UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996).
For the fiscal year ended April 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from __________ to __________
Commission file number 1-12856
SYNERGISTIC HOLDINGS CORP.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 42-1358036
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
50 Laser Court, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 436-5000
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Securities registered under Section 12 (b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, par value $.01 OTC Bulletin Board
Securities registered pursuant to Section 12 (g) of the Act:
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(Title of Class)
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(Title of Class)
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(Title of Class)
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(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 filling requirements for the past 90 days. Yes No X
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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 Common Stock held by non-affiliates as
of November 19, 1997, (based upon the average of the closing bid and asked
prices of the Common Stock as quoted on the OTC Bulletin Board) was
approximately $568,534. For purposes of this computation the shares of Common
Stock held by directors, executive shareholders owning more than 5% of the
Company's outstanding Common Stock were deemed to be stock held by affiliates.
As of November 19, 1997, there were 3,032,180 shares of Common Stock
outstanding held by non-affiliates.
As of November 19, 1997, 9,187,260 shares of the Registrants Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
Item 1. Business
All statements contained herein that are not historical facts including,
but not limited to, statements regarding the future development plans of
Synergistic Holdings Corp. (the "Company") and the Company's ability to
generate cash from its operations, are based upon current expectations. These
statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially from the anticipated results
or other expectations expressed in the Company's forward looking statements
are the following: competition in the automobile asset management business,
the inability of the Company to obtain additional financing and general
business and economic conditions.
Recent Development of Business
Synergistic Holdings Corp. was incorporated under the laws of the State
of Delaware on February 2, 1994. Prior to the Company's acquisition with Salex
Holding Corporation ("Salex"), the Company was primarily engaged in securities
trading, securities brokerage, investment banking, and related financial
activities. Salex, a Delaware corporation, founded in 1974, provides
automobile asset management services and manages on a nationwide basis, the
maintenance and repair of fleets of automobiles and trucks owned, leased and
operated by corporate customers. In August of 1995, the Company purchased from
Salex 1,580,000 shares of Salex common stock (the "Salex Common Stock") (which
represented a 20% common equity interest) for a purchase price of $1,500,000.
In January of 1996, the Company purchased an additional 363,400 shares of
Salex Common Stock (representing a 4.6% common equity) directly from one of
the principal shareholders of Salex, Salvatore Crimi, for a purchase price of
$500,000. Subsequently, on September 18, 1996 (the "Closing"), the Company's
wholly-owned subsidiary, Salex Industries, Inc., a Delaware corporation
("Subsidiary"), consummated a merger contemplated by a Merger Agreement, dated
June 27, 1996, as amended and restated on September 18, 1996 (the "Merger
Agreement"), by and among the Company, Subsidiary, Salex, Salex Fleet
Specialist Corp., a New York corporation, Salex Fleet Management Corp., a New
York corporation, Salex National Account Corp., a New York corporation, Salex
Salvage Disposal Corp., a New York corporation, Salex Financial Services
Corp., a New York corporation (collectively, the "Salex Subsidiaries"), the
Salvatore Crimi Family Limited Partnership, Pershing Sun, Michael Sun,
Jennifer Sun, Susan Tauss-Giovinco, Francis Fitzpatrick and Harrison
Fitzpatrick (collectively, the "Salex Shareholders") and T. Marshall Swartwood
and Thomas M. Swartwood. Pursuant to the Merger Agreement, the Subsidiary was
merged with and into Salex and (i) all shares of Salex Common Stock held by
the Company were cancelled and extinguished and (ii) all 4,503,000 issued and
outstanding shares of Salex Common Stock owned by the Salex Shareholders were
converted into (a) 4,003,165 shares of Common Stock, par value $.001, of the
Company (the "Common Stock") and (b) 1,000 shares of Series B Preferred Stock.
Upon the filing by the Company of a Certificate of Amendment to its
Certificate of Incorporation increasing the authorized capital stock of the
Company, each share of Series B Preferred Stock shall be converted into
2,059.106 shares of Common Stock. At the time of the Closing, the shares of
Common Stock delivered, together with the shares of Common Stock into which
the shares of Series B Preferred Stock are convertible, represented, in the
aggregate, 51% of the fully-diluted, issued and outstanding shares of the
Common Stock. This merger enabled the Salex Shareholders to acquire control of
the Company from T. Marshall Swartwood and Thomas M. Swartwood.
Immediately after the Closing, the Company divested itself of
substantially all its assets other than its investment in Salex. As a result,
the Company's primary business now is automobile asset management. The current
management of the Company and its board of directors have elected to
concentrate on expansion in the automobile asset management industry. Salex
had achieved significant goodwill in this sector and it is managements wish to
leverage the core competency of Salex and adopt it as the primary mission of
this company. It is the Company's intention, subject to Shareholders approval,
to change the name of "Synergistic Holdings Corp." to "Salex Holding
Corporation."
During May 1997, the Company authorized the issuance and sale of 25,000
shares of its convertible
Preferred Stock, Series C to Meadow Management, LLP at a purchase price of
$25,000. Because the Company does not have sufficient authorized Common Stock to
issue upon conversion of the Preferred Stock, Series C the Company,
subject to shareholder approval intends to amend its Certificate of
Incorporation to increase its authorized Common Stock at the annual
shareholders meeting scheduled to occur on December 29, 1997. In the event the
shareholders do not approve to amendment to the Certificate of Incorporation by
December 31, 1997, the Company has agreed to pay the holders of the Preferred
Stock, Series C $1,000,000.
Description of the Company
Corporate Fleet Program
The Company is in the business of automobile asset management and
through such business manages, on a nationwide basis, the maintenance and
repair of fleets of automobiles and small trucks which are owned and operated
by corporate customers (the "Corporate Fleet Program"). If a vehicle of one of
the Company's corporate customers needs repair, the Company directs the
customers to the most conveniently located service center that is part of its
nationwide servicing network (the "Service Network"). All of the service
centers that are part of the Service Network are independently owned or
affiliated with a national chain of repair centers, have been pre-screened and
pre-approved by the Company and are reviewed by the Company from time to time.
Before any work is commenced by the service center on a vehicle referred to it
by the Company, the service center must contact the Company's certified
mechanics and other auto specialists, who are located at its Hauppauge
offices, to discuss all the proposed necessary repairs and the proposed cost
thereof. The Company's specialists negotiate with the service centers to
ensure that the customer is not overcharged or subjected to unnecessary
repairs. The Company monitors the repairs, if needed, to assure on time
completion of the work, expedites the delivery of needed parts when necessary
and, in certain locations, provides the customer with access to a discount
rental car until the repairs are completed. Participation in the Corporate
Fleet Program provides the corporate customers with quality and price control
over all work performed and provides the service centers with reliable levels
of volume. In exchange for its services, the Company receives a monthly
management fee, per-occurrence or monthly management fee based on the number
of vehicles in the fleet, from the corporate customer based on the number of
vehicles registered in the program and a fee from the Service Network ranging
from 7 1/2 % to 15% of the cost of repair and maintenance (including both
parts and labor) depending upon the type of service rendered.
The Service Network
The Company services all of its customers through its nationwide network
of pre-screened, pre-approved maintenance and repair centers. Over 30,000
independently owned service centers are affiliated with the Service Network.
The service centers are located in all 50 states, Canada and Puerto Rico. The
Service Network includes service centers associated with national chains of
auto repair centers, such as The Goodyear Tire and Rubber Company and Jiffy
Lube, as well as smaller local centers. The Company retains complete control
over which repair centers are affiliated with the Service Network. Generally,
the Company's written affiliation agreements with the service centers are
terminable at will with short notice requirements, and thus any service center
that fails to perform to the Company's standards will be terminated. The
Company has developed and maintains proprietary software and
telecommunications at its corporate headquarters in Hauppauge, New York. The
database allows the Company to (i) keep track of the labor rates, areas of
specialty and hours of operation of each service center which helps the
Company direct customers to appropriate service centers and (ii) communicate
with the service centers, enabling the Company to oversee and monitor the
maintenance and repair work performed by the centers. For the period ended
April 30, 1997, net revenues from the Company's operation of its Corporate
Fleet Program were $22,193,113.
Guaranties
Most of the repair and maintenance services provided to the corporate
fleets are guaranteed against defects in parts and workmanship for certain
periods of time and/or for a certain number of miles. As part of their
affiliation
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agreements with the Company, the individual service centers are required to
make such a guaranty to the Company. The Company, in turn, grants an identical
guaranty to its corporate customers. If a vehicle has been improperly
repaired, the customer contacts the Company and the Company arranges to have
the appropriate repairs done at no additional cost to the customer either
through the service center that originally performed the work, or through a
service center responsible for the costs of rectifying any improper or faulty
repairs. The Company coordinates the reimbursement of costs between service
centers. In rare cases, an improper repair is not covered by the Service
Network's guaranty and the Company must pay for the repairs to the vehicle
from its own funds. Historically, claims which are not covered by a Service
Network member have been insignificant. If the vehicle is under a
manufacturer's warranty, the Company arranges for the repairs to be done by an
authorized dealer. The Company receives no fee and incurs no costs for work
performed by the Service Network that is covered by a manufacturer's warranty.
Other Services Provided by the Company
In addition to the services provided under the Corporate Fleet Program,
the Company also provides its customers with other services relating to
automobile repair, repossession and disposal.
Computerized Auction System and the Collateral Disposal Services
The Company maintains a proprietary computer network of buyers
nationwide who submit bids on vehicles which according to the Company's
vehicle condition reports, are considered demolished or clients do not wish to
repair. The Company receives a fee from the corporate fleet or financial
institution customer who wishes to dispose of the demolished vehicle, in
addition to a fee from the buyer upon its purchase of the demolished vehicle.
