UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No.: 0-22693 SYSCOMM INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 11-2889809 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 Precision Drive, Shirley, New York 11967 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 205-9000 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the 2,143,176 shares of Common Stock held by non-affiliates of the Company as of December 3, 1999 is $2,010,299. The number of shares outstanding of each of the registrant's classes of common equity as of December 3, 1999 is as follows: Class of Common Equity Number of Shares ---------------------- ---------------- Common Stock 4,720,894 par value $.01 The information required by Part III of this Form 10-K is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission on or before December 27, 1999. PART I Item 1. BUSINESS General SysComm International Corporation ("SysComm" or the "Company"), through its wholly owned subsidiary, Information Technology Services, Inc. ("InfoTech"), has been a leading systems integrator and reseller of computer hardware, operating software and networking applications to Fortune 1000 companies. From 1985 until recently, the Company's primary focus has been on the sale, integration and servicing of International Business Machine Corporation ("IBM") products including personal computers, mid-range systems based on the IBM RS/6000, servers, the IBM AS/400 and the System/390 mainframe. In addition, the Company integrates, resells and services products from such manufacturers as Hewlett Packard, Compaq, Microsoft, and Novell. Because of the recognition by the Company that margins were shrinking on its core business, and because of a change in IBM's policies with respect to the Authorized Assembler Program ("AAP"), in the last year the Company made a strategic decision to fundamentally change the nature of its business. The Company will continue to provide its customers with cost efficient, comprehensive solutions that satisfy their information technology requirements, but the product offerings will be less focused on PC products and hardware, and more on mid-range products network connectivity, services and consulting to develop e-solutions. During the last year, the Company has been transitioning its workforce, through training and specialized hires, to position itself as a total e-business solutions provider of hardware, software and consulting services. In addition, while maintaining its elite status as an IBM Tier II Premier Business Partner in mid-range systems, the Company has expanded its capabilities in web design and creation, remote access to databases via web interface, and Tivoli enterprise systems management. A significant percentage of the Company's revenues continues to be derived from sales to customers in the financial and investment communities. However, the Company's customer base also includes retailers, manufacturers, health care providers, distributors, colleges, universities and state and local government agencies. The Company's customers include: Baystate Medical Center Liberty Mutual Spear, Leeds & Kellogg Brown Brothers Harriman Mass. Financial Services Sungard Citibank Memorial Sloan - Kettering Hospital The City of New York CPC International Mount Sinai Medical Center The City University of New York Deutsche Bank Northeastern University The Hartford Dowling College Pfizer The Stop & Shop Companies Fidelity Investments Philip Morris Unisys Corporation Gillette Prudential Insurance Company United Healthcare Harvard University Reuters America Witco Corporation IBM Sony Lawrence Public Schools The Company intends to pursue new business by focusing on the sale and integration of high-end systems in the financial, commercial, governmental, healthcare and educational areas. To this end, the Company has the following growth strategies: (i) targeting markets, particularly those businesses seeking to expand their presence on the internet, (ii) offering a more complete line of IBM products, (iii) expanding its role as an IBM Premier Business Partner, and (iv) targeting client-server architecture, e-commerce, enterprise network management and website hosting. Strategy The Company is striving to become a leading supplier of Enterprise Computing in e-Business solutions that enable customers to maximize return on technology investments by providing open, integrated end-to-end solutions from system architecture and implementation to hardware and software procurement. The Company strives to offer its customers high quality computer and networking system hardware, related operating system software and network design, system implementation and support services in a timely, cost-effective manner. The Company believes that the following factors are significant elements to the successful implementation of this strategy: Targeting Markets The Company has an eleven (11) year track record as a market leader in the installation and integration of high-level information systems to the banking and financial services communities. In addition, the Company has recently begun to focus on other selected, major markets, including retailers, manufacturers and distributors, institutions of higher learning, health care and pharmaceutical companies, and state and local government agencies. The Company's in-depth understanding of its customers' current and future needs combined with its experience and in-depth market focus enable it to offer an optimum range of products and services that meet each customer's requirements. Offering a Complete Line of IBM Products The Company has chosen to represent primarily IBM products because it believes that IBM is the world's premier designer and manufacturer of computer equipment, software and networking products. The wide range of products and services offered by the Company, include personal computers (desktop workstations, file servers and notebook computers), mid-range computers (RS/6000 and AS/400 systems), IBM S/390 mainframe, and IBM software products, including Lotus Domino, ADSM, HACMP and DB 2. The Company also offers enterprise network management software from Tivoli Systems, an IBM subsidiary. The Company believes that its current mix of products meets the needs of its customers and helps the Company in achieving its goal of becoming a total solution integrator. Expanding the Company's Role as an IBM Premier Business Partner The Company's designation as an IBM and Tivoli Premier Business Partner provides it with important competitive advantages. In 1997, 1998 and 1999, the Company was among a small number of value-added resellers selected by IBM as a Premier Business Partner. This designation by IBM was in recognition of the Company's long-standing relationship with IBM, combined with its overall value, performance and contribution in value to its customers. The Company believes that the principal advantage to being a Premier Business Partner is the potential referral of business by IBM. Targeting the Client-Server Architecture and Business Intelligence Markets Client-Server refers to the migration of software applications and data from a centralized mainframe or legacy environment to a system of distributed servers with data access via local and wide area networks. The Company is certified by IBM to sell IBM Client Server solutions. Business Intelligence refers to the analysis of vast quantities of information within a corporate enterprise which is used to make business decisions such as investments, product development and marketing programs. The Company is certified by IBM to sell IBM Business Intelligence solutions. E-Business refers to the conduct of business on the Internet (World Wide Web). The Company offers turn-key e-business solutions based on its IBM certification and skill sets acquired with new hires. This allows the Company to perform online design and Intranet/Internet programming, combined with other support skills, to deliver dynamic web solutions. The Company also provides web-hosting and design services which entails designing, implementing and maintaining customer web sites on the Company's equipment located at its Shirley, New York location. Enterprise network management encompasses the management of all facets of a network from and including the desktop, cabling, servers, communications network and host. The Company uses the Tivoli Management Environment to provide planning, architecture, and implementation services. Industry Background Complex computer information processing systems, the foundation on which business and organizations now function, are continuously being redesigned, modified and upgraded as new computer and telecommunications technologies are introduced. Until the mid-1980's, either mid-range or mainframe computer systems were used to manage an organization's mission-critical, transaction-oriented commerce and business functions, such as banking, credit transactions, retail point-of-sale transactions and airline reservations. Client/server networks support access to these functions, either within a single site or from numerous geographically-dispersed sites. In the late 1980's, a new architecture for information processing called "client/server" computing emerged, fueled by the growing intelligence in desktop computers, expanding capabilities of software applications and growing capabilities of networks. A client/server system typically consists of multiple intelligent desktop client computers linked with high performance server computers by a local and/or wide area network ("LAN" and/or "WAN") and is characterized by the flexibility and mobility of both application and user. In order to take advantage of their established operational staff and physical plant, many corporations are seeking to reconfigure their existing mainframe/mid-range computers (sometimes referred to as "legacy" systems) to operate in parallel with client/server networks. The Company believes that these two information system models -legacy systems and client/server systems - will continue to coexist, each containing advantages for certain applications. Thus, organizations are faced with complex decisions concerning the current and future configurations of their information systems, based upon factors such as the re-engineering of aspects of legacy systems to function more efficiently with related client/server systems, the explosive growth of the Internet (and related World Wide Web) and stand-alone intranets, the convergence of computer and telecommunications technologies and the universal recognition of information systems as the medium for commerce, finance, education and administration. Mid-range and mainframe computer systems remain important in this changing environment, and the Company intends to exploit opportunities in both segments of the high end computer system markets. At the same time, manufacturers such as IBM and Sun Microsystems are increasing their reliance upon companies such as SysComm to work with mid-and large-sized businesses and organizations to provide single-source responsibility for the design, procurement, installation and implementation of such systems. Principal Markets and Customers Since 1994, the Company has sold and delivered computer systems, network products, software, maintenance and system support services to more than 800 customers throughout the United States and in more than 20 countries worldwide. Based on its installed customer base, the Company believes it is a leading IBM supplier/systems integrator of mid-range and computer/network systems in the northeastern United States. No one customer accounted for more than 6% of the Company's total revenues in fiscal year 1997. In fiscal year 1998, the Company's top customer accounted for approximately 6.8% of total revenues. In fiscal year 1999, the Company's top customer accounted for approximately 8.6% of total revenues. In fiscal year 1999, the Company's top five customers (3 of which were new) accounted for 24.7% of total revenues. Dependence on Major Customers; Risk of Industry Concentration For the last three (3) fiscal years, 1997, 1998, and 1999, a significant portion (28%, 21%, and 25% respectively) of the Company's revenues were derived from sales to five principal customers, which customers varied annually, and encompass markets wherein the demands of any one customer may vary greatly. In addition, the Company does not have any exclusive long-term arrangements with its customers for the continued sales of computer systems. Although the number of customers who purchase at least $250,000 of computer systems from the Company has increased from 29 in fiscal year 1995 to 67 in fiscal year 1999, the failure to acquire a significant or principal customer or to maintain its relationship with its principal customers could have a material adverse effect on the Company's operations. In the fiscal year