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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report under Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number: 0-22122
MICROS-TO-MAINFRAMES, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 13-3354896
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
614 Corporate Way, Valley Cottage, New York 10989
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 268-5000
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 $0.001 per share
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 the Registrant's knowledge, in the proxy
statement 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 voting stock held by non-
affiliates of the Registrant, as of June 19, 2000 was $21,186,508
(assuming solely for purposes of this calculation that all directors and
officers of the Registrant are "affiliates").
The number of shares outstanding of the Registrant's Common Stock,
par value $.001 per share, as of June 19, 2000, was 4,880,569.
This Annual Report on Form 10-K contains "forward looking statements"
within the meaning of Section 21E of the Securities Exchange Act of
1934. The statements appear in a number of places in this Annual Report
and include statements regarding the intent, belief or current
expectations of Micros-to-Mainframes, Inc. (the "Company") with respect
to, among other things, future business conditions and the outlook for
the Company including trends affecting the Company's business, financial
condition and results of operations. Readers are cautioned not to place
undue reliance on these forward looking statements, which speak only as
of the date hereof. These forward looking statements are subject to
risks and uncertainties which could cause the Company's actual results
or performance to differ materially from those expressed in these
statements. Wherever possible, the Company has identified forward
looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. The Company assumes no
obligation to update publicly any forward looking statements, whether as
a result of new information, future events or otherwise.
Part I
ITEM 1. BUSINESS
GENERAL
Micros-to-Mainframes, Inc. and its subsidiaries, MTM Advanced
Technology, Inc., PTI Corporation (formerly known as Pivot Technologies,
Inc.)("Pivot"), and Data.Com RESULTS, Inc. ("Data.Com") (collectively,
the "Company" or "MTM") serve as a "one-stop" organization for data
processing solutions by providing computer hardware and software sales,
systems design, installation, consulting, maintenance and integration of
microcomputer products, including the design and implementation of wide
area networks ("WAN's") and local area networks ("LANs"). The Company
sells, installs and services microcomputers, microcomputer software
products, supplies, accessories and custom designed microcomputer
systems. MTM is primarily an authorized direct dealer and value added
reseller. The Company also serves as a systems integrator, by
integrating into a single working system, for a client, a group of
hardware and software products from more than 40 major computer vendors
including Compaq Computer Corporation, Hewlett Packard Company, IBM
Corporation, Dell Computer Corporation, NEC Technologies, Inc., Seagate
Technology Inc., Citrix Systems, Inc., Cisco Systems, Inc., Canon USA,
Inc., Novell, Inc., Microsoft Corporation, Toshiba American Information,
Inc., 3COM Corporation, Cubix Corporation, Fore Systems, Inc. and Madge
Development Corp.
MTM provides its customers, certain Fortune 500 corporations and
others mostly considered to be in the Fortune 2000 category (hereinafter
referred to as "Fortune 2000 corporations") in the tri-state New York
Metropolitan area, with a wide range of related outsourced customer
support services, including network analysis and design, systems
configuration, physical installation, software loading, application
training, continuing education, maintenance and repair services. A
network is the integration of two or more computers and their components
into a system that allows multiple users to share the same information,
communicate with the mainframe (a computer with large capacity used
primarily for massive data storage and processing) or central networking
system and all other computers and peripheral equipment.
The outsourcing of computer services is a rapidly growing trend
whereby a client company obtains all or a portion of its data processing
requirements from a systems integrator, such as MTM, that specializes in
the computer service, product or application required by the client.
Outsourcing is a fast growing component of the data processing industry.
The focus of the Company's growth revolves around the Company's
outsourced support services, which include contract programming, network
consulting and staff leasing in addition to systems integration. Since
1991, the Company has been providing customer support services and is
focusing its current marketing efforts in such areas. Such services
account for about 29% of the Company's current revenues, including a
small amount of revenues derived from maintenance and repair services.
On May 18, 1998, the Company acquired 19.9% of Pivot, an automated
remote network service provider, and an option (the "Option") to cause
the merger of Pivot into a wholly-owned subsidiary of the Company or to
increase its ownership in Pivot to 33.4%. The Company exercised its
right to increase its ownership in Pivot to 33.4% on February 22, 1999.
As of June 2, 1999, the Company entered into an agreement with Pivot and
merged Pivot into a wholly-owned subsidiary of the Company. In
connection with such acquisition, Anthony Travaglini, the President of
Pivot, became the Company's Chief Technology Officer.
The Company's software support services include network and
mainframe connectivity (communication between computers and networks)
consulting, hardware and software maintenance, network management,
videoconferencing consulting and trouble-shooting support. The
Company's clients have access to person-to-person support services
administered by a staff of highly trained support engineers, generally
via a toll-free 800 telephone call. The Company's clients also have
access to MTM's consulting services for LAN and WAN planning, detailed
systems design, gateway (a device which allows computer users to access
data from networks to the mainframes or by telephone), bridge (a device
which allows computer users to communicate between networks and provides
an expansion route for the existing network) and security/disaster
recovery, among other services.
On February 8, 1999, the Company opened two E-Commerce web sites
to enable the Company's clients to purchase the Company's products
and/or services on-line. E-Commerce complements the Company's existing
business by giving access to old and new clients to purchase the
Company's products and/or services through the site. The site became
fully operational on February 26, 1999.