The Company believes that these fees are generally lower than traditional
auction and disposal service fees. The Company has focused on selling its
customers' salvaged and demolished vehicles. In addition, the Company has
begun to use its disposal services to sell non-salvage vehicles to auto
wholesalers and retailers.
The Collateral Disposal Service is a vehicle disposal service that the
Company provides to loan servicing companies and lenders that assists these
entities in the repossession, storage and auctioning off of repossessed
automobiles. The Company provides the proper control, documentation and
conversion of vehicle collateral into cash. Under the program, loan servicing
companies and lenders receive significant discounts on storage, access to the
Computerized Auction System and access to the Company's nationwide vehicle
transport system. These services enable loan servicing companies and lenders
to convert repossessed vehicles more quickly into cash and receive a higher
price for each vehicle than they are presently able to receive in the
marketplace from traditional services and auction companies.
Insurance Subrogation
If one of the Company's customers has a vehicle that has been in an
accident, the Company offers to the customer its expertise and experience in
the area of insurance subrogation (i.e. making a determination of fault and
the payment of damages and claims based upon that determination). Insurance
subrogation is a process that has numerous regulations and reporting
requirements that vary from state to state. Corporate fleet operators and
financial institutions rarely have the expertise or desire to perform this
function. The Company has the ability to perform these services and it earns a
percentage of the amount collected from third parties or their insurance
companies. The Company generally retains a percentage of amounts collected,
plus expenses, as a fee for its subrogation services.
Retail Customer Autocare Plan
Through its retail customer autocare plan the Company extends its
current services to individual automobile owners. The services provided to the
customer and the economic benefits to the Company are essentially the same as
those that are provided to its corporate customers under the Corporate Fleet
Program. In addition to the fees
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that the Company receives from the service centers, the Company also charges
its retail customers an annual membership fee to enter the network, depending
upon the service option level that the customer chooses.
Unlike roadside service clubs which only arrange for towing service in
the event of a breakdown or collision, the Company actually monitors and
negotiates all repairs with the repair centers in the Service Network. The
Company believes that its retail customers are able to receive collision,
maintenance and repair services anywhere in the country for less than they
would pay if they were not members of the Company's Program.
Extended Service Contracts
In April 1996, the Company entered into an agreement with Virginia
Surety, an insurance company specializing in the issuance of extended
mechanical service contract agreements for automobiles and light trucks
nationwide. Under the Agreement, the Company offers to corporate customers,
financial institutions and retail customers service contracts covering
mechanical repairs for the covered vehicle for twelve to twenty-four months.
In addition to the up-front fees earned on the sale of the contracts, the
Company generates revenues from the management of related repairs coordinated
through the Service Network.
Mechanic's Lien Collection Services
The Company has recently begun to analyze the potential for providing
collection services for the 30,000 members of its Service Network. Under such
a program, the Company would be reimbursed for all fees and expenses and would
receive a percentage of proceeds collected from vehicle owners or lenders
relating to nonpayment of repair bills by non-member customers. The program
would assist repair shops, who oftentimes are not equipped to efficiently
collect such sums in collecting their bad debts. The Company believes that
these services may be provided in conjunction with strategic financial or
operational partners and is currently involved in negotiations with potential
partners.
Corporate Customer Base
The Company's customers include corporations that have automobile
fleets, insurance companies, financial institutions and individuals that want
to take advantage of fleet pricing for automotive repair and vehicle disposal.
The typical customer for our product is a company, which provides automobiles
and or trucks to employees in the ordinary course of business. For the fiscal
year ended April 30, 1997, no single customer accounted for more than 10% of
the Company's revenues.
Competition
The Company believes the principal competitive factors in its corporate
fleet business are prices and service. Key factors that have resulted in the
present competitive position in this industry are use of technology and
bundling of services. This is especially present for those companies that use
the funding of leases and whose primary function is to sell money to finance a
corporate fleet. Collision and mechanical maintenance is more a sideline for
these lenders and not the primary product. Companies such as PH&H Corp. and GE
Capital bundle the cost of these services into the lending rate.
Management Information Systems
The Salex Response System is software developed by the Company which
offers a full range of on-line interactive functions for the analysis of
trends; comparison to industry of fleet standards; and identification of
opportunities for future improvement. It presents various modifiable systems,
which can be tailored to meet the exact current and future requirements of the
individual fleet. Salex Response is available and operational on Windows 3.X,
95 and NT.
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Main Fleet Management Menu - The Main Fleet Management menu allows the
fleet administrator to design and print standard and customized reports and to
display interactive graphics.
Vehicle Operations Menu - The Vehicle Operations Menu tracks, in detail,
the vehicle from order status through delivery for new acquisition and
provides a comprehensive fleet cycling and disposal capability. In addition,
it monitors all of the operational aspects of fleet management, including
analysis of operating, fixed and maintenance costs.
Driver Administration Menu - The Driver Administration Menu provides the
Company control over vehicle assignment and usage by individual drivers. It
tracks historical assignment of drivers to vehicles by date and mileage, and
vehicle assignment by driver. Personal mileage and Fair Market Value can be
detailed for personal tax liabilities.
Safety Administration Menu - The Safety Administration Menu audits any
accidents that the vehicle or driver may have been involved in, and the
resulting salvage or subrogation that may be realized. It also monitors any
formal training programs that the driver is enrolled in or has completed; and
a history of parking violations and DMV reporting.
Accident Menu - The Accident Menu details every accident that involves a
company vehicle. It describes not only which vehicle was involved in the
accident, but also who was driving at the time. It details the third party
vehicle(s), who was at fault, what citations were issued, any injuries that
were sustained and their extent, and all witnesses. Finally, it monitors the
process of subrogation or salvage and the cost of recovery process. Through
exception reporting and live interactive graphics, the system will allow our
customers to bench mark and project trends, and to provide senior management
with unlimited specialized analysis.
Marketing and Advertising
Sales of the Company's vehicle management services are made by the
Company's sales staff, which consists of six full-time salespeople and
Salvatore Crimi, the Company's Chief Executive Officer and founder. Marketing
is presently conducted through direct solicitation, which enables the Company
to deal directly with, and be readily accessible to its major customers. New
marketing and advertising strategies and the addition of new personnel will be
necessary to accommodate the Company's anticipated expansion plans. The
Company also markets its services through labor organizations, credit card
companies, insurance companies, universities, credit unions and other
associations.
Federal Regulation
The Federal Trade Commission, under the Magnuson-Moss Warranty Act, and
various state and local laws regulate the requirements and mechanics of
consumer product warranties. Since the Company provides products and services
to consumers and guarantees work performed by the service centers, it is
subject to these regulations in addition to other laws regarding consumer
products. The Company believes that it is in compliance with all such laws and
regulations.
The promulgation of any additional laws or regulations regarding
warranties or consumer products could have an adverse effect on the Company's
business. There can be no assurance that the Company will have the ability to
comply with any such laws or regulations. The failure to comply with such
statutes and regulations could have a material adverse effect upon the
Company.
Employees
As of November 15, 1997, the Company employed 61 full and part-time
employees. Of the 61 employees,
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6 are classified as executives, 12 as sales and administrative personnel, 34
as customer service personnel and 9 as clerical personnel. None of the
Company's employees are represented by collective bargaining agreements. The
Company believes that its relations with its employees are good and has not
experienced any interruption of its operations due to labor disagreements.
Item 2. Properties
The Company's executive office comprised of approximately 12,000 square
feet is located at 50 Laser Court, Hauppauge, New York 11788 and is owned by
the Company.
Item 3. Legal Proceedings
There are no material legal proceedings now pending or threatened
against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the shareholders of the Company
during the fourth quarter of the fiscal year ended April 30, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There does not exist any established trading market for the Company's
common stock. The Company's Common Stock is presently being quoted on the OTC
Bulletin Board. On April 16, 1997, the Company's Common Stock, which was
trading on the NASDAQ Small-Cap Market, under the trading symbol "SYNH" was
delisted. On January 17, 1997, the Company's Common Stock, which was trading
on the Boston Stock Exchange under the trading symbol "SNH" was delisted. No
dividends were paid during fiscal year ended April 30, 1997.
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The following table sets forth the high and low closing sale price for the
Common Stock (based on transaction data as reported by the NASDAQ Small Cap
Market) for the fiscal year ended April 30, 1997:
Stock Price(s)
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High Low
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YEAR ENDED April 30, 1997:
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07/31/96 First Quarter:
Common Stock 3.625 2.50
10/31/96 Second Quarter:
Common Stock 4.125 2.75
01/31/97 Third Quarter:
Common Stock 1.875 1.00
04/30/97 Fourth Quarter:(1)
Common Stock 0.625 0.375
YEAR ENDED April 30, 1996:
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07/31/95 First Quarter:
Common Stock 2.375 .50
10/31/95 Second Quarter:
Common Stock 2.50 1.875
01/31/96 Third Quarter:
Common Stock 2.375 1.875
04/30/96 Fourth Quarter:
Common Stock 3.375 2.75
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(1) On April 16, 1997, the Company's Common Stock was delisted by the NASDAQ
Small Cap Market. From April 16, 1997, through April 30, 1997, the Company's
Common Stock was quoted on the OTC Bulletin Board. During such period the
average closing bid and ask prices were .241 and .463 respectively.