ended September 30, 1999, approximately 10.3% of the Company's sales of computer systems were to customers in the banking, financial and securities industry based in the Northeastern United States. Although the Company continues to broaden its market focus to include sales to other markets, such as educational institutions, government agencies, healthcare and insurance companies, the Company expects that it will continue to derive a substantial percentage of its sales of computer systems from such banking, financial and securities businesses. Accordingly, unfavorable economic conditions or factors that relate to these industries, particularly any such conditions that might result in reductions in capital expenditures or changes in such company's information processing system requirements, could have a material adverse affect on the Company's results of operations. Product Lines The Company has access to a full range of computer product lines, networking and interconnectivity systems and operating software, from IBM, Hewlett Packard, and Compaq, as well as other selected manufacturers. However, the Company has concentrated its efforts in developing strong relationships with IBM because it believes that IBM offers the most comprehensive and well established product line in the industry. The Company has had a long term relationship with IBM whereby it has the opportunity to configure, sell and service IBM's full line of PCs, mid-range information and mainframe processing systems. The Company believes its strong marketing and technical skills enable it to continue to have a strong business relationship with IBM. The Company's principal sales revenues are derived from the following: (i) IBM PC systems; (ii) IBM RS/6000 systems; (iii) IBM AS/400 systems; and (iv) communication and networking systems. IBM PC Systems IBM is one of the world's leading designers and manufacturers of personal computer systems. IBM's personal computer product line includes mobile (notebook) and desktop workstations as well as file, application and network servers. For many years, the Company's sales volume of PCs enabled the Company to purchase products directly from IBM for resale at the lowest prices available. In fiscal year 1997, the Company's sales of IBM PC products were approximately $35 million or 39% of the Company's annual sales. In March of 1997, the Company commenced operation of an IBM PC systems assembly facility. Such a program required the commitment of significant capital to hire and train a high quality workforce, to establish an appropriate assembly facility and to initially increase its inventory of components. A further requirement was the Company's need to attain and maintain ISO 9002 registration standards, the registered international standard for ensuring the consistent and measurable quality of products and services. Because of low margins and a change in IBM's policies with respect to the IBM Authorized Assembler Program, the Company ceased PC manufacturing activities. The Company, however, continues to sell large amounts of PC products. In fiscal 1998 and 1999, PC products accounted for 27.4% and 14.8% of total sales, respectively. IBM RISC System/6000 The IBM RISC System/6000 is a mid-range computer workstation and server configuration providing industry-leading computing and graphic performance that meets large-scale, data handling and network management demands for many types of businesses. RS/6000 systems perform mission critical applications, such as those found in financial trading systems, from the combination of a robust UNIX operating system with fast 2D and 3D graphic capabilities. The RS/6000 is a flexible and scalable system incorporating (1) symmetric multiprocessing capabilities, a design that makes it possible for a number of processors to share memory and other existing features more efficiently; (2) scalable parallel processing, a technology that allows several hundred processor nodes to run in tandem as application servers, data servers, Internet or Intranet servers; and (3) a multi-operating system support, allowing a user to run existing programs simultaneously. RS/6000 systems have been used for general business and financial applications, including billing, payroll and accounts receivable, as well as for advanced graphics programs for mechanical and electrical design, scientific visualization, communications and networking applications for optimum client/server and Internet performance, and word processing and desktop publishing applications for both scientific and commercial documents. These applications are particularly useful for the securities, manufacturing, retail, education and transportation industries. As Internet and Intranet-based transactions grow, RS/6000 systems' networking capabilities, including security and integrity features, are becoming increasingly important. In 1996 and 1997, IBM recognized the Company (ranked by dollar value of systems sold) as its largest "Solution Provider" for RS/6000 systems in North America. For fiscal 1997, 1998 and 1999, the Company's sales of the RS/6000 were approximately $40 million, $46 million and $33 million or 45% and, 47% and 46% of revenues, respectively. The Company considers RS/6000 systems to be an integral product for future increases in IBM AS/400 Although the IBM Application System/400 (also known as AS/400) has not been a major source of revenue to the Company, the Company is attempting to increase its revenue in this market. The AS/400 is designed and built as a multi-user commercial application platform integrating a relational database and networking capabilities into the operating system of the computer. It is designed as a general purpose business computer, optimized for the commercial environment. Its design reflects the dominant requirements for businesses, i.e., integration of new technology without disrupting existing applications, large portfolio of business solutions allowing companies to discover the most suitable application for their needs, integration of functions including security, database, system management, communications and on-line teleprocessing, enabling companies to manage a system with limited resources in a demanding business climate. The AS/400 provides businesses with a cost effective solution, allowing them to adopt advanced technologies at their own pace, integrating high quality PC technology and associated software to enhance the computer's speed for PC file serving. The AS/400 is a popular business computing system due to its ease of installation, implementation, usage (it can support up to 7,000 users) and ability to upgrade. All Other Products Communication -- Networking Systems. The Company provides various communications and networking products including complex data communications equipment and software such as bridges, hubs and routers, as well as modems and network interface cards (NIC) to connect personal computers to local and wide area networks (LAN/WAN). Nearly every computer sold today in the commercial marketplace is connected to a communications network. Other. The Company is authorized to sell other manufacturers' personal computer systems, networking, printers and software products including: Bay Networks, Compaq, Lexmark, Hewlett Packard, Microsoft, and Novell. The Company's agreements with such suppliers allow for volume discounts if certain quotas are met. Although the Company, to date, has complied with these agreements, there is no assurance that the Company will continue to meet such quotas. To the extent that it does not comply with such terms, the Company may lose its status as an authorized reseller for such suppliers. For fiscal year 1999, the Company's sales of non-IBM products accounted for approximately $18.9 million, or 27%, of total revenue. Dependence on IBM as a Supplier For the fiscal years ended September 30, 1997, 1998 and 1999, in excess of 84% of the Company's revenues resulted from the sale of personal computers, mid-range computer systems, networking systems and operating software manufactured by IBM. Although the Company has had a long standing reseller relationship with IBM, IBM may terminate this relationship with the Company at will and upon relatively short notice. The Company's reseller arrangements with IBM are not exclusive. Moreover, IBM is not obligated to have product on hand for timely delivery to the Company, nor can IBM guarantee product availability in sufficient quantities to meet the Company's demands. In September 1997, IBM announced new criteria which its resellers must meet in order to be eligible to acquire personal computers directly from IBM. Beginning on January 1, 1998, in order to directly purchase from IBM, resellers must have purchased a minimum of $100 million worth of computer systems and other products directly from IBM during the period between January 1, 1997 and December 31, 1997. Beginning on January 1, 1999, resellers must have purchased a minimum of $150 million worth of computer systems and other products directly from IBM during the period January 1, 1998 through December 31, 1998. IBM has stated that resellers who are approved to assemble IBM PCs under the AAP, must meet this new criteria to purchase components directly from IBM. The Company has not satisfied the volume requirements under the AAP and does not expect future purchases to do so. The Company terminated its involvement in the AAP in April 1999. The Company currently purchases many components from third-party distributors such as Pinacor and Ingram Micro on terms more favorable than the Company was receiving from IBM direct. Financing Agreement The Company's business activities are capital intensive, requiring the Company to finance accounts receivable and inventory. The failure to obtain adequate product financing on a timely basis could have a material adverse affect on the Company's business, results of operations and financial condition. Pursuant to the Company's financing agreement ("Financing Agreement") with IBM Credit Corporation ("IBM Credit"), the Company is permitted to borrow up to $27,500,000 based upon 85% of all eligible receivables due within 90 days and up to 100% of all eligible inventory. As of September 30, 1998 and 1999, borrowings outstanding under the Financing Agreement were $3,020,234 and zero, respectively. Pursuant to the Financing Agreement, the Company's credit availability is reduced by the aggregate amount of accounts payable owed to IBM credit which, as of September 30, 1998 and 1999 was $9,855,736 and $3,282,454, respectively. The Financing Agreement is subject to temporary increases, thereby increasing the line of credit to $41,250,000 during certain periods. The Company is also required to comply with certain financial covenants. The amount of credit available to the Company pursuant to the Financing Agreement at any point in time may be adversely affected by factors such as delays in collection or deterioration in the quality of the Company's accounts receivable, inventory obsolescence, economic trends in the computer industry and interest rate fluctuations. Any decrease or material limitation on the amount of capital available to the orders, purchase inventory or expand it sales levels and, therefore, would have a material adverse effect on the Company's financial conditions and results of operations. The Company has had a credit facility with IBM Credit since 1992 and was renewed until September, 2000. However, there can be no assurance that the credit facility will be renewed, or that if renewed, the financing to the Company under this renewal will be available in amounts at comparable or better terms than those in effect. The inability of the Company to have continuous access to such financing at reasonable costs would materially and adversely impact the Company's financial condition and results of operations. Sales and Marketing The Company has a broad customer base of primarily Fortune 1000 companies. The Company's sales and marketing efforts are focused on high level decision making executives, whose purchasing decisions are based on factors such as the overall cost of purchasing and maintaining a system and the Company's reputation and expertise in delivering and installing effective total information technology solutions, which initially may not be the least expensive. The Company relies on its marketing and sales programs, its industry-wide expertise, its relationship with existing customers and its status as an IBM Premier Business Partner to generate sales opportunities. The Company currently has sales offices in six locations: New York City, Shirley, and Buffalo, New York; Waltham, Massachusetts; Marlton, New Jersey; and Fairfield, Connecticut. Currently, the Company employs approximately 50 field sales representatives and system engineers. The sales efforts are led by the Company's senior executives, John