-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C51mqGqnjuY6ym1/iIs2VMnRs171cJjvrFuR5/7YbxXKdn7jtBVFZTBC+nm8SBSW BWC32PYZ4l/cOhsFzAi0Yw== 0001068800-00-500037.txt : 20010101 0001068800-00-500037.hdr.sgml : 20010101 ACCESSION NUMBER: 0001068800-00-500037 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSCOMM INTERNATIONAL CORP CENTRAL INDEX KEY: 0001037417 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 112889809 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22693 FILM NUMBER: 798447 BUSINESS ADDRESS: STREET 1: 275 MARCUS BLVD CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162732300 MAIL ADDRESS: STREET 1: 275 MARCUS BLVD CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 sys10k.txt SYSCOMM INTERNATIONAL CORPORATION FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO.: 0-22693 SYSCOMM INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 11-2889809 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 20 PRECISION DRIVE, SHIRLEY, NEW YORK 11967 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 205-9000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 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 the 2,061,283 of our common stock held by non-affiliates of the Company as of December 22, 2000 is $1,803,623. The number of shares outstanding of each class of our common equity as of December 22, 2000 is as follows: Class of Common Equity Number of Shares - ---------------------- ---------------- Common Stock, par value $.01 4,702,483 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, 2001. 1 TABLE OF CONTENTS ITEM DESCRIPTION PAGE PART I 1. Business 3 2. Properties 14 3. Legal Proceedings 14 4. Submission of Matters to a Vote of Security Holders 14 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 15 6. Selected Financial Data 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 7A. Quantitative and Qualitative Disclosures About Market Risk 22 8. Financial Statements and Supplementary Data 22 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 22 PART III 10. Directors and Executive Officers of the Registrant 23 11. Executive Compensation 23 12. Security Ownership of Certain Beneficial Owners and Management 23 13. Certain Relationships and Related Transactions 23 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24 Signatures 25 2 PART I ITEM 1. BUSINESS RECENT DEVELOPMENTS CHANGE IN CONTROL On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement, as amended, between the selling shareholders described below and Applied Digital Solutions, Inc., a Missouri corporation, Applied Digital Solutions acquired approximately 55% of our issued and outstanding common shares, resulting in a change in control of the Company. Shares of our common stock were sold to Applied Digital Solutions by the following persons and in the following amounts:
Selling Shareholders Number of Shares Held Percent Ownership - ------------------------------------------------------------------------------------------------------------- John H. Spielberger 1,920,000 41% Catherine Spielberger 50,000 1% Bearpen Limited Partnership 600,000 13% - ------------------------------------------------------------------------------------------------------------- Total 2,570,000 55% =============================================================================================================
Applied Digital Solutions acquired the shares listed above for $4.5 million by issuing approximately 1.7 million shares of its common stock, valued at approximately $2.75 million, to the selling shareholders listed above and upon payment of an aggregate amount of cash equal to approximately $1.75 million to the selling shareholders listed above. As a condition to the closing of the transaction, John H. Spielberger, John C. Spielberger, Lee Adams and Cornelia Eldridge resigned as officers and directors of the Company. Garrett A. Sullivan, David A. Loppert and Anat Ebenstein were appointed to fill the vacancies on the board of directors created by such resignations, and the following persons become the officers of the Company: David A. Loppert Chief Executive Officer, Assistant Secretary and Assistant Treasurer Anat Ebenstein President, Chief Operating Officer Michael Krawitz Vice President, Secretary J. Robert Patterson Vice President, Chief Financial Officer and Treasurer John C. Spielberger Vice President, Sales and Marketing ACQUISITION OF ASSETS On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement, as amended, between us and Applied Digital Solutions, we acquired fifty-one percent (51%) of the outstanding shares of common stock of Information Products Center, Inc., a New Jersey corporation. The purchase price for the shares of Information Products Center was $2.075 million, payable $1.821 million in cash and $0.254 million by promissory note. On December 15, 2000, pursuant to the terms of a Stock Purchase Agreement between us and Applied Digital Solutions, we acquired forty-nine percent (49%) of the outstanding shares of common stock of Information Products Center. The purchase price for the shares of Information Products Center was approximately $2.4 million, payable by promissory note. The assets of Information Products Center to be acquired indirectly by us include, without limitation, physical property. For the foreseeable future, we intend to utilize those assets in connection with the operations of the business of Information Products Center. 3 GENERAL We are a Delaware corporation incorporated in 1997. Through our wholly owned subsidiary, Information Technology Services, Inc., we are a systems integrator and reseller of computer hardware, operating software and networking applications to Fortune 1000 companies. From 1985 until 1998, our primary focus had been on the sale, integration and servicing of International Business Machine Corporation, or IBM, products including personal computers, mid-range systems based on the IBM RS/6000 servers, the IBM AS/400 and the System/390 mainframe. In addition, we integrate, resell and service products from such manufacturers as Hewlett Packard, Compaq, Microsoft, and Novell. In 1999 we recognized that our margins were shrinking in our core business, and because of a change in IBM's policies with respect to the Authorized Assembler Program, we made a strategic decision to fundamentally change the nature of our business. While we continue to provide our customers with cost efficient, comprehensive solutions that satisfy their information technology requirements, we attempted to focus less on personal computer products and hardware, and more on mid-range products network connectivity, services and consulting to develop e-solutions. During the last year eighteen months, we transitioned our workforce, through training and specialized hires, to position ourselves as a total e-business solutions provider of hardware, software and consulting services, while maintaining our status as an IBM Tier II Premier Business Partner in mid-range systems. In addition we attempted to expand our capabilities in web design and creation, remote access to databases via web interface, and Tivoli enterprise systems management. The transformation was not altogether successful and during the last six months we laid off a substantial portion of our workforce as we strived to find a strategic partner with whom to align ourselves or seek to be acquired. In December 2000, Applied Digital Solutions acquired a controlling interest and, simultaneously, we acquired from Applied Digital Solutions, Information Products Center, a full service, profitable, systems integrator. A significant percentage of our revenue is derived from sales to customers in the financial and investment communities. However, our customer base also includes retailers, manufacturers, health care providers, distributors, colleges, universities and state and local government agencies. Our customers include: Amdahl Corporation Liberty Mutual Barter.Com Mass Financial Services Baystate Medical NYS Electric & Gas Bentley College Philip Morris Bestfoods Phoenix Home Life Blue Cross/Blue Shield NH Polytechnic University Columbia University Reuters America Connecticut College Sharp Electronics Desantis Warehouse Sunguard Deutsche Bank The City of New York Dowling College UAPC Elf Atochem UMass Medical Center Fugi Capital Unisys Corporation Gillette Witco Corporation ISI 4 We intend to pursue new business by focusing on the sale and integration of high-end systems in the financial, commercial, governmental, healthcare and educational areas. To this end, we have identified the following growth strategies: (i) targeting our traditional markets, particularly those businesses seeking to expand their presence on the internet, (ii) offering a more complete line of IBM and related products, (iii) expanding our role as an IBM Premier Business Partner, and (iv) targeting client-server architecture, e-commerce, enterprise network management and website hosting. STRATEGY With our acquisition of Information Products Center, we are striving to become a leading supplier of Enterprise Computing in e-Business solutions that enable customers to maximize return on technology investments by providing open, integrated end-to-end solutions from system architecture and implementation to hardware and software procurement. We strive to offer our customers high quality computer and networking system hardware, related operating system software and network design, system implementation and support services in a timely, cost-effective manner. We believe that the following factors are significant elements to the successful implementation of this strategy: TARGETING MARKETS We have a twelve-year track record in the installation and integration of high-level information systems to the banking and financial services communities. In addition, we have recently begun to focus on other selected, major markets, including retailers, manufacturers and distributors, institutions of higher learning, health care and pharmaceutical companies, and state and local government agencies. Our in-depth understanding of our customers' current and future needs combined with our experience and in-depth market focus enable us to offer an optimum range of products and services that meet each of our customer's requirements. OFFERING A COMPLETE LINE OF IBM PRODUCTS We have chosen to represent primarily IBM products because we believe that IBM is the world's premier designer and manufacturer of computer equipment, software and networking products. The wide range of products and services we offer, include personal computers (desktop workstations, file servers and notebook computers), mid-range computers (RS/6000 and AS/400 systems), IBM S/390 mainframe, and IBM software products, including Lotus Domino, ADSM, HACMP and DB 2. In addition, with our recent acquisition of Information Products Center, we believe that our current mix of products now meets the needs of our customers and will help us in achieving our goal of becoming a total solution integrator. TARGETING THE CLIENT-SERVER ARCHITECTURE AND BUSINESS INTELLIGENCE MARKETS Client-Server refers to the migration of software applications and data from a centralized mainframe or legacy environment to a system of distributed servers with data access via local and wide area networks. We are certified by IBM to sell IBM Client Server solutions. Business Intelligence refers to the analysis of vast quantities of information within a corporate enterprise which is used to make business decisions such as investments, product development and marketing programs. We are certified by IBM to sell IBM Business Intelligence solutions. E-Business refers to the conduct of business on the Internet (World Wide Web). We offer turn-key e-business solutions based on our IBM certification and skill sets acquired with the acquisition of IPC and new hires. This will allow us to perform online design and Intranet/Internet programming, combined with other support skills, to deliver dynamic web solutions. Through our affiliation with Applied Digital Solutions, we are now able to offer web-hosting and design services which entails designing, implementing and maintaining customer web sites. 5 INDUSTRY BACKGROUND Complex computer information processing systems, the foundation on which business and organizations now function, are continuously being redesigned, modified and upgraded as new computer and telecommunications technologies are introduced. Until the mid-1980's, either mid-range or mainframe computer systems were used to manage an organization's mission-critical, transaction-oriented commerce and business functions, such as banking, credit transactions, retail point-of-sale transactions and airline reservations. Client/server networks support access to these functions, either within a single site or from numerous geographically- dispersed sites. In the late 1980's, a new architecture for information processing called "client/server" computing emerged, fueled by the growing intelligence in desktop computers, expanding capabilities of software applications and growing capabilities of networks. A client/server system typically consists of multiple intelligent desktop client computers linked with high performance server computers by a local and/or wide area network and is characterized by the flexibility and mobility of both application and user. In order to take advantage of their established operational staff and physical plant, many corporations are seeking to reconfigure their existing mainframe/ mid-range computers (sometimes referred to as "legacy" systems) to operate in parallel with client/server networks. We believe that these two information system models - legacy systems and client/server systems - will continue to coexist, each containing advantages for certain applications. Thus, organizations are faced with complex decisions concerning the current and future configurations of their information systems, based upon factors such as the re-engineering of aspects of legacy systems to function more efficiently with related client/server systems, the explosive growth of the Internet (and related World Wide Web) and stand-alone intranets, the convergence of computer and telecommunications technologies and the universal recognition of information systems as the medium for commerce, finance, education and administration. Mid-range and mainframe computer systems remain important in this changing environment, and we intend to exploit opportunities in both segments of the high end computer system markets. At the same time, manufacturers such as IBM and Sun Microsystems are increasing their reliance upon companies such as us to work with mid-and large-sized businesses and organizations to provide single-source responsibility for the design, procurement, installation and implementation of such systems. PRODUCT LINES We have access to a full range of computer product lines, networking and interconnectivity systems and operating software, from IBM, Hewlett Packard, and Compaq, as well as other selected manufacturers. However, in the past, we have concentrated our efforts in developing strong relationships with IBM because we believed that IBM offers the most comprehensive and well established product line in the industry. While we have had a long-term relationship with IBM to configure, sell and service IBM's full line of personal computers, mid-range information and mainframe processing systems, such relationships may be terminated at any time. We believe that our past strong marketing and technical skills have enabled us to continue to have a strong business relationship with IBM. Our principal sales revenues are derived from the following IBM products: (i) IBM personal computer systems; (ii) IBM RS/6000 systems; (iii) IBM AS/400 systems; and (iv) communication and networking systems. IBM PERSONAL COMPUTER SYSTEMS IBM is one of the world's leading designers and manufacturers of personal computer systems. IBM's personal computer product line includes mobile (notebook) and desktop workstations as well as file, application and network servers. In fiscal year 1998, our sales of IBM personal computer products were approximately $27 million, or 27.4% of the total sales. In fiscal 1999, personal computer products accounted for approximately $15 million, or 14.8% of total sales. In fiscal 2000, personal computer products accounted for approximately $8 million, or 20.1% of total sales. 