On June 2, 1997, the Company sold 25,000 shares of Preferred Stock,
Series C (the "Preferred Stock") to Meadows Management, LLC at a purchase
price of $25,000. Each share of the Preferred Stock is convertible at any time
into 100 shares of Common Stock at a conversion price of $0.10 per share. The
sale and issuance of the Preferred Stock was exempt from registration by
virtue of Section 4(2) of the Securities Act of 1933.
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Item 6. Selected Financial Data
(In thousands, except per share amounts)
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993
STATEMENT OF OPERATIONS DATA:
Net Sales 22,959 25,482 33,884 29,235 24,189
Cost of sales 18,643 21,174 28,392 24,298 19,973
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Gross profit 4,316 4,308 5,492 4,937 4,216
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Selling, general & administrative expenses 5,022 6,188 5,123 4,454 3,718
Operating income (loss) (706) (1,880) 369 483 498
Interest expense - net 380 460 432 282 216
Net income (loss) (1,087) (2,399) (94) 120 155
Accretion of preferred stock (1,062) - - - -
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Net loss attributable to Common Stockholders (2,149) (2,399) (94) 120 155
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Net income (loss) per common share (0.19) (0.21) (0.01) (0.01) (0.01)
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April 30,
1997 1996 1995 1994 1993
BALANCE SHEET DATA:
Accounts receivable 3,452 3,219 3,288 4,881 3,343
Total assets 6,847 7,821 8,208 9,601 4,796
Long-term debt 781 1,054 1,278 1,329 4,972
Stockholders' equity (deficit) (1,528) 821 1,201 1,359 (176)
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Item 7. Management's Discussion and Analysis or Plan of Operation
All statements contained herein (other than historical facts) including,
but not limited to, statements regarding the Company's future development
plans, the Company's ability to generate cash from its operations and any
losses related thereto, are based upon current expectations. These statements
are forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially from the anticipated results or other
expectations expressed in the Company's forward looking statements. Generally,
the words "anticipate," "believe," "estimate," "expects," and similar
expressions as they relate to the Company and/or its management, are intended
to identify forward looking statements. Among the factors that could cause
actual results to differ materially are the following: the inability of the
Company to obtain additional financing to meet its capital needs; competition
in the automotive maintenance industry; and general business and economic
conditions.
Pursuant to the merger agreement dated September 19, 1996, the Company
was merged with and into Salex whereby all of the shares of common stock of
Salex held by the Company were cancelled and all of the 4,503,000 shares of
common stock owned by the Salex Stockholders were converted into (a) 4,003,165
shares of common stock, par value $.01 per share and (b) 1,000 shares of
Series B Convertible Preferred Stock.
Immediately after the closing, the Company pursuant to a Stock and Asset
Purchase Agreement with Dickinson Holding Corporation ("Dickinson"), a
Delaware corporation, sold (the "Divestiture") all of the outstanding shares
of its subsidiary, Dickinson & Co., Inc, ("DCI"), a registered broker/dealer
and its investment in Electronic Designs, Inc. ("EDI"). As consideration for
the stock and assets that were transferred in connection with the divestiture,
Dickinson transferred to the Company 750,000 shares of its Common Stock and a
$500,000 promissory note secured by 250,000 shares of its Common Stock
pursuant to a Pledge Agreement between Dickinson and the Company.
Because the Company's only asset after the Divestiture was its
investment in Salex, the company was considered to be an in substance "shell"
at the Closing of the Merger. The SEC believes that shells are not businesses
and therefore, cannot initiate business combinations. For accounting purposes
the SEC views the transaction as an equity transaction by the private
operating company ("Salex") rather than as an acquisition of Salex by the
Company. The SEC requires that the net assets of the public shell be recorded
at carryover basis in which no goodwill arises on the transaction.
Accordingly, the merger transaction has been accounted for as recapitalization
of Salex (stock split, distribution of preferred stock, and treasury stock
purchase) followed by an issuance of common stock by Salex in exchange for
treasury stock and Synergistic's note receivable from Dickinson. The note
receivable, which is collateralized by Common Stock, has been recorded as a
reduction of additional paid-in capital.
All financial information, as presented, reflects that of Salex and does
not reflect that of Synergistic prior to the merger.
Results of Operations -- Year Ended April 30, 1997 vs. Year Ended April
30, 1996
Net sales decreased by 2.52 million or 9.81% to 22.96 million for the
fiscal year ended April 30, 1997, as compared to $25.48 million for fiscal
year ended April 30, 1996. This decrease resulted from the loss of several
major corporate accounts.
The Company's gross margin of 18.8% was 1.9 percentage points higher
than the previous year level of 16.9%. The increase resulted from the loss of
one of its corporate fleet customers that yielded a significantly lower gross
margin than standard.
General and administrative expenses for the fiscal year ended April 30,
1997, of $5.022 million was $1.16 million less than the previous year. This
18.7% decrease was attributable to significant expenditures incurred for
implementing the Company's plan for the development of service and products to
be provided to insurance
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companies, financial institutions and retail consumers. In the future, the
Company intends to restructure its operations and management in order to
minimize its expenditures and increase productivity.
Interest expense of $379,656 for year ended April 30, 1997, was $80,444
lower than the previous year. This 17.4% decrease was partially attributable to
a decrease in the interest rate charged on the Company's revolving credit with a
finance company, in addition to the interest charged on the Company's loan to an
officer.
Net Loss, Liquidity and Capital Resources
Net cash flows used in operating activities were $57,194 for the year
ended April 30, 1997, as compared to $117,674 provided by operations for the
comparable prior period. This change of $174,868 resulted primarily from
changes in accounts receivable, refund on taxes, accrued expense and
compensation expense in the prior year relating to the sale of Common Stock.
Net cash flows used in investing activities were $105,347 for the Year
Ended April 30, 1997, as compared to $290,086 that was used in investing
activities for the comparable prior period. This difference of $184,739 was
attributable to the reduction in loans receivable due from an officer.
Net cash flows provided by financing activities were $213,955 as
compared to $21,630 that were provided by financing activities for the
comparable prior year. This was primarily the result of the acquisition and
constructive retirement of common stock and was partially offset by the
issuance of preferred stock.
The Company has suffered a loss for the fiscal year ended April 30,
1997, and has negative working capital. The Company has limited availability
under its existing credit facility and the Company will need additional
capital to have sufficient liquidity and to meet its working capital needs for
the foreseeable future. It is the Company's intention to refinance its mortgage
liability on a short term basis. The Company expects to enter into a sale and
leaseback arrangement with respect to the property in the near future.
Results of Operations -- Year Ended April 30, 1996 vs. Year Ended April
30, 1995
Net sales for 1996 of $25.48 million decreased by $8.4 million in the
comparable prior year. This decrease of 24.8% is the result of losing three of
its major corporate fleet customers.
The Company's gross margin of 16.9% was relatively the same as it was in
the prior year where it was 16.2%.
Selling, general and administrative expense of $6.19 million for Year
Ended 1996, was $1.06 million higher than the comparable prior period. This is
attributable to the Company's plan for the development of service and products
to be provided to insurance companies, financial institutions and retail
consumers.
Interest expense of $460,100 for the Year Ended 1996 was $28,256 higher
than the prior year. This 6% increase was attributable to interest paid for
the mortgage on the Company's building, more interest incurred on officers
loan, which was partially offset by reduced interest charged on our revolving
line of credit.
Liquidity and Capital Resources
Net cash flows provided by operations was $117,674 for the year ended
April 30, 1996, as compared to $720,999 provided by operations for the
comparable prior year. This decrease was attributable primarily to changes in
accounts receivable and accounts payable.
Net cash flows used in investing activities was $290,086 for year ended
April 30, 1996, as compared to $141,332 for the comparable prior year. This was
primarily the result of an increase due to a loan to an officer.
Net cash flows provided by financing activities was $21,630 for year
ended April 30,1996, as compared to
-10-
$396,880 that was used in financing activities for the comparable prior year.
This was primarily attributable to the issuance of Common Stock offset by
decreases in the bank overdraft.
Impact of Inflation and Changing Prices
Although the Company cannot accurately predict the precise effect of
inflation on its operation, it does not believe inflation has had a material
effect on sales or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Research
Not Applicable.
Item 8. Financial Statements and Supplementary Data
Financial statements are included herein beginning with page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
-11-
PART III
Item 10. Directors and Executive Officers of the Company
The following table sets forth certain information concerning each
nominee for the office of Director, each Director and each executive officers
of the Company:
Name Age Position
- ---- --- --------
Salvatore Crimi 72 Chief Executive Officer and Chairman of the Board of
Directors
Angelo Crimi 45 Vice Chairman, Secretary, Vice President Sales and Vice
Chairman of the Board of Directors
Pershing Sun 54 Senior Vice President, Chief Information Officer and
Director
Franklin Pinter 47 Director
Francis Fitzpatrick 56 Director
Syd Mandelbaum 47 Nominee for Director
Andrew Lunetta 47 Nominee for Director
Salvatore Crimi has served as the Chairman of the Board of Directors and
Chief Executive Officer of the Company since September 18, 1996. From 1974 to
1996 Mr. Crimi served as Chairman of the Board and Chief Executive Officer of
Salex Holding Corporation. He is the father of Angelo Crimi, the Vice Chairman
of the Board of Directors, Vice President of Sales and Secretary of the
Company.
Angelo Crimi has served as the Vice Chairman of the Board of Directors,
Vice President of Sales, and Secretary of the Company since September 18,
1996. From 1995 to 1996 Mr. Crimi served as President of Salex Holding
Corporation. He is the son of Salvatore Crimi, the Chief Executive Officer,
Chairman of the Board of Directors and President of the Company.