H. Spielberger, Jeff Rettinger and Lowell Shulman, who have more than 60 years of combined experience in sales of high-level computer systems. The Company believes that due to the complex nature of the computer products it sells and supports, maximum marketing effectiveness can only be achieved by sales specialization. Each sales representative is trained in one specific product line and representatives of one product line can call upon specialized sales and systems engineering personnel from another product line. The Company pursues new business opportunities by referrals from manufacturers, referrals from existing customers, direct solicitation by telephone or mail of pre-qualified customers, and participation in industry trade shows. The Company has developed and maintained automated sales tools intended to improve sales productivity, quality and reliability and increased customer satisfaction. These systems include on-line systems configuration and pricing, real time order entry, order confirmation and electronic mail for customers through privately leased telephone lines and through the Internet. Customer Support and Service The Company believes that its ability to provide effective total solutions to meet the needs of its customers is enhanced by its internal management information system, which combines accounting, purchasing, inventory control, sales order processing and work order management. The Company provides a large array of services to its customers, including warranty repair on all IBM personal computer products; toll-free telephone number for sales and product information and order placement; toll-free telephone number for customer service on all products sold, including technical assistance and repair warranty; E-mail network access for customers to receive real time price quotations, place orders and check order status; on-site system engineers to provide technical assistance for installations and upgrades; partnership with IBM to provide customized services such as helpdesk, consulting, extended warranty, extended maintenance coverage; and IBM Credit Corporation financing options on all products sold. Competition The markets in which the Company operates are characterized by intense competition from several types of network integrators and technical service providers, including mainframe and mid-range computer manufacturers and outsourcers, including, among others, Sun Microsystems, Electronic Data Systems Corporation, Hewlett-Packard Company, Andersen Consulting, IBM Global Services and UNISYS. Other competitors which purchase directly from IBM, like the Company, include value-added resellers, systems integrators and third-party service companies, including CompuCom Systems, Inc., InaCom Corp., MicroAge, Inc., EnPoint Technologies and GE ITS. While the Company receives sales and marketing assistance from IBM, including introductions and referrals to potential customers, the Company, from time to time, faces direct competition from IBM with respect to large contracts. The Company expects to face further competition from new market entrants and possible alliances between competitors in the future. Certain of the Company's current and potential competitors have greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sales of their services than the Company. No assurance can be given that the Company will be able to compete successfully against current and future competitors. The Company's ability to compete successfully depends on a number of factors such as breadth of product and service offerings, sales and marketing efforts, pricing, quality and reliability of services and other support capabilities. While there can be no assurance that the Company will be able to continue to compete successfully with existing or new competition, the Company believes that it currently competes favorably due to its focus and expertise of network integration and mid-range infrastructure services. Limited Backlog of Orders Customers typically do not place recurring "long-term" orders with the Company, resulting in a limited order backlog at any point in time. The failure by the Company to receive orders from customers on a continuous basis would have a material adverse effect on the Company's financial condition and results of operations given the Company's lack of recurring orders. Dependence on Key Personnel The Company's success during the foreseeable future will depend largely upon the continued services of its founder and Chief Executive Officer, John H. Spielberger. The loss of any of the services of the Company's key executive could have a material adverse affect on the Company's business, ongoing results and financial condition. In addition, the Company has attempted to mitigate the risks associated with its dependence on John H. Spielberger by obtaining $1,000,000 key person life insurance policy on his life. The Company's success also depends in part on its ability to attract and retain qualified managerial, technical, sales and marketing personnel. The Company's results of operations could be adversely affected if the Company were unable to attract, hire, assimilate, and train these personnel in a timely manner. Control by Principal Stockholder As of September 30, 1999, John H. Spielberger, Chairman of the Board, President and Chief Executive Officer of the Company, beneficially owned approximately 53% of the Company's outstanding Common Stock. As a result of his stock ownership, Mr. Spielberger has effective control of the Company and the power to control the outcome of matters submitted to a vote of the Company's stockholders, such as the election of at least a majority of the members of the Company's Board of Directors and to direct the future operations of the Company. Such concentration may have the effect of discouraging, delaying or preventing a change in control of the Company. Anti-Takeover Provisions Certain provisions of the Company's Amended and Restated Certificate of Incorporation ("Certificate of Incorporation"), Amended and Restated By-laws ("By-Laws") and Delaware law may be deemed to have an anti-takeover effect. The Company's Certificate of Incorporation provides that the Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock with such designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations that the Board of Directors fixes without stockholder approval. Moreover, the Company's Certificate of Incorporation and By-Laws provide that its Board of Directors is divided into three classes serving staggered three year terms, resulting in approximately one-third of the directors being elected each year and also contain certain other provisions relating to voting and the removal of the officers and directors. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Each of the foregoing provisions may have the effect of rendering more difficult, delaying, discouraging, preventing or rendering more costly an acquisition of the Company or a change in control of the Company Employees As of September 30, 1999, the Company had 72 full-time employees. The Company has no collective bargaining agreements and believes its relations with its employees are good. Significant Fluctuations in Quarterly Results The Company's quarterly operating results have fluctuated in the past and may continue to do so in the future. Quarterly operating results may fluctuate as a result of a variety of factors, including: the timing of the Company's delivery of significant orders, the ability of manufacturers to deliver, in a timely fashion, products for which the Company has received orders, the length of the sales cycle, receipt of volume discounts, the demand for products and services offered by the Company, the introduction or announcements by IBM and other manufacturers relating to new products, the hiring and training of additional personnel, as well as general business conditions. Historically, the size and timing of the Company's sales transactions have varied substantially from quarter to quarter and the Company expects such variations to continue in future periods, including the possibility of losses in one or more fiscal quarters. The fluctuations may be caused by delays in shipping certain computer systems for which the Company received orders that it expected to deliver during that quarter. In addition, the Company's collection periods have fluctuated due to periodic unavailability of product, which resulted in the Company not receiving payment from certain customers until their entire orders were shipped. Accordingly, it is likely that in one or more future fiscal quarters, the Company's operating results may be below the expectations of public market analysts and investors. As a result, the market price of the Company's Common Stock would be materially adversely affected. Disclosures Regarding Forward Looking Statements This report on Form 10-K includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Form 10-K including, but not limited to, statements contained in this "Business," "Management's Discussion and Analysis" and "Notes to Consolidated Financial Statements," located elsewhere herein regarding the Company's financial position, business strategy, plans and objectives of management of the Company for future operations, and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove correct. Item 2. Properties In May 1998, the Company's new 40,000 square foot assembly, warehouse and headquarters facility located in Shirley, New York became operational. The total cost to construct and equip this facility was approximately $2.325 million, exclusive of land. Construction costs were reduced by $100,000, after application of a $100,000 grant from The Empire State Development Corporation in 1999. The Company leases 5,027 square feet of general office space in New York City pursuant to a five year lease at an annual rental of $130,704. This lease expires on February 28, 2002. The Company leases 5,350 square feet of general office space in Waltham, Massachusetts pursuant to a five year lease with an initial term which expired on October 31, 1999. The lease provided for rental payments in the amount of $70,085 annually for the period from December 1, 1994 through September 30, 1997 and $76,772 annually for the period from October 1, 1997 through October 31, 1999. Effective November 1, 1999, the Company amended this lease to reduce the leased area to 2,850 square feet and extended the term through January 31, 2002 at a base annual rental of $62,700 subject to escalation. The Company leases 340 square feet of general office space in Marlton, New Jersey for $13,200 per year, expiring on January 31, 2000. The Company leases 795 square feet of general office space in Fairfield, Connecticut for $17,180 per year. The lease expires on November 30, 2002. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Common Equity and Related Stockholder Matters (a) The Company's Common Stock, par value $.01 per share (the "Common Stock"), trades on the Nasdaq SmallCap Stock Market under the symbol SYCM. The following table sets forth for each period indicated the high and low sales prices for the Common Stock through September 30, 1998 and 1999, as reported by Nasdaq: Sales Prices ------------ High Low ---- --- Fiscal 1998 ----------- Quarter Ended December 31, 1997 6 1/4 5 Quarter Ended March 31, 1998 5 1/4 4 1/4 Quarter Ended June 30, 1998 4 19/32 1 3/4 Quarter Ended September 30, 1998 3 1 1/8 Fiscal 1999 ----------- Quarter Ended December 31, 1998 1 3/4 1 1/16 Quarter Ended March 31, 1999 3 1 1/8 Quarter Ended June 30, 1999 2 1 1/4 Quarter Ended September 30, 1999 2 1/2 1 3/16 The foregoing over-the-counter market quotations represent inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. On or about September 16, 1998, the Company received notification from Nasdaq that because its market value of public float (MVAF) had fallen below the $5,000,000 threshold set forth in Marketplace Rule 4450(A)(2) for a period of ten (10) consecutive trade days, its stock could be subject to possible delisting action from the Nasdaq National Market. The Company attended a hearing before Nasdaq officials in early 1999 to explain why its stock should continue to be listed on the Nasdaq National Market. Nasdaq officials ruled to delist the Company from the National Market. As a result, the Company's stock is currently traded on the Nasdaq SmallCap Market. (b) The number of recordholders of the Common Stock as of December 3, 1999 is approximately 53. The Company believes that there are a substantially greater number of beneficial owners of shares of its Common Stock. (c) The Company currently intends to retain all future earnings for use in the operations of its business and, therefore, does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will be dependent, among other things, upon earnings, capital requirements, financing agreement covenants, the financial condition of the Company and applicable law. Item 6. Selected Financial Data The following financial statement data as of and for the fiscal years ended September 30, 1997, 1998 and 1999 are derived from, and are qualified by reference to, the audited Consolidated Financial Statements included herein and should be read in conjunction with those Consolidated Financial Statements and the Notes thereto. The financial statement data as of and for the fiscal years ended September 30, 1995 and 1996 are derived from audited consolidated financial statements not included herein. Consolidated Statement of Operations Data 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Net sales ......................... $ 55,195,507 $ 98,446,698 $ 89,725,938 $ 98,302,636 $ 69,683,295 Cost of sales ..................... 