6 IBM RISC SYSTEM/6000 The IBM RISC System/6000 is a mid-range computer workstation and server configuration providing industry-leading computing and graphic performance that meets large-scale, data handling and network management demands for many types of businesses. RS/6000 systems perform mission critical applications, such as those found in financial trading systems, from the combination of a robust UNIX operating system with fast 2D and 3D graphic capabilities. The RS/6000 is a flexible and scalable system incorporating (1) symmetric multiprocessing capabilities, a design that makes it possible for a number of processors to share memory and other existing features more efficiently; (2) scalable parallel processing, a technology that allows several hundred processor nodes to run in tandem as application servers, data servers, Internet or Intranet servers; and (3) a multi-operating system support, allowing a user to run existing programs simultaneously. RS/6000 systems have been used for general business and financial applications, including billing, payroll and accounts receivable, as well as for advanced graphics programs for mechanical and electrical design, scientific visualization, communications and networking applications for optimum client/server and Internet performance, and word processing and desktop publishing applications for both scientific and commercial documents. These applications are particularly useful for the securities, manufacturing, retail, education and transportation industries. As Internet and Intranet-based transactions grow, RS/6000 systems' networking capabilities, including security and integrity features, are becoming increasingly important. For fiscal 1998, 1999 and 2000, our sales of the RS/6000 were approximately $46 million, $33 million and $15 million, or 47%, 46% and 38% of revenues, respectively. IBM AS/400 Although the IBM Application System/400 (also known as AS/400) has not been a major source of revenue for us, we are attempting to increase its revenue in this market. The AS/400 is designed and built as a multi-user commercial application platform integrating a relational database and networking capabilities into the operating system of the computer. It is designed as a general purpose business computer, optimized for the commercial environment. Its design reflects the dominant requirements for businesses, i.e., integration of new technology without disrupting existing applications, large portfolio of business solutions allowing companies to discover the most suitable application for their needs, integration of functions including security, database, system management, communications and on-line teleprocessing, enabling companies to manage a system with limited resources in a demanding business climate. The AS/400 provides businesses with a cost effective solution, allowing them to adopt advanced technologies at their own pace, integrating high quality personal computer technology and associated software to enhance the computer's speed for personal computer file serving. The AS/400 is a popular business computing system due to its ease of installation, implementation, usage (it can support up to 7,000 users) and ability to upgrade. ALL OTHER PRODUCTS Communication -- Networking Systems. With our acquisition of Information Products Center, we have enhanced and provide various communications and networking products including complex data communications equipment and software such as bridges, hubs and routers, as well as modems and network interface cards (NIC) to connect personal computers to local and wide area networks (LAN/WAN). Nearly every computer sold today in the commercial marketplace is connected to a communications network. Other. We are authorized to sell other manufacturers' personal computer systems, networking, printers and software products including: Bay Networks, Compaq, Lexmark, Hewlett Packard, Microsoft, 7 and Novell. Our agreements with such suppliers allow for volume discounts if certain quotas are met. Although we have, to date, complied with these agreements, 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. DEPENDENCE ON IBM AS A SUPPLIER For the fiscal year ended September 30, 2000, approximately 62% of our revenue was derived from the sale of IBM personal computers, mid-range computer systems, networking systems and operating software manufactured by IBM, down from approximately 84% in fiscal 1998 and 1999. Although we have had a long-standing reseller relationship with IBM, IBM may terminate this relationship "at will" and upon relatively short notice. Our reseller arrangements with IBM are not exclusive, and IBM is not obligated to have product on hand for timely delivery to us, nor will IBM guarantee product availability in sufficient quantities to meet our demands. We currently do not meet the volume requirements to purchase personal computers and components directly from IBM. We currently purchase computers and components from third-party distributors such as Pinacor and Ingram Micro on terms more favorable than those we previously received when we were purchasing directly from IBM. FINANCING AGREEMENT 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. We entered into an Inventory and Working Capital Financing Agreement with IBM Credit Corporation in September 1996, as amended, which permitted us to borrow up to $22,500,000 based upon 85% of all eligible receivables due within 90 days and up to 100% of all eligible inventory. As of September 30, 1999 and 2000, we had not borrowed under this agreement. Our credit availability under this agreement is reduced by the aggregate amount of accounts payable owed to IBM Credit Corporation which, as of September 30, 1999 and 2000 was $3,282,454 and $4,411,031, respectively. We are also required to comply with certain financial covenants with which we were in compliance, as of September 30, 2000. On November 27, 2000 we entered into an Agreement for Wholesale Financing with IBM Credit Corporation. This agreement replaced the Inventory and Working Capital Financing Agreement. However, certain terms of this agreement are still being negotiated and, consequently we are presently operating under the terms of our existing Inventory and Working Capital Financing Agreement. As a result of Applied Digital Solutions having acquired a majority interest in the Company, we will, in the future, be required to borrow from IBM Credit Corporation through Applied Digital Solutions under its credit facility with IBM Credit Corporation. Borrowings from Applied Digital Solutions will be on such terms and conditions as it may reasonably make available to us from time to time, which will be no worse than those currently provided for in the Inventory and Working Capital Financing Agreement. There can be no assurance that Applied Digital Solutions will have sufficient availability in the future to permit us to have sufficient resources to conduct or maintain our business. Our inability to have continuous access to such financing at reasonable costs would materially and adversely impact our financial condition, results of operations and cash flows. SALES AND MARKETING We have a broad customer base of primarily Fortune 1000 companies. Our sales and marketing efforts are focused on high level decision making executives, whose purchasing decisions are based on factors such as the overall cost of purchasing and maintaining a system and our reputation and expertise in delivering and installing effective total information technology solutions, which initially may not be the least expensive. We rely on our marketing and sales programs, our industry-wide expertise, our 8 relationship with existing customers and our status as an IBM Business Partner to generate sales opportunities. We pursue new business opportunities by referrals from manufacturers and existing customers, direct solicitation by telephone or mail of pre-qualified customers and participation in industry trade shows. We have developed and maintained automated sales tools intended to improve sales productivity, quality and reliability and increased customer satisfaction. These systems include on-line systems configuration and pricing, real time order entry, order confirmation and electronic mail for customers through privately leased telephone lines and through the Internet. All of our revenue is derived from US based customers. CUSTOMER SUPPORT AND SERVICE We believe that our ability to provide effective total solutions to meet the needs of our customers is enhanced by its internal management information system, which combines accounting, purchasing, inventory control, sales order processing and work order management. We provide a large array of services to our customers, including warranty repair on all IBM personal computer products; toll-free telephone number for sales and product information and order placement; toll-free telephone number for customer service on all products sold, including technical assistance and repair warranty; E-mail network access for customers to receive real time price quotations, place orders and check order status; on-site system engineers to provide technical assistance for installations and upgrades; partnership with IBM to provide customized services such as helpdesk, consulting, extended warranty, extended maintenance coverage; and IBM Credit Corporation financing options on all products sold. COMPETITION The markets in which the we operate are characterized by intense competition from several types of network integrators and technical service providers, including mainframe and mid-range computer manufacturers and outsourcers, including, among others, Sun Microsystems, Electronic Data Systems Corporation, Hewlett-Packard Company, Andersen Consulting, IBM Global Services and UNISYS. Other competitors who purchase directly from IBM, include value-added resellers, systems integrators and third-party service companies, including CompuCom Systems, Inc., InaCom Corp., MicroAge, Inc., EnPoint Technologies and GE ITS. While we receive sales and marketing assistance from IBM, including introductions and referrals to potential customers, the Company, from time to time, faces direct competition from IBM with respect to large contracts. 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. 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 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 of network integration and mid-range infrastructure services. 9 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: our continued ability to sustain our growth through product development and business acquisitions; the successful completion and integration of future acquisitions; the ability to hire and retain key personnel; the continued development of our technical, manufacturing, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the industries in which we operate and compete; potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; changes in our capital structure and cost of capital; and uncertainties inherent in international operations and foreign currency fluctuations. 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. RISK FACTORS In addition to the other information contained herein, the following factors should be considered in evaluating our Company and our business. These risks and uncertainties include, but are not limited to those set forth herein and the risk factors described in our Prospectus dated June 17, 1997, and from time to time in our other filings with the Securities and Exchange Commission. UNCERTAINTY OF FUTURE FINANCIAL RESULTS We have incurred operating losses for each of the last three fiscal years, and our future financial results are uncertain. There can be no assurance that we will return to profitability, and we may continue to operate at a loss for the foreseeable future. Profitability depends upon many factors, including the success of our various marketing programs, the maintenance or reduction of expense levels and our ability to successfully coordinate the efforts of the different divisions of our business. SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS Our quarterly operating results have fluctuated in the past and may continue to do so in the future. Quarterly operating results may fluctuate as a result of a variety of factors, including: the timing of the our delivery of significant orders, the ability of manufacturers to deliver, in a timely fashion, products for which we have received orders, the length of the sales cycle, receipt of volume discounts, the demand for products and services we offer, the introduction or announcements by IBM and other manufacturers relating to new products, the hiring and training of additional personnel, as well as general business conditions. Historically, the size and timing of our sales transactions have varied substantially from quarter to quarter, and we expect such variations to continue in future periods, including the possibility of losses in one or more fiscal quarters. The fluctuations may be caused by delays in shipping certain computer systems for we receive orders that we expect to deliver during that quarter. In addition, our collection periods have fluctuated due to periodic unavailability of product, which resulted in delayed payment 10 from certain customers until their entire orders were shipped. Accordingly, it is likely that in one or more future fiscal quarters, our operating results may be below the expectations of public market analysts and investors. As a result, the market price of our Common Stock would be materially adversely affected. PRINCIPAL MARKETS AND CUSTOMERS Since 1994, we have sold and delivered computer systems, network products, software, maintenance and system support services to more than 800 customers throughout the United States and in more than 20 countries worldwide. Based on its installed customer base, we believe we are a leading IBM supplier/systems integrator of mid-range and computer/network systems in the northeastern United States. In fiscal years 1998, 1999 and 2000, our top customer accounted for approximately 6.8%, 8.6% and 25.0%, respectively, of our total revenues. In fiscal year 1999, the Company's top five customers (3 of which were new) accounted for approximately 24.7% of total revenues. In fiscal year 2000, the Company's top five customers (1 of which was new) accounted for approximately 48.0% of total revenues. DEPENDENCE ON MAJOR CUSTOMERS; RISK OF INDUSTRY CONCENTRATION For the last three fiscal years, 1998, 1999, and 2000, a significant portion (21%, 25% and 48%, respectively) of our revenues were derived from sales to five principal customers, which customers varied annually, and encompass markets where the demands of any one customer may vary greatly. In addition, we do not have any exclusive long-term arrangements with our customers for the continued sales of computer systems. The number of customers who purchased at least $250,000 of computer systems from us decreased from 67 in 1999 to 29 in 2000. Our failure to acquire a significant or principal customer or to maintain its relationship could have a material adverse effect on our operations. In the fiscal year ended September 30, 2000, approximately 10.9% of our sales of computer systems were to customers in the banking, financial and securities industry based in the Northeastern United States. Although we are striving to broaden our market focus to include sales to other markets, such as educational institutions, government agencies, healthcare and insurance companies, in the immediate future we expect that we will continue to derive a substantial percentage of our sales of computer systems from such banking, financial and securities businesses. Accordingly, unfavorable economic conditions or factors that relate to these industries, particularly any such conditions that might result in reductions in capital expenditures or changes in such companies' information processing system requirements, could have a material adverse effect on our results of operations. GOODWILL WRITE-OFF'S WILL REDUCE OUR EARNINGS As a result of the December 2000 acquisition of Information Products Center, we have approximately $2.4 million of goodwill which will be amortized over 20 years at the rate of approximately $122,000 per year, which reduces our net income and our earnings per share. In addition, future acquisitions may also increase our existing goodwill and the amount of annual amortization, further reducing net income and earnings per share. As required by Statement of Financial Accounting Standards No. 121, we will periodically review our goodwill for impairment based on expected future discounted cash flows. If we determine that there is such impairment, we would be required to write down the amount of goodwill accordingly, which would also reduce our earnings. NEED FOR ADDITIONAL CAPITAL We may require additional capital to fund growth of our current business as well as to make future acquisitions. However, we may not be able to obtain capital from outside sources. Even if we obtain capital from outside sources, it may not be on terms favorable to us. Our current credit agreement with IBM Credit Corporation may hinder our ability to raise additional debt capital. If we raise additional capital by issuing equity securities, these securities may have rights, preferences or privileges senior to those of our common stockholders. 11 DEPENDENCE ON KEY INDIVIDUALS Our future success is highly dependent upon our ability to attract and retain qualified key employees. We are organized with a small senior management team, with each of our separate operations under the day-to-day control of local managers. If we were to lose the services of any members of our central management team, our overall operations could be adversely affected, and the operations of any of our individual facilities could be adversely affected if the services of the local managers should be unavailable. CONTROL BY PRINCIPAL STOCKHOLDER As of September 30, 2000, John H. Spielberger, our former Chairman of the Board, President and Chief Executive Officer, beneficially owned approximately 55% of our outstanding common stock. As a result of his stock ownership as of September 30, 2000, Mr. Spielberger had effective control of the Company and the power to control the outcome of matters submitted to a vote of the stockholders, such as the election of at least a majority of the members of our Board of Directors and to direct the future operations of the Company. On December 14, 2000, Mr. Spielberger and certain affiliates sold their controlling interest in the Company to Applied Digital Solutions which now has effective control of the Company and the power to control the outcome of matters submitted to a vote of the stockholders, such as the election of at least a majority of the members of our Board of Directors and to direct the future operations of the Company. Such concentration may have the effect of discouraging, delaying or preventing a future change in control of the Company. ANTI-TAKEOVER PROVISIONS Certain provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware law may be deemed to have an anti-takeover effect. Our certificate of incorporation provides that our Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock with such designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations that the Board of Directors fixes without stockholder approval. Moreover, our certificate of incorporation and by-laws provide that our Board of Directors is divided into three classes serving staggered three year terms, resulting in approximately one-third of the directors being elected each year and also contain certain other provisions relating to voting and the removal of the officers and directors. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Each of the foregoing provisions may have the effect of rendering more difficult, delaying, discouraging, preventing or rendering more costly an acquisition of the Company or a change in control of the Company. RISKS THAT THE VALUE OF OUR INVENTORY MAY DECLINE We purchase and warehouse inventory. As a result, we assume inventory risks and price erosion risks for these products. These risks are especially significant because computer equipment generally is characterized by rapid technological change and obsolescence. These changes affect the market for refurbished or excess inventory equipment. Our success will depend on our ability to purchase inventory at attractive prices relative to its resale value and our ability to turn our inventory rapidly through sales. If we pay too much or hold inventory too long, we may be forced to sell our inventory at a discount or at a loss or write down its value, and our business could be materially adversely affected. 12 LACK OF DIVIDENDS ON COMMON STOCK; ISSUANCE OF PREFERRED STOCK We do not have a history of paying dividends on our common stock, and there can be no assurance that such dividends will be paid in the foreseeable future. Pursuant to certain restrictions under our financing agreement with IBM Credit Corporation, there are restrictions on the declaration and payment of dividends. We intend to use any earnings which may be generated to finance the growth of our businesses. Our Board of Directors has the right to authorize the issuance of preferred stock, without further shareholder approval, the holders of which may have preferences over the holders of the common stock as to payment of dividends. POSSIBLE VOLATILITY OF STOCK PRICE Our common stock is quoted on the Nasdaq SmallCap Stock Market(R), which has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as the significant changes to our business resulting from continued acquisitions and expansions, quarterly fluctuations in our financial results or cash flows, shortfalls in earnings or sales below expectations, changes in the performance of other companies in our same market sectors and the performance of the overall economy and the financial markets could cause the price of our common stock to fluctuate substantially. During the 12 month period prior to December 22, 2000, the price per share of our common stock has ranged from a high of $3.47 to a low of $0.41. YEAR 2000 COMPLIANCE We have not experienced any significant Year 2000 related problems. During 1998 and 1999, we implemented a company wide program to ensure that we would be compliant prior to the Year 2000 failure dates. We experienced no problems on either January 1, 2000 or February 29, 2000. However we cannot make any assurances that unforeseen problems may not arise in the future. We do not believe that the Year 2000 problem has had or will continue to have a material adverse effect on our business, results of operations or cash flows. The estimate of the potential impact on our financial position, overall results of operations or cash flows for the Year 2000 problem could change in the future. Our ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. The discussion of our efforts, and management's expectations, relating to Year 2000 compliance are forward-looking statements. EMPLOYEES As of September 30, 2000, we employed 32 full-time and 3 part-time employees. 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 its operations with respect to potential environmental issues, including changes in legally mandated standards. 13 ITEM 2. PROPERTIES In May 1998, our new 40,000 square foot assembly, warehouse and headquarters facility located in Shirley, New York became operational. The total cost to construct and equip this facility was approximately $2.325 million, exclusive of land. Construction costs were reduced by $100,000, after application of a $100,000 grant from The Empire State Development Corporation in 1999. We lease 5,027 square feet of general office space in New York City pursuant to a five year lease at an annual rental of $130,704. This lease expires on February 28, 2002. We leased 2,850 square feet of general office space in Waltham, Massachusetts pursuant to a five year lease with an initial term which expired on October 31, 1999 and was renewed through January 31, 2002 at a base annual rental of $62,700 subject to escalation. On September 30, 2000, we closed the Waltham office and sublet the space at no profit or loss. We lease 340 square feet of general office space in Marlton, New Jersey for $13,200 per year, expiring on July 31, 2001. We leased 795 square feet of general office space in Fairfield, Connecticut for $17,180 per year. The office was closed on August 31, 2000 and we were released from any obligations under the lease. ITEM 3. LEGAL PROCEEDINGS We are party to one legal action arising in the ordinary course of business. In the opinion of management, this proceeding will not have a material adverse effect on the financial position, cash flows or overall trends in our results. The estimate of the potential impact on our financial position, overall results of operations or cash flows for this proceeding could change in the future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock trades on the Nasdaq SmallCap Stock Market(R) under the symbol "SYCM." The following table shows, for the periods indicated, the high and low sale prices per share of the common stock based on published financial sources. HIGH LOW ---- --- 1999 ---- First Quarter $1.75 $1.06 Second Quarter 3.00 1.13 Third Quarter 2.00 1.25 Fourth Quarter 2.50 1.19 2000 ---- First Quarter $1.53 $0.63 Second Quarter 3.47 1.09 Third Quarter 1.94 0.88 Fourth Quarter 1.25 0.63 DIVIDENDS We have never paid cash dividends on our common stock. The decision whether to apply legally available funds to the payment of dividends on our common stock will be made by our Board of Directors from time to time in the exercise of its business judgment. The financing agreement with IBM Credit Corporation contains restrictions on our ability to declare and pay dividends. See "Lack of Dividends on Common Stock; Issuance of Preferred Stock" on page 13. HOLDERS As of December 22, 2000, there were 54 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. 15 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, 2000, are derived from, and are qualified by reference to, our audited consolidated financial statements included herein and should be read in conjunction with those consolidated financial statements and the notes thereto. The selected consolidated financial data as of September 30, 1996, 1997 and 1998 and for the years ended September 30, 1996 and 1997 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 ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Net sales....................... $ 98,446,698 $ 89,725,938 $ 98,302,636 $ 69,683,295 $ 40,689,842 Cost of sales................... 89,025,331 78,049,310 89,047,731 62,731,687 36,116,860 Inventory write-down............ - - 657,491 - ------------ ------------ ------------ ------------ ------------ Gross Profit.................... 9,421,367 11,676,628 8,597,414 6,951,608 4,572,982 Selling and administrative expenses........................ 5,028,812 6,534,552 8,193,905 7,249,568 6,719,424 ------------ ------------ ------------ ------------ ------------ Income/(loss) from operations... 4,392,555 5,142,076 403,509 (297,960) (2,146,442) Interest expense (net).......... (1,390,867) (979,185) (881,781) (216,521) (36,324) Other income.................... 63,151 2,570 (35,000) 2,553 (8,734) Realized loss on available- for-sale securities............. (1,406,250) - (206,250) - - ------------ ------------ ------------ ------------ ------------ Income/(loss) from continuing operations before income taxes.. 1,658,589 4,165,461 (719,522) (511,928) (2,191,500) (Provision) benefit for income taxes........................... (735,886) (1,761,855) 272,160 111,603 231,440 ------------ ------------- ------------ ------------ ------------ Net income/(loss)............... $ 922,703 $ 2,403,606 $ (447,362) $ (400,325) $ (1,960,060) ============ ============ ============ ============ ============ PER SHARE DATA: Income (loss) from continuing operations...................... $ 0.25 $ 0.61 $ (0.10) $ (0.08) $ (0.42) Diluted weighted average number of shares outstanding........... 3,677,290 3,931,846 4,613,750 4,771,364 4,694,306
CONSOLIDATED BALANCE SHEET DATA: As of September 30, ------------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Working capital.................. $ 3,342,545 $ 10,356,416 $ 9,314,237 $ 9,077,650 $ 6,062,837 Total assets..................... 32,102,557 38,104,036 27,857,265 19,301,700 15,630,688 Short term debt.................. 12,510,017 10,658,451 3,114,998 96,461 278,758 Long term debt................... 67,291 66,416 1,611,355 1,610,338 999,473 Stockholders' equity............. 3,998,587 11,827,636 11,551,919 11,206,868 9,208,021
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS CHANGE IN CONTROL On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement, as amended, between the selling shareholders described below and Applied Digital Solutions, Applied Digital Solutions acquired approximately 55% of our issued and outstanding common shares, resulting in a change in control of the Company. Shares of our common stock were sold to Applied Digital Solutions by the following persons and in the following amounts:
Selling Shareholders Number of Shares Held Percent Ownership - ------------------------------------------------------------------------------------------------------------- John H. Spielberger 1,920,000 41% Catherine Spielberger 50,000 1% Bearpen Limited Partnership 600,000 13% - ------------------------------------------------------------------------------------------------------------- Total 2,570,000 55% =============================================================================================================
Applied Digital Solutions acquired the shares listed above for $4.5 million by issuing approximately 1.7 million shares of its common stock, valued at approximately $2.75 million to the selling shareholders listed above and upon payment of an aggregate amount of cash equal to approximately $1.75 million, to the selling shareholders listed above. As a condition to the closing of the transaction, John H. Spielberger, John C. Spielberger, Lee Adams and Cornelia Eldridge resigned as officers and directors of the Company. Garrett A. Sullivan, David A. Loppert and Anat Ebenstein were appointed to fill the vacancies on the board of directors created by such resignations, and the following persons become the officers of the Company: David A. Loppert Chief Executive Officer, Assistant Secretary and Assistant Treasurer Anat Ebenstein President, Chief Operating Officer Michael Krawitz Vice President, Secretary J. Robert Patterson Vice President, Chief Financial Officer and Treasurer John C. Spielberger Vice President, Sales and Marketing ACQUISITION OF ASSETS On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement, as amended, between us and Applied Digital Solutions, we acquired fifty-one percent (51%) of the outstanding shares of common stock of Information Products Center. The purchase price for the shares of Information Products Center was $2.075 million, payable $1.821 million in cash and $0.254 million by promissory note. On December 15, 2000, pursuant to the terms of a Stock Purchase Agreement, between us and Applied Digital Solutions, we acquired forty-nine percent (49%) of the outstanding shares of common stock of Information Products Center. The purchase price for the shares of Information Products Center was approximately $2.4 million, payable by promissory note. The assets of Information Products Center to be acquired indirectly by us include, without limitation, physical property. For the foreseeable future, we intend to utilize these assets in connection with the operations of the business of Information Products Center. 17 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 the Company's consolidated statements of operations.
Years Ended September 30, ----------------------------------------- 2000 1999 1998 ---- ---- ---- % % % - - - Net sales 100.0% 100.0% 100.0% Cost of goods sold -88.8% -90.0% -90.6% Writedown of Inventory 0.0% 0.0% -0.7% ----------------------------------------- Gross profit 11.2% 10.0% 8.7% Selling, general and administrative expenses -16.5% -10.4% -8.3% ----------------------------------------- Income (loss) from operations -5.3% -0.4% 0.4% Interest expense (net) -0.1% -0.3% -0.9% Realized loss on available-for-sale securities 0.0% 0.0% -0.2% ----------------------------------------- Loss before income taxes -5.4% -0.7% -0.7% Income tax benefit 0.6% 0.2% 0.3% ----------------------------------------- Net loss -4.8% -0.5% -0.4% =========================================
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999 Sales for fiscal year 2000 decreased approximately 41.6%, or $28,993,453, to $40,689,842, from $69,683,295 in fiscal year 1999. The decrease in sales was a result of the Company transitioning its business from a primarily hardware distributor and personal computer assembler to a reseller of mid-range systems and the transition to a systems integrator. Gross profit as a percentage of sales increased to 11.2% in fiscal year 2000, from 10.0% in fiscal year 1999. This increase was primarily attributable to the sale of more profitable mid-range systems than less profitable personal computer systems. Selling and Administrative expenses decreased by approximately 7.3%, or $530,144, to $6,719,424 in fiscal 2000, from $7,249,568 in fiscal year 1999. The reduction in expense is primarily due to cost control programs, reduced commissions on lower sales and staff reductions associated with redirecting marketing efforts, offset by an increase in salaries related to systems integration engineers and specialists. Interest expense decreased 43.5%, or $113,282, to $146,858 in fiscal year 2000, from $260,140 in fiscal year 1999. We believe that constant monitoring of accounts receivable has helped to keep interest costs at a minimum. In addition, we use all available funds to reduce our outstanding supplier credit facility on a daily basis. Net interest expense (interest expense less interest income) for fiscal year 2000 and 1999 was $36,324 and $216,521, respectively. Loss from operations before income taxes increased 428.1% to $2,191,500 in fiscal year 2000, from $511,928 in fiscal year 1998. This increase resulted primarily from increase in salary expense to support our transition to a systems integrator. Our effective tax rate was a negative 10.6% in fiscal year 2000 and a negative 21.8% in fiscal year 1999. 18 Our net loss for fiscal year 2000 increased to $1,960,060, from $400,325 in fiscal year 1999 primarily due to increases in Selling and Administrative Expenses. FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998 Sales for fiscal year 1999 decreased approximately 29%, or $28,619,341, to $69,683,295, from $98,302,636 in fiscal year 1998. The decrease in sales was a result of customer reluctance to spend on new programs before the effects of the new millennium are understood, and we are transitioning our business from a personal computer assembler to a reseller of mid-range systems. Gross profit as a percentage of sales increased to 10.0% in fiscal year 1999, from 8.7% in fiscal year 1998. This increase was primarily attributable to the inclusion of a $657,491 writedown of inventory in fiscal 1998, or .7% of sales. Selling and Administrative expenses decreased by approximately 11.5%, or $944,337 to $7,249,568 in fiscal year 1999, from $8,193,905 in fiscal year 1998. The reduction in expense is primarily due to cost control programs, reduced commissions on lower sales and staff reductions associated with redirecting marketing efforts. Interest expense decreased 70.7%, or $628,075 to $260,140 in fiscal year 1999, from $888,215 in fiscal year 1998. We believe that constant monitoring of accounts receivable has helped to keep interest costs at a minimum. In addition, we use all available funds to reduce our outstanding supplier credit facility on a daily basis. Net interest expense (interest expense less interest income) for fiscal year 1999 and 1998 was $216,521 and $881,781, respectively. Loss from continuing operations before income taxes decreased by 28.9% to $511,928 in fiscal year 1999, from $719,522 in fiscal year 1998. This decrease resulted primarily from improved gross margin percentage and reduced interest expense referred to above. Our effective tax rate was a negative 21.8% in fiscal year 1999 and a negative 37.8% in fiscal year 1998. Our net loss for fiscal year 1999 decreased to $400,325, from $447,362 in fiscal year 1998, primarily due to the lost gross profit in fiscal 1999 being more than offset by the inventory write-off, increased operating expenses and interest expense in 1998. LIQUIDITY AND CAPITAL RESOURCES Our current ratios at September 30, 2000 and 1999 were 2.1 and 2.4, respectively. Working capital at September 30, 2000 was $6,062,837, a decrease of $3,014,813, from $9,077,650 at September 30, 1999. Cash used for operating activities in fiscal 2000 was $457,640 compared to $4,569,649 of cash provided by operating activities in fiscal year 1999 and $9,342,275 provided in fiscal 1998. The cash used in operating activities in fiscal 2000 was primarily as a result of the net loss and reductions in accounts receivable and payable, inventory, recoverable income taxes, prepaid expenses and deferred income taxes. The cash provided by operating activities during fiscal years 1999 and 1998 were a result of significant reductions in both inventory and accounts receivable. Cash used in investing activities was $299,986, $109,357 and $2,607,070 for fiscal years 2000, 1999 and 1998, respectively, and was used primarily to finance capital expenditures. We moved into our new facility in 1998. Net cash used in financing activities was $467,355, $3,111,280 and $6,258,290 in each of fiscal 2000, 1999 and 1998, respectively. The net cash used during fiscal 2000 was primarily payments on long-term debt and the re-purchase of our common stock. The net cash used in financing activities during fiscal years 1999 and 1998 related primarily to payments made under our supplier credit facility, payments on long-term debt and the repurchase of our common stock. In addition, in 1998, we obtained 19 a mortgage from the Chase Manhattan Bank secured by our new facility in the amount of $1,650,000. The proceeds were used to pay down our debt with IBM Credit Corporation. Under our financing arrangement with IBM Credit Corporation, as of September 30, 2000, we were able to borrow up to 85% of our