Pershing Sun has served as a Director of the Company and Senior Vice
President and Chief Information Officer of the Company since September 18,
1996. From 1991 to 1996 Mr. Sun served as Chief Information Officer of Salex
Holding Corporation.
Franklin T. Pinter has served as a Director since January 7, 1997. From
1984 to the present Mr. Pinter has served as an investment and estate planner
with the firm of Arnone, Lowth, Fanning.
Francis Fitzpatrick has served as a Director since September 18, 1996.
Mr. Fitzpatrick has served as a Vice President of Fitzpatrick Brothers
Corporation, an auto collision repair facility since 1982.
Syd Mandelbaum has served as an account executive for Toshiba American
Medical Systems since 1997. From 1993 to 1997 Mr. Mandelbaum served as a laser
flow cytometry specialist with the Coulter Corporation. From 1990 to 1993 Mr.
Mandelbaum was a Vice President of Cell Measurement Systems for Imager
Insrumentation.
-12-
Andrew Lunetta was retained as a Consultant to the Company in July 1997.
From 1995 to 1997, Mr. Lunetta served as Chief Financial Officer of Tostel
Corp., a publicly traded construction company. From 1982 to 1995 Mr.
Lunetta was the Vice President-Controller of Coyne Electrical Contractors, Inc.
Guardian Angel Management, LTD, Meadows Management, LLC, Dr. Robert
Cohen, Dr. Alan Cohen and Jonathan Pratt were required to file Form 3 by June
12, 1997. Such forms were filed on June 26, 1997.
-13-
Item 11. Executive Compensation
The following table sets forth the cash and non-cash compensation
awarded to or earned by the Chief Executive Officer who served in that
position during fiscal year ended April 30, 1997, and the most highly
compensated executive officer of the Company earning at least $100,000 per
year.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Other Awards
Annual Securities
Compen- Underlying
Name and Principal Position Salary sation Options/SARs
- --------------------------- ------ ------ ------------
($) ($) (#)
Salvatore Crimi, $ 95,866 $12,214(2) 79,610
Chairman of the Board and
Chief Executive Officer(1)
Jeffrey Dickson, $103,365 $4,800(4) 300,000
President and Chief
Operating Officer(3)
- -----------------------------
(1) Includes the compensation earned by Mr. Crimi prior to the merger of the
Company with Salex on September 18, 1996.
(2) Includes $5,173 representing car and commuting allowance and $7,041
representing the value of certain health insurance benefits provided by the
Company.
(3) Mr. Dickson is no longer an employee of the Company.
-14-
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Set forth below is information on grants of stock options for the named
executive officers for the period May 1, 1996 to April 30, 1997.
Number of Percent Total
Securities Options/SARs
Underlying Granted To
Options/SARs Employees In Exercise or Base Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date 5%(s) 10%(S)
- ---- ----------- ----------- ------ --------------- ----- ------
(a) (b) (c) (d) (e) (f) (g)
Salvatore Crimi 79,610 7.0% $2.125 11/21/02 $2.85 $3.76
500,000 44.0% $1.50 4/30/97 -- --
Jeffrey Dickson 300,000 27.0% $1.00 8/31/00 $1.22 $1.46
Aggregated Options Exercised in Last Fiscal Year
and Fiscal Year-End Option Values*
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Year-End Options at Fiscal Year-End
(#) ($)(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Salvatore Crimi 31,844 47,766 - -
Jeffrey Dickson 300,000 - - -
- -----------------------------
(1) Calculated based on the average closing bid and ask prices as quoted the
OTC Bulletin Board for the last business day of the fiscal year ($0.34 per
share) less the exercise price payable for such shares.
Directors' Compensation
Directors of the Company receive compensation for serving on the
Board of Directors or any of its committees. Upon adoption of the Stock Option
Plan each non-employee director will receive options, as a formula grant, to
purchase 5,000 shares of Common Stock at an exercise price equal to their
market value on the first trading day of each May.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
In August 1995, the Salex Holding Corporation ("Salex") entered into
an employment agreement with Mr. Salvatore Crimi which provides for his
appointment as Chief Executive Officer for a term ending on August 4, 1998.
Mr. Crimi's agreement was assumed by the Company upon completion of the
acquisition of Salex. The term is automatically extended for additional
one-year periods unless either party gives written notice to the other of its
desire not to renew such term which notice must be given no later than ninety
(90) days prior to the end of each term on any such renewal. The agreement
provides that during each fiscal year of the Company until the expiration or
termination of the agreement, Mr. Crimi's annual base salary shall be greater
of (i) his base salary for the immediate prior year plus the product
obtainable by multiplying Mr. Crimi's base salary for the immediate prior year
by a percentage, if any, by which, the Consumer Price Index for all Urban
Consumers - New York - Northeast New Jersey Region (the "CPI") for the month of
December of the immediate prior year exceeds the CPI for the month of December
of the year prior to the immediate prior year, or (ii) an amount at the annual
rate as determined by the Board of Directors of the Company. To demonstrate
his commitment to the Company during
-15-
the fiscal year ended April 30, 1997, Mr. Crimi reduced his base salary
approximately 31.52% from $140,000 to $95,866. For the fiscal year ending
April 30, 1998, Mr. Crimi's base salary is $140,000.
In the event that the Company terminates Mr. Crimi's employment,
other than for cause, or Mr. Crimi terminates his employment as a result of a
breach by the Company of the agreement, Mr. Crimi will be paid severance
compensation equal to his annual base salary (at the rate payable at the time
of such termination) and accrued benefits plus an amount equal to the lesser
of one year's full base salary (as in effect at the time of such termination)
and any other amounts owed to him under the agreement or the full base (as in
effect at the time of such termination) and any other amounts that would have
been payable to Mr. Crimi from the date of termination through the original
stated expiration date of the employment agreement. In the event that the
Company terminates Mr. Crimi's employment for cause or Mr. Crimi shall
terminate his employment for reasons other than a breach of the agreement by
the Company, the Company shall pay Mr. Crimi his full base salary and accrued
benefits through the date of termination at the rate in effect at the time
notice of termination is given. For a period of two years following
termination of Mr. Crimi's employment for any reason (other than a termination
by the Company without cause) Mr. Crimi cannot perform services for or have an
equity interest in (except for an interest of 2% of less in an entity which is
engaged in a competitive business and which is publicly traded) any
competitive business. In addition, the Agreement provides that for the two
year period following termination of Mr. Crimi's employment for any reason,
with or without cause, Mr. Crimi cannot, directly or indirectly (including
without limitation, as owner employee, agent consultant or independent
contractor) provide or solicit services of the type provided by the Company to
any of its existing customers or potential customers with which or with whom
the Company has negotiated within the twelve months preceding the date of
termination of Mr. Crimi's employment.
Item 12. Security Ownership of Management and Certain Beneficial Owners(1)
The following table sets forth certain information, as of August 26,
1997, regarding the beneficial ownership of the Company's Common Stock by: (i)
each shareholder known by the Company to be the beneficial owner of more than
five percent of the outstanding shares of the Company's Common Stock; (ii)
each Director of the Company and nominees for director; (iii) each Named
Executive Officer (as hereinafter defined) of the Company; and (iv) all
Directors, nominees and executive officers of the Company as a group.
-16-
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Owner(2)(3) Percent of Class(2)(3)
- ------------------------------------ ---------------------- ----------------------
Salvatore Crimi Family Limited Partnership............ 1,631,696(4) 16.75
Meadows Management, LLC............................... 1,250,000(5)(6) 11.97
1500 Hempstead Turnpike
East Meadow, New York 11554
Dr. Robert Cohen...................................... 1,250,000(5)(6)(7) 11.97
1500 Hempstead Turnpike
East Meadow, New York 11554
Dr. Alan Cohen........................................ 1,250,000(5)(6)(8) 11.97
1500 Hempstead Turnpike
East Meadow, New York 11554
Guardian Angel Management, Ltd........................ 1,250,000(5)(6)(9) 11.97
147 Redpoll Circle
North Hills, New York 11577
Jonathan Pratt........................................ 1,250,000(5)(6)(10) 11.97
147 Redpoll Circle
North Hills, New York 11577
Pershing Sun.......................................... 1,299,449(11) 13.48
Salvatore Crimi....................................... 1,091,483(12) 11.39
Franklin Pinter....................................... 75,000(13) *
Francis Fitzpatrick................................... 54,516(14) *
Angelo Crimi.......................................... -- --
Andrew Lunetta ....................................... -- --
Syd Mandelbaum........................................ -- --
All directors and executive officers as a group (5
persons).............................................. 2,520,448 25.06
- -----------------------------
* Less than one percent (1%)
(1) These tables are based upon information supplied by Schedules 13D and 13G,
if any, filed with the Securities and Exchange Commission (the "SEC").
Unless otherwise indicated in the footnotes to the table and subject to the
community property laws where applicable, each of the shareholders named in
this table has sole voting and investment power with respect to the shares
shown as beneficially owned by him. Applicable percentage of ownership is
based on 9,187,250 shares of Common Stock, which were outstanding on
November 19, 1997.
(2) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage of ownership of that person, shares of Common Stock subject to
options or preferred stock held by that person that are currently
exercisable or convertible within 60 days of November 19, 1997 are deemed
outstanding. To the Company's knowledge, except as set forth in the
footnotes to this table and subject to applicable community property laws,
each person named in the table has sole voting and investment power with
respect to the shares set forth opposite such person's name.
-17-
(3) In calculating the percent of the outstanding shares of Common Stock,
all shares issuable on exercise of stock options or conversion of
preferred stock held by the particular beneficial owner that are
included in the column to the left of this column are deemed to be
outstanding.