49,441,544 89,025,331 78,049,310 89,047,731 62,731,687 Inventory write-down .............. -- -- -- 657,491 -- ------------ ------------ ------------ ------------ ------------ Gross Profit ...................... 5,753,963 9,421,367 11,676,628 8,597,414 6,951,608 Selling and administrative expenses .......................... 4,079,184 5,028,812 6,534,552 8,193,905 7,249,568 ------------ ------------ ------------ ------------ ------------ Income/(loss) from operations ..... 1,674,779 4,392,555 5,142,076 403,509 (297,960) Interest expense (net) ............ (1,207,316) (1,390,867) (979,185) (881,781) (216,521) Other income ...................... 37,126 63,151 2,570 (35,000) 2,553 Realized loss on available-for-sale securities ........................ -- (1,406,250) -- (206,250) -- ------------ ------------ ------------ ------------ ------------ Income/(loss) from continuing operations before income taxes .... 504,589 1,658,589 4,165,461 (719,522) (511,928) (Provision) benefit for income taxes ............................. (223,769) (735,886) (1,761,855) 272,160 111,603 ------------ ------------ ------------ ------------ ------------ Net income/(loss) ................. $ 280,820 $ 922,703 $ 2,403,606 $ (447,362) $ (400,325) ============ ============ ============ ============ ============ Per Share Data: Income from continuing operations $ .08 $ .25 $ .61 $ (.10) $ (.08) Diluted weighted average number of shares outstanding ................ 3,614,040 3,677,290 3,931,846 4,613,750 $ 4,771,364 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Consolidated Balance Sheet Data: Working capital..................... $1,769,589 $3,342,545 $10,356,416 $9,314,237 $9,077,650 Total assets........................ 18,471,659 32,102,557 38,104,036 27,857,265 19,301,700 Short term debt..................... 10,797,111 12,510,017 10,658,451 3,114,998 96,461 Long term debt...................... -- 67,291 66,416 1,611,355 1,610,338 Stockholders' equity................ 2,355,884 3,998,587 11,827,636 11,551,919 11,206,868 Item 7. Management's Discussion and Analysis of Results of Operations Overview The Company operates in a highly competitive industry which in turn places constant pressures on maintaining gross profit margins. Many of the Company's sales are high volume equipment sales which produce lower than average gross profit margins, but are often accompanied by a service arrangement which yields higher than average gross profit margins. The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items in the Company's consolidated statements of operations. Year Ended September 30 ----------------------- 1999 1998 1997 ---- ---- ---- Net sales.......................................... 100% 100.0% 100.0% Cost of sales......................................(90.0) (90.6) (87.0) Writedown of inventory............................. --- (.7) --- --------------------------------- Gross profit........................................10.0 8.7 13.0 Selling and administrative expenses.................(10.4) (8.3) (7.3) ---------------------------------- Income/(loss) from operations....................... (.4) .4 5.7 Interest expense (net)..............................(.3) (.9) (1.1) Realized loss on available-for-sale securities...... --- (.2) --- ---------------------------------- (Loss)/income before income taxes....................(.7) (.7) 4.6 Benefit/(provision) for income taxes................. .2 .3 (1.9) ---------------------------------- Net (loss)/income................................... (.5) (.4) 2.7 ---------------------------------- Fiscal Year 1999 Compared to Fiscal Year 1998 Sales for fiscal year 1999 decreased approximately 29% or $28,619,341 to $69,683,295 from $98,302,636 in fiscal year 1998. The decrease in sales was a result of customer reluctance to spend on new programs before the effects of the new millennium are understood and the Company transitioning its business from a PC assembler to a reseller of mid-range systems. Gross profit as a percentage of sales increased to 10.0% in fiscal year 1999 from 8.7% in fiscal year 1998. This increase was primarily attributable to the inclusion of a $657,491 writedown of inventory in fiscal 1998 or .7% of sales. Selling and Administrative expenses decreased by approximately 11.5% or $944,337 to $7,249,568 in fiscal year 1999 from $8,193,905 in fiscal year 1998. The reduction in expense is primarily due to cost control programs, reduced commissions on lower sales and staff reductions associated with redirecting marketing efforts. Interest expense decreased 70.7% or $628,075 to $260,140 in fiscal year 1999 from $888,215 in fiscal year 1998. The Company also believes that its constant monitoring of accounts receivable has helped to keep interest costs at a minimum. In addition, the Company uses all available funds to reduce its outstanding supplier credit facility on a daily basis. Net interest expense (interest expense less interest income) for fiscal year 1999 and 1998 was $216,521 and $881,781, respectively. Loss from continuing operations before income taxes decreased by 28.9% to $511,928 in fiscal year 1999 from $719,522 in fiscal year 1998. This decrease resulted primarily from improved gross margin percentage and reduced interest expense referred to above. The Company's effective tax rate was a negative 21.8% in fiscal year 1999 and a negative 37.8% in fiscal year 1998. The Company's net loss for fiscal year 1999 decreased to $400,325 from $447,362 in fiscal year 1998 primarily due to the lost gross profit in fiscal 1999 being more than offset by the inventory write-off, increased operating expenses and interest expense in 1998. Fiscal Year 1998 Compared to Fiscal Year 1997 Sales for fiscal year 1998 increased approximately 10% or $8,576,698 to $98,302,636 from $89,725,938 in fiscal year 1997. The entire increase in sales relates to improved results from the Company's locations in Connecticut and Buffalo, New York which began operations in January 1997 and October 1997, respectively. Gross Profit as a percentage of sales decreased to 8.7% in fiscal year 1998 from 13.0% in fiscal year 1997. Included in this decrease is the Company's writedown of inventory in the amount of $657,491 during fiscal year 1998. Excluding this writedown, gross profit percentage would have been 9.4% for fiscal year 1998. The decrease in gross profit percentage was the result of increased competition and lower selling prices, most notably in the personal computer segment of the market. In addition, the Company attempted to increase its sales volume by taking some orders at relatively low margins. As pricing pressures in the computer market remain intense, the Company is becoming more selective in its participation in programs that cannot meet profitability requirements. Selling and Administrative expenses increased by $1,659,353 or 25% to $8,193,905 for fiscal year 1998 from $6,534,552 in fiscal year 1997. Approximately $700,000 of the increase relates to costs associated with the commencement and growth of operations in the Company's Connecticut, New Jersey, and Buffalo, New York offices. Professional services and insurance increased by approximately $250,000 for expenses incurred as a result of the transition to a public company. The balance relates to payroll and payroll related expenses incurred as a result of the hiring of systems engineers and additional sales personnel, along with an increase in commissions paid as a result of the increased sales volume. Interest expense decreased $97,872 or 9.9% to $888,215 in fiscal year 1998 from $986,087 in fiscal year 1997. This decrease is a result of a reduction in debt due to the decrease in inventory during fiscal year 1998. The full impact of this reduction in inventory on interest expense will be realized during the first quarter of fiscal year 1999. Additionally, the Company uses all available funds to reduce its outstanding loan balance on a daily basis. Net interest expense (interest expense less interest income) for fiscal year 1998 and 1997 was $881,781 and $979,185, respectively. Losses from operations before income taxes was $719,522 for fiscal year 1998 compared to income from operations before income taxes of $4,165,461 in fiscal year 1997. This absolute decrease of $4,884,983 is the result of the significant decline in gross profits along with the Company's writedown of inventory and the increase in selling and administrative expenses. As a result of the loss, the Company had a tax benefit for fiscal year 1998 of $272,160. The effective tax rate for fiscal year 1998 was (37.83%). This compared to a tax provision of $1,761,855 for fiscal year 1997. The effective tax rate for fiscal year 1997 was 42.3%. The Company's net loss for fiscal year 1998 was $447,362 or $.10 per diluted share compared to net income of $2,403,606 or $.61 per diluted share for fiscal year 1997. The decrease is the result primarily of a lower gross profit percent in fiscal 1998 and significantly higher operating expenses versus fiscal 1997. Liquidity and Capital Resources The Company's current ratios at September 30, 1999 and 1998 were 2.40 and 1.63, respectively. Working capital at September 30, 1999 was $9,077,650, a decrease of $236,587 from September 30, 1998. Cash provided by operating activities was $4,569,649 in fiscal year 1999 and cash provided by operating activities was $9,342,275 in fiscal year 1998. The cash provided by operating activities during fiscal year 1999 and 1998 was the result of significant reductions in both inventory and accounts receivable. Cash used in investing activities was $109,357 and $2,607,070 for the fiscal years 1999 and 1998, respectively, and was used to finance capital expenditures. A 40,000 square foot facility was completed and occupied in May 1998 and houses the Company's corporate office, warehouse and assembly facility. Net cash used in financing activities was $3,111,280 in fiscal year 1999 and net cash used by financing activities was $6,258,290 in fiscal year 1998. The net cash used in financing activities during fiscal years 1998 and 1999 related to payments made under the Company's supplier credit facility. Since 1992, the Company has had a series of credit arrangements with IBM Credit Corporation. Pursuant to the Financing Agreement, the Company may borrow up to 85% of its eligible receivables and 100% of eligible inventory, to a maximum of $27,500,000. In addition to the permanent credit line, there are various credit line uplifts during the year which can increase the line of credit by as much as 50%. As of September 30, 1999, 1998 and 1997, interest on the outstanding borrowings is payable monthly at the prime rate, or prime rate plus 6.5% should the Company fail to meet certain collateral requirements. As of September 30, 1999 and 1998, borrowings outstanding under this facility were zero and $3,020,234, respectively. Additionally, $3,282,454 and $9,855,736 were included in accounts payable at September 30, 1999 and 1998, respectively, and are included against the maximum credit available. The Company also received a grant of $100,000 and a loan of $100,000 from The Empire State Development Corporation to assist in the financing of the new facility in Shirley, New York. The Company believes that its present line of credit with IBM Credit Corporation coupled with its projected earnings capacity will be sufficient to fund its operations and capital expenditures for at least 12 months. In addition, the Company secured a mortgage during fiscal year 1998 with Chase Manhattan Bank on its new facility in the amount of $1,650,000. The proceeds of this mortgage were used to pay down its debt with IBM Credit Corporation. Throughout fiscal years 1999 and 1998, the Company has been in a positive collateral position with IBM Credit Corporation resulting in the ability to draw down against its current line of credit whenever needed. The number of days sales outstanding for each of fiscal years 1999 and 1998 was 60 and 68 days, respectively. The Company is increasing its efforts in the accounts receivable area and is expecting to reduce its days sales outstanding in the coming fiscal year. Seasonality and Quarterly Fluctuations The Company has historically experienced and expects to continue to experience fluctuations in its net sales, income from operations and net income due to the size and timing of system sales transactions. Due to the fact that a significant portion of the Company's overhead is fixed, the Company's results of operations may be adversely affected if revenues were to fall below Company expectations. The Company can typically deliver systems within a short period of time and therefore does not have a significant long-term backlog in orders. The following table sets forth certain quarterly information for the periods indicated: Fiscal Year 1999 ---------------- Sept. 30 June 30 March 31 Dec. 31 (in thousands) 1999 1999 1999 1998 - ---------------------------------------------------------------------------------------- Net sales .............................. $ 13,982 $ 14,018 $ 14,355 $ 27,329 Gross profit .......................... 