eligible accounts receivable and 100% of our eligible inventory, up to a maximum of $22,500,000. As of September 30, 2000, 1999 and 1998, interest on the outstanding borrowings for IBM Credit Corporation were payable monthly at the prime rate, or prime rate plus 6.5% should we fail to meet certain collateral requirements. As of September 30, 2000 and 1999, there were no borrowings outstanding under the IBM Credit Corporation facility. Additionally, advances under our Agreement for Wholesale Financing from IBM Credit Corporation totaling $4,411,031 and $3,282,454 were included in accounts payable at September 30, 2000 and 1999, respectively, and were offset against the maximum credit available at that time from IBM Credit Corporation. As a result of Applied Digital Solutions having acquired a majority interest in the Company, we will, in the future, be required to borrow from IBM Credit Corporation through Applied Digital Solutions under its credit facility with IBM Credit Corporation. Borrowings from Applied Digital Solutions will be on such terms and conditions as it may reasonably make available to us from time to time, which will be no worse than those currently provided for in the Inventory and Working Capital Financing Agreement. In 1999, we received a grant of $100,000 and a loan of $100,000 from The Empire State Development Corporation to assist in the financing of the new facility in Shirley, New York. We believe that our present Agreement for Wholesale Financing with IBM Credit Corporation, financing provided by Applied Digital Solutions and our projected earnings capacity will be sufficient to fund our operations and capital expenditures for at least 12 months. SEASONALITY AND QUARTERLY FLUCTUATIONS We have historically experienced, and expect to continue to experience, fluctuations in our net sales, income from operations and net income 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. We can typically deliver systems within a short period of time and therefore we do have a significant long-term backlog in orders. The following table sets forth certain quarterly information for the periods indicated:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- FOR THE YEAR ENDED SEPTEMBER 30, 2000: Net sales $ 11,725,000 $ 9,338,000 $ 10,832,000 $ 8,795,000 Gross profit 1,282,000 1,313,000 1,034,000 944,000 Loss from operations (952,000) (535,000) (538,000) (122,000) Net loss (748,000) (470,000) (530,000) (213,000) FOR THE YEAR ENDED SEPTEMBER 30, 1999: Net sales $ 27,329,000 $ 14,355,000 $ 14,018,000 $ 13,982,000 Gross profit 2,839,000 1,921,000 1,218,000 974,000 Income (loss) from operations 938,000 368,000 (777,000) (827,000) Net income (loss) 511,000 172,000 (478,000) (605,000) FOR THE YEAR ENDED SEPTEMBER 30, 1998: Net sales $ 28,062,000 $ 22,228,000 $ 26,417,000 $ 21,596,000 Gross profit 2,814,000 1,873,000 2,500,000 1,410,000 Income (loss) from operations 809,000 (151,000) 432,000 (687,000) Net income (loss) 317,000 (196,000) 89,000 (657,000)
DISCLOSURES REGARDING FORWARD LOOKING STATEMENTS Management's discussion and analysis of our financial conditions and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in 20 this Report. Except for the historical statements and discussions contained in this Report, statements contained herein constitute forward looking statements within the meanings of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the results anticipated in such statements. YEAR 2000 COMPLIANCE We have not experienced any significant internal Year 2000 related problems. During 1998 and 1999, we implemented a company wide program to ensure that our internal systems would be compliant prior to the Year 2000 failure dates. We have not experienced any Year 2000 compliance problems. However, we cannot make any assurances that unforeseen problems may not arise in the future. We do not believe that the Year 2000 problem has had or will continue to have a material adverse effect on our business, results of operations or cash flows. The estimate of the potential impact on our financial position, overall results of operations or cash flows for the Year 2000 problem could change in the future. Our ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, a vendor's ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. The discussion of our efforts, and management's expectations, relating to Year 2000 compliance are forward-looking statements. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued FAS 133, Accounting for Derivative Instruments and Hedging Activities, which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The statement is effective for fiscal years commencing after June 15, 2000. In June 2000, the FASB issued FAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FAS statement 133, which addresses implementation issues experienced by those companies that adopted FAS 133 early. We will adopt FAS 133, as well as its amendments and interpretations, in fiscal year 2001. We do not believe that FAS 133 will have a material impact on our results of operations, cash flows and financial condition. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. This Staff Accounting Bulletin summarizes certain of the staff's views on applying Generally Accepted Accounting Principles to revenue recognition in financial statements. On June 26, 2000, the SEC staff issued SAB No. 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. Therefore, we will adopt this statement no later than the fourth quarter of fiscal 2001. We do not believe that SAB 101 will have a material impact on our results of operations, cash flows and financial condition. In September 2000, the EITF reached a consensus in EITF Issues 00-10, "Accounting for Shipping and Handling Fees and Costs," agreeing that shipping and handling fees must be classified as revenues and comparable prior periods should be restated. Further, they agreed that shipping and handling costs can be classified anywhere in the statement of earnings, except they cannot be netted against sales. If shipping and handling costs are not included in costs of goods sold, the amount and classification of these expenses must be disclosed in the footnotes to the financial statements. This consensus must be adopted no later than the fourth quarter of fiscal years beginning after December 15, 1999. Therefore, we will adopt EITF Issue 00-10 in the fourth quarter of 2001. We do not anticipate that the adoption of EITF Issue 00-10 will have a material impact on our results of operations, cash flows and financial condition. INFLATION In the opinion of management, inflation has not had a material effect on the operations of the Company. 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We presently do not use any derivative financial instruments to hedge our exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices or other market risks, nor do we invest in speculative financial instruments. Borrowings under the financing agreement with IBM Credit Corporation are at the prime rate. Our interest income is sensitive to changes in the general level of U. S. interest rates, particularly since the majority of our investments are in short-term investments. Due to the nature of our borrowings and our short-term investments, we have concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and supplementary data included in this Annual Report are listed in Item 14 and begin immediately after Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 will be included in our Proxy Statement for our 2001 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 will be included in our Proxy Statement for our 2001 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 will be included in our Proxy Statement for our 2001 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 will be included in our Proxy Statement for our 2001 Annual Meeting of Stockholders and is incorporated herein by reference. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The financial statements and financial statement schedule listed below are included in this report Independent Auditors' Report Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Financial Statement Schedule Schedule of Valuation and Qualifying Accounts (a)(2) Financial statement schedules have been included in Item 14(a)(1) above. (a)(3) Exhibits See Index to Exhibits filed as part of this annual report on Form 10-K. (b) Reports on Form 8-K On December 22, 2000, we filed a Current Report on Form 8-K reporting (a) a change in control of the Registrant and (b) the acquisition of Information Products Center, Inc. (c) Exhibits - Included in Item 14(a)(3) above. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Palm Beach, State of Florida, on December 28, 2000. SYSCOMM INTERNATIONAL CORPORATION (Registrant) BY: /S/ DAVID A. LOPPERT ------------------------------------------- Dated: December 28, 2000 David A. Loppert, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /S/ GARRETT A. SULLIVAN - ------------------------------------------------ Chairman of the Board of December 28, 2000 (Garrett A. Sullivan) Directors Chief Executive Officer, Assistant /S/ DAVID A. LOPPERT Secretary and Assistant December 28, 2000 - ------------------------------------------------ Treasurer (Principal Executive (David A. Loppert) Officer) /S/ ANAT EBENSTEIN - ------------------------------------------------ President and Director (Principal December 28, 2000 (ANAT EBENSTEIN) Operating Officer) /S/ J. ROBERT PATTERSON Vice President, Treasurer and - ------------------------------------------------ Chief Financial Officer December 28, 2000 (J. ROBERT PATTERSON) (Principal Accounting Officer)
25 LIST OF EXHIBITS (Item 14 (c)) Exhibit Number Description ------ ----------- 3.1 Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-25593) filed with the Commission on April 22, 1997) 3.2 Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-25593) filed with the Commission on April 22, 1997) 10.1 Inventory and Working Capital Financing Agreement, dated September 24, 1996 between the Company's subsidiary, Information Technology Services, Inc., and IBM Credit Corporation (incorporated herein by reference to Exhibit 10.2. to the Company's Registration Statement on Form S-1/A (File No. 333-25593) filed with the Commission on June 12, 1997) 10.2 Agreement for Wholesale Financing (Security Agreement), dated November 27, 2000 between the Company's subsidiary, Information Technology Services, Inc., and IBM Credit Corporation 10.3* 1998 Incentive Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File No. 333-25593) filed with the Commission on April 22, 1997) 10.4* 1998 Incentive Stock Option Plan, as Amended (incorporated herein by reference to Exhibit 99 to the Company's definitive Proxy Statement filed with the Commission on December 27, 1999) 10.5* 1999 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit A to the Company's definitive Proxy Statement filed with the Commission on December 28, 1998) 12.1 Statement re Computation of Ratios 21.1 List of Subsidiaries 23.1 Consent of Albrecht, Viggiano, Zureck & Company, P.C. 27.1 Financial Data Schedule [FN] ------- * Management contract or compensatory plan. 26 TABLE OF CONTENTS ----------------- Page No. -------- INDEPENDENT AUDITORS' REPORT.......................................... F-2 FINANCIAL STATEMENTS Consolidated Balance Sheets....................................... F-3 Consolidated Statements of Operations............................. F-4 Consolidated Statements of Stockholders' Equity................... F-5 Consolidated Statements of Cash Flows............................. F-6 Notes to Consolidated Financial Statements........................ F-7 F-1 A L B R E C H T , V I G G I A N O , Z U R E C K & C O M P A N Y , P . C . CERTIFIED PUBLIC ACCOUNTANTS 25 SUFFOLK COURT HAUPPAUGE, NY 11788 (631) 434-9500 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Board of Directors SysComm International Corporation and Subsidiary Shirley, New York We have audited the accompanying consolidated balance sheets of SysComm International Corporation and Subsidiary as of September 30, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2000. These consolidated 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes 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 SysComm International Corporation and Subsidiary as of September 30, 2000 and 1999 and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2000, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C. Hauppauge, New York December 15, 2000 F-2 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
September 30, ---------------------------- 2000 1999 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,038,540 $ 2,263,521 Accounts receivable, net 9,802,460 11,400,892 Inventory 404,505 741,561 Recoverable income taxes -0- 725,900 Prepaid expenses 42,391 106,740 Deferred income taxes 198,135 323,530 ------------ ------------ Total Current Assets 11,486,031 15,562,144 PROPERTY, PLANT AND EQUIPMENT, NET 3,298,074 3,315,187 OTHER ASSETS 471,188 424,369 DEFERRED INCOME TAXES 375,395 -0- ------------ ------------ Total Assets $ 15,630,688 $ 19,301,700 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 5,131,425 $ 6,378,033 Current portion of long-term debt 278,758 96,461 Income taxes payable 13,011 10,000 ------------ ------------ Total Current Liabilities 5,423,194 6,484,494 LONG-TERM DEBT 999,473 1,610,338 ------------ ------------ Total Liabilities 6,422,667 8,094,832 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock; no par value; 1,000,000 shares authorized; none issued Common stock; $.01 par value; 40,000,000 shares authorized; 5,554,878 shares issued at September 30, 2000; 5,523,589 shares issued at September 30, 1999 55,549 55,236 Additional paid-in capital 6,502,197 6,473,892 Retained earnings 3,562,151 5,522,211 ------------ ------------ 10,119,897 12,051,339 Treasury stock (at cost) (911,876) (844,471) ------------ ------------ Total Stockholders' Equity 9,208,021 11,206,868 ------------ ------------ Total Liabilities and Stockholders' Equity $ 15,630,688 $ 19,301,700 ============ ============ See accompanying notes to consolidated financial statements.
F-3 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ SALES $ 40,689,842 $ 69,683,295 $ 98,302,636 ------------ ------------ ------------ Cost of Sales 36,116,860 62,731,687 89,047,731 Writedown of Inventory -0- -0- 657,491 ------------ ------------ ------------ 36,116,860 62,731,687 89,705,222 ------------ ------------ ------------ Gross Profit 4,572,982 6,951,608 8,597,414 SELLING AND ADMINISTRATIVE EXPENSES 6,719,424 7,249,568 8,193,905 ------------ ------------ ------------ Income (Loss) from Operations (2,146,442) (297,960) 403,509 ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest expense (146,858) (260,140) (888,215) Interest income 110,534 43,619 6,434 Other (8,734) 2,553 (35,000) Realized loss on available-for-sale securities -0- -0- (206,250) ------------ ------------ ------------ Total Other Expense (45,058) (213,968) (1,123,031) ------------ ------------ ------------ Loss before Income Taxes (2,191,500) (511,928) (719,522) INCOME TAX BENEFIT 231,440 111,603 272,160 ------------ ------------ ------------ Net Loss $ (1,960,060) $ (400,325) $ (447,362) ============ ============ ============ PER SHARE DATA Basic $ (0.42) $ (0.08) $ (0.10) Diluted (0.42) (0.08) (0.10) WEIGHTED AVERAGE SHARES Basic 4,694,306 4,749,519 4,593,065 Diluted 4,694,306 4,771,364 4,613,750 See accompanying notes to consolidated financial statements.
F-4 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended September 30, 2000, 1999 and 1998
Common Stock Additional Treasury Stock ------------------------ Paid-In ------------------------ Shares Amount Capital Shares Amount ---------- ----------- ------------ ---------- ----------- Balance as of September 30, 1997 4,555,540 $ 50,172 $ 5,610,452 461,660 $ (142,170) Comprehensive Loss: Net Loss Unrealized Loss on Available-for- Sale Securities Realized Loss on Available-for-Sale Securities Total Comprehensive Loss Compensatory Stock Options Issued to Non-employees 75,225 Exercise of Stock Options 498,000 4,980 631,940 Purchase of Treasury Shares (279,635) 279,635 (601,216) ---------- ----------- ------------ ---------- ----------- Balance as of September 30, 1998 4,773,905 55,152 6,317,617 741,295 (743,386) Net Loss Compensatory Stock Options Issued to Non-employees 147,000 Common Stock Issued Pursuant to Stock Purchase Plan 8,389 84 9,275 Purchase of Treasury Shares (61,400) 61,400 (101,085) ---------- ----------- ------------ ---------- ----------- Balance as of September 30, 1999 4,720,894 55,236 6,473,892 802,695 (844,471) ---------- ----------- ------------ ---------- ----------- Common Stock Issued Pursuant to Stock Purchase Plan 31,289 313 28,305 Net Loss Purchase of Treasury Shares (49,700) 49,700 (67,405) ---------- ----------- ------------ ---------- ----------- Balance as of September 30, 2000 4,702,483 $ 55,549 $ 6,502,197 852,395 $ (911,876) ========== =========== ============ ========== =========== Accumulated Other Total Comprehensive Retained Stockholders' Income Earnings Equity ------------- ----------- ------------- Balance as of September 30, 1997 $ (60,716) $ 6,369,898 $ 11,827,636 Comprehensive Loss: Net Loss (447,362) (447,362) Unrealized Loss on Available-for- Sale Securities (63,034) (63,034) Realized Loss on Available-for-Sale Securities 123,750 123,750 ------------- Total Comprehensive Loss (386,646) Compensatory Stock Options Issued to Non-employees 75,225 Exercise of Stock Options 636,920 Purchase of Treasury Shares (601,216) ------------- ----------- ------------- Balance as of September 30, 1998 -0- 5,922,536 11,551,919 Net Loss (400,325) (400,325) Compensatory Stock Options Issued to Non-employees 147,000 Common Stock Issued Pursuant to Stock Purchase Plan 9,359 Purchase of Treasury Shares (101,085) ------------- ----------- ------------- Balance as of September 30, 1999 -0- 5,522,211 11,206,868 ------------- ----------- ------------- Common Stock Issued Pursuant to Stock Purchase Plan 28,618 Net Loss (1,960,060) (1,960,060) Purchase of Treasury Shares (67,405) ------------- ----------- ------------ Balance as of September 30, 2000 $-0- $ 3,562,151 $ 9,208,021 ============= =========== ============ See accompanying notes to consolidated financial statements.