(4) Includes 553,900 shares which may be acquired upon the conversion of
269 shares of Series B Preferred Stock.
(5) Represents shares of Common Stock to be acquired upon the conversion
of 12,500 shares of Series C Preferred Stock.
(6) At the annual meeting of shareholders, Meadows Management, LLC
("Meadows"), of which Dr. Robert Cohen and Dr. Alan Cohen are managing
members, and Guardian Angel Management, LTD ("Guardian Angel"), of which
Jonathan Pratt is the sole shareholder, intend to vote together on all
matters presented as such meeting. In the aggregate this group
beneficially owns 2,500,000 shares.
(7) This amount includes all of the shares beneficially owned by Meadows.
Dr. Robert Cohen, a managing member of Meadows, has shared voting
power and shared investment power. Dr. Robert Cohen disclaims
beneficial ownership of such shares.
(8) This amount includes all of the shares beneficially owned by Meadows.
Dr. Alan Cohen, a managing member of Meadows, has shared voting power
and shared investment power. Dr. Alan Cohen disclaims beneficial
ownership of such shares.
(9) The Company intends to challenge the validity of the transfer of 12,500
shares of Series C Preferred Stock from Meadows to Guardian Angel of
which Jonathan Pratt is the sole shareholder.
(10) This amount includes all of the shares beneficially owned Guardian
Angel. Jonathan Pratt disclaims beneficial ownership of such shares.
(11) Includes 436,530 shares which may be acquired upon the conversion of
212 shares of Series B Preferred Stock and 15,190 shares which may be
acquired upon the exercise options which will be exercisable within 60
days. Does not include 22,186 shares underlying options with are not
exercisable within 60 days.
(12) Includes 360,314 shares which may be acquired upon the conversion of
175 shares of Series B Preferred Stock and 31,844 shares which may be
acquired upon exercise of options which will be exercisable within 60
days. Does not include 47,766 shares underlying option with are not
exercisable within 60 days.
(13) Includes warrants to purchase 25,000 shares of Common Stock.
(14) Includes 956 shares which may be acquired upon the exercise of options
which will be exercisable within 60 days. Does not include 1,435
shares underlying options which are not exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
On September 19, 1996, the Company constructively retired 1,453,600
shares of Common Stock purchased by the Company from Mr. Crimi for a purchase
price of $2,000,000. As payment for this obligation, the Company and Mr. Crimi
agreed to offset the amount owed Mr. Crimi against certain loans made by the
Company to Mr. Crimi totaling $1,004,212. In addition, the Company assumed a
note payable by Mr. Crimi to a former shareholder of the Company in the amount
of $995,788.
Andrew Lunetta, a nominee for election as a director, is currently
serving as a consultant to the Company.
-18-
Mr.Lunetta is paid $8,650 per month and his employment may be terminated by
either party at any time.
Item 14. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 3.1 Registrant's Certificate of Incorporation, as amended to date
- incorporated by reference to Exhibit 3 (a) to the
Registrant's Registration Statement on Form SB-2, File No.
33-75162.
Exhibit 3.2 Certificate and Agreement and Plan of Merger -
incorporated by reference to Exhibit 3 (b) to Registrant's
Registration Statement on Form SB-2, File No. 33-75162.
Exhibit 3.3* Registrant's Bylaws -
Exhibit 4.1* Specimen of Common Stock Certificate.
Exhibit 4.2* Certificate of Designation of the Registrant's Series A
Preferred Stock.
Exhibit 4.3* Certificate of Designation of the Registrant's Series B
Preferred Stock.
Exhibit 4.4 Certificate of Designation of the Registrant's Series C
Preferred Stock - incorporated by reference to Exhibit 4 to
the Registrant's 8-K filed on June 17, 1997.
Exhibit 10.1 Amended and Restated Merger Agreement, dated as of
September 19, 1996, by and among the Company, the Subsidiary,
Salex, the Salex Subsidiaries, the Salex Stockholders, Thomas
M. Swartwood and T. Marshall Swartwood. Incorporated by
reference to Exhibit 10.1 to the Registrant's report on Form
8-K filed on September 19, 1996.
Exhibit 10.2 List of Omitted Schedules/Exhibits to Merger Agreement.
Incorporated by reference to Exhibit 10.2 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.3 Promissory Note issued by the Company to Crimi for
$1,055,562.19 dated September 18, 1996. Incorporated by
reference to Exhibit 10.3 to the Registrant's report on Form
8-K filed on September 19, 1996.
Exhibit 10.4 Promissory Note issued by the Company to Crimi for
$944,437.81 dated September 18, 1996. Incorporated by
reference to Exhibit 10.4 to the Registrant's report on Form
8-K filed on September 19, 1996.
Exhibit 10.5 Amendment to Promissory Notes dated September 18, 1996.
Incorporated by reference to Exhibit 10.5 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.6 Stock and Asset Purchase Agreement between the Company and
Dickinson dated September 18, 1996. Incorporated by reference
to Exhibit 10.6 to the Registrant's report on Form 8-K filed
on September 19, 1996.
Exhibit 10.7 Indemnification Agreement between the Company and Dickinson
dated September 18, 1996. Incorporated by reference to
Exhibit 10.7 to the Registrant's report on Form 8-K filed on
September 19, 1996.
-19-
Exhibit 10.8 Tax Indemnity Agreement among the Company, Dickinson,
and Dickinson & Co., Inc. dated September 18, 1996.
Incorporated by reference to Exhibit 10.8 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.9 The Divestiture Promissory Note issued by Dickinson to
the Company dated September 18, 1996. Incorporated by
reference to Exhibit 10.9 to the Registrant's report on Form
8-K filed on September 19, 1996.
Exhibit 10.10 Stock Pledge and Security Agreement between the Company
and Dickinson dated September 18, 1996. Incorporated by
reference to Exhibit 10.10 to the Registrant's report on Form
8-K filed on September 19, 1996.
Exhibit 10.11 Stock Option Agreement between Crimi and the Company
dated September 18, 1996. Incorporated by reference to
Exhibit 10.11 to the Registrant's report on Form 8-K filed on
September 19, 1996.
Exhibit 10.12 Stock Option Agreement among Salex Stockholders and the
Company dated September 18, 1996. Incorporated by reference
to Exhibit 10.12 to the Registrant's report on Form 8-K filed
on September 19, 1996.
Exhibit 10.13 Form of Registration Rights Agreements among each of
the Salex Stockholders and the Company dated September 18,
1996. Incorporated by reference to Exhibit 10.13 to the
Registrant's report on Form 8-K filed on September 19, 1996.
Exhibit 10.14 Assumption by the Company of Salex's Mortgage dated
September 18, 1996. Incorporated by reference to Exhibit
10.14 to the Registrant's report on Form 8-K filed on
September 19, 1996.
Exhibit 10.15 Assumption of the Company of Salex's Employment
Agreement with Crimi. Incorporated by reference to Exhibit
10.15 to the Registrant's report on Form 8-K filed on
September 19, 1996.
Exhibit 10.16 Assumption of the Company of Salex's Employment
Agreement with Pershing Sun. Incorporated by reference to
Exhibit 10.16 to the Registrant's report on Form 8-K filed on
September 19, 1996.
Exhibit 10.17* Form of Subscription Agreement dated as of June 2, 1997,
between Registrant and Meadows Management LLC.
Exhibit 10.18* Form of Registration Rights Agreement between
Registrant and Meadows Management LLC dated as of June 2,
1997.
Exhibit 11 Statement re computation of per share earnings.
Exhibit 21 Subsidiary of the Registrant.
Exhibit 27 Financial data schedule.
- -----------------------------
* Filed herewith.
(b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth
quarter of fiscal year ended April 30, 1997.
-20-
SYNERGISTIC HOLDINGS CORP.
AND SUBSIDIARIES
AND AFFILIATE
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1995, 1996 and 1997
SYNERGISTIC HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
INDEX TO FINANCIAL STATEMENTS
Page #
Independent auditor's report F - 1
Consolidated balance sheets
April 30, 1997 and 1996 F - 2
Consolidated financial statements for the three years
ended April 30, 1997
Statements of operations F - 3
Statements of stockholders' equity and F - 4
capital deficit
Statement of cash flows F - 5
Notes to consolidated financial statements F - 6-18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Synergistic Holdings Corp.
We have audited the accompanying combined consolidated balance sheets of
Synergistic Holdings Corp. as of April 30, 1996 and 1997, and the related
combined consolidated statements of operations, stockholders' deficit and cash
flows for each of the three years in the period ended April 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 combined consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the 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 combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Synergistic Holdings Corp. as of April 30, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended April 30, 1997, in conformity with generally accepted accounting
principles.
/S/ Feldman Loudin & Co., P.C.