973 1,218 1,921 2,839 (Loss)/income from continuing operations before income taxes ............... (827) (777) 368 938 Net (Loss)/income(1) ................... (605) (478) 172 511 Fiscal Year 1998 Fiscal Year 1997 ---------------- ---------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, (in thousands) 1998 1998 1998 1997 1997 1997 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Net sales ..................... $ 21,596 $ 26,417 $ 22,228 $ 28,062 $ 25,848 $ 24,719 $ 17,876 $ 21,283 Gross profit .................. 1,410 2,500 1,873 2,814 3,791 2,617 2,629 2,640 Income (loss) from continuing operations before income taxes (1,080) 152 (355) 564 1,481 868 855 962 Net income (loss)(1) .......... (657) 89 (196) 317 851 502 490 560 <FN> (1) Taxes are computed based on effective tax rates for the respective fiscal years. </FN> Disclosures Regarding Forward Looking Statements Management's discussion and analysis of financial conditions and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto appearing elsewhere in this Report. Except for the historical statements and discussions contained in this Report, statements contained herein constitute forward looking statements within the meanings of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the results anticipated in such statements. These risks and uncertainties include, but are not limited to those set forth herein and the risk factors described in the Company's prospectus dated June 17, 1997, its Form 10-K for the year ended September 30, 1998 and from time to time in the Company's other filings with the Securities and Exchange Commission. Year 2000 Compliance The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment, software and devices with embedded technology that are time-sensitive may recognize a date using "00" as the year 1900, rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in normal business activities. The Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the year 2000 and thereafter. For this purpose, the term "computer equipment and software" includes systems that are commonly thought of as information technology ("IT") systems, including accounting, data processing and scanning equipment. Based upon its identification and assessment, the Company has replaced or modified some of its computer equipment and software that it had identified as not year 2000 ready. In addition, in the ordinary course of replacing computer equipment and software, the Company attempts to obtain replacements that it believes are Year 2000 compliant. Utilizing internal resources to identify and assess needed Year 2000 remediation, the Company began its Year 2000 identification, assessment, remediation, and testing efforts in October 1997. As of June 4, 1999, The Company completed final testing and is now 100% year 2000 ready. The Company believes that the cost of its Year 2000 identification, assessment, remediation, and testing efforts, as well as the anticipated costs to be incurred by the Company with respect to Year 2000 issues of third parties, will not be material. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. However, if all Year 2000 issues are not properly identified, or assessment, remediation, and testing are not effected timely with respect to Year 2000 problems that are identified, there can be no assurance that the Year 2000 issue will not materially adversely impact the Company" results of operations or adversely affect the Company's relationships with customers, vendors or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations. The Company has not fully developed a comprehensive contingency plan to address situations that may result from the year 2000. If Year 2000 compliance issues are discovered, the Company will evaluate the need for contingency plans relating to such issues. The costs of the Company's Year 2000 identification, assessment, remediation, and testing efforts are based upon management's good-faith estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, possible third-party remediation plans, and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to identify, assess, remediate, and test all relevant computer codes and imbedded technology, and similar uncertainties. In addition, variability of definitions of "Year 2000 Compliant" and the myriad of different products and services, and combinations thereof, sold by the Company may lead to claims whose impact on the Company is not currently estimateable. No assurance can be given that the aggregate cost of defending and resolving such claims, if any, will not materially adversely affect the Company's results of operations. Although some of the Company's agreements with manufacturers and others from whom it purchases products for resale contain provisions requiring such parties to indemnify the Company under such circumstances, there can be no assurance that such indemnification arrangements will cover all of the Company's liabilities and costs related to claims by third parties related to Year 2000 issue. Inflation In the opinion of management, inflation has not had a material effect on the operations of the Company. Item 8. Consolidated Financial Statements The information is contained on Pages F-1 through F-19 hereof. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART IV Item 14. Exhibits, Financial Statement Schedule and reports on Form 8-K (a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S) Index to Consolidated Financial Statements........................................................F-1 Independent Auditors' Report......................................................................F-2 Consolidated Balance Sheets as of September 30, 1999 and 1998.....................................F-3 Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997...............................................................F-4 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1999, 1998 and 1997.........................................................F-5 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997...............................................................F-6 Notes to Consolidated Financial Statements.................................................F-7 - F-19 (a)(2) FINANCIAL STATEMENT SCHEDULE Combined Consent and Report of Independent Accountants on Schedule................................S-1 Schedule II - Valuation and Qualifying Accounts...................................................S-2 (a)(3) EXHIBITS *3.1 Form of Amended and Restated Certificate of Incorporation *3.2 Form of Amended and Restated By-Laws *4.1 Form of Common Stock Certificate *10.1 1988 Incentive Stock Option Plan **10.2 1998 Incentive Stock Option Plan ***10.3 1999 Employee Stock Purchase Plan *22.1 List of Subsidiaries 23 Consent of Albrecht, Viggiano, Zureck & Company, P.C. 27 Financial Data Schedule - --------------------------- * Incorporated by reference from the Registrant's Registration Statement on Form S-1, Registration Number 333-25593. ** Incorporated by reference from the Registrant's definitive proxy statement filed with the Securities and Exchange Commission on January 29, 1998. *** Incorporated by reference from the Registrant's definitive proxy statement filed with the Securities and Exchange Commission on December 29, 1998. (b)(1) REPORTS ON FORM 8-K The Registrant did not file any reports on Form 8-K during the last quarter of its fiscal year ended September 30, 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SYSCOMM INTERNATIONAL CORPORATION Registrant By: /s/ John H. Spielberger, President ---------------------------------- Dated: December 10, 1999 John H. Spielberger , President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following Signature Title Date /s/ John H. Spielberger Chairman of the Board, President and Chief December 10, 1999 - ----------------------- Executive Officer (Principal Operating Officer) John H. Spielberger /s/ Thomas F. Belleau Vice President Finance, Secretary, Chief Financial December 10, 1999 - --------------------- Officer and Director Thomas F. Belleau /s/ Lowell Shulman Vice President General Manager Consulting Services December 10, 1999 - ------------------ and Director Lowell Shulman /s/ John C. Spielberger Director December 10, 1999 - ----------------------- John C. Spielberger /s/ Cornelia Eldridge Director December 10, 1999 - --------------------- Cornelia Eldridge /s/ Lee Adams Director December 10, 1999 - ------------- Lee Adams /s/ Lawrence S. Brochin Director December 10, 1999 - ----------------------- Lawrence S. Brochin SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS ----------------- Page No. -------- INDEPENDENT AUDITORS' REPORT............................................................................ F-2 FINANCIAL STATEMENTS Consolidated Balance Sheets......................................................................... F-3 Consolidated Statements of Operations............................................................... F-4 Consolidated Statements of Stockholders' Equity..................................................... F-5 Consolidated Statements of Cash Flows............................................................... F-6 Notes to Consolidated Financial Statements.......................................................... F-7 A L B R E C H T , V I G G I A N O , Z U R E C K & C O M P A N Y , P . C . CERTIFIED PUBLIC ACCOUNTANTS 25 SUFFOLK COURT HAUPPAUGE, NY 11788 (516) 434-9500 INDEPENDENT AUDITORS' REPORT To the Board of Directors SysComm International Corporation and Subsidiary Shirley, New York We have audited the accompanying consolidated balance sheets of SysComm International Corporation and Subsidiary as of September 30, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended September 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the consolidated financial position of SysComm International Corporation and Subsidiary as of September 30, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 1999, in conformity with generally accepted accounting principles. /s/ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C. Hauppauge, New York November 10, 1999 F-2 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, 1999 and 1998 1999 1998 ------------------ ------------------ ASSETS Current Assets Cash and cash equivalents $ 2,263,521 $ 914,509 Accounts receivable, net 11,400,892 19,612,934 Inventory 741,561 2,586,236 Recoverable income taxes 725,900 280,976 Prepaid expenses 106,740 83,780 Deferred income taxes 323,530 529,793 ------------------ ------------------ Total Current Assets 15,562,144 24,008,228 Property, Plant and Equipment, Net 3,315,187 3,509,345 Other Assets 424,369 339,692 ------------------ ------------------ Total Assets $ 19,301,700 $ 27,857,265 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Supplier credit facility $ -0- $ 3,020,234 Accounts payable and accrued liabilities 6,378,033 11,578,993 Current portion of long-term debt 96,461 94,764 Income taxes payable 10,000 -0- ------------------ ------------------ Total Current Liabilities 6,484,494 14,693,991 Long-Term Debt 1,610,338 1,611,355 ------------------ ------------------ Total Liabilities 8,094,832 16,305,346 ------------------ ------------------ Commitments and Contingencies Stockholders' Equity Preferred stock; no par value; 1,000,000 shares authorized; none issued Common stock; $.01 par value; 40,000,000 shares authorized; 5,523,589 sharesissued at September 30, 1999; 5,515,200 shares issued at September 30, 1998 55,236 55,152 Additional paid-in capital 6,473,892 6,317,617 Retained earnings 5,522,211 5,922,536 ------------------ ------------------ 12,051,339 12,295,305 Treasury stock (at cost) (844,471) (743,386) ------------------ ------------------ Total Stockholders' Equity 11,206,868 11,551,919 ------------------ ------------------ Total Liabilities and Stockholders' Equity $ 19,301,700 $ 27,857,265 ================== ================== See accompanying notes to consolidated financial statements. F-3 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years ended September 30, 1999, 1998 and 1997 1999 1998 1997 ------------ ------------ ------------ Sales .................................................... $ 69,683,295 $ 98,302,636 $89,725,938 Cost of Sales ............................................ 