F-5 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, ------------------------------------------------------- 2000 1999 1998 --------------- --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,960,060) $ (400,325) $ (447,362) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 308,365 292,144 299,274 Compensatory stock options issued to non-employees -0- 147,000 75,225 Deferred tax provision (benefit) (250,000) 206,263 (208,212) Loss on disposition of equipment 8,734 11,371 -0- Realized loss on available-for-sale securities -0- -0- 206,250 Changes in assets and liabilities: Accounts receivable 1,598,432 8,212,042 3,655,192 Inventory 337,056 1,844,675 10,058,107 Recoverable income taxes 725,900 (444,924) (280,976) Prepaid expenses and other assets 17,530 (107,637) (42,683) Accounts payable and accrued liabilities (1,246,608) (5,200,960) (3,473,326) Income taxes payable 3,011 10,000 (499,214) --------------- --------------- ---------------- Net Cash Provided by (Used in) Operating Activities (457,640) 4,569,649 9,342,275 --------------- --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (305,036) (209,357) (2,607,070) Proceeds from disposition of equipment 5,050 -0- -0- Proceeds from state grant -0- 100,000 -0- --------------- --------------- ---------------- Net Cash Used in Investing Activities (299,986) (109,357) (2,607,070) --------------- --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Net payments under supplier credit facility -0- (3,020,234) (7,594,604) Net proceeds from long-term debt -0- 100,000 1,650,000 Payments of long-term debt (428,568) (99,320) (53,910) Net proceeds from issuance of common stock 28,618 9,359 -0- Purchase of treasury stock (67,405) (101,085) (259,776) --------------- --------------- ---------------- Net Cash Used in Financing Activities (467,355) (3,111,280) (6,258,290) --------------- --------------- ---------------- Net Increase (Decrease) in Cash and Cash Equivalents (1,224,981) 1,349,012 476,915 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,263,521 914,509 437,594 --------------- --------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,038,540 $ 2,263,521 $ 914,509 =============== =============== ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 28,951 $ 241,935 $ 809,910 Interest 146,858 252,727 888,215 SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES Purchase of treasury stock: Proceeds from sale of stock options $ -0- $ -0- $ 341,440 Purchase of treasury stock -0- -0- (601,216) --------------- --------------- ---------------- Cash Paid for Treasury Stock $ -0- $ -0- $ (259,776) =============== =============== ================ See accompanying notes to consolidated financial statements.
F-6 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Organization and Basis of Presentation - ----------------------------------------------- SysComm International Corporation (the "Company"), incorporated on September 30, 1987, is a Delaware corporation with one active subsidiary: Information Technology Services, Inc. (doing business as InfoTech, a New York Corporation since 1980). The Company, through its subsidiary, conducts business in New York, New Jersey, Connecticut and Massachusetts. The Company is a supplier and systems integrator of a broad range of computer and related products. Basis of Consolidation - ---------------------- The consolidated financial statements include the accounts of SysComm International Corporation and its wholly-owned subsidiary. Significant intercompany accounts and transactions have been eliminated in consolidation. Estimates - --------- The preparation of financial statements, in conformity with generally accepted accounting principles, 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation - ------------------------ The Company accounts for stock options and employees' purchase rights as prescribed by Accounting Principles Board Opinion No. 25 and includes pro forma information in the stock-based compensation footnote, as permitted by Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost is recognized for employees' purchase rights and stock options granted to employees. Compensation cost is recognized for stock options granted to non-employees based upon the fair market value of the options granted. Accounts Receivable - ------------------- Accounts receivable are presented net of allowances for doubtful accounts and for sales returns. The allowances are based on prior experience and management's evaluation of the collectibility of accounts receivable and returned merchandise credits. Authorized returns from suppliers are classified as receivables. The allowance for doubtful accounts was $133,000 and $169,050 as of September 30, 2000 and 1999, respectively. The allowance for sales returns was $25,000 and $110,000 as of September 30, 2000 and 1999, respectively. F-7 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Inventory - --------- Inventory consists principally of computer hardware and software, and is valued at the lower of cost (first-in, first-out) or market. Substantially all inventory items are finished goods. The Company reviews the movement of inventory on an item by item basis to determine the value of items which are slow moving. After considering the potential for near term product engineering changes and/or technological obsolescence and current realizability due to changes in returns and price protection policies, the Company determines the current need for its inventory valuation allowance. The allowance was $250,000 and $164,420 as of September 30, 2000 and 1999, respectively. Property, Plant and Equipment - ----------------------------- Property, plant and equipment is stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged against operations as incurred. Upon retirement or sale, any assets disposed are removed from the accounts and any resulting gain or loss is reflected in the results of operations. Capitalized values of property under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
Estimated Useful Life ----------- Building 39 years Vehicles 1-5 years Computer equipment 5 years Furniture and fixtures 7 years Leasehold improvements 5 years
Income Taxes - ------------ The Company accounts for income taxes in accordance with Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, which requires the use of the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Investments - ----------- The Company evaluates its investment policies consistent with Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, investment securities are classified as available-for-sale securities and carried at fair value, with temporary unrealized gains and losses reported as a separate component of accumulated other comprehensive income within stockholders' equity. Realized losses are recorded for any decline in value determined to be other-than-temporary on available-for-sale securities. F-8 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Comprehensive Income - -------------------- In 1999, the Company adopted Financial Accounting Standards Board Statement No. 130, Reporting Comprehensive Income. Comprehensive income consists of net income and other comprehensive income; the latter includes unrealized gains and losses on available-for-sale securities and is presented in the Consolidated Statements of Stockholders' Equity. This adoption had no effect on stockholders' equity. Prior year financial statements have been reclassified to conform with this requirement. Revenue Recognition - ------------------- Revenue related to the sales of computer equipment is recorded at the time of shipment. Service revenue and costs are recognized when services are provided. Earnings (Loss) Per Common Share - -------------------------------- In February 1997, the Financial Accounting Standard Board issued Statement No. 128, Earnings per Share. This pronouncement requires the reporting of two income (loss) per share figures: basic net income (loss) per share and diluted net income (loss) per share. Basic net income (loss) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted-average number of common shares outstanding during the period plus the dilutive effect of shares issuable through stock options and warrants. A reconciliation of the weighted-average number of common shares outstanding used in the calculations of basic and diluted earnings (loss) per share follows.
Year Ended Year Ended Year Ended September 30, 2000 September 30, 1999 September 30, 1998 --------------------------- ---------------------------- --------------------------- Basic Dilutive Basic Dilutive Basic Dilutive -------------- ----------- ------------- ------------- ------------- ------------ Weighted-average number of common shares outstanding 4,694,306 4,694,306 4,749,519 4,749,519 4,593,065 4,593,065 ============== =========== ============= ============= ============= ============
The dilutive effect of the following options were not included in the computation of diluted loss per share for their respective year because they are anti-dilutive: * 57,000 options granted in 1997 at exercise prices ranging from $5.56 to $6.12 * 40,000 options granted in 1998 at an exercise price of $1.88 * 327,000 options granted in 1999 at exercise prices ranging from $1.56 to $2.85 * 150,000 options granted in 2000 at exercise prices ranging from $0.88 to $0.97 F-9 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and Cash Equivalents - ------------------------- The Company considers all liquid instruments purchased with a maturity of three months or less to be cash equivalents. Fair Value of Financial Instruments - ----------------------------------- The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities, approximate fair value due to the relatively short maturity of these instruments. The fair value of investments is estimated based on quoted market price. The carrying value of the long-term debt, including the current portion, approximates fair value based on the incremental borrowing rates currently available to the Company for financing with similar terms and maturities. NOTE 2 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of:
2000 1999 -------------- -------------- Land $ 437,660 $ 437,660 Building 2,225,480 2,225,480 Vehicles 81,251 81,251 Computer equipment 1,022,611 1,026,084 Furniture and fixtures 502,608 518,141 Leasehold improvements 10,703 117,691 -------------- -------------- 4,280,313 4,406,307 Accumulated depreciation (982,239) (1,091,120) -------------- -------------- Property, plant and equipment, net $ 3,298,074 $ 3,315,187 ============== ==============
The Company received a grant of $100,000 from the Empire State Development Corporation in 1999 that reduced the cost of the building in Shirley, New York. NOTE 3 - OTHER ASSETS The Company is the owner and beneficiary of a $1,000,000 whole life policy covering the life of the principal stockholder/officer. The cash surrender value of life insurance included in Other Assets as of September 30, 2000 and 1999 amounted to $276,974 and $240,652, respectively. F-10 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - FINANCING ARRANGEMENTS The Company entered into a formal credit agreement with the financing subsidiary of IBM. Under the credit facility, the Company may borrow up to 85% of receivables due within 90 days and up to 100% of eligible inventory, to a maximum of $22,500,000. The agreement, which is subject to renewal each September, is also subject to temporary increases, thereby increasing the line of credit to $41,500,000 during certain periods. Interest on the outstanding borrowings is payable monthly at prime, or prime plus 6.5%, should the Company fail to meet certain collateral requirements. Additionally, $4,411,031 and $3,282,454 were included in accounts payable at September 30, 2000 and 1999, respectively, and are included against the maximum credit available. Subsequent to September 30, 2000, this agreement is in the process of being revised as further detailed in Note 12. NOTE 5 - LONG-TERM DEBT Long-term debt consists of the following:
2000 1999 ------------ ------------ CHASE MANHATTAN BANK Mortgage loan in the amount of $1,650,000 collateralized by the land and building in Shirley, New York; payable in monthly installments of $14,979 including interest of 7.16% per annum; subsequent to September 30, 2000, this agreement was modified, as further detailed in Note 12. $ 1,173,778 $ 1,575,274 EMPIRE STATE DEVELOPMENT CORPORATION Loan in the amount of $100,000 to finance improvements to the facility in Shirley, New York; payable in 119 monthly installments of $1,012, beginning May 1, 1999 and ending April 1, 2009, including principal and a base interest rate of 4.0% per annum; interest rate is subject to change each March 1 to prime plus 2.0% if the number of full-time employees in Shirley, New York declines below 85% of certain annual base numbers. 88,142 95,892 FORD MOTOR CREDIT CORP. Collateralized by a lien on a Company automobile; payable in 36 monthly installments of $815 including interest of 9.0% per annum; final payment due October 1999. -0- 809 ------------ ------------ (carried forward) 1,261,920 1,671,975 F-11 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - LONG TERM DEBT (continued) 2000 1999 ------------ ------------ (brought forward) $ 1,261,920 $ 1,671,975 AT&T CREDIT CORP. Capital lease collateralized by a lien on the Company's phone system; payable in monthly installments of $708 including interest of 14.5% per annum; final payment due May 2001. 5,368 12,515 Capital lease collateralized by a lien on the Company's phone system; payable in monthly installments of $542 including interest of 15.1% per annum; final payment due January 2001. 1,581 7,406 Capital lease collateralized by a lien on the Company's phone system; payable in monthly installments of $560 including interest of 9.5% per annum; final payment due March 2002. 9,362 14,903 ------------ ------------ 1,278,231 1,706,799 Current maturities (278,758) (96,461) ------------ ------------ $ 999,473 $ 1,610,338 ============ ============ Maturities of long-term debt are as follows: September 30, 2001 $ 278,758 2002 929,256 2003 9,514 2004 9,902 2005 10,305 Thereafter 40,496 ------------ $ 1,278,231 ============
NOTE 6 - CAPITAL LEASES As of September 30, 2000 and 1999, gross assets capitalized under equipment leases totaled $80,745 and the accumulated amortization totaled $49,353 and $37,519, respectively. Amortization expense for the years ended September 30, 2000, 1999 and 1998 amounted to $11,834. F-12 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - INCOME TAXES The provision (benefit) for income taxes consists of the following:
Years Ended September 30, ------------------------------------------------------- 2000 1999 1998 --------------- ---------------- ---------------- Current: Federal $ (25,863) $ (362,184) $ (63,948) State 44,423 44,318 -0- --------------- ---------------- ---------------- Total Current 18,560 (317,866) (63,948) --------------- ---------------- ---------------- Deferred: Federal (202,500) 167,073 (168,652) State (47,500) 39,190 (39,560) --------------- ---------------- ---------------- Total Deferred (250,000) 206,263 (208,212) --------------- ---------------- ---------------- Provision (Benefit) for Income Taxes $ (231,440) $ (111,603) $ (272,160) =============== ================ ================
A reconciliation of income tax benefit at the statutory federal income tax rate to net income taxes included in the accompanying statements of operations is as follows:
Years Ended September 30, ------------------------------------------------------- 2000 1999 1998 --------------- ---------------- ---------------- Income taxes at federal statutory rate $ (745,110) $ (174,056) $ (244,637) State taxes, net of federal benefit (59,860) 62,453 (27,523) Valuation allowance 573,530 -0- -0- --------------- ---------------- ---------------- Provision (Benefit) for Income Taxes $ (231,440) $ (111,603) $ (272,160) =============== ================ ================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