------------------------------
New York, New York Certified Public Accountants
June 19, 1997
SYNERGISTIC HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
CONSOLIDATED BALANCE SHEET
ASSETS
April 30,
--------------------------
1997 1996
----------- -----------
CURRENT ASSETS:
Cash $ 125,769 $ 74,354
Accounts receivable, net of allowance for
doubtful accounts of $188,000 in 1997 and 1996 3,451,589 3,218,909
Prepaid expenses and other current assets 77,263 91,261
Refundable income taxes -- 58,239
Deferred income taxes -- --
----------- -----------
Total Current Assets 3,654,621 3,442,763
----------- -----------
PROPERTY AND EQUIPMENT, net 1,746,120 1,867,655
----------- -----------
OTHER NONCURRENT ASSETS:
Loan Receivable from officer, net of current portion -- 1,004,212
Goodwill, net 1,210,625 1,308,125
Noncompetition and consulting agreement, net 186,667 150,000
Other assets 48,635 48,635
----------- -----------
1,445,927 2,510,972
----------- -----------
$ 6,846,668 $ 7,821,390
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT (CAPITAL DEFICIT)
CURRENT LIABILITIES:
Bank overdraft $ 471,236 $ 445,440
Note payable - finance company 1,283,699 1,456,443
Accounts payable 4,161,585 3,323,566
Accrued expenses and other 487,260 487,111
Current portion of long-term debt 1,179,906 223,339
----------- -----------
Total Current Liabilities 7,583,686 5,935,899
----------- -----------
LONG-TERM DEBT:
Long-term debt 71,000 47,730
Mortgage payable -- 912,203
Capital leases obligations 33,155 94,518
Note payable 676,948 --
----------- -----------
781,103 1,054,451
----------- -----------
DEFERRED INCOME TAXES 10,000 10,000
----------- -----------
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock-series A, $.01 par value - shares authorized 20,000,
issued and outstanding 10,625
(liquidation preference $100 per share) 737,387 --
Preferred stock-series B, $.01 par value -
shares authorized, issued and outstanding 1,000 10 --
Common stock, $.01 par value - shares authorized 10,000,000 91,873 79,000
Additional paid-in capital 3,501,163 3,951,546
Accumulated deficit and proprietor's capital deficiency (5,358,554) (3,209,506)
Distribution to stockholders -- --
Less: Note receivable (500,000) --
----------- -----------
Total stockholders' (deficit) equity (1,528,121) 821,040
----------- -----------
$ 6,846,668 $ 7,821,390
=========== ===========
See notes to financial statements.
F-2
SYNERGISTIC HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended April 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net sales $ 22,958,814 $ 25,481,629 $ 33,883,908
Cost of sales 18,642,887 21,174,290 28,392,318
------------ ------------ ------------
Gross profit 4,315,927 4,307,339 5,491,590
Selling, General & Administrative expenses 4,669,128 5,892,493 4,865,937
Depreciation and amortization 352,629 294,973 256,638
------------ ------------ ------------
Loss from operations (705,830) (1,880,127) 369,015
Interest expense, net 379,656 460,100 431,844
Loss on disposal of property and equipment -- -- 34,908
------------ ------------ ------------
Loss before taxes (1,085,486) (2,340,227) (97,737)
Taxes 1,062 58,686 (4,000)
------------ ------------ ------------
Net Loss (1,086,548) (2,398,913) (93,737)
Accretion of preferred stock dividends attributable
to increase to conversion value (1,062,500) -- --
------------ ------------ ------------
Net loss $ (2,149,048) $ (2,398,913) $ (93,737)
============ ============ ============
Net loss per share of common stock (0.19) (0.21) (0.01)
============ ============ ============
Weighted average common shares outstanding 11,246,366 11,246,366 11,246,366
============ ============ ============
See notes to financial statements.
F-3
SYNERGISTIC HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
STATEMENT OF STOCKHOLDERS' DEFICIT (CAPITAL DEFICIT)
Preferred Stock Preferred Stock Common Stock
Series A Series B ($.01 par) ($.01 par)
------------------------- ------------------------ ------------------------
Balance, April 30, 1994 -- -- -- -- 5,356,200 $ 53,562
Capital contribution
Net loss
Distribution to stockholders
------ ---------- ----- ---------- --------- ----------
Balance, April 30, 1995 -- -- -- -- 5,356,200 53,562
Sale of common stock 2,543,800 25,438
Compensation related to sale of shares
Net loss
------ ---------- ----- ---------- --------- ----------
Balance, April 30, 1996 -- -- -- -- 7,900,000 79,000
Acquisition and constructive retirement of
treasury stock purchased from principal
shareholder (1,453,600) (14,536)
Reverse stock split and issuance of series B
preferred stock 1,000 $ 10 (715,550) (7,155)
Acquisition of Synergistic Holding
Corporation and constructive
retirement of treasury stock 3,456,410 34,564
Private placement of preferred stock and
warrants net of related expenses 10,625 $ 737,387
Accretion of preferred stock to
conversion value
Net loss
------ ---------- ----- ---------- --------- ----------
Balance, April 30, 1997 10,625 $ 737,387 1,000 $ 10 9,187,260 $ 91,873
====== ========== ===== ========== ========= ==========
Additional Deficit Less
Paid-In (Capital Note
Capital deficit) Receivable Total
------------------------------------------------------------------
Balance, April 30, 1994 $1,933,438 ($627,675) - $1,359,325
Capital contribution 25,000 25,000
Net loss (93,737) (93,737)
Distribution to stockholders (89,181) (89,181)
------------------------------------------------------------------
Balance, April 30, 1995 1,958,438 (810,593) - 1,201,407
Sale of common stock 1,206,562 1,232,000
Compensation related to sale of shares 786,546 786,546
Net loss (2,398,913) (2,398,913)
------------------------------------------------------------------
Balance, April 30, 1996 3,951,546 (3,209,506) - 821,040
Acquisition and constructive retirement of
treasury stock purchased from principal shareholder (1,985,464) (2,000,000)
Reserve stock split and issuance of series B preferred stock 7,145 -
Acquisition of Synergistic Holding Corporation
and constructive retirement of treasury stock 465,436 (500,000) -
Private placement of preferred stock and warrants
net of related expenses 737,387
Accretion of preferred stock to conversion value 1,062,500 (1,062,500) -
Net loss (1,086,548) (1,086,548)
------------------------------------------------------------------
Balance, April 30, 1997 $3,501,163 ($5,358,554) ($500,000) ($1,528,121)
==================================================================
See notes to financial statements.
F-4
SYNERGISTIC HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended April 30,
------------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,086,548) $(2,398,913) $ (93,737)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 352,629 294,973 256,638
Provision for doubtful accounts -- 31,000 74,000
Loss on disposal of property and equipment -- -- 34,908
Deferred income taxes -- (1,000) (12,000)
Compensation related to sale of shares -- 786,546 --
Increase (decrease) in cash flows from changes in
operating assets and liabilities:
Accounts receivable (232,680) 57,360 1,514,328
Prepaid expenses and other current assets 12,998 58,554 (704)
Refundable taxes 58,239 239,022 (297,261)
Accounts payable 838,019 921,908 (869,369)
Accrued expenses and other current liabilities 149 128,225 114,195
----------- ----------- -----------
Net cash provided by (used in) operating activities (57,194) 117,675 720,998
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (50,260) (63,626) (146,867)
Increase in noncompetition and consulting agreements -- -- --
Increase in other assets -- (600) (1,814)
Loan to officer, net of repayments (55,086) (225,860) 7,349
----------- ----------- -----------
Net cash used in investing activities (105,346) (290,086) (141,332)
----------- ----------- -----------
(162,540) (172,411) 579,666
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft 25,796 (757,514) (88,426)
Net proceeds from (repayments of) note payable-
finance company (172,744) (232,062) (221,820)
Principal payments on long-term debt (210,687) (54,753) (36,669)
Payments on capital leases obligations (61,363) (58,906) (11,081)
Payments on mortgage obligation (72,000) (72,000) (72,000)
Distribution to stockholders -- 89,181 110,819
Proceeds from promissory note - Bank (32,433) (35,135) 97,297
Net proceeds from issuance of preferred stock 737,386 -- --
Net proceeds from issuance of common stock -- 1,142,818 (174,999)
----------- ----------- -----------
Net cash provided by (used in) financing activities 213,955 21,629 (396,879)
----------- ----------- -----------
Net increase (decrease) in cash 51,415 (150,782) 182,787
Cash, at beginning of period 74,354 225,136 42,349
=========== =========== ===========
Cash, at end of period $ 125,769 $ 74,354 $ 225,136
=========== =========== ===========
SUPLEMENTARY CASHFLOW DISCLOSURE
Interest paid $ 379,656 $ 460,000 $ 419,000
=========== =========== ===========
Taxes paid -- $ 33,000 $ 164,000
=========== =========== ===========
See notes to financial statements.
F-5
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business
Synergistic Holdings Corp. (the "Company") operates in the
automobile asset management industry. Through the Company's
"Corporate Fleet Program" it manages, on a nationwide basis,
the maintenance and repair of fleets of automobiles which
are owned and operated by corporate customers. The Company
maintains a nationwide "Service Network" of over 30,000
independently owned pre-screened and pre-approved
maintenance and repair centers. The Company receives a
monthly management fee from its corporate customers as well
as fees from its service network. Other services of the
Company include the Collision Management Program, the
Computerized Auction System and Collateral Service Shield
and the Insurance Subrogation Program.
b. Basis of Presentation and Principles of Combination and
Consolidation
Pursuant to the merger agreement dated September 19, 1996
Salex Industries, Inc. ("SII") a wholly - owned subsidiary
of Synergistic Holdings Corp. was merged with and into Salex
Holding Corporation (Salex) whereby all of the shares of
common stock of Salex held by the Company were canceled and
all of the 4,503,000 shares of common stock owned by the
Salex Stockholders were converted into (a) 4,003,165 shares
of common stock, par value $.01 per share and (b) 1,000
shares of Series B Convertible Preferred Stock.
Immediately after the closing, the Company pursuant to a
Stock and Asset Purchase Agreement with Dickinson Holding
Corporation ("Dickinson"), a Delaware corporation, sold (
the "Divestiture") all of the outstanding shares of its
subsidiary, Dickinson & Co., Inc. ("DCI"), a registered
broker/dealer and its investment in Electronic Designs, Inc.