62,731,687 89,047,731 78,049,310 Writedown of Inventory ................................... -0- 657,491 -0- ------------ ------------ ------------ 62,731,687 89,705,222 78,049,310 ------------ ------------ ------------ Gross Profit 6,951,608 8,597,414 11,676,628 Selling and Administrative Expenses ...................... 7,249,568 8,193,905 6,534,552 ------------ ------------ ------------ (Loss) Income from Operations (297,960) 403,509 5,142,076 ------------ ------------ ------------ Other Income (Expense) Interest expense ..................................... (260,140) (888,215) (986,087) Interest income ...................................... 43,619 6,434 6,902 Other ................................................ 2,553 (35,000) 2,570 Realized loss on available-for-sale securities ......................................... -0- (206,250) -0- ------------ ------------ ------------ Total Other Expense (213,968) (1,123,031) (976,615) ------------ ------------ ------------ (Loss) Income Before Income Taxes (511,928) (719,522) 4,165,461 Benefit (Provision) for Income Taxes ..................... 111,603 272,160 (1,761,855) ------------ ------------ ------------ Net (Loss) Income $ (400,325) $ (447,362) $ 2,403,606 ============ ============ ============ Per Share Data Basic ................................................ $ (0.08) $ (0.10) $ 0.67 Diluted .............................................. (0.08) (0.10) 0.61 Weighted Average Shares Basic ................................................ 4,749,519 4,593,065 3,562,033 Diluted .............................................. 4,771,364 4,613,750 3,931,846 See accompanying notes to consolidated financial statements. F-4 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended September 30, 1999, 1998 and 1997 Additional Common Stock Paid-In ------------------------- Shares Amount Capital ----------- ----------- ------------ Balance as of September 30, 1996 .... 3,170,540 $ 36,322 $ 138,143 Common Stock Sold in Public Offerings Net of Offering Costs ............. 1,385,000 13,850 5,472,309 Comprehensive Income: Net Income .......................... Unrealized Loss on Available-for- Sale Securities ................... Total Comprehensive Income .......... ----------- ----------- ------------ Balance as of September 30, 1997 .... 4,555,540 50,172 5,610,452 Comprehensive Loss: Net Loss ............................ Unrealized Loss on Available-for- Sale Securities ................... Realized Loss on Available-for-Sale Securities ........................ Total Comprehensive Loss ............ Compensatory Stock Options Issued to Non-employees ........... 75,225 Exercise of Stock Options ........... 498,000 4,980 631,940 Purchase of Treasury Shares ......... (279,635) ----------- ----------- ------------ Balance as of September 30, 1998 .... 4,773,905 55,152 6,317,617 Net Loss ............................ Compensatory Stock Options Issued to Non-employees ........... 147,000 Common Stock Issued Pursuant to Stock Purchase Plan ............ 8,389 84 9,275 Purchase of Treasury Shares ......... (61,400) ----------- ----------- ------------ Balance as of September 30, 1999 .... 4,720,894 $ 55,236 $ 6,473,892 =========== =========== ============= Accumulated Other Total Treasury Stock Comprehensive Retained Stockholders' ------------------------- --------------------------------- Shares Amount Income Earnings Equity ----------- ----------- ------------ ----------------- ------------------ Balance as of September 30, 1996 .... 461,660 $(142,170) -0- $3,966,292 $ 3,998,587 Common Stock Sold in Public Offerings Net of Offering Costs ............. 5,486,159 Comprehensive Income: Net Income .......................... 2,403,606 2,403,606 Unrealized Loss on Available-for- Sale Securities ................... (60,716) (60,716) ----------- Total Comprehensive Income 2,342,890 ---------- ---------- -------- ---------- ----------- Balance as of September 30, 1997 .... 461,660 (142,170) (60,716) 6,369,898 11,827,636 ----------- Comprehensive Loss: Net Loss ............................ (447,362) (447,362) Unrealized Loss on Available-for- Sale Securities ................... (60,034) (60,034) Realized Loss on Available-for-Sale Securities ........................ 123,750 123,750 ----------- Total Comprehensive Loss ............ (386,646) Compensatory Stock Options Issued to Non-employees ........... 75,225 Exercise of Stock Options ........... 636,920 Purchase of Treasury Shares ......... 279,635 (601,216) (601,216) ---------- ---------- -------- ---------- ----------- Balance as of September 30, 1998 .... 741,295 (743,386) -0- 5,922,536 11,551,919 Net Loss ............................ (400,325) (400,325) Compensatory Stock Options Issued to Non-employees ........... 147,000 Common Stock Issued Pursuant to Stock Purchase Plan ............ 9,359 Purchase of Treasury Shares ......... 61,400 (101,085) (101,085) ---------- --------- -------- ---------- ----------- Balance as of September 30, 1999 .... 802,695 $(844,471) -0- 5,522,211 11,206,868 ========== ========= ======== ========== =========== See accompanying notes to consolidated financial statements. F-5 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30, 1999, 1998 and 1997 1999 1998 1997 --------------- --------------- ---------------- Cash Flows From Operating Activities Net (loss) income $ (400,325) $ (447,362) $ 2,403,606 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 292,144 299,274 188,759 Compensatory stock options issued to non-employees 147,000 75,225 -0- Deferred tax provision (benefit) 206,263 (208,212) (43,145) Loss (gain) on disposition of equipment 11,371 -0- (2,570) Realized loss on available-for-sale securities -0- 206,250 -0- Changes in assets and liabilities: Accounts and note receivable 8,212,042 3,655,192 (2,255,884) Inventory 1,844,675 10,058,107 (3,707,498) Recoverable income taxes (444,924) (280,976) -0- Prepaid expenses and other assets (107,637) (42,683) (153,423) Accounts payable and accrued liabilities (5,200,960) (3,473,326) 611,898 Income taxes payable 10,000 (499,214) (569,983) --------------- --------------- ---------------- Net Cash Provided by (Used in) Operating Activities 4,569,649 9,342,275 (3,528,240) --------------- --------------- ---------------- Cash Flows From Investing Activities Purchase of property, plant and equipment (209,357) (2,607,070) (803,317) Proceeds from disposition of equipment -0- -0- 7,300 Proceeds from state grant 100,000 -0- -0- Net Cash Used in Investing Activities (109,357) (2,607,070) (796,017) --------------- --------------- ---------------- Cash Flows From Financing Activities Net payments under supplier credit facility (3,020,234) (7,594,604) (1,868,553) Net proceeds from long-term debt 100,000 1,650,000 -0- Payments of long-term debt (99,320) (53,910) (36,435) Net proceeds from issuance of common stock 9,359 -0- 5,486,159 Purchase of treasury stock (101,085) (259,776) -0- --------------- --------------- ---------------- Net Cash (Used in) Provided by Financing Activities (3,111,280) (6,258,290) 3,581,171 --------------- --------------- ---------------- Net Increase (Decrease) in Cash and Cash Equivalents 1,349,012 476,915 (743,086) Cash and Cash Equivalents at Beginning of Year 914,509 437,594 1,180,680 --------------- --------------- ---------------- Cash and Cash Equivalents at End of Year $ 2,263,521 $ 914,509 $ 437,594 =============== =============== ================ Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Income taxes $ 241,935 $ 809,910 $ 2,386,580 Interest 252,727 888,215 986,087 Supplemental Schedules of Noncash Investing and Financing Activities Purchase of treasury stock: Proceeds from sale of stock options $ -0- $ 341,440 $ -0- Purchase of treasury stock -0- (601,216) -0- --------------- --------------- ---------------- Cash Paid for Treasury Stock $ -0- $ (259,776) $ -0- =============== =============== ================ Acquisition of equipment: Cost of equipment $ -0- $ -0- $ 52,547 Equipment financed -0- -0- (52,547) --------------- --------------- ---------------- Cash Paid for Equipment $ -0- $ -0- $ -0- =============== =============== ================ See accompanying notes to consolidated financial statements. F-6 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Business Organization and Basis of Presentation SysComm International Corporation (the "Company"), incorporated on September 30, 1987, is a Delaware corporation with one active subsidiary: Information Technology Services, Inc. (doing business as InfoTech, a New York Corporation since 1980). The Company, through its subsidiary, is authorized to conduct business in New York, New Jersey, Connecticut and Massachusetts. The Company is a supplier and systems integrator of a broad range of computer and related products. On March 31, 1997, the Company effected a two-for-one split of common stock. All references in the accompanying consolidated financial statements and notes thereto relating to common stock and additional paid-in capital, stock options, per share and share data have been retroactively adjusted to reflect the two-for-one stock split. On April 21, 1997, a special meeting of the stockholders was held to amend the Certificate of Incorporation to increase the aggregate of authorized shares of common stock from 5,000,000 shares of common stock to 40,000,000 shares of common stock and to authorize 1,000,000 shares of preferred stock. The preferred stock is not expected to be issued at any time in the near future. The preferred stock's rights, preferences and characteristics will be determined by the Board of Directors at such time as the preferred stock is issued. On June 17, 1997, the Company consummated an initial public offering of common stock (the "Offering"). The Company sold 1,250,000 shares at $5.00 per share. On July 21, 1997, the underwriters exercised their over-allotment option to purchase an additional 135,000 shares. In connection with the Offering, 125,000 warrants were granted to the Company's representative underwriter. The fair value was estimated at $.52 per warrant using the Black-Scholes pricing model. The fair value of these warrants were offset against the Offering proceeds. Basis of Consolidation The consolidated financial statements include the accounts of SysComm International Corporation and its wholly-owned subsidiary. Significant intercompany accounts and transactions have been eliminated in consolidation. Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (continued) Stock-Based Compensation The Company accounts for stock options and employees' purchase rights as prescribed by Accounting Principles Board Opinion No. 25 and includes pro forma information in the stock-based compensation footnote, as permitted by Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). Accordingly, no compensation cost is recognized for employees' purchase rights and stock options granted to employees. Compensation cost is recognized for stock options granted to non-employees based upon the fair market value of the options granted. Accounts Receivable Accounts receivable are presented net of allowances for doubtful accounts and for sales returns. The allowances are based on prior experience and management's evaluation of the collectibility of accounts receivable and returned merchandise credits. Authorized sales returns from the supplier are classified as receivables. Management believes that the allowances are adequate. However, further additions to the allowances may be necessary based on changes in economic conditions. The allowance for doubtful accounts was $169,050 and $116,606 as of September 30, 1999 and 1998, respectively. The allowance for sales returns was $110,000 and $37,389 as of September 30, 1999 and 1998, respectively. Inventory Inventory consists principally of computer hardware and software, and is valued at the lower of cost (first-in, first-out) or market. Substantially all inventory items are finished goods. With regard to the Company's assessment of the realizability of inventory, the Company periodically conducts a complete physical inventory, and reviews the movement of inventory on an item by item basis to determine the value of items which are slow moving. After considering the potential for near term product engineering changes and/or technological obsolescence and current realizability due to changes in returns and price protection policies, the Company determines the current need for valuation allowances. After applying the above noted measurement criteria at September 30, 1999 and 1998, the Company determined that an allowance of $164,420 and $284,000, respectively, was adequate. Property, Plant and Equipment Property, plant and equipment is stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged against operations as incurred. Upon retirement or sale, the assets disposed are removed from the accounts and any resulting gain or loss is reflected in the results of operations. Capitalized values of property under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less. F-8 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (continued) Property, Plant and Equipment (continued) Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Estimated Useful Life ----------- Building 39 years Vehicles 1-5 years Computer equipment 5 years Furniture and fixtures 7 years Leasehold improvements 5 years Income Taxes The Company uses the asset and liability method of accounting for income taxes. 