56
Gross Profit Service 633 391 1,119 791
------ ------ ------ ------
Total Gross Profit $1,480 $1,663 $2,695 $2,848
====== ====== ====== ======
Gross Margin Product % 28% 35% 26% 29%
Gross Margin Subcontract % 18% 18% 20% 18%
Gross Margin Service % 50% 34% 45% 35%
Revenues
The Company's product revenues during the three and six months ended March 31,
2006 decreased 18% and 14% from the respective 2005 periods. These decreases in
product revenues primarily resulted from lower shipments with respect to transit
products which reflect a lower level of orders and timing of releases required
by customers.
Subcontract revenue decreased during the current three and six month periods as
the Company was responsible for various small electrical installation projects
in both the 2006 and 2005 periods.
Service revenues increased during the three and six month periods of 2006. The
increase in both periods is due to an increase in call-in service on fire alarm
systems (replacement parts and service required by buildings) and from an
increase in service contract revenue related to additional customers and higher
fees on renewal of contracts compared to the prior year periods.
Item 2. Management's Discussion and Analysis or Plan of Operations
Gross Profit
Gross profit on product revenues for the three and six months ended March 31,
2006 decreased compared to the respective 2005 periods. The decrease in absolute
gross profit is primarily related to the declines in product sales (noted
above). The decrease in gross margin percentage during the current three month
and six periods in 2006 is related to lower sales on which to absorb overhead,
which is relatively fixed in nature.
Gross profit related to subcontract revenues for the three months ended March
31, 2006, decreased in absolute terms due to the decrease in revenue related to
electrical installation during this period. For the six month period ended March
31, 2006 higher markups were obtained on electrical installations than in the
prior year period.
Gross profit on service revenues for the three and six months ended March 31,
2006, increased due to the increase in call-in service and from higher service
contract revenue (noted above). The improvement in absolute gross profit and
gross margin percent were primarily related to the additional revenue and was
also aided by a decrease in technical staff as the Company reevaluated its
customer support staffing level.
Income Before Tax
The decline in income and increase in loss before income taxes during the three
and six months ended March 31, 2006 is primarily due to the decrease in gross
profit caused by anticipated lower product revenue. The decrease in product
gross profit was partially offset by higher gross profit from service revenues.
The increase in service gross profit was caused by higher revenue and in part by
a decrease in technical staff. In addition, selling, general and administrative
expenses decreased slightly during the three months ended March 31, 2006
compared to the prior year period as the Company benefited from certain
reductions in work force that were implemented in the first quarter of fiscal
2006. For the six months ended March 31, 2006, selling, general and
administrative expenses were higher than the prior year period since the Company
incurred $92,000 of additional recruitment costs and also $77,000 of budgeted
increases related to advertising and additional staff to develop and strengthen
our sales and marketing, which is geared to support higher product revenues,.
Interest expense increased during 2006 due to both higher interest rates and
higher borrowing levels. For the three and six months of 2006, the Company
recorded a loss of $17,000 and $42,000, respectively, on its equity in the
operating loss of Secure 724 LP.
Tax Provision
The Company's current income tax provision represents the benefit from a net
operating loss carryback as it relates to federal, state and local income taxes.
Deferred taxes represent the net change in deferred tax assets and in a non
current deferred tax liability as it relates to differences between financial
reporting and tax bases of assets and liabilities.
2. Management's Discussion and Analysis or Plan of Operations
Order Position
The Company's order position, excluding service, at March 31, 2006 was
$8,300,000 as compared to $8,800,000 at September 30, 2005 and $11,100,000 at
March 31, 2005. This order position includes large orders received for several
subway complexes which will be deliverable over several years as the projects
are released. While quotation activity is brisk, there is no assurance when
orders will be received and whether the order position will increase. Due to the
fact that the Company's products are sold and installed as part of larger mass
transit construction projects, there is typically a delay between the booking of
the contract and its revenue realization. The order position includes, and the
Company continues to bid on projects that might include, significant
subcontractor labor (electrical installation performed by others). The Company
expects to be active in seeking orders where the Company would act as a prime
contractor and be responsible for management of the project as well as
electrical installation. The Company is also looking for potential acquisitions
that would enable it to add incremental products and customers to over absorb
fixed overheads.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures. At the period end of this
Quarterly Report on Form 10-QSB, the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded, as of the end of the quarter covered
by this report, that:
The Company's disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified.
That Company's disclosure controls and procedures are effective to ensure that
such information is accumulated and communicated to the Company's management,
and made known to the Company's Chief Executive Officer and Chief Financial
Officer, to allow timely decision regarding the required disclosure.
There have been no changes in the Company's internal controls over financial
reporting that have materially affected, or is reasonably likely to materially
affect the Company's internal controls over financial reporting during the
period covered by this Quarterly Report.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control systems
are met. Because of the inherent limitations in all control systems no
evaluation of control can provide absolute assurance that all control issues, if
any, within a company have been detected. Such limitations include the fact that
human judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
The Registrant's Annual Meeting of Stockholders was held on March 15, 2006.
At the meeting, Stockholders considered and voted upon:
(1) the election of seven (7) directors to Synergx's Board of Directors,
(2) the selection of Marcum & Kliegman LLP as Synergx's independent
auditiors for the fiscal year ending September 2006
The seven nominees for director were unopposed and were, accordingly
elected by the Stockholders. The following table details the votes cast for,
against and abstained from voting on each matter considered by the Stockholders.
MATTER FOR AGAINST ABSTAINED
---------------------- ----------- ------------ -------------
Daniel Tamkin 4,156,490 93,497
John Poserina 4,147,790 102,197
J. Ian Dalrymple 4,238,096 11,891
Mark I. Litwin 4,238,196 11,791
Harris Epstein 4,237,996 11,991
Mitchell J. Sanders 4,236,896 13,091
Gary Oreman 4,237,196 12,791
Auditors 4,232,887 9,105 7,995
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification of Daniel S. Tamkin pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of John A. Poserina pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications of Daniel S. Tamkin and John A. Poserina pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SYNERGX SYSTEMS INC
(Registrant)
/S/ John A. Poserina
------------------------------
John A. Poserina,
Chief Financial Officer
(Principal Accounting and
Financial Officer), Secretary
And Director
Date: May 12, 2006