("EDI"). As consideration for the stock and assets that were
transferred in connection with the divestiture, Dickinson
transferred to the Company 750,000 shares of its Synergistic
Common Stock and a $500,000 promissory note secured by
250,000 shares of its Synergistic Common Stock pursuant to a
Pledge Agreement between Dickinson and the Company.
Because the Company's only asset after the Divestiture was
its investment in Salex and its collateralized promissory
note from Dickinson., the Company was deemed to be in
substance a "shell" at the Closing of the merger. The SEC
believes that shells
F-6
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
are not businesses and therefore, cannot initiate business
combinations. For accounting purposes the SEC views the
transaction as an equity transaction by the private
operating company ("Salex") rather than as an acquisition of
Salex by the Company. The SEC requires that the net assets
of the public shell be recorded at carryover basis in which
no goodwill arises on the transaction. Accordingly the
merger transaction has been accounted for as a
recapitalization of Salex (stock split, distribution of
preferred stock, and treasury stock purchase) followed by an
issuance of common stock by Salex in exchange for treasury
stock and Synergistic's note receivable from Dickinson. The
note receivable, which is collateralized by Synergistic
stock, has been recorded as a reduction of additional paid-
in capital.
The Company has sustained operating losses which have
continued into fiscal 1997. Such losses have related
primarily to the loss of several major customers and
increases in operating expenses. The losses have been funded
by the proceeds from the sale of convertible preferred stock
under a private placement, bank overdrafts, additional
borrowings under the revolving credit agreement, and
increased trade payables. Management's plans to return the
Company to profitability include a cost cutting program
which was commenced in November 1996 and an aggressive sales
program to replace lost customers which has resulted in
increased sales.
c. Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and
amortization are provided on either the straight-line basis
or accelerated methods over the estimated useful lives of
the assets.
In March 1995, the Financial Accounting Standards Board
issued Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which is effective for fiscal years beginning after
December 31, 1995, with earlier application encouraged. The
Company has adopted Statement No. 121 for the year ended
April 30, 1996. The adoption of Statement No. 121 did not
have a material effect on the combined consolidated
financial statements.
d. Taxes on Income
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases
(temporary differences) and operating loss and tax credit
carry forwards. These temporary differences arise primarily
from the allowance for doubtful accounts provision and
differences in depreciation methods
F-7
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
between the financial statements and the depreciation
utilized on the Company tax returns. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation
allowance has been provided to reduce the deferred tax
assets to a level that will be realized.
e. Use of Estimates
In preparing financial statements in conformity with
generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
f. Revenue Recognition
The Company's principal revenues are derived from billings
for repairs and maintenance for vehicles covered in its
fleet management program. Revenues are recorded when the
services have been rendered.
g. Goodwill
The excess of cost over fair value of net assets acquired is
being amortized on the straight-line method over a twenty
year period. Amortization of goodwill for each of the years
ended April 30, 1997, 1996 and 1995 amounted to $97,500.
The Company's operational policy for the assessment and
measurement of any impairment in the value of excess of cost
over fair value of net assets acquired which is other than
temporary is to evaluate the recoverability and remaining
life of its goodwill and determine whether the goodwill
should be completely or partially written-off or the
amortization period accelerated. The Company will recognize
an impairment of goodwill if undiscounted estimated future
operating cash flow of the Company is determined to be less
than the carrying amount of goodwill. If the Company
determines that goodwill has been impaired, the measurement
of the impairment will be equal to the excess of the
carrying amount of the goodwill over the amount of the
discounted estimated operating cash flow using the Company's
average cost of funds. If an impairment of goodwill were to
occur, the Company would reflect the impairment through a
reduction in the carrying value of goodwill. The assessment
of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
F-8
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
h. Noncompetition and Consulting Agreements
Amortization is provided over the three to five year
contractual lives of the agreements. Amortization of the
agreements was $83,333, $60,000 and $60,000 for the three
years ended April 30, 1997, 1996 and 1995.
I. Fair Value of Financial Instruments
The carrying amounts of certain financial instruments,
including cash, accounts receivable and payable, and
short-term debt, approximated fair value as of April 30,
1996 and 1997. The carrying value of long-term debt,
including the current portion, approximated fair value as of
April 30, 1996 and 1997, based on the borrowing rates
currently available to the Company for bank loans with
similar terms and maturities.
j. New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board
issued Statement No.123, "Accounting for Stock-Based
Compensation," which is effective for transactions entered
into after December 31, 1995. Statement No.123 establishes a
fair value method of accounting for stock-based
compensation, through either recognition or disclosure. The
Company intends to adopt the employee stock-based
compensation disclosure - only provisions of Statement No.
123 in fiscal 1997 by disclosing the pro forma net income
amounts assuming the fair value method was adopted May 1,
1996. The adoption of Statement No. 123 will not impact the
Company's results of operations, financial position or cash
flows.
k. Earnings Per Share
Earnings per share are based on the weighted average number
of common and common equivalent shares outstanding. The
calculation when applicable takes into account the shares
that may be issued upon exercise of stock options and
warrants, reduced by the shares repurchased with the funds
received from their exercise.
l. Concentration of Credit Risk
Financial instruments, which potentially subject the Company
to concentrations of credit risk consist principally of
trade accounts receivable. The Company's largest customer
accounts for approximately 7 % of accounts receivable at
April 30, 1997. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other
information.
F-9
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
April 30,
1997 1996
---------- ----------
Land $ 490,000 $ 490,000
Building 1,227,261 1,227,261
Furniture & Fixture 1,417,052 1,383,754
Vehicles 77,760 60,799
Leasehold improvements 21,920 21,920
---------- ----------
3,233,993 3,183,734
Less accumulated depreciation and
amortization 1,487,873 1,316,078
---------- ----------
$1,746,120 $1,867,656
========== ==========
3. NOTE PAYABLE - FINANCE COMPANY
The Company has a $2,250,000 revolving credit agreement with a
finance company, which expires January 1, 1998. Interest on
borrowings are at prime plus 4.5% or 12.75% at April 30, 1997 and
1996, respectively. The interest rate was reduced to prime plus 2% in
November 1996. Borrowings are collateralized by substantially all of
the Company's assets not otherwise encumbered and are personally
guaranteed by the Company's principal stockholder.
4. SUBSEQUENT EVENT
During May 1997 the Board of Directors of the Company adopted a
resolution providing for the authorization and issuance of 25,000
shares of its $.01 par value Series C Preferred Stock. The Preferred
Stock has an issue price of $1.00 per share and each share issued is
convertible into 100 shares of Common Stock. The Series C Preferred
Stock shall rank prior to all of the Company's $.01par value common
stock
F-10
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
1997 1996
-------------- -----------
Mortgage payable to bank, payable in monthly
installments of $6,000 through December 1997,
plus interest at 2% above the bank's "peg rate"
(10.75% at April 30, 1996). The balance of
$792,203 is due January 20, 1998. The mortgage
is collateralized by land and building with a
book value of $1,454,499 at April 30, 1997. $840,203 $912,203
Consulting and Noncompetition agreement payable
in monthly installments of $5,000 through June
1998. 90,000 150,000
Capital lease obligations with varying monthly
payments and interest rates ranging from 15% to 17%
per annum maturing 1998 through 2000;
secured by interests in computer equipment. 94,518 153,425
Promissory note payable to bank in monthly
installments of $2,703, plus interest, through April
1998; interest at prime plus 2% (10.25% at April
30, 1996); secured by an interest in computer
equipment. 29,729 62,162
Buy out agreement payable in monthly installments
of $4,000 through September. 1998 and then
$1,750 through September 1999. 89,000 -
Note payable in quarterly installments of $55,086
including interest at 11%. 817,559 -
-------------- -----------
1,961,009 1,277,790
Less: Current maturities of long-term debt and
capital lease obligations 1,179,906 223,339
-------------- -----------
$ 781,103 $ 1,054,451
============== ===========
-11-
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
The following is a schedule by years of future minimum lease payments
under capital leases, together with the present value of the net
minimum lease payments as of April 30, 1997:
Year ending April 30,
1998 $ 70,813
1999 31,201
2000 5,200
----------
Total minimum lease payments 107,214
Less: amount representing interest 12,696
----------
Present value of net minimum lease payment $ 94,518
==========
The following is a schedule of long-term debt maturities (including
capital lease obligations) as of April 30, 1997:
Year ending April 30,
1998 $ 977,933
1999 62,250
2000 8,750
----------
$1,048,933
==========
5. MAJOR CUSTOMERS
For the year ended April 30, 1997, no single customer exceeded 10% of
net sales. For the year ended April 30, 1996 sales to one customer
accounted for approximately 13% of net sales and for the year ended
April 30, 1995 the Company had two customers each of whom had sales
of approximately 12% of net sales. No receivables from any one
customer represented more than 10% of the April 30, 1997, 1996 and
1995 accounts receivable balance. No single customer or group of
customers affiliated through common control accounted for more than
10% of the Company's sales or accounts receivable in fiscal 1997,
1996 or 1995.
F-12
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
6. EMPLOYMENT AGREEMENTS
The Company has employment agreements with seven officers covering a
three-year period ending in August 1998. These agreements originally
provided for minimum aggregate annual salaries of $678,000 for fiscal
1997 and 1998, and $170,000 for fiscal 1999. Certain of these
commitments have recently been reduced in connection with the
Company's cost cutting plans described in Note 1.