September 30, ------------------------------------ 2000 1999 --------------- ---------------- Allowance for doubtful accounts $ 51,870 $ 71,001 Allowance for sales returns 9,750 46,200 Inventory 98,936 71,891 Investments 16,803 18,096 Depreciation (29,018) (21,742) Vacation accrual 20,776 39,078 Stock options 86,668 93,335 Other 4,875 5,671 Net operating loss carry forward 886,400 -0- --------------- ---------------- Total Deferred Tax Assets $ 1,147,060 $ 323,530 Less: Valuation Allowance (573,530) -0- --------------- ---------------- Net Deferred Tax Assets $ 573,530 $ 323,530 =============== ================
F-13 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - INCOME TAXES (continued) At September 30, 2000, the Company has a net operating loss carryforward of approximately $2,300,000 which will expire in 2020. Utilization of the Company's net operating loss is subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been partially offset by a valuation allowance at September 30, 2000. NOTE 8 - STOCK-BASED COMPENSATION Stock Option Plans - ------------------ The 1988 stock option plan expired on May 5, 1998. In February 1998, a new stock option plan (the "1998 Plan") was approved by the stockholders. The 1998 Plan was amended in January 2000. Under the revised plan, 1,000,000 shares of common stock are reserved for issuance upon the exercise of options designated as either incentive stock options or non-qualified stock options. The 1998 Plan will terminate in February 2008. Options granted under the 1998 Plan will expire not more than ten years from the date of grant. In the case of options granted to an employee of the Company who is a 10% or more stockholder, the option price is an amount per share of not less than 110% of the fair market value per share on the date the option is granted. The option price for options granted to all other employees and non-employees of the Company is an amount per share of not less than the fair market value per share on the date the option is granted. During 2000 and 1999, 110,000 and 115,000 options, respectively, were granted to investment bankers, directors and employees of the Company with immediate vesting. All other options granted vest over a four-year period following the date of grant. The options granted in 1997 expire on September 1, 2001. All other options expire five years from the date of the grant. A summary of stock option activity related to the Company's stock option plans is as follows:
Beginning Granted Exercised Canceled Ending Balance During During During Balance Outstanding Period Period Period Outstanding Exercisable ----------- ---------- ---------- ---------- ----------- ----------- Year ended September 30, 1998 Number of shares 564,500 40,000 498,000 9,500 97,000 54,250 Weighted average exercise price per share $ 1.26 $ 1.875 $ 0.69 $ 5.56 $ 4.06 $ 2.85 Year ended September 30, 1999 Number of shares 97,000 327,000 -0- 21,000 403,000 173,000 Weighted average exercise price per share $ 4.06 $ 2.02 $ -0- $ 5.56 $ 2.32 $ 2.90 Year ended September 30, 2000 Number of shares 403,000 150,000 -0- 244,000 309,000 283,000 Weighted average exercise price per share $ 2.32 $ .92 $ -0- $ 1.71 $ 2.12 $ 2.12
F-14 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - STOCK-BASED COMPENSATION (continued) The weighted average per share fair value of the options granted during the years ended September 30, 2000 and 1999 was estimated as $.59 and $1.34, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2000 1999 ----------------- -------------- Risk-free interest rates 5.83% - 6.22% 5.62% - 5.86% Expected option lives 4.13 - 4.84 years 4.48 - 5 years Expected volatilities 110% 110% Expected dividend yields 0% 0%
The following table summarizes information about the options outstanding at September 30, 2000:
Options Outstanding Options Exercisable ------------------------------------------ --------------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercisable Number Exercisable Exercise Price Outstanding Life Price Exercisable Price - ----------------------------- ----------- ---------- ----------- ----------- ----------- $5.56 - $6.12 24,000 .92 years $ 5.63 18,000 $ 5.63 $2.69 - $2.85 115,000 3.48 years 2.83 115,000 2.83 $0.88 - $1.88 170,000 4.18 years 1.14 150,000 1.16
Employee Stock Purchase Plan - ---------------------------- On December 17, 1998, the Company adopted the 1999 Employee Stock Purchase Plan (the "1999 Plan") whereby 200,000 shares of common stock are reserved for issuance to eligible employees. A participant may have up to 10% of their earnings withheld during a period of approximately six months commencing on the first trading day on or after April 1 and terminating on the last trading day ending the following September 30, or commencing on the first trading day on or after October 1 and terminating on the last trading day ending the following March 31. The purchase price shall be an amount equal to 85% of the fair market value of a share of common stock on the enrollment date or on the exercise date, whichever is lower. During the year ended September 30, 2000, participating employees in the 1999 Plan exercised their rights to purchase 31,289 shares of common stock at 85% of the fair market value. No purchase rights remain outstanding or exercisable at September 30, 2000. The fair market value of each stock purchase plan grant is estimated on the date of grant using the Black-Scholes model with the following assumptions: no estimated dividends; expected volatility of 110%; risk free interest rates of 6.26% and 5.72%; and an expected life of 0.5 years. The weighted-average fair value of these purchase rights granted in 2000 was $0.40. F-15 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - STOCK-BASED COMPENSATION (continued) Employee Stock Purchase Plan - ---------------------------- Had compensation expense for the Company's stock-based compensation plans been determined consistent with FAS 123, net loss and loss per share would be increased to the pro forma amounts indicated below:
2000 1999 ------------ ------------ Net loss As reported $(1,960,060) $ (400,325) Pro forma (2,036,061) (480,008) Loss per share - basic As reported $ (0.42) $ (0.08) Pro forma (0.43) (0.10) Loss per share - diluted As reported $ (0.42) $ (0.08) Pro forma (0.43) (0.10)
NOTE 9 - 401(k) PLAN On January 1, 1994, the Company adopted a 401(k) Savings Plan (the "Plan") for the benefit of all eligible employees. All employees as of the effective date of the Plan became eligible. An employee who became employed after January 1, 1994, would become a participant after the completion of a half-year of service and the attainment of 20 years of age. Participants may elect to contribute from their compensation any amount up to the maximum deferral allowed by the Internal Revenue Code. Employer contributions are a discretionary percentage match. The Company may make optional contributions for any plan year at its discretion. During the years ended September 30, 2000, 1999 and 1998, the Company incurred 401(k) costs totaling $7,796, $21,411 and $19,945, respectively. NOTE 10 - CONCENTRATION OF CREDIT RISK Cash - ---- The Company places most of its temporary cash investments with one financial institution and normally exceeds the Federal Deposit Insurance Corporation limit. The Company has not experienced any loss to date as a result of this policy. F-16 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - CONCENTRATION OF CREDIT RISK (continued) Major Customers - --------------- Computer sales encompass markets wherein the demands of any one customer may vary greatly due to changes in technology. For the year ended September 30, 2000, one customer comprised 25% of sales. This customer comprised 14% of accounts receivable at September 30, 2000. No single customer comprised more than 10% of sales for the years ended September 30, 1999 and 1998. Two customers comprised 14% and 11%, respectively, of accounts receivable as of September 30, 2000. In comparison, three customers comprised 19%, 18% and 14% of accounts receivable as of September 30, 1999. NOTE 11 - COMMITMENTS AND CONTINGENCIES Purchases - --------- In 1998 and 1997, the Company purchased a majority of its products from International Business Machines Corporation (IBM). In 1999, the Company began purchasing more products from other vendors and less from IBM. Purchases from IBM represented approximately 16%, 9% and 85% of total purchases for each of the years ended September 30, 2000, 1999 and 1998, respectively. Four other vendors were major suppliers in 2000. Purchases from these suppliers represented approximately 40%, 21%, 10% and 5% of total purchases for the year ended September 30, 2000 and 35%, 1%, 0% and 12%, respectively, of accounts payable at September 30, 2000. Leases - ------ The Company has operating leases on real property and equipment expiring through the year 2003. In addition to fixed rentals, the real property leases have escalation clauses that require the Company to pay a percentage of common area maintenance, real estate taxes, and insurance. Rent expense and other charges totaled $296,304, $201,655 and $387,837 for the years ended September 30, 2000, 1999 and 1998, respectively. The future minimum rental commitments are as follows: September 30, 2001 $ 150,704 2002 54,460 ----------- $ 205,164 ===========
Employment Agreements - --------------------- Effective June 17, 1997, the Company entered into two-year employment agreements with four senior executives. The employment agreements expired in 1999 and were not renewed. No other long-term employment agreements exist as of September 30, 2000. F-17 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - SUBSEQUENT EVENTS Change in Control - ----------------- On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement, as amended, between the selling shareholders described below and Applied Digital Solutions, Inc., a Missouri corporation, Applied Digital Solutions acquired approximately 55% of the issued and outstanding common shares of the Company, resulting in a change in control of the Company. Shares of the Company's common stock were sold by the following persons and in the following amounts:
Number of Percent Shares Held Ownership ------------- ----------- John H. Spielberger 1,920,000 41% Catherine Spielberger 50,000 1% Bearpen Limited Partnership 600,000 13% ------------- ----------- Total 2,570,000 55% ============= ===========
Applied Digital Solutions acquired the shares listed above for $4.5 million by issuing approximately 1.7 million shares of its common stock valued at approximately $2.75 million to the selling shareholders listed above and upon payment of an aggregate amount of cash equal to approximately $1.75 million to the selling shareholders listed above. As a condition to the closing of the transactions, John H. Spielberger, John C. Spielberger, Lee Adams and Cornelia Eldridge resigned as officers and directors of the Company. Garrett A. Sullivan, David A. Loppert and Anat Ebenstein were appointed to fill the vacancies on the board of directors created by such resignations, and the following persons become the officers of the Company: David A. Loppert Chief Executive Officer, Assistant Secretary and Assistant Treasurer Anat Ebenstein President, Chief Operating Officer Michael Krawitz Vice President, Secretary J. Robert Patterson Vice President, Chief Financial Officer and Treasurer John C. Spielberger Vice President, Sales and Marketing Acquisition of Assets - --------------------- On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement, as amended, between the Company and Applied Digital Solutions, the Company acquired fifty-one percent (51%) of the outstanding shares of common stock of Information Products Center, Inc., a New Jersey corporation ("IPC"). The purchase price for the shares of IPC was $2.075 million, payable $1.821 million in cash and $0.254 million by promissory note. On December 15, 2000, pursuant to the terms of a Stock Purchase Agreement, between the Company and Applied Digital Solutions, the Company acquired forty-nine percent (49%) of the outstanding shares of common stock of IPC. The purchase price for the shares of IPC was approximately $2.4 million, payable by promissory note. F-18 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - SUBSEQUENT EVENTS (continued) Financing Arrangements - ---------------------- Financing arrangements between the Company and one of its lenders, Chase Manhattan Bank, were revised as a result of the Stock Purchase Agreements. After the closing of the transactions, a principal payment in the amount of $158,000 was made and the final payment due date was changed from December 2012 to March 2002 resulting in a balloon payment due at that time. The interest rate of 7.16% and monthly installments of $14,979 remain the same through March 2002. Financing arrangements between the Company and another of its lenders, IBM Credit Corporation, are in the process of being revised but have not been finalized. The Company is continuing to operate under the current terms and conditions of the IBM Credit Corp. agreement in place at September 30, 2000. NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data (rounded to the nearest 000 except for per share data) for the years ended September 30, 2000, 1999 and 1998 follow:
First Second Third Fourth Quarter Quarter Quarter Quarter -------------- -------------- -------------- -------------- For the year ended September 30, 2000: Net sales $ 11,725,000 $ 9,338,000 $ 10,832,000 $ 8,795,000 Gross profit 1,282,000 1,313,000 1,034,000 944,000 Loss from operations (952,000) (535,000) (538,000) (122,000) Net loss (748,000) (470,000) (530,000) (213,000) Net loss per share: Basic (0.16) (0.10) (0.11) (0.05) Diluted (0.16) (0.10) (0.11) (0.05) For the year ended September 30, 1999: Net sales $ 27,329,000 $ 14,355,000 $ 14,018,000 $ 13,982,000 Gross profit 2,839,000 1,921,000 1,218,000 974,000 Income (loss) from operations 938,000 368,000 (777,000) (827,000) Net income (loss) 511,000 172,000 (478,000) (605,000) Net income (loss) per share: Basic 0.11 0.04 (0.10) (0.13) Diluted 0.11 0.04 (0.10) (0.13) For the year ended September 30, 1998: Net sales $ 28,062,000 $ 22,228,000 $ 26,417,000 $ 21,596,000 Gross profit 2,814,000 1,873,000 2,500,000 1,410,000 Income (loss) from operations 809,000 (151,000) 432,000 (687,000) Net income (loss) 317,000 (196,000) 89,000 (657,000) Net income (loss) per share: Basic 0.07 (0.04) 0.02 (0.15) Diluted 0.06 (0.04) 0.02 (0.14)
F-19 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions -------------------------- Balance at Charged Charged Balance Beginning to Costs and to Other at End Deducted from Assets of Period Expenses Accounts Deductions of Period - ------------------------------------- ---------- ------------ --------- ---------- --------- Allowance for Doubtful Accounts: Year ended September 30, 1998 $108,343 $151,000 $ -0- $142,737 (a) $116,606 Year ended September 30, 1999 116,606 78,000 -0- 25,556 (a) 169,050 Year ended September 30, 2000 169,050 131,640 -0- 167,690 (a) 133,000 Allowance for Sales Returns: Year ended September 30, 1998 $ 37,389 $ -0- $ -0- $ -0- $ 37,389 Year ended September 30, 1999 37,389 72,611 -0- -0- 110,000 Year ended September 30, 2000 110,000 -0- -0- 85,000 25,000 Allowance for Inventory Obsolescence: Year ended September 30, 1998 $ -0- $657,491 $ -0- $373,491 (b) $284,000 Year ended September 30, 1999 284,000 -0- -0- 119,580 (b) 164,420 Year ended September 30, 2000 164,420 85,580 -0- 250,000 Deferred Tax Valuation Allowance Year ended September 30, 1998 $ -0- $ -0- $ -0- $ -0- $ -0- Year ended September 30, 1999 -0- -0- -0- -0- -0- Year ended September 30, 2000 -0- 573,530 -0- -0- 573,530 (a) Amounts written off, net of recoveries. (b) Realized loss on sale of inventory.