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 and the tax basis of existing assets and liabilities. A valuation allowance against deferred tax assets is not considered necessary because it is more likely than not that the deferred tax asset will be fully realized. Investments The Company evaluates its investment policies consistent with Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). Accordingly, investment securities are classified as available-for-sale securities and carried at fair value, with temporary unrealized gains and losses reported as a separate component of accumulated other comprehensive income within stockholders' equity. Realized losses are recorded for any decline in value determined to be other-than-temporary on available-for-sale securities. Comprehensive Income In 1999, the Company adopted Financial Accounting Standards Board Statement No. 130 ("SFAS No. 130"), Reporting Comprehensive Income. Comprehensive income consists of net income and other comprehensive income; the latter includes unrealized gains and losses on available-for-sale securities and is presented in the Consolidated Statements of Stockholders' Equity. The adoption of SFAS No. 130 had no effect on stockholders' equity. Prior year financial statements have been reclassified to conform to the SFAS No. 130 requirements. Revenue Recognition Revenue related to the sales of computer equipment is recorded at the time of shipment. Service revenue and costs are recognized when services are provided. F-9 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (continued) Earnings (Loss) Per Common Share In February 1997, the Financial Accounting Standard Board issued SFAS No. 128, Earnings per Share. This pronouncement requires the reporting of two net income (loss) per share figures: basic net income (loss) per share and diluted net income (loss) per share. Basic net income (loss) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted-average number of common shares outstanding during the period plus the dilutive effect of shares issuable through stock options and warrants. All prior period net income (loss) per share figures presented herein have been restated in accordance with the provisions of SFAS No. 128. A reconciliation of the weighted-average number of common shares outstanding used in the calculations of basic and diluted earnings (loss) per share follows. Year Ended Year Ended Year Ended September 30, 1999 September 30, 1998 September 30, 1997 ------------------ ------------------ ------------------ Basic Dilutive Basic Dilutive Basic Dilutive ----- -------- ----- -------- ----- -------- Weighted-average number of common shares outstanding 4,749,519 4,749,519 4,593,065 4,593,065 3,562,033 3,562,033 ============== ============= ============= Dilutive options to purchase common shares 21,845 20,685 369,813 ----------- ------------- ------------ 4,771,364 4,613,750 3,931,846 =========== ============= ============ The dilutive effect of 57,000 options granted in 1997 at exercise prices ranging from $5.56 to $6.12 were not included in the computation of diluted loss per share for the years ended September 30, 1999 and 1998 because they are anti-dilutive. In addition, the dilutive effect of 40,000 options granted in 1998 at an exercise price of $1.88 and 115,000 options granted in 1999 at exercise prices ranging from $2.69 to $2.85 were not included in the computation of diluted loss per share for the year ended September 30, 1999 because they are anti-dilutive. Cash and Cash Equivalents The Company considers all liquid instruments purchased with a maturity of three months or less to be cash equivalents. Fair Value of Financial Instruments The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities, approximate fair value due to the relatively short maturity of these instruments. The fair value of investments is estimated based on quoted market price. The carrying value of the supplier credit facility and long-term debt, including the current portion, approximates fair value based on the incremental borrowing rates currently available to the Company for financing with similar terms and maturities. F-10 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Investments Investments at September 30, 1999 and 1998 consist of the following: Ameriquest Technologies, Inc. (Formerly CMS Enhancements, Inc.) Number of Shares 300,000 Fair Value $ -0- Cost $ 1,612,500 At September 30, 1999 and 1998, marketable equity securities have been categorized as available-for-sale and are stated at fair value. The Company recorded a realized loss on available-for-sale securities of $-0- and $206,250, which net of deferred taxes amounted to $-0- and $123,750 for the years ended September 30, 1999 and 1998, respectively, since the decline in value was determined to be other-than-temporary as of those dates. The increase in the net unrealized loss recognized in other comprehensive income (loss) for the years ended September 30, 1999, 1998, and 1997 totaled $-0-, $63,034 and $60,716, respectively. Note 3 - Property, Plant and Equipment Property, plant and equipment is set forth below: 1999 1998 ----------------- ----------------- Land $ 437,660 $ 437,660 Building 2,225,480 2,325,480 Vehicles 81,251 119,159 Computer equipment 1,026,084 833,767 Furniture and fixtures 518,141 501,101 Leasehold improvements 117,691 117,691 ----------------- ----------------- 4,406,307 4,334,858 Accumulated depreciation (1,091,120) (825,513) ----------------- ----------------- Property, plant and equipment, net $ 3,315,187 $ 3,509,345 ================= ================= The Company received a grant of $100,000 from the Empire State Development Corporation in 1999 that reduced the cost of the building in Shirley, New York. F-11 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Other Assets The Company is the owner and beneficiary of a $1,000,000 whole life policy covering the life of the principal stockholder/officer. The cash surrender value of life insurance included in Other Assets as of September 30, 1999 and 1998 amounted to $240,652 and $208,267, respectively. Note 5 - Financing Arrangements The Company entered into a formal credit agreement with the financing subsidiary of IBM. Under the credit facility, the Company may borrow up to 85% of receivables due within 90 days and up to 100% of eligible inventory, to a maximum of $27,500,000. The agreement, which is subject to renewal each September, is also subject to temporary increases, thereby increasing the line of credit to $41,500,000 during certain periods. As of September 30, 1999 and 1998, interest on the outstanding borrowings is payable monthly at prime, or prime plus 6.5%, should the Company fail to meet certain collateral requirements. Interest costs included in interest expense for the years ended September 30, 1999, 1998 and 1997 totaled $130,173, $851,708 and $970,912, respectively. Additionally, $3,282,454 and $9,855,736 were included in accounts payable at September 30, 1999 and 1998, respectively, and are included against the maximum credit available. Note 6 - Long-Term Debt Long-term debt consists of the following: 1999 1998 --------------- --------------- CHASE MANHATTAN BANK Mortgage loan in the amount of $1,650,000 collateralized by the land and building in Shirley, New York; payable in monthly installments of $14,979 including interest of 7.16% per annum; final payment due December 2012. $ 1,575,274 $ 1,639,702 EMPIRE STATE DEVELOPMENT CORPORATION Loan in the amount of $100,000 to finance improvements to the facility in Shirley, New York; payable in 119 monthly installments of $1,012, beginning May 1, 1999 and ending April 1, 2009, including principal and a base interest rate of 4.0% per annum; interest rate is subject to change each March 1 to prime plus 2.0% if the number of full-time employees in Shirley, New York declines below 85% of certain annual base numbers. 95,892 -0- ------ --- (carried forward) 1,671,166 1,639,702 F-12 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Long Term Debt (continued) 1999 1998 --------------- --------------- (brought forward) $ 1,671,166 $ 1,639,702 FORD MOTOR CREDIT CORP. Collateralized by a lien on a Company automobile; payable in 36 monthly installments of $815 including interest of 9.0% per annum; final payment due October 1999. 809 10,060 Collateralized by a lien on a Company automobile; payable in 36 monthly installments of $1,194 including interest of 9.9% per annum; final payment was December 1998. -0- 3,529 Collateralized by a lien on a Company automobile; payable in 36 monthly installments of $678 including interest of 9.0% per annum; final payment was November 1998. -0- 1,341 AT&T CREDIT CORP. Capital lease collateralized by a lien on the Company's phone system; payable in monthly installments of $708 including interest of 14.446% per annum; final payment due May 2001. 12,515 18,706 Capital lease collateralized by a lien on the Company's phone system; payable in monthly installments of $542 including interest of 15.089% per annum; final payment due January 2001. 7,406 12,838 Capital lease collateralized by a lien on the Company's phone system; payable in monthly installments of $560 including interest of 9.5% per annum; final payment due March 2002. 14,903 19,943 --------------- --------------- 1,706,799 1,706,119 Current maturities (96,461) (94,764) --------------- ---------------- $ 1,610,338 $ 1,611,355 ============ ============ Maturities of long-term debt are as follows: September 30, 2000 $ 96,461 2001 96,695 2002 92,257 2003 95,267 2004 101,999 Thereafter 1,224,120 $ 1,706,799 =============== F-13 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - Capital Leases As further described in Note 6, the Company began leasing telephone equipment during December 1995. As of September 30, 1999 and 1998, the gross assets capitalized under telephone equipment leases totaled $80,745 and the accumulated amortization totaled $37,519 and $25,685, respectively. The amortization expense for the years ended September 30, 1999 and 1998 of $11,834 and $11,834, respectively, is included in depreciation expense. Note 8 - Income Taxes The provision (benefit) for income taxes consists of the following: Years Ended September 30, ------------------------- 1999 1998 1997 ---- ---- ---- Current: Federal $ (362,184) $ (63,948) $ 1,285,000 State 44,318 -0- 520,000 --------------- ---------------- ---------------- Total Current (317,866) (63,948) 1,805,000 --------------- ---------------- ---------------- Deferred: Federal 167,073 (168,652) (32,440) State 39,190 (39,560) (10,705) --------------- ---------------- ---------------- Total Deferred 206,263 (208,212) (43,145) --------------- ---------------- ---------------- Provision (Benefit) for Income Taxes $ (111,603) $ (272,160) $ 1,761,855 =============== ================ ================ The difference between the provision (benefit) for income taxes at the Company's effective income tax rate and the federal statutory rate of 34% is as follows: Years Ended September 30, 1999 1998 1997 Income taxes at statutory rate $ (174,056) $ (244,637) $ 1,416,258 State taxes, net of federal benefit 62,453 -0- 333,237 Other -0- (27,523) 12,360 --------------- ---------------- ---------------- Provision (Benefit) for Income Taxes $ (111,603) $ (272,160) $ 1,761,855 =============== ================ ================ The tax effects of temporary differences giving rise to significant portions of deferred taxes are as follows: September 30, ------------- 1999 1998 ---- ---- Allowance for doubtful accounts $ 71,001 $ 48,975 Allowance for sales returns 46,200 -0- Inventory 71,891 126,792 Investments 18,096 18,096 Depreciation (21,742) (24,636) Vacation accrual 39,078 33,491 Stock options 93,335 327,075 Other 5,671 -0- --------------- ---------------- Net Deferred Tax Asset $ 323,530 $ 529,793 =============== ================ F-14 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 - Stock-Based Compensation Stock Option Plans The 1988 stock option plan expired on May 5, 1998. In February 1998, a new stock option plan (the "1998 Plan") was approved by the stockholders, whereby 500,000 shares of common stock are reserved for issuance upon the exercise of options designated as either incentive stock options or non-qualified stock options. The 1998 Plan will terminate in February 2008; however, options granted under the 1998 Plan will expire not more than ten years from the date of grant. In the case of options granted to an employee of the Company who is a 10% or more stockholder, the option price is an amount per share of not less than 110% of the fair market value per share on the date the option is granted. The option price for options granted to all other employees and non-employees of the Company is an amount per share of not less than the fair market value per share on the date the option is granted. During 1999 and 1998, 115,000 and 40,000 options, respectively, were granted to investment bankers and directors of the Company with immediate vesting. All other options granted vest over a four-year period following the date of grant. The options granted in 1997 expire on September 1, 2001. All other options expire five years from the date of the grant. A summary of stock option activity related to the Company's stock option plans is as follows: Beginning Granted Exercised Canceled Ending Balance During During During Balance Outstanding Period Period Period Outstanding Exercisable ----------- ------ ------ ------ ----------- ----------- Year ended September 30, 1997 Number of shares 498,000 69,500 -0- 3,000 564,500 328,680 Weighted average exercise price per share $ 0.69 $ 5.59 -0- $ 5.56 $ 1.26 $ 0.69 Year ended September 30, 1998 Number of shares 564,500 40,000 498,000 9,500 97,000 54,250 Weighted average exercise price per share $ 1.26 $ 1.875 $ 0.69 $ 5.56 $ 4.06 $ 2.85 Year ended September 30, 1999 Number of shares 97,000 327,000 -0- 21,000 403,000 173,000 Weighted average exercise price per share $ 4.06 $ 2.02 $ -0- $ 5.56 $ 2.32 $ 2.90 The weighted average per share fair value of the options granted during the years ended September 30, 1999 and 1998 was estimated as $1.34 and $1.70, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1999 1998 ------------------- ---------------------- Risk-free interest rates 5.62% - 5.86% 4.23% Expected option lives 4.48 - 5 years 4.92 years Expected volatilities 110% 147% Expected dividend yields 0% 0% F-15 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 - Stock-Based Compensation (continued) Stock Option Plan (continued) The following table summarizes information about the options outstanding at September 30, 1999: Options Outstanding Options Exercisable Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercisable Number Exercisable Exercise Price Outstanding Life Price Exercisable Price - ----------------------------- -------------- ----------- ----------- ------------------- --------------- $5.56 - $6.12 36,000 1.92 years $ 5.61 18,000 $ 5.61 $2.69 - $2.85 115,000 4.48 years 2.83 115,000 2.83 $1.56 - $1.88 252,000 4.62 years 1.61 40,000 1.88 Employee Stock Purchase Plan On December 17, 1998, the Company adopted the 1999 Employee Stock Purchase Plan (the "1999 Plan") whereby 200,000 shares of common stock are reserved for issuance to eligible employees. A participant may have up to 10% of their earnings withheld during a period of approximately six months commencing on the first trading day on or after April 1 and terminating on the last trading day ending the following September 30, or commencing on the first trading day on or after October 1 and terminating on the last trading day ending the following March 31. The purchase price shall be an amount equal to 85% of the fair market value of a share of common stock on the enrollment date or on the exercise date, whichever is lower. At September 30, 1999, the six participating employees in the 1999 Plan exercised their rights to purchase 8,389 shares of common stock at 85% of the fair market value on September 30, 1999. No purchase rights remain outstanding or exercisable at September 30, 1999. The fair market value of each stock purchase plan grant is estimated on the date of grant using the Black-Scholes model with the following assumptions: no estimated dividends; expected volatility of 110%; risk free interest rate of 5.88%; and an expected life of 0.5 years. The weighted-average fair value of these purchase rights granted in 1999 was $0.49. Had compensation expense for the Company's stock-based compensation plans been determined consistent with SFAS 123, net loss and loss per share would be increased to the pro forma amounts indicated below: 1999 1998 --------------- ---------------- Net loss As reported $ (400,325) $ (447,362) Pro forma (480,008) (467,057) Loss per share - basic As reported $ (0.08) $ (0.10) Pro forma (0.10) (0.10) Loss per share - diluted As reported $ (0.08) $ (0.10) Pro forma (0.10) (0.10) F-16 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 - 401(k) Plan On January 1, 1994, the Company adopted a 401(k) Savings Plan (the "Plan") for the benefit of all eligible employees. All employees as of the effective date of the Plan became eligible. An employee who became employed after January 1, 1994, would become a participant after the completion of a half-year of service and the attainment of 20 years of age. Participants may elect to contribute from their compensation any amount up to the maximum deferral allowed by the Internal Revenue Code. Employer contributions are a discretionary percentage match. The Company may make optional contributions for any plan year at its discretion. During the years ended September 30, 1999, 1998 and 1997, the Company incurred 401(k) costs totaling $21,411, $19,945 and $42,986, respectively. Note 11 - Concentration of Credit Risk Cash The Company places most of its temporary cash investments with one financial institution and normally exceeds the Federal Deposit Insurance Corporation limit. The Company has not experienced any loss to date as a result of this policy. Major Customers Computer sales encompass markets wherein the demands of any one customer may vary greatly due to changes in technology. No single customer comprised more than 10% of sales for the years ended September 30, 1999, 1998 and 1997. Three customers comprised 19%, 18% and 14%, respectively, of accounts receivable as of September 30, 1999. In comparison, no single customer comprised more than 10% of accounts receivable as of September 30, 1998. Note 12 - Commitments and Contingencies Purchases In 1998 and 1997, the Company purchased a majority of its products from International Business Machines Corporation (IBM), whose subsidiary represents the Company's major lending source, as further discussed in Note 5. In 1999, the Company began purchasing more products from other vendors and less from IBM. Purchases from IBM represented approximately 9%, 85% and 90% of total purchases for each of the years ended September 30, 1999, 1998 and 1997, respectively. Four other vendors became major suppliers in 1999. Purchases from these suppliers represented approximately 40%, 22%, 17% and 8% of total purchases for the year ended September 30, 1999 and 52%, 1%, 7% and 39%, respectively, of accounts payable at September 30, 1999. F-17 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 - Commitments and Contingencies (continued) Leases The Company has operating leases on real property and equipment expiring through the year 2003. In addition to fixed rentals, the real property leases have escalation clauses that require the Company to pay a percentage of common area maintenance, real estate taxes, and insurance. Rent expense and other charges totaled $201,655, $387,837 and $309,861 for the years ended September 30, 1999, 1998 and 1997, respectively. The future minimum rental commitments are as follows: September 30, 2000 $ 223,832 2001 204,534 2002 76,040 2003 1,855 ---------------- $ 506,261 ================ Employment Agreements Effective June 17, 1997, the Company entered into two-year employment agreements with four senior executives. The employment agreements expired in 1999 and were not renewed. No other long-term employment agreements exist as of September 30, 1999. Purchase Commitment In March 1997, the Company commenced operation of an IBM PC assembly facility under IBM's Authorized Assembler Program (the "AAP"). Under the terms of the AAP Agreement with IBM, the Company would use its best efforts to purchase a sufficient number of Base System Units and Approved Components to enable it to assemble at least 20% of the Company's actual sales volume of PCs. In March 1999, the Company was de-authorized. No other purchase commitments exist as of September 30, 1999. Litigation The Company was a defendant in a lawsuit which alleged wrongful termination of employment. The action had been in the discovery stage since 1992. Effective April 14, 1998, the Company entered into a Confidential Settlement Agreement and General Release with the plaintiff. Neither the execution of the Agreement nor the Agreement itself is an admission of liability or wrongdoing by the Company. In consideration of the obligations of the plaintiff and in full and complete settlement and final satisfaction of any claims which plaintiff may have against the Company, the Company agreed to pay plaintiff $35,000 as full and complete settlement of the Action. The Company has no other legal actions pending. F-18 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13 - Quarterly Financial Data (unaudited) Quarterly financial data for the years ended September 30, 1999, 1998 and 1997 follow: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- For the year ended September 30, 1999: Net sales $ 27,329,070 $ 14,354,827 $ 14,017,525 $ 13,981,873 Gross profit 2,839,112 1,921,102 1,217,899 973,495 Income (loss) from operations 937,662 367,847 (776,604) (826,865) Net income (loss) 510,599 171,897 (478,094) (604,727) Net income (loss) per share: Basic 0.11 0.04 (0.10) (0.13) Diluted 0.11 0.04 (0.10) (0.13) For the year ended September 30, 1998: Net sales $ 28,062,283 $ 22,227,999 $ 26,416,609 $ 21,595,745 Gross profit 2,814,257 1,873,150 2,499,527 1,410,480 Income (loss) from operations 809,056 (150,853) 432,074 (686,768) Net income (loss) 316,768 (196,140) 89,088 (657,078) Net income (loss) per share: Basic 0.07 (0.04) 0.02 (0.15) Diluted 0.06 (0.04) 0.02 (0.14) For the year ended September 30, 1997: Net sales $ 21,282,537 $ 17,876,338 $ 24,718,664 $ 25,848,399 Gross profit 2,639,498 2,629,349 2,617,138 3,790,643 Income from operations 1,275,495 1,036,205 1,072,381 1,757,995 Net income 559,642 490,673 502,347 850,944 Net income per share: Basic 0.18 0.15 0.15 0.19 Diluted 0.16 0.14 0.14 0.17 F-19 COMBINED CONSENT AND REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE To the Board of Directors SysComm International Corporation and Subsidiary Hauppauge, New York The audits referred to in our report on page F-2 included the related financial statement schedule on page S-2 as of September 30, 1999, and for each of the years in the three-year period ended September 30, 1999, included in this Form S-1. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C. Hauppauge, New York November 10, 1999 S-1 SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Additions Balance at (1) Charged (2) Charged Balance Beginning to Costs and to Other at End Deducted from Assets of Period Expenses Accounts Deductions of Period -------------------- --------- -------- ------------------- --------- Allowance for Doubtful Accounts: Year ended September 30, 1997 $ 63,846 $ 125,000 $ -0- $ 80,503 (a) $ 108,343 Year ended September 30, 1998 108,343 151,000 -0- 142,737 (a) 116,606 Year ended September 30, 1999 116,606 78,000 -0- 25,556 (a) 169,050 Allowance for Sales Returns: Year ended September 30, 1997 $ 37,389 $ -0- $ -0- $ -0- $ 37,389 Year ended September 30, 1998 37,389 -0- -0- -0- 37,389 Year ended September 30, 1999 37,389 72,611 -0- -0- 110,000 Allowance for Net Unrealized Losses on Marketable Equity Securities: Year ended September 30, 1997 $ -0- $ -0- $60,716 (b) $ -0- $ 60,716 Year ended September 30, 1998 60,716 -0- 63,034 (b) 123,750 (c) -0- Year ended September 30, 1999 -0- -0- -0- -0- -0- Allowance for Inventory Obsolescence: Year ended September 30, 1997 $ -0- $ -0- $ -0- $ -0- $ -0- Year ended September 30, 1998 -0- 657,491 -0- 373,491 (d) 284,000 Year ended September 30, 1999 284,000 -0- -0- 119,580 (d) 164,420 (a) Amounts written off, net of recoveries. (b) Net unrealized loss on marketable equity securities recorded in stockholders' equity. (c) Net realized loss on marketable equity securities. (d) Realized loss on sale of inventory. S-2