7. RETIREMENT PLANS
The Company has a 401(K) plan for eligible salaried employees. The
contribution for any participant may not exceed statutory limits.
During fiscal years ended April 30, 1996 and 1995 the Company matched
each employee participant's contributions up to the first 6% of
compensation. No matching contributions were recorded for the year
ended April 30, 1997. The total matching contributions charged
against operations approximated $60,000 and $70,000 for the years
ended April 30, 1996 and 1995.
8. TAXES ON INCOME
The provisions for (recoveries of) taxes on income in the
consolidated statements of operations consist of the following:
Year Ended April 30,
------------------------------------------------
1997 1996 1995
----------- ------------ -------------
Current:
Federal $ - $ 50,733 $ (21,250)
State 1,062 8,953 (3,750)
----------- ------------ -------------
Total current 1,062 59,686 (25,000)
Deferred:
Federal - (850) 17,850
State - (150) 3,150
----------- ------------ -------------
Total deferred - (1,000) 21,000
----------- ------------ -------------
Total taxes on income (recoveries) $ 1,062 $ 58,686 $ (4,000)
=========== ============ =============
F-13
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
April 30,
-------------------------------------------------------
1997 1996 1995
--------- --------- ---------
Deferred tax. Assets:
Receivable reserve $ 75,000 $ 75,000 $ 16,000
Net operating loss carryforwards 886,000 515,000 0
--------- --------- ---------
Total deferred tax asset 961,000 590,000 16,000
Valuation allowance for deferred tax assets (961,000) (590,000) 0
--------- --------- ---------
Net deferred tax asset $ -- $ -- $ 16,000
========= ========= =========
Deferred tax liability:
Depreciation $ 10,000 $ 10,000 $ 27,000
--------- --------- ---------
Noncurrent deferred income tax liability $ 10,000 $ 10,000 $ 27,000
========= ========= =========
The provision for taxes on income (loss) before taxes differs from the amounts
computed applying Federal statutory rates due to the following:
Year Ended April 30,
---------------------------------------------
1997 1996 1995
---------- ---------- --------
Provision for Federal income taxes at the
statutory rate (34%) (34%) (34%)
Loss (income) earned by S Corporation
taxable to individual stockholders 0 0 4
Adjustment for under (over) accrual from
prior year 0 3 (16)
State taxes, net of Federal tax benefit (6) (6) (6)
Non-deductible expenses 9 16 48
Valuation allowance for deferred tax assets 31 24 0
---------- ---------- --------
Provision for taxes on income 0 3% (4%)
========== ========== ========
F-14
SYNERGISTIC HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
As of April 30, 1997, the Company has net operating loss
carryforwards for federal income tax purposes of approximately
$2,100,000, expiring in the year 2012.
The Company has established valuation allowances equal to its
deferred tax assets because of the uncertainty as to their future
utilization.
9. CONVERTIBLE PREFERRED STOCK
The Company in an effort to raise additional capital issued its
series A convertible Preferred Stock pursuant to a private placement
offering dated July 9, 1996. The shares are redeemable solely at the
option of the Company based on a redemption value of $100 plus any
accrued but unpaid dividends. The Series A Preferred Stock sold in
250 share "units" which includes 25,000 Warrants per unit each
exercisable for 1 share of Common Stock at an exercise price of $4.75
per Warrant.
Each share of the series A Preferred Stock is convertible based on
the average price of the common stock for the (10) day trading period
immediately preceding the conversion but in no event less than $0.50
per share. Preferred shareholders are able to convert the series A
preferred stock at twice its liquidation preference. The substance of
this adjustment to the series A preferred stock is that of a 100%
stock dividend. Accordingly the Company has recorded accretion to
increase paid in capital and charge retained earnings for the amount
of the adjustment. As discussed more fully in (Note12) the Company
does not have sufficient authorized Common Stock available for
issuance should all of the series A Preferred Stockholders exercise
their option to convert.
As part of the merger agreement all of the issued and outstanding
shares of Salex Holding Corp. were converted into shares of
Synergistic Common Stock and as part of a reverse stock split, 1,000
shares of series B Convertible Preferred Stock. Each share of the
series B Preferred Stock automatically converts into 2,059.106 shares
of Synergistic Common Stock as soon as the Company amends its
certificate of incorporation increasing the authorized Common Stock
of the Company. Because the series B Preferred Stock automatically
converts into common stock it is treated as common stock for purposes
of computing loss per share data.
.
F-15
SYNERGISTIC HOLDINGS CORP.
--------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
----------------------------------------------------
10. STOCK BASED COMPENSATION
------------------------
The following table summarizes the changes in options and warrants
outstanding and the related price range for shares of the Company's
common stock.
Stock Options and Warrants
--------------------------
Options Warrants Price
Outstanding at April 30, 1994 247,000 173,500
Granted - -
Exercised - -
Expired (67,000) (57,832)
Retired - -
------------- -----------
Outstanding at April 30, 1995 180,000 115,668
Granted 58,300 $ 2.00
Granted 625,000 $ 2.00
Exercised - -
Expired (66,000) 115,668
Retired - -
------------- -----------
Outstanding at April 30, 1996: 172,300 625,000
Granted 1,129,333 $ 1.00 - 2.12
Granted 1,062,500 $ 4.75
Exercised - -
Expired (500,000) -
Retired - -
------------ -----------
Outstanding at April 30, 1997 801,633 1,687,500
============ ===========
F-16
SYNERGISTIC HOLDINGS CORP.
--------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
----------------------------------------------------
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation would be recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. For the year ended
April 30, 1997 the Company has adopted the disclosure only provisions of SFAS
123 "Accounting for Stock Based Compensation". Accordingly, no compensation
cost has been recognized for the plan. Had compensation cost for the Company's
option plans been determined based on fair value at the grant date for the
awards in 1997 consistent with the provisions of SAS 123, the Company's net
loss and net loss per share would have been increased by $515,547 and $.05 for
the year ended April 30, 1997.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for grants: No dividend yield; expected volatility of .87%; risk free
interest rate of 6%; and expected lives of 3 years.
11. MORTGAGE PAYABLE
----------------
It is the Company's intention to refinance its mortgage liability on
a short term basis. The Company expects to enter into a sale and
leaseback arrangement with respect to the property in the near
future. Because the Company has not entered into a formal refinancing
agreement with respect to the mortgage the entire amount has been
included in current liabilities.
12. CONTINGENCIES
-------------
As of April 30, 1997 the Company does not have sufficient authorized
Common Stock available to permit the conversion in its entirety, of
both its Series A and Series B Preferred Stock. The Series B
Preferred Stock is automatically convertible into common stock as
soon as the Company amends its certificate of incorporation
increasing the authorized Common Stock of the Company.
During the quarter ended April 30, 1997 certain Series A Preferred
Shareholder's gave notice to the Company and exercised their right of
conversion by tendering their Preferred Stock as required under the
private placement agreement. Because the Company does not have enough
authorized Common Stock available the shareholders who have converted
their shares will not receive Common Stock until an increase in
authorized shares has been approved by the Company. In the event the
Company is unable to obtain the requisite stockholder approval, the
investors in the Private Placement will hold for an indefinite period
of time, shares of Preferred Stock and Warrants that are not
registered securities and are not publicly traded. Moreover with
regard to those shareholders that converted their Series A
F-17
SYNERGISTIC HOLDINGS CORP.
--------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
----------------------------------------------------
Preferred stock the Company has not yet issued any common shares in connection
with such conversion. As of April 30, 1997, 812,740 shares were available to
converting shareholders meanwhile approximately 1,350,000 shares are necessary
for issuance to accommodate all of the converting shareholders.
As discussed in Note 8 the Series A Preferred are entitled to dividends of 8.5
% per year. As of April 30, 1997 no payment or accrual of these dividends has
been recorded because under Delaware Law the Company can not legally pay
dividends unless there is sufficient retained earnings or current profits from
which the dividends can be distributed. Said dividends although unpaid are
cumulative and will become payable to the preferred stockholders at such time
in which the Company has restored its capital deficiency. The amount of unpaid
dividends otherwise applicable to the period ended April 30,1997 was
approximately $45,000.
As discussed in Note 4 the Company during May of 1997 authorized the issuance
of 25,000 shares of its $.01 par value Series C Preferred Stock. Pursuant to a
subscription agreement dated June 2, 1997 the Company accepted payment for all
of the 25,000 Series C shares. Because the Company does not have sufficient
authorized Common Stock to issue upon conversion the Company as discussed
above intends to ammend its Certificate of Incorporation to increase its
authorized $.01 par value common stock at the next meeting of the Board of
Directors and Shareholders which is scheduled for December 29, 1997.
In the event the Board of Directors and Shareholders do not approve the
amendment to the Certificate of Incorporation by December 31, 1997 the Company
has agreed to pay the Series C preferred stockholders $1,000,000.
F-18
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf of the undersigned thereunto duly authorized.
SYNERGISTIC HOLDINGS CORP.
/s/ Salvatore Crimi
- ---------------------------------------------------
Salvatore Crimi, Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Angelo Crimi
- ---------------------------- Vice Chairman, Secretary, November 26, 1997
Angelo Crimi Vice President Sales and
Director
/s/ Pershing Sun
- ---------------------------- Senior Vice President, November 26, 1997
Pershing Sun Chief Information Officer
and Director
/s/ Franklin Pinter
- ---------------------------- Director November 26, 1997
Franklin Pinter
/s/ Francis Fitzpatrick
- ---------------------------- Director November 26, 1997
Francis Fitzpatrick
EXHIBIT INDEX
EXHIBIT INDEX (Continued)