S-1 EX-10.2 2 ex10p2.txt AGREEMENT FOR WHOLESALE FINANCING Exhibit 10.2 IBM Credit Corporation AGREEMENT FOR WHOLESALE FINANCING (SECURITY AGREEMENT) This Agreement for Wholesale Financing - Security Agreement (as amended, supplemented or otherwise modified from time to time, this "Agreement") dated November 27, 2000 is by and between IBM CREDIT CORPORATION, a Delaware corporation, with a place of business at 1500 RiverEdge Parkway, Atlanta, GA 30358 ("IBM Credit"), and INFORMATION TECHNOLOGY SERVICES, INC., a New York corporation, ("Customer"). This Agreement replaces that Inventory and Working Capital Financing Agreement between IBM Credit Customer (as amended, modified or supplemented from time to time) dated September 24, 1996. In the course of Customer's business, Customer acquires products and wants IBM Credit to finance Customer's purchase of such products under the following terms and conditions: 1. IBM Credit may in its sole discretion from time to time decide the amount of credit IBM Credit extends to Customer, notwithstanding any prior course of conduct between IBM Credit and Customer. IBM Credit may combine all of its advances to make one debt owed by Customer. 2. IBM Credit may in its sole discretion decide the amount of funds, if any, IBM Credit will advance on any products Customer may seek to acquire. Customer agrees that any decision to finance products will not be binding on IBM Credit until such time as the funds are actually advanced by IBM Credit. 3. In the course of Customer's operations, Customer intends to purchase from persons approved in writing by IBM Credit for the purposes of this Agreement (the "Authorized Suppliers") computer hardware and software products manufactured or distributed by or bearing any trademark or trade name of such Authorized Suppliers (the "Authorized Inventory"). When IBM Credit advances funds, IBM Credit may send Customer a Statement of Transaction or other statement. If IBM Credit does, Customer will have acknowledged the debt to be an account stated and Customer will have agreed to the terms set forth on such statement unless Customer notifies IBM Credit in writing of any question or objection within seven (7) days after such statement is mailed to Customer. 4. To secure payment of all Customer's current and future obligations to IBM Credit whether under this Agreement, any guaranty that Customer now or hereafter executes, or any other agreement between Customer and IBM Credit, whether direct or contingent, Customer grants IBM Credit a security interest in all of Customer's inventory, equipment, fixtures, account, contract rights, chattel paper, instruments, reserves, documents of title, deposit accounts and general intangibles, whether now owned or hereafter acquired, and all attachments, accessories, accessions, substitutions and/or replacements thereto and all proceeds thereof. All of the above assets are defined pursuant to the provisions of Article 9 of the Uniform Commercial Code and are hereinafter collectively referred to as the "Collateral." This security interest is also granted to secure Customer's obligations to all IBM Credit's affiliates. Customer will hold all of the Collateral financed by IBM Credit, and the proceeds thereof, in trust for IBM Credit and Customer will immediately account for and remit directly to IBM Credit all such proceeds when payment is required under the terms set forth in the billing statement or as otherwise provided in this Agreement. IBM Credit may directly collect any amount owed Customer from Authorized Suppliers with respect to the Collateral and credit Customer with all such sums received by IBM Credit from Authorized Suppliers. IBM Credit's title, lien or security interest will not be impaired by any payments Customer makes to the seller or anyone else or by Customer's failure or refusal to account to IBM Credit for proceeds. 5. Customer's principal place of business is located at: - ------------------------------------------------------------------------------ 20 Precision Drive, Shirley, NY 11967 - ------------------------------------------------------------------------------ (Number and Street) (City, County, State, Zip Code) Page 1 of 9 and Customer represents that its business is conducted as a SOLE ---- PROPRIETORSHIP. PARTNERSHIP, XXX CORPORATION. X LIMITED LIABILITY ---- ---- COMPANY (check applicable term). Customer will notify IBM Credit, in writing, prior to any change in Customer's identity, name, form of ownership, management, and of any changes in Customer's principal place of business, or any additions or discontinuances of other business locations. The Collateral will be kept at Customer's principal place of business. Customer will notify IBM Credit, in writing, thirty (30) days prior to moving any of the Collateral to any other address. Customer and Customer's predecessors have done business during the last six (6) months only under the following names: - ------------------------------------------------------------------------------ Information Technology Services, Inc. - ------------------------------------------------------------------------------ This paragraph is not in any manner intended to limit the extent of IBM Credit's security interest in the Collateral. 6. Customer represents and covenants that the Collateral is and will remain free from all claims and liens superior to IBM Credit's unless otherwise agreed to by IBM Credit in writing, and that Customer will defend the Collateral against all other claims and demands. Customer will not sell, rent, lease, lend, demonstrate, pledge transfer or secrete any of the Collateral or use any of the Collateral for any purpose other than exhibition and sale to buyers in the ordinary course of business, without IBM Credit's prior written consent. Customer will execute all documents IBM Credit may request to confirm or perfect IBM Credit's security interest in the Collateral. Customer warrants and represents that Customer is not in default in the payment of any principal, interest or other charges relating to any indebtedness owed to any third party, and no event has occurred, as of the effective date of this Agreement or as of the date of any request by Customer to IBM Credit for financing in the future, under the terms of any agreement, document, promissary note or other instrument, which with or without the passage of time and/or the giving of notice constitutes or would constitute an event of default thereunder. Customer will promptly provide its year-end financial statement, in form and detail satisfactory to IBM Credit, to IBM Credit within ninety (90) days after Customer's fiscal year ends and, if requested by IBM Credit, Customer will also promptly provide Customer's financial Statement to IBM Credit after each fiscal quarter within forty five (45) days. Customer represents and covenants that each financial statement that Customer submits to IBM Credit will be prepared according to generally accepted accounting principles in effect in the United States from time to time, and is and will be correct and will accurately represent Customer's financial condition. Customer further acknowledges IBM Credit's reliance on the truthfulness and accuracy of each financial statement that Customer submits to IBM Credit in IBM Credit's extension of various financial accommodations to Customer. 7. Customer will pay all taxes, license fees, assessments and charges on the Collateral when due. Customer will immediately notify IBM Credit of any loss, theft, or destruction of or damage to any of the Collateral. Customer will be responsible for any loss, theft, or destruction or damage of Collateral. Customer will keep the Collateral insured for its full insurable value against loss or damage under an "all risk" insurance policy. Customer will obtain insurance under such terms and in such amounts acceptable to IBM Credit, from time to time, with companies acceptable to IBM Credit, with a lender loss- payee or mortgagee clause payable to IBM Credit to the extent of any loss to the Collateral and containing a waiver of all defenses against Customer that is acceptable to IBM Credit. Customer agrees to provide IBM Credit with written evidence of the required insurance coverage and lender loss-payee or mortgagee clause. Customer assigns to IBM Credit all amounts owed to Customer under any insurance policy, and Customer directs any insurance company to make payment directly to IBM Credit to be applied to the unpaid obligations owed IBM Credit. Customer further grants IBM Credit an irrevocable power of attorney to endorse any checks or drafts and sign and file any of the papers, forms and documents required to initiate and settle any insurance claims with respect to the Collateral. If Customer fails to pay any of the above-referenced costs, charges, or insurance premiums, or if Customer fails to insure the Collateral, IBM Credit may, but will not be obligated to, pay such costs, charges and insurance premiums, and the amounts paid will be considered an additional obligation owed by Customer to IBM Credit. 8. IBM Credit has the right to enter upon Customer's premises from time to time, as IBM Credit in its sole discretion may determine for IBM Credit's sole benefit, and all without any advance notice to Customer, to: examine the Collateral; appraise it as security; verify its condition and non-use; verify that Page 2 of 9 all Collateral have been properly accounted for; verify that Customer has complied with all the terms and provisions of this Agreement; and assess, examine, and make copies of Customer's books and record. Any collection by IBM Credit of any amounts Customer owes at or during IBM Credit's examination of the Collateral does not relieve Customer of its continuing obligation to pay Customer's obligations owed to IBM Credit in accordance with such terms. 9. Customer agrees to immediately pay IBM Credit the full amount of the principal balance owed IBM Credit on each item of Approved Inventory financed by IBM Credit at the time such Approved Inventory is sold, lost, stolen, destroyed, or damaged, whichever occurs first, unless IBM Credit has agreed in writing to provide financing to Customer on other terms. Customer also agrees to provide IBM Credit, upon IBM Credit's request, an inventory report which describes all the Approved Inventory in Customer's possession (excluding any Approved Inventory financed by IBM Credit under the Demonstration and Training Equipment Financing Option). Regardless of the repayment terms set forth in any billing statement, if IBM Credit determines, after conducting an inspection of all of Customer's inventory, that the current outstanding obligations owed by Customer to IBM Credit exceeds the aggregate wholesale invoice price, net of all applicable price reduction credits, of the Approved Inventory in Customer's possession that is new and in manufacturer sealed boxes and in which IBM Credit has a perfected first priority security interest, Customer agrees to immediately pay to IBM Credit an amount equal to the difference between such outstanding obligations and the aggregate wholesale invoice price, net of all applicable price reduction credits, of such Approved Inventory. Customer will make all payments to IBM Credit according to the remit instructions in the billing statement. Any checks or other instruments delivered to IBM Credit to be applied against Customer's outstanding obligations will constitute conditional payment until the funds represented by such instruments are actually received by IBM Credit. IBM Credit may apply payments to reduce finance charges first and then principal, irrespective of Customer's instructions. Further, IBM Credit may apply principal payments to the oldest (earliest) invoice for the Approved Inventory financed by IBM Credit, or to such Approved Inventory which is sold, lost, stolen, destroyed, damaged, or otherwise disposed of. If Customer signs any instrument for any outstanding obligations, it will be evidence of Customer's obligation to pay and will not be payment. Any discount, rebate, bonus, or credit for Approved Inventory granted to Customer by any Authorized Supplier will not, in any way, reduce the obligations Customer owes IBM Credit, until IBM Credit has received payment in good funds. 10. Customer will pay IBM Credit finance charges on the total amount of credit extended to Customer in the amount agreed to between Customer and IBM Credit from time to time. The period of any financing will begin on the invoice date of the Approved Inventory whether or not IBM Credit advances payment on such date. This period will be included in the calculation of the annual percentage rate of the finance charges. Such finance charges may be applied by IBM Credit to cover any amounts expended for IBM Credit's: appraisal and examination of the Collateral; maintenance of facilities for payment; assistance in support of Customer's retail sales; IBM Credit's commitments to Authorized Suppliers to finance shipments of Approved Inventory to Customer; recording and filing fees; expenses incurred in obtaining additional collateral or security; and any costs and expenses incurred by IBM Credit arising out of the financing IBM Credit extends to Customer. Customer also agrees to pay IBM Credit additional charges which include: late payment fees at a per annum rate equal to the Prime Rate plus 6.5%; flat charges: charges for receiving NSF checks from Customer; renewal charges; and any other charges agreed to by Customer and IBM Credit from time to time. For purposes of this Agreement, "Prime Rate" will mean the average of the rates of interest announced by banks which IBM Credit uses in its normal course of business of determining prime rate. Unless Customer hereafter otherwise agrees in writing, the finance charges and additional charges agreed upon will be IBM Credit's applicable finance charges and additional charges for the class of Approved Inventory involved prevailing from time to time at IBM Credit's principal place of business, but in no event greater than the highest rate from time to time permitted by applicable law. If it is determined that amounts received from Customer were in excess of such highest rate, then the amount representing such excess will be considered reductions to the outstanding principal of IBM Credit's advances to Customer. IBM Credit will send Customer, at monthly or other intervals, a statement of all charges due on Customer's account with IBM Credit. Customer will have acknowledged the charges due, as indicated on the statement, to be an account stated, unless Customer objects in writing to IBM Credit within seven (7) days after such statement is mailed to Page 3 of 9 Customer. This statement may be adjusted by IBM Credit at any time to conform to applicable law and this Agreement. IBM Credit shall calculate any free financing period utilizing a methodology that is consistent with the methodologies used for similarly situated customers of IBM Credit. The Customer understands that IBM Credit may not offer, may change or may cease to offer a free financing period for the Customer's purchases of Approved Inventory. If any Authorized Supplier fails to provide payment of a finance charge for Customer, as agreed, Customer will be responsible for and pay to IBM Credit all finance charges billed to Customer's account. 11. Any of the following events will constitute an event of default by Customer under this Agreement: Customer breaches any of the terms, warranties or representations contained in this Agreement or in any other agreements between Customer and IBM Credit or between Customer and any of IBM Credit's affiliates; any guarantor of Customer's obligations to IBM Credit under this Agreement or any other agreements, breaches of any terms, warranties or representations contained in such guaranty or other agreements between such guarantor and IBM Credit: any representation, statement, report or certificate made or delivered by Customer or any of Customer's owners, representatives, employees or agents or by any guarantor to IBM Credit is not true and correct; Customer fails to pay any of the liabilities or obligations owed to IBM Credit or any of IBM Credit's affiliates when due and payable under this Agreement or under any other agreements between Customer and IBM Credit or between Customer and any of IBM Credit's affiliates; IBM Credit determines that IBM Credit is insecure with respect to any of the Collateral or the payment of Customer's obligations owed to IBM Credit; Customer abandons the Collateral or any part thereof; Customer or any guarantor becomes in default in the payment of any indebtedness owed to any third party; a judgment issues on any money demand against Customer or any guarantor; an attachment, sale or seizure is issued against Customer or any of the Collateral; any part of the Collateral is seized or taken in execution; the death of the undersigned if the business is operated as a sole proprietorship, or the death of a partner if the business is operated as a partnership, or the death of any guarantor; Customer ceases or suspends Customer's business; Customer or any guarantor makes a general assignment for the benefit of creditors; Customer or any guarantor becomes insolvent or voluntarily or involuntarily becomes subject to the Federal Bankruptcy Code, state insolvency laws or any act for the benefit of creditors; any receiver is appointed for any of Customer's or any guarantor's assets, or any guaranty pertaining to Customer's obligations to IBM Credit is terminated for any reason whatsoever; any guarantor disclaims any obligations under any guaranty; Customer loses any franchise, permission license or right to sell or deal in any Approved Inventory; Customer or any guarantor misrepresents its respective financial condition or organizational structure; or IBM Credit determines, in its sole discretion, that the Collateral, any other collateral given to IBM Credit to secure Customer's obligations to IBM Credit, any guarantor's guaranty, or Customer's or any guarantor's net worth has decreased in value, and Customer has been unable, within the time period prescribed by IBM Credit, to either provide IBM Credit with additional collateral in a form and substance satisfactory to IBM Credit or reduce Customer's total obligations by an amount sufficient to satisfy IBM Credit. Following an event of a default: (a) IBM Credit may, at any time at IBM Credit's election, without notice or demand to Customer do any one or more of the following: declare all or part of the obligations Customer owes IBM Credit immediately due and payable, together will all court costs and all costs and expenses of IBM Credit's repossession and collection activity, including, but not limited to, all attorney's fees: exercise any or all rights of a secured party under applicable law; cease making any further financial accommodations or extending any additional credit to Customer, and/or exercise any or all rights available at law or in equity. All of IBM Credit's rights and remedies are cumulative. (b) Customer will segregate, hold and keep the Collateral in trust, in good order and repair, only for IBM Credit's benefit, and Customer will not exhibit, transfer, sell, further encumber, otherwise dispose of or use for any other purpose whatsoever any of the Collateral. (c) Upon IBM Credit's oral or written demand, Customer will immediately deliver the Collateral to IBM Credit, in good order and repair, at a place specified by IBM Credit, together with all related documents: or IBM Credit may, in its sole discretion and without notice or demand to Customer, take immediate possession of the Collateral, together with all related documents. Page 4 of 9 (d) Customer waives and releases: any claims and causes of action which Customer may now or ever have against IBM Credit as a direct or indirect result of any possession, repossession, collection or sale by IBM Credit of any of the Collateral and the benefit of all valuation, appraisal and exemption laws. If IBM Credit seeks to take possession of any of the Collateral by court process, Customer irrevocably waives any notice, bonds, surety and security relating thereto required by any statute, court rule or otherwise. (e) Customer appoints IBM Credit or any person IBM Credit may delegate as Customer's duly authorized Attorney-In-Fact to do, in IBM Credit's sole discretion, any of the following in the event of a default: endorse Customer's name on any notes, checks, drafts or other forms of exchange constituting Collateral, or received as payment on any Collateral for deposit in IBM Credit's account; sell, assign, transfer, negotiate, demand, collect, receive, settle, extend or renew any amounts due on any of the Collateral; and exercise any rights Customer has in the Collateral. If Customer brings any action or asserts any claim against IBM Credit which arises out of this Agreement, any other agreement or any of the business dealings between IBM Credit and Customer, in which Customer does not prevail, Customer agrees to pay IBM Credit all costs and expenses of IBM Credit's defense of such action or claim including, but not limited to, all attorney's fees. If IBM Credit fails to exercise any of IBM Credit's rights or remedies under this Agreement, such failure will in no way or manner waive any of IBM Credit's rights or remedies as to any past, current or future default. 