The Company reorganized its operations in Fiscal 2000 and
established Pivot as its sole service organization. All of the services
previously offered by the Company, including those provided by MTM,
Pivot, the Advanced Technologies Group and Data.Com, are now reported as
one unit. The service business represents over $20,000,000 in revenue
for Fiscal 2000. The Company is presently reviewing options with its
financial advisors regarding various financing alternatives, given
current market conditions, to increase the sales and profitability of
these operations. Although the Company believes that these operations
will continue to grow, there can be no assurance that the Company will
be able to obtain the financing necessary to fund this growth or that
the service operations will obtain the business to increase its sales
and profitability.
The Company was incorporated on May 12, 1986 in the State of New
York.
INDUSTRY
The microcomputer industry has become a multi-billion dollar
industry since its development in the late 1970's. Management believes
that this is attributable to rapid technological advances leading to the
development of significantly more powerful microcomputers at
substantially lower prices than larger minicomputers. The use of
microcomputers has become widespread throughout the workplace due to the
smaller size of microcomputers, as compared to minicomputers, and the
microcomputer's versatility and ability to connect to and share
information with mainframe systems. The Company believes, based on its
knowledge of the industry and industry data, that the microcomputer
industry experienced a compound annual growth rate of almost 50% from
1984 to 1988 and a more modest annual rate of growth ranging from 10% to
17% since 1988. The Company believes that the industry will continue to
grow at this modest rate in the future, although there can be no
assurance that it will.
Corporations purchase their computer hardware from a number of
sources, including manufacturer authorized dealers and value-added
resellers, such as MTM, retail stores and, with increasing importance,
directly from manufacturers through direct telemarketing and mail order
organizations. Direct sales have benefited from microcomputer users
becoming more computer literate, the emergence of industry standards and
increased inter-changeability of peripherals. As a result of the
foregoing, the microcomputer dealer distribution channel is currently
undergoing additional market segmentation into dealers such as the
Company, which are systems integrators which offer a one-stop total
solution for outsourcing.
PRODUCTS
The Company markets microcomputers, printers, displays, video
conferencing products, LAN and WAN products, plotters, software and
other peripheral products. MTM is an authorized sales and service
dealership of microcomputer equipment and related products supplied
primarily by major manufacturers, including, but not limited to, Compaq
Computer Corporation, IBM Corporation, Dell Computer Corporation,
Hewlett-Packard Company, Seagate Technology, Inc., Cisco Systems, Inc.,
Fore Systems, Inc., Canon USA, Inc., Novell, Inc. and Toshiba American
Information. The Company offers a variety of products manufactured by
other companies, including Cisco Systems, Inc., Citrix Systems, Inc.,
NEC Technologies, Inc., 3COM Corporation, Cubix Corporation, Madge
Development Corp. and others, and software products from major
suppliers, including Microsoft Corporation, IBM and others.
MTM purchases certain products from distributors selling to other
dealers, at prices generally lower than the Company could obtain
directly from suppliers. The Company also obtains products from a
number of suppliers, including independent distributors, on an
individual purchase order basis rather than through dealership
agreements. MTM will also order specific products from other
manufacturers to satisfy a particular customer requirement. The Company
regularly evaluates new products, both internally and through
evaluations with its customers. See "Business - Suppliers."
The microcomputer industry is characterized by numerous hardware
systems that utilize different and often incompatible standards for
hardware and software. The Company has the capability to design systems
and support services which include products or components manufactured
by numerous manufacturers that address most applicable industry
standards.
The Company is an authorized dealership for the various
standardized LAN systems, including Cisco, Citrix, Novell, 3COM,
Microsoft LAN Manager, the IBM Networking Internet Routers and
compatible alternatives. In addition, the Company sells and services
LAN and WAN products produced by the various manufacturers which it
represents. LAN and WAN systems allow various microcomputers to
communicate with other computers in a group and with other
microcomputers in other LANs and WANs. The Company's clients have
access to the Company's Connectivity and Communication Laboratory
described below where they can test, design and create LANs and WANs.
OUTSOURCED SUPPORT SERVICES
MTM support services include a wide range of services designed for
its customers' corporate planners and management needing a single source
for technical support issues, such as local and wide area networks,
gateways, routers, bridges, system conversion planning, hardware and
software specifications, database and database server development and
implementation, videoconferencing, disaster recovery, network system
management, and security monitoring and management.
The outsourcing of computer services is a rapidly growing trend in
which a client company obtains all or a portion of its data processing
requirements from a systems integrator, such as the Company, that
specializes in the computer service, product or application required by
the client.
The Company believes that it is generally more cost-effective and
more efficient for its clients to purchase outsourcing services from the
Company than for them to provide equivalent services by hiring their own
service and support personnel.
The following services provide the Company's clients with the
ability to outsource virtually all of their support issues with one
company for a wide variety of microcomputer hardware and software
products. These services generally provide the Company's clients with
access via an 800 telephone call to person-to-person support services
administered by a staff of highly trained support engineers in the
Company's Advanced Technology Group. There are presently 129 technical
support persons under the supervision of a Data Communications Manager
working in this area. This group is responsible for systems design and
the implementation of technology and the management of advanced
technology projects including LANs, WANs and data communications problem
solving for clients.