12. Customer agrees that if IBM Credit conducts private sale of any Collateral by soliciting bids from ten (10) or more other dealers or distributors in the type of Collateral repossessed by or returned to IBM Credit hereunder, any sale by IBM Credit of such property will be deemed to be a commercially reasonable disposition under the Uniform Commercial Code. IBM Credit agrees that commercially reasonable notice of any public or private sale will be deemed given to Customer if IBM Credit sends Customer a notice of sale at least seven (7) days prior to the date of any public sale or the time after which a private sale will be made. If IBM Credit disposes of any such Collateral other than as herein contemplated, the commercial reasonableness of such sale will be determined in accordance with the provisions of the Uniform Commercial Code as adopted by the state whose laws govern this Agreement. Customer agrees that IBM Credit does not warrant the Approved Inventory. Customer will pay IBM Credit in full even if the Approved Inventory is defective or fails to conform to any warranties extended by any third party. Customer's obligations to IBM Credit will not be affected by any dispute Customer may have with any third party. Customer will not assert against IBM Credit any claim or defense against any claim or defense Customer may have against any third party. Customer will indemnify and hold IBM Credit harmless against any claims or defenses asserted by any buyer of the Approved Inventory by reason of: the condition of any Approved Inventory; any representations made about the Approved Inventory; or for any and all other reasons whatsoever. 13. Customer grants to IBM Credit a power of attorney authorizing any of IBM Credit's representatives to: execute or endorse on Customer's behalf any documents, financing statements and instruments evidencing Customer's obligations to IBM Credit; supply any omitted information and correct errors in any documents or other instruments executed by or for the Customer; do any and every act which Customer is obligated to perform under this Agreement; and do any other things necessary to preserve and protect Collateral and IBM Credit's security interest in the Collateral. Customer further authorizes IBM Credit to provide to any third party any credit, financial or other information about Customer that is in IBM Credit's possession. 14. Each party may electronically transmit to or receive from the other party certain documents specified in the E-Business Schedule A attached hereto ("E- Documents") via the Internet or electronic data interchange ("EDI"). Any transmission of data which is not an E-Document shall have no force or effect between the parties. EDI transmissions may be transmitted directly or through any third party service provider ("Provider") with which either party may contract. Each party will be liable for the acts or omissions of its Provider while handling E-Documents for such party, provided, that if both parties use Page 5 of 9 the same Provider, the originating party will be liable for the acts or omissions of such Provider as to such E-Document. Some information to be made available to Customer will be specific to the Customer and will require Customer to register with IBM Credit before access is provided. After IBM Credit has approved the registration submitted by Customer, IBM Credit will provide an ID and password(s) to an individual designated by Customer ("Customer Recipient"). Customer accepts responsibility for the designated individual's distribution of the ID and password(s) within its organization and Customer will take reasonable measures to ensure that passwords are not shared or disclosed to unauthorized individuals. Customer will conduct an annual review of all IDs and passwords to ensure that they are accurate and properly authorized. IBM CREDIT MAY CHANGE OR DISCONTINUE USE OF AN ID OR PASSWORD AT ITS DISCRETION AT ANY TIME. E-Documents will not be deemed to have been properly received, and no E-Document will give rise to any obligation, until accessible to the receiving party at such party's receipt computer at the address specified therein. Upon proper receipt of an E- Document, the receiving party will promptly transmit a functional acknowledgment in return. A functional acknowledgment will constitute conclusive evidence that an E-Document has been properly received. If any transmitted E-Document is received in an unintelligible or garbled form, the receiving party will promptly notify the originating part in a reasonable manner. In the absence of such a notice, the originating party's records of the contents of the E-Document will control. Each party will use those security procedures which are reasonable sufficient to ensure that all transmissions of E-Documents are authorized and to protect its business records and data from improper access. Any E-Document received pursuant to this paragraph 14 will have the same effect as if the contents of the E-Document had been sent in paper rather than electronic form. The conduct of the parties pursuant to this paragraph 14 will, for all legal purposes, evidence a course of dealing and a course of performance accepted by the parties. The parties agree not to contest the validity or enforceability of E- Documents under the provisions of any applicable law relating to whether certain agreements are to be in writing or signed by the party to be bound thereby. The parties agree as to any E-Document accompanied by Customer's ID, that IBM Credit can reasonably rely on the fact that such E-Document is properly authorized by Customer. E-Documents, if introduced as evidence on paper in any judicial, arbitration, mediation or administrative proceedings, will be admissible as between the parties to the same extent and under the same conditions as other business records originated and maintained in documentary form. Neither party will contest the admissibility of copies of E- Documents under either the business records exception to the hearsay rule or the best evidence rule on the basis that the E-Documents were not originated or maintained in documentary form. Neither party will be liable to the other for any special, incidental, exemplary or consequential damages arising from or as a result of any delay, omission or error in the electronic transmission or receipt of any E-Document pursuant to this paragraph 14, even if neither party has been advised of the possibility of such damages. In the event Customer requests IBM Credit to effect withdrawal or debit of funds from an account of Customer, then in no event will IBM Credit be liable for any amount in excess of any amount incorrectly debited, except in the event of IBM Credit's gross negligence or willful misconduct. No party will be liable for any failure to perform its obligations pursuant to this paragraph 14 in connection with any E-Document, where such failure results from any act of God or other cause beyond such party's reasonable control (including, without limitation, any mechanical, electronic or communications failure) which prevents such party from transmitting or receiving E-Documents. CUSTOMER RECIPIENT for Internet transmissions: (PLEASE PRINT) NAME OF CUSTOMER'S DESIGNATED CENTRAL CONTACT AUTHORIZED TO RECEIVE IDS AND PASSWORDS: Mary Driscoll - ------------------------------------------------------- E-MAIL ADDRESS: mary.driscoll@infotechusa.com --------------------------------------- PHONE NUMBER: 631-205-1000 ext. 115 --------------------------------------- Page 6 of 9 15. Time is of the essence in this Agreement. This Agreement will be effective from the date of its acceptance at IBM Credit's office. Customer acknowledges receipt of a true copy and waives notice of IBM Credit's acceptance of it. If IBM Credit advances funds under this Agreement, IBM Credit will have accepted it. This Agreement will remain in force until one of the parties gives notice to the other that it is terminated. If Customer terminates this Agreement, IBM Credit may declare all or any part of the obligations Customer owes IBM Credit due and payable immediately. If this Agreement is terminated, Customer will not be relieved from any obligations to IBM Credit arising out of IBM Credit's advances or commitments made before the effective date of termination. IBM Credit's rights under this Agreement and IBM Credit's security interest in present and future Collateral will remain valid and enforceable until all Customer's obligations to IBM Credit are paid in full. This Agreement shall be binding and inure to the benefit of IBM Credit and the Customer and their respective successors and assigns; provided, that the Customer shall have no right to assign this Agreement without the prior written consent of IBM Credit. This Agreement will protect and bind IBM Credit's and Customer's respective heirs, representatives, successors and assigns. It can be varied only by a document signed by IBM Credit's and Customer's authorized representatives. If any provision of this Agreement or its application is invalid or unenforceable, the remainder of this Agreement will not be impaired or affected and will remain binding and enforceable. This Agreement is executed with the authority of Customer's Board of Directors, and with shareholder approval, if required by the law, if Customer is a corporation or if Customer is a limited liability company, with the authority of authorized members. All notices IBM Credit sends to Customer will be sufficiently given if mailed or delivered to Customer as its address shown in paragraph 5. 16. The laws of the State of New York will govern this Agreement. Customer agrees that venue for any lawsuit will be in the State of Federal Court within the county, parish, or district where IBM Credit's office, which provides the financial accommodations, is located. Customer hereby waives any right to change the venue of any action. 17. If Customer has previously executed any security agreements relating to the Collateral with IBM Credit, Customer agrees that this Agreement is intended only to amend and supplement such written agreements, and will not be deemed to be a novation or termination of such written agreements. In the event the terms of this Agreement conflict with the terms of any prior security agreement that Customer previously executed with IBM Credit, the terms of this Agreement will control in determining the agreement between Customer and IBM Credit. 18. CUSTOMER WAIVES ALL EXEMPTIONS AND HOMESTEAD LAWS TO THE MAXIMUM EXTENT PERMITTED BY LAW. CUSTOMER WAIVES ANY STATUTORY RIGHT TO NOTICE OR HEARING PRIOR TO IBM CREDIT'S ATTACHMENT, REPOSSESSION OR SEIZURE OF THE COLLATERAL. CUSTOMER FURTHER WAIVES ANY AND ALL RIGHTS OF SETOFF CUSTOMER MAY HAVE AGAINST IBM CREDIT. CUSTOMER AGREES THAT ANY PROCEEDING IN WHICH CUSTOMER, OR IBM CREDIT OR ANY OF IBM CREDIT'S AFFILIATES, OR CUSTOMER'S OR IBM CREDIT'S ASSIGNS ARE PARTIES, AS TO ALL MATTERS AND THINGS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT, OR THE RELATIONS AMONG THE PARTIES LISTED IN THIS PARAGRAPH WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE WITHOUT A JURY. EACH PARTY TO THIS AGREEMENT HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN ANY SUCH PROCEEDING. ATTEST: /s/ John H. Spielberger - ----------------------------------- INFORMATION TECHNOLOGY SERVICES, INC. Secretary Customer By: /s/ Mary Driscoll --------------------------------- Print Name: John H. Spielberger - --------------------------- Print Name: Mary Driscoll ------------------------- Title: Controller ------------------------------ (CORPORATE SEAL) Page 7 of 9 E-BUSINESS SCHEDULE A ("SCHEDULE A") CUSTOMER NAME: INFORMATION TECHNOLOGY SERVICES, INC. EFFECTIVE DATE OF THIS SCHEDULE A: December 1, 2000 ------------------------ E-DOCUMENTS AVAILABLE TO SUPPLIERS: Invoices Payment Report/Remittance Advisor E-DOCUMENTS AVAILABLE TO CUSTOMER: Invoices Remittance Advisor Transaction Approval Billing Statement Payment Planner Auto Cash Statements of Transaction Common Dispute Form Page 8 of 9 SECRETARY'S CERTIFICATE OF RESOLUTION I certify that I am the Secretary and the official custodian of certain records, including the certificate of incorporation, charter, by-laws and minutes of the meeting of the Board of Directors of the corporation named below, and that the following is a true, accurate and compared extract from the minutes of the Board of Directors of the corporation adopted at a special meeting thereof held on due notice, at which meeting there was present a quorum authorized to transact the business described below, and that the proceedings of the meeting were in accordance with the certificate of incorporation, charter and by-laws of the corporation, and that they have not been revoked, annulled or amended in any manner whatsoever. Upon motion duly made and seconded, the following resolution was unanimously adopted after full discussion: "RESOLVED, That the several officers, directors and agents of this corporation, or any one or more of them, are hereby authorized and empowered on behalf of this corporation: to obtain financing from IBM Credit Corporation ("IBM Credit") in such amounts and on such terms as such officers, directors or agents deem proper; to enter into security and other agreements with IBM Credit relating to the terms upon which financing may be obtained and security to be furnished by this corporation therefor; from time to time to supplement or amend any such agreements; and from time to time to pledge, assign, guaranty, mortgage, grant security interest in and, otherwise transfer to IBM Credit as collateral security for any obligations of this corporation to IBM Credit and its affiliated companies, whenever and however arising, any assets of this corporation, whether now owned or hereafter acquired; hereby ratifying, approving and confirming all that any of said officers, directors or agents have done or may do in the premises." IN WITNESS WHEREOF, I have executed and affixed the seal of the corporation on the date stated below. Dated: November 27 , 2000 /s/ John H. Spielberger -------------------- ------ --------------------------------- Secretary SysComm International Corp. --------------------------------- Corporate Name Page 9 of 9 EX-12.1 3 exh12p1.txt STATEMENT RE COMPUTATION OF RATIOS Exhibit 12.1 STATEMENT RE COMPUTATION OF RATIOS This schedule contains financial information extracted from the Registrant's Consolidated Financial Statements as of September 30, 2000 and 1999, and is qualified in its entirety by reference to such Consolidated Financial Statements:
September 30, ------------------------------- 2000 1999 ---- ---- Current Ratio: The ratio of current assets divided by current liabilities - Current assets (numerator) $11,486,031 $15,562,144 Current liabilities (denominator) 5,423,194 6,484,494 Current ratio 2.1 2.4 Working Capital: Current Assets minus Current Liabilities Current assets $11,486,031 $15,562,144 Current liabilities 5,423,194 6,484,494 Working Capital $ 6,062,837 $ 9,077,650
Ex 12 EX-21.1 4 exh21p1.txt LIST OF SUBSIDIARIES Exhibit 21.1 SysComm International Corporation List of Subsidiary Companies (as of December 22, 2000) Country or State Company Name of Incorporation - ------------ ---------------- Information Technology Services, Inc. New York Information Products Center, Inc. New Jersey Ex 21 EX-23.1 5 exh23p1.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated December 15, 2000 included herein. /s/ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C. Hauppauge, New York December 15, 2000 Ex 23 EX-27 6 ex27.xfd FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Registrant's audited consolidated financial statements as of and for the twelve months ended September 30, 2000, and is qualified in its entirety by reference to such financial statements. YEAR Oct-01-1999 Sep-30-2000 Sep-30-2000 1,038,540 0 9,960,460 158,000 404,505 11,486,031 4,280,313 982,239 15,630,688 5,423,194 999,473 0 0 55,549 9,152,472 15,630,688 40,689,842 40,689,842 36,116,860 36,116,860 6,728,158 0 146,858 (2,191,500) 231,440 (1,960,060) 0 0 0 (1,960,060) (0.42) (0.42)
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