NETWORK AND MAINFRAME CONNECTIVITY CONSULTING
MTM and its staff of networking consultants offer experience at
all levels of computers to provide management information services (MIS)
departments with consulting services ranging from connectivity to
enhancements, feasibility and implementation. These services address
critical issues such as performance, reliability and compatibility with
proven strategies and products. MTM offers research and planning
insight at all levels of information flow from mainframes to minis to
micros and within each system. These consulting services provide
clients with access to a variety of options in designing and maintaining
systems.
CONNECTIVITY AND COMMUNICATION LABORATORY
The Company's Advanced Technology Group seeks to serve customers'
increasing communications requirements, including their need to share
data and resources using LANs and WANs. The Company offers an array of
connectivity services, including LAN and WAN system design and
configuration, videoconferencing consulting, user training and
installation. In addition, the Company has established a Connectivity
and Communication Laboratory in its executive offices. This
state-of-the-art facility provides a multi-vendor environment to test
connectivity networks, create multi-vendor LANs and WANs and solution
prototypes, perform feasibility studies, perform pre-release and new
connectivity product testing, perform product compatibility testing,
product bulletproofing, procedures development, product evaluation and
optimization, replication, diagnosis and solution of service problems
and to generally provide a basis to address support issues.
The Company's lab features several different LAN and WAN operating
systems from such manufacturers as Novell, IBM, SCO, Microsoft Lan
Manager and 3COM and includes the entire spectrum of computer sizes.
NETWORK MANAGEMENT AND FINE-TUNING
The Company's Advanced Technology Group provides services designed
to resolve complex network and data communications management issues for
clients with existing multiple networks and/or sites currently utilizing
communication servers, gateways to host computers and bridges linking
multiple servers (a primary storage device, normally a PC in a network).
These services include network security planning and implementation,
data integrity and redundancy, network fine-tuning and auditing,
performance testing, evaluation and optimization, corporate electronic
mail and site management. Pivot provides automated remote network
services, security, and systems monitoring and management on both a
proactive and reactive basis.
1-800-PRODUCT SUPPORT
The Company's experienced support engineers provide product
support to resolve specific operating system and application problems.
The Company's toll-free 800 telephone support line can be used for such
problems as application software, installation assistance, error message
handling or shared device problems. The applications supported include
spreadsheets, word processing packages, communications, network and PC
operating systems, graphics, databases and various utilities.
The Company provides its clients with instant access to the latest
product support resources for known problems and resolutions, updates
and release information.
NETWORK TRAINING AND CONSULTING
The Company's Advanced Technology Group provides the Company's
clients and their corporate management, as well as its own engineering
and sales personnel, with technical support and training. The Company's
support engineers have generally been trained by the major computer
vendors and receive additional training from courses given by computer
vendors, as well as by the Company's Data Communications Manager, on an
as needed basis and also in order to maintain their certifications with
the respective vendors. The Company offers comprehensive training
sessions for its customers featuring instruction by manufacturer-trained
customer support representatives. This department assists in post-sale
customer inquiries and network consultation and support via a toll-free
800 telephone number. The Company offers customer training seminars for
various microcomputer hardware and software products at its own
facilities and at customer sites.
PRODUCT MAINTENANCE
The Company offers contracts to its customers for both on-site and
off-site complete product maintenance and repair services. These
maintenance contracts generally provide for the Company to maintain
microcomputer equipment at the customer's location during regular
business hours. Most maintenance contracts are renewable annually. In
addition, the Company provides authorized warranty service and repair
for equipment sold by it and by others. The service department fulfills
warranty requirements and offers extended maintenance and repair
agreements after the expiration of manufacturers' warranties. The
service department maintains complete parts inventories for the products
distributed by the Company and is staffed by manufacturer-certified
field engineers.
REMOTE NETWORK SERVICES
The Company, through Pivot, provides remote network services to
its clients. Remote network services are designed to monitor local wide
area and private virtual networks remotely from Pivot's offices at 614
Corporate Way in Valley Cottage, New York.
DIAGNOSTICS
The Company will ship one of its trouble-shooting tools (e.g., HP
Advisor, Novell LANalyzer or Network Analyzer) to a client to allow
dial-in access for trouble-shooting network hardware and software
related problems. By displaying and capturing network traffic, the
Company's experienced systems engineers can analyze and determine the
network problem. In addition, through a remote dial-in system, the
Company's systems engineers can access a client's network problems.
Diagnostics is also provided utilizing the Pivot remote network
management system.
DATABASE
MTM has access to state-of-the-art technical databases which
provide it with information concerning technological advances from major
vendors. This assists the Company in trouble-shooting as it receives
up-to-date product information from a wide variety of vendors. The
Company has either been licensed, contracted or authorized to use the
following databases: Novell's technical database which Novell
engineers use for research and network diagnosis, as well as technical
information from IBM, Compaq, Cisco, Microsoft, NEC, 3COM, and Fore
Systems, Inc. These databases provide the Company with technological
advances from major vendors as soon as the information is published.
These, in turn, allow the Company its flexibility to shift rapidly to
vendors whose products are expected to increase in demand as a result of
technological advances.
INSTALLATION SERVICE PROVIDER
The Company entered into a Master Services Agreement (the
"Services Agreement") with Dell Marketing L.P. ("Dell") on April 15,
1999 to become a designated Dell installation service provider. Under
the Services Agreement, the Company became Dell's subcontractor for the
purpose of providing certain services to Dell customers, including,
among other things, installation services for workstations, desktops and
notebooks, systems upgrades, customer orientation and virus checks in
exchange for a fee to be paid by Dell for such services. The Services
Agreement is for a three year term, unless otherwise terminated pursuant
to the Service Agreement, and is automatically renewed for additional
one year terms on each expiration date unless a written notice of
termination is given by either party at least one hundred twenty days
prior to the expiration date of the then current term.
ACCESSORY PRODUCTS
The Company has formed new purchasing relationships with several
computer supply vendors, through which it resells diskettes, data tape,
compact disks, toner, ribbons and other related computer supplies. The
Company does not believe that it is dependent on any one vendor of
computer supplies, and the loss of any such vendor would not have a
material adverse impact on the Company.
MARKETING AND SALES
The Company's marketing efforts are focused on Fortune 500
corporations and, to a greater degree, on what may be categorized as
Fortune 2000 corporations, professional firms and governmental and
educational institutions. Except for major corporate accounts, these
customers generally do not have internal computer support personnel.
Management believes that the increasing complexity of microcomputer
systems, increased usage of microcomputers in the workplace and the
trend toward network interconnecting will cause business and
institutional customers to require significant levels of outsourced
customer support services, such as those provided by the Company. The
Company believes that these customers are increasingly relying on their
dealers and suppliers to provide, in addition to competitive pricing, a
one-stop solution-based approach to their data processing requirements.
The Company uses such an approach which addresses purchasing,
compatibility, maintenance, support, training and obsolescence.
The Company has approximately 525 active clients. The Company's
customers are well diversified in such industries as securities,
financial institutions, pharmaceuticals, manufacturing, distribution,
law and accounting firms. For the fiscal years ended March 31, 2000,
1999 and 1998 ("Fiscal 2000", "Fiscal 1999" and "Fiscal 1998"),
approximately 19%, 21% and 13%, respectively, of the Company's total
revenues were derived from sales to PaineWebber, Incorporated
("PaineWebber"). Even though the Company's agreement with PaineWebber
terminated on February 28, 1998, the Company is continuing to do
business with PaineWebber on generally the same terms as the expired
agreement. The Company is continuing its efforts to negotiate a term
agreement with PaineWebber. In Fiscal 2000, A.I. Credit Corp.("A.I.
Credit") accounted for 19% of the Company's revenue. The Company has
been working under a verbal agreement with A.I. Credit to purchase
computer hardware and services. While the Company believes it will be
able to maintain its relationship with PaineWebber and A.I. Credit, no
assurance thereof can be given. In any event, sales to PaineWebber and
A.I. Credit are negotiated on a case by case basis. Although the
Company's customer base has increased, the loss of PaineWebber or A.I.
Credit as well as, to a lesser extent, the loss of any other principal
customer, would be expected to have a material adverse effect on the
Company's operations during the short term until the Company is able to
generate replacement business, although there can be no assurance of
obtaining such business.
As of June 15, 2000, the Company employed 35 salespersons who are
paid salaries, commissions and/or a combination of both. The Company's
sales executives regularly call on management at companies seeking
solutions for their computer problems. While the Company's marketing
activities are focused on Fortune 2000 corporations located in the
tri-state Metropolitan New York area and throughout New England, the
Company sells its products and services to branch offices of its
customers, including Fortune 500 corporations, throughout the United
States. The Company also relies on customer referrals from its major
suppliers and manufacturers who often receive requests for a systems
integrator to design and install their systems.
The Company's sales executives generally participate in weekly
training concerning various topics, including product knowledge,
industry information and sales techniques. The Company's ability to
successfully expand its business will depend, in part, on its ability to
attract, hire and retain highly skilled and motivated marketing and
sales personnel, of which there can be no assurance.
MTM also makes joint sales presentations with certain of the
Company's major suppliers to existing and prospective customers.
Certain of these suppliers' customer fulfillment option programs allow
customers who purchase directly from the supplier to apply purchases
from MTM to their purchase obligations under those agreements. As a
result, these customers have the flexibility of purchasing products from
the Company to take advantage of MTM's added services and its ability to
integrate multiple manufacturers' products. Most major manufacturers
have instituted either a moratorium or a selective authorization
procedure on the approval of additional authorized dealership locations.
While in effect, such policies may preclude the Company and its
competitors from becoming authorized dealers for new vendors.
SUPPLIERS
The Company purchases microcomputers and related products directly
from numerous suppliers as either an authorized dealer or a value added
reseller. The Company has entered into authorization agreements with
its major suppliers. Typically, these agreements provide that MTM has
been appointed, on a non-exclusive basis, as an authorized dealer and
systems integrator of specified products of the supplier at specified
locations. Most of the authorization agreements provide that the
supplier may terminate the agreement with or without cause upon 30 to 90
days notice or immediately upon the occurrence of certain events. In
addition, although each agreement is generally subject to renewal on an
annual basis, there can be no assurance that such agreements will be
renewed. The Company believes that its relationships with its major
suppliers are good.
Sales of Dell Computer ("Dell") products have accounted for
approximately 30%, 27% and 23%, respectively, of the Company's revenues
during Fiscal 2000, Fiscal 1999 and Fiscal 1998. All or substantially
all of such sales were purchased directly through Dell. Sales of Compaq
products accounted for approximately 11%, 13% and 16%, respectively, of
the Company's revenues during Fiscal 2000, Fiscal 1999 and Fiscal 1998.
Purchases related to these sales were substantially, if not all, made
through distributors. No other supplier's products accounted for 10% or
more of the Company's revenue during Fiscal 2000, Fiscal 1999 or Fiscal
1998. The Company's sales of products purchased through Tech Data
Corporation ("Tech Data") accounted for approximately 25%, 25% and 27%,
respectively during Fiscal 2000, Fiscal 1999 and Fiscal 1998. The
Company's sales of products purchased through Ingram Micro,
Inc.("Ingram") accounted for approximately 29%, 15% and 17% during
Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively. Except for Dell
terminating its arrangement with the Company and Compaq notifying
distributors that the Company was not an authorized agent thereof,
management does not believe that a termination of any one supplier's
agreement or distributor's agreement would have a material adverse
effect on the Company.
The Company's future results of operations are dependent upon
continued demand for microcomputer products. Distributors in the
microcomputer industry currently face a number of adverse business
conditions, including price and gross profit margin pressures and market
consolidation. During the past five years, all major hardware vendors
have instituted extremely aggressive price reductions in response to
lower component costs and discount pricing by certain microcomputer
manufacturers. The increased price competition among major hardware
vendors has resulted in declining gross margins for many microcomputer
distributors and may result in a reduction in existing vendor subsidies.
Management of the Company believes that these current conditions, which
are forcing certain of the Company's direct competitors out of business,
may present the Company with opportunities to expand its business.
There can be no assurance, however, that the Company will be able to
continue to compete effectively in this industry, given the intense
price reductions and competition currently existing in the microcomputer
industry.
Pursuant to the terms of most of its authorized dealership
agreements, the Company furnishes firm purchase orders 30 to 90 days in
advance of shipment. Under the terms of these agreements, the Company
is generally liable for up to a 5% restocking fee to many manufacturers
for the return of previously received merchandise. The Company has not
experienced any significant cancellation penalties or restocking fees.
The Company receives certain discretionary cost subsidies, typical
for the industry, from certain major suppliers to promote sales and
support activities relating to their products. It has used these funds
to subsidize marketing, advertising and its Connectivity and
Communication Laboratory, where the Company has been able to expand into
areas relating to these suppliers' products and sales, such as LAN sales
and support.
MTM's current arrangements with major suppliers generally provide
protection for up to two months against declines in the wholesale price
of microcomputers and related products in the Company's inventory.
These arrangements typically take the form of a cash payment or a credit
against future purchases in an amount equal to the difference between
the price actually paid by the Company for its inventory of that
supplier's products and the new dealer price.
The Company's suppliers permit the Company to pass through to its
customers all warranties and return policies applicable to the
suppliers' products. To date, the Company has experienced little return
of product and has been reimbursed by the suppliers for most warranty
work done for its customers. All service work after the expiration of
the warranty period is at the customer's expense. The Company offers
service contracts of varying lengths under which the Company agrees to
be responsible for all service costs for a fixed term in exchange for a
set fee paid by the customer.
Software and other related products are purchased from numerous
industry suppliers. As is customary, the Company does not have any
long-term agreements or commitments with these suppliers, because
competitive sources of supply are generally available for such products.
In response to discounted pricing by certain microcomputer
manufacturers, all major CPU hardware suppliers have instituted
aggressive price reductions. The heightened price competition among
hardware suppliers has resulted in declining gross margins for many
microcomputer resellers. Although discounted prices have enabled the
Company to increase its sales volume in recent years, it has resulted in
lower gross margins for some of the Company's product lines. Network
services and service-related hardware products, however, have had
improving margins. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
TECH DATA CORPORATION AND INGRAM MICRO, INC.
The Company entered into a Program Agreement with Ingram as of
December 5, 1997. Such agreement incorporated therein interim
agreements between the parties. Either party may terminate such
agreement without cause upon thirty (30) days prior notice. Pursuant to
the agreement, Ingram provides a supplemental program to provide the
Company (and other similarly situated companies contracting with Ingram)
with services designed to assist the reseller in marketing and
distributing its product. The Company agreed under such agreement to
name Ingram as its primary supplier and to purchase from Ingram at least
65% of its total product purchased from wholesale distributors. No
assurance can be given that such agreement will not be prematurely
terminated by Ingram.
The Company's agreement with Tech Data was for a one year term
commencing January 15, 1997, subject to an automatic three month
renewal. Such agreement was terminable upon 30 day prior notice. Even
though the term has expired, the Company continues to conduct business
with Tech Data on substantially the same terms as the original
agreement. Such agreement generally sets forth the price to be charged
the Company for purchases based on a percentage above Tech Data's landed
cost. Even though the Company has no reason to believe that Tech Data
will not continue to do business on substantially similar terms as
provided in the agreement referred to above, no assurance thereof can be
given.
DELL COMPUTER
The Company entered into the Services Agreement with Dell on April
15, 1999. Under the Services Agreement, the Company became Dell's
subcontractor for the purpose of providing certain services to Dell
customers, including, among other things, installation services for
workstations, desktops and notebooks, systems upgrades, customer
orientation and virus checks in exchange for a fee to be paid by Dell
for such services. The Services Agreement is for a three year term, or
unless otherwise terminated pursuant to the Service Agreement, and is
automatically renewed for additional one year terms on each expiration
date unless a written notice of termination is given by either party at
least one hundred twenty days prior to the expiration date of the then
current term.
PIVOT
On May 18, 1998, the Company acquired 19.9% of Pivot, an automated
remote network service provider, and an Option to cause the merger of
Pivot into a wholly-owned subsidiary of the Company or to increase its
ownership in Pivot to 33.4%. The Company exercised its right to
increase its ownership in Pivot to 33.4% on February 22, 1999. As of
June 2, 1999, the Company entered into an agreement with Pivot and
merged Pivot into a wholly-owned subsidiary of the Company. In
connection with such acquisition, Anthony Travaglini, President of
Pivot, became the Company's Chief Technology Officer. As of the date
hereof, Pivot has a limited number of customers and its revenues are not
significant to the Company. However, the Company intends to further
integrate its client base for the use of services provided by Pivot.
COMPETITION
The microcomputer market is highly competitive. The Company is in
direct competition with local, regional and national distributors of
microcomputer products and related services. Several of these
competitors offer most of the same basic products as does the Company.
The Company competes with other resellers and believes its prices and
delivery terms are competitive. Many competitors may sell their
products at lower prices than the Company, but generally do not offer
the same range of support services after installation of equipment that
the Company offers to its customers.
In addition, the tri-state Metropolitan New York area and New
England, to which the Company markets its products and services, are
particularly characterized by highly discounted pricing on microcomputer
products from various sources of competition. The Company faces
competition from microcomputer suppliers that sell their products
through direct sales forces and from manufacturers and distributors that
emphasize mail order and telemarketing.
Depending on the customer, the principal areas of competition may
include price, pre-sales and post-sales technical support and service,
availability of inventory and breadth of product line. The Company has
an insignificant market share of sales in the microcomputer industry and
the service markets which the Company serves. Certain of the Company's
competitors at the regional and national level are substantially larger,
have more personnel, have materially greater financial and marketing
resources than the Company and operate within a larger geographic area
than does the Company.
Management believes that the Company will continue to be able to
compete effectively against its various competitors by combining fair
pricing with its wide range of customer support services designed to
provide its customers with high-end technological services, multi-vendor
technical support, maintenance of their computer product needs, a
dedicated, trained staff of salespersons and technicians, complete
solutions for single user, multi-user or network systems and specialized
vertical market software.
The Company generally delivers products from inventory to its
customers within one to two weeks of its receipt of purchase orders. As
a result, the Company believes that its backlog of unfilled customer
orders is not material.
PROPRIETARY INFORMATION
The Company holds no patents and has no trademarks registered in
the United States Patent and Trademark Office or in any state, but has
applied for certain trademarks and service marks related to its Pivot
operations. If the Company believes that trademark registration is
significant in protecting its product or service recognition, the
Company may apply for registration of various trademarks or service
marks, including, but not limited to, the names Micros-to-Mainframes,
Data.Com, and The Advanced Technology Group and Pivot Technologies, in
which it believes that it has certain common-law rights. The Company
may also affix copyright notices on its support service, training and
service manuals. While such protection may become important to the
Company, it is not considered essential to the success of its business.
The Company relies on the know-how, experience and capabilities of its
management, sales and service personnel. The Company requires some of
its employees to sign confidentiality or non-competition agreements.
EMPLOYEES
As of June 15, 2000, the Company employed 190 persons, all but 4
of whom are full-time personnel. Of these employees, 6 are responsible
for management, 35 are responsible for sales and marketing, 129 for
technical support, 3 for distribution, 6 for finance and 7 for
administration. None of the Company's personnel is represented by a
union, and the Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse are located in
approximately 11,000 square feet of space at a two-story facility leased
at 614 Corporate Way, Valley Cottage, New York. The lease is terminable
on four months notice and expires on August 31, 2001. The cost to
terminate this lease is not material to the Company. Approximately 35%
of such space is devoted to marketing and telephone sales, 15% to
service and customer support, 10% to administration, 10% to the
Connectivity and Communication Lab and 30% to warehouse space. The
Company does not maintain a retail showroom. The current monthly rental
payment is approximately $9,400. Even though no assurance can be given,
the Company anticipates no difficulty in renewing the lease at the going
rate.
The Company entered into a lease on June 17, 1998 for 8,433 square
feet of office space at 270 Madison Avenue for an approximate term of 5
years and three months. The monthly rent for the new space is
approximately $22,500 for the first 2 years of the lease and
approximately $23,200 thereafter. The Company also leases approximately
8,100 square feet of office and warehouse space (only about 10% of this
property is devoted to warehouse space) in Rocky Hill, Connecticut. The
monthly payment on this lease is approximately $5,600. The lease is
terminable on six months' notice after August 2002 and expires on July
31, 2004. The cost to terminate this lease is not material to the
Company. Even though no assurance can be given, the Company anticipates
no difficulty in renewing the lease at the going rate. In connection
with the acquisition of Pivot, the Company assumed Pivot's lease dated
August 4, 1997 for approximately 2,500 square feet at 614 Corporate Way,
Valley Cottage, New York. This lease expires on August 31, 2000. The
monthly rent for such space is approximately $2,900. Even though no
assurance can be given, the Company anticipates no difficulty in
renewing the lease at the going rate.
The Company is also responsible for real estate taxes, insurance,
utilities and maintenance expenses concerning these premises.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal or
administrative proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company is listed on NASDAQ/NMS under the
symbol "MTMC".
The following table sets forth the high and low closing bid prices
of the Common Stock for the last two fiscal years as reported by NASDAQ.
Bid quotations represent high and low prices quoted between dealers, do
not reflect retail mark-ups, mark-downs or commissions and do not
necessarily represent actual transactions.
Bid
-----
Security Period High Low
- -------- ------- ------ ------
COMMON
STOCK
FISCAL YEAR ENDED MARCH 31, 1999
----------------------------------
April 1 - June 30, 1998 $3.500 $2.438
July 1 - September 30, 1998 $2.688 $2.000
October 1 - December 31, 1998 $2.688 $1.313
January 1 - March 31, 1999 $8.750 $1.906
FISCAL YEAR ENDED MARCH 31, 2000
----------------------------------
April 1 - June 30, 1999 $5.125 $3.250
July 1 - September 30, 1999 $3.813 $2.438
October 1 - December 31, 1999 $10.188 $2.500
January 1 - March 31, 2000 $19.625 $4.000
On June 19, 2000, the closing bid and asked prices of a share of
Common Stock were $6.875 and $7.250, respectively, and the Company had in
excess of 3,000 beneficial holders of Common Stock.
The Company has not paid any cash dividends on Common Stock to date and
does not anticipate paying any in the foreseeable future. The Board of
Directors intends to retain earnings, if any, to support the growth of the
Company's business.
ITEM 6. SELECTED FINANCIAL DATA
This Annual Report on Form 10-K contains "forward looking statements"
within the meaning of Section 21E of the Securities Exchange Act of
1934. The statements appear in a number of places in this Annual Report
and include statements regarding the intent, belief or current
expectations of Micros-to-Mainframes, Inc. (the "Company") with respect
to, among other things, future business conditions and the outlook for
the Company including trends affecting the Company's business, financial
condition and results of operations. Readers are cautioned not to place
undue reliance on these forward looking statements, which speak only as
of the date hereof. These forward looking statements are subject to
risks and uncertainties which could cause the Company's actual results
or performance to differ materially from those expressed in these
statements. Wherever possible, the Company has identified forward
looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. The Company assumes no
obligation to update publicly any forward looking statements, whether as
a result of new information, future events or otherwise.
The following selected financial data for the fiscal years ended
March 31, 2000, 1999, 1998, 1997 and 1996, are derived from the
financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements, related notes
and other financial information included herein.
Income Statement Data:
Year Ended March 31,
-----------------------------------------------
2000 1999 1998 1997 1996
(In thousands; except earnings per share)
Net revenues $72,823 $69,031 $69,602 $58,062 $47,326
Cost of products
sold 48,137 44,250 49,721 47,549 40,452
Cost of services
provided 14,232 15,585 11,764 2,420 1,109
Selling, general and
administrative
expenses 9,922 8,615 7,638(2) 6,698 4,070
Compensatory stock
arrangement(1) 0 0 0 0 4,655
Interest expense 177 18 13 6 13
Other Income 36 953(3) 163 141 66
Income (loss) from
operations before
income taxes 391 1,516 629 1,530 (2,907)
Net income (loss) 223 910 342 910 (3,614)
Net income (loss)
per common share:
Basic $0.05 $0.21 $0.08 $0.21 $(1.43)
Diluted $0.05 $0.21 $0.08 $0.20 $(1.43)
Weighted average
number of common
and common
equivalent shares
used in
calculation:
Basic 4,769 4,415 4,450 4,425 2,533
Diluted 4,901 4,437 4,484 4,491 2,533
Balance Sheet Data:
At March 31,
--------------------------------------------------
2000 1999 1998 1997 1996
(In thousands)
Working Capital $10,202 $10,630 $10,769 $10,418 $10,684
Total Assets 24,950 22,950 22,077 20,460 16,209
Total Liabilities 8,965 9,279 9,391 8,117 5,208
Retained Earnings
(Deficit) 1,006 783 (127) (469) (1,379)
Shareholders' Equity 15,985 13,670 12,685 12,343 11,000
_______________________
(1) Reflects a non-cash, non-recurring charge related to the 1,400,000
shares of the Company's Preferred Stock issued in September 1993 that
were redeemed in September 1996 in exchange for 980,000 shares of
Common Stock.
(2) Reflects receipt of $850,000 from BTG to offset the direct ($421,000)
and indirect costs of the terminated merger. Net income and basic and
diluted net income per share would have been $85,000 and $0.02
respectively, excluding amounts with the aforementioned indirect cost.
(3) Includes $810,000 contractual payment from BTG and interest
income of $107,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company reported income from operations before income taxes
of approximately $391,000 for the year ended March 31, 2000, compared with
income from operations before income taxes of approximately $1,516,000 in the
prior year. The decrease in income from operations before income taxes is
primarily due to (a) $810,000 of nonrecurring income in Fiscal 1999 resulting
from the termination of the merger agreement with BTG, (b) goodwill
amortization recorded in Fiscal 2000 of approximately $175,000 resulting from
the June 1999 acquisition of Pivot, and (c) an increase in cash requirements
due to the Company's investment in the service sector of its business that
resulted in increased interest expense for Fiscal 2000 from Fiscal 1999 of
approximately $159,000 and reduced interest income of approximately $73,000
from the prior year. The Company intends to continue to invest in the service
sector of its business, including the Pivot automated remote network
management system, in the coming year.
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Report.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items in
the Company's Consolidated Statements of Operations expressed as a Percentage
of total revenue for that period:
Year Ended March 31,
--------------------------------------------------
2000 1999 1998
Product Sales 71.42% 68.76% 77.00%
Services 28.58 31.24 23.00
------- ------ ------
Net sales 100.00 100.00 100.00
Cost of Products
and Services 85.64 86.68 88.34
------- ------ ------
14.36 13.32 11.66
Selling, general and
administrative expenses 13.63 12.47 10.97(1)
Interest expense 0.24 0.03 0.02
Other Income 0.05 1.38(2) 0.23
Income from operations before
income taxes 0.54 2.20 0.90
Net income 0.31 1.32 0.49
_______________________
(1) Includes $850,000 contractual payment from BTG to offset the
direct ($421,000) and indirect cost of the terminated merger.
(2) Includes $810,000 contractual payment from BTG and interest income
of $107,000.
The following table sets forth revenues and cost of revenues as a
percentage of each category:
Year Ended March 31,
------------------------------------------------
2000 1999 1998
Product Sales
Revenues 100.00% 100.00% 100.00%
Cost of products sold 92.56 93.22 92.77
-------- ------- -------
7.44% 6.78% 7.23%
======== ======= =======
Service Revenues
Revenues 100.00% 100.00% 100.00%
Cost of service revenues 68.37 72.27 73.50
------- ------ -------
31.63% 27.73% 26.50%
======= ====== =======
Year Ended March 31, 2000 and 1999
The Company had net sales of approximately $72,823,000 for the
year ended March 31, 2000 ("Fiscal 2000") as compared with approximately
$69,031,000 for the year ended March 31, 1999 ("Fiscal 1999"). Product sales
increased approximately $4,541,000, or 9.6%, and Service sales decreased
approximately $749,000, or 3.5%, in Fiscal 2000. Product sales increased due
to higher demands for products from current and new customers of the Company
during the year. Service sales consist of service related sales, which include
the Pivot automated remote network management system, and high-end service
related product sales. The Company grew the service related portion of its
business by approximately $1,840,000, or 14.0%, in Fiscal 2000 from Fiscal
1999. High-end service related product sales decreased by approximately
$2,589,000, or 30.8%, in Fiscal 2000 from Fiscal 1999. The Company intends to
continue to invest in the service sector of its business, including the Pivot
automated remote network management system, in the coming year.
Gross profit in Fiscal 2000 increased to approximately $10,455,000
from approximately $9,196,000 in Fiscal 1999, an increase of 13.7%. Gross
profit margins increased to 14.4% in Fiscal 2000 as compared to 13.3% in the
prior year. The gross profit margins from product sales increased to 7.4% in
Fiscal 2000 compared to 6.8% in Fiscal 1999. The increase in gross profit
margins from product sales is primarily related to the mix of products sold
within the year. The gross profit margins from service sales increased to
31.6% in Fiscal 2000 compared to 27.7% in Fiscal 1999. The increase in gross
profit margins from service sales primarily is a result of a decrease in the
use of outside contractors to perform certain services and the increased
efficiency in the use of the Company's technical and engineering staff. The
Company expects to continue to hire additional professional technicians and
engineers for its consulting and service business in order to meet the
expected demand in the outsourcing and services business for the coming year
and to not be so dependent on third party service subcontractors in the
future. To the extent necessary, the Company will continue to use
subcontractors.
The Company continues to face competitive market pressures which
impact on the mark-up on product sales and services related sales. The Company
currently faces a number of adverse business conditions, including price and
gross profit margin pressures and market consolidation. In recent years, all
major hardware vendors have instituted extremely aggressive price reductions
in response to lower component costs and discount pricing by certain
microcomputer manufacturers. The increased price competition among major
hardware vendors has resulted in declining gross profit margins for many
microcomputer distributors, including the Company, and may result in a
reduction in existing vendor subsidies. Management of the Company believes
that these current conditions, which are forcing certain of the Company's
direct competitors out of business, may present the Company with opportunities
to expand its business. There can be no assurance, however, that the Company
will be able to continue to compete effectively in this industry, given the
intense price reductions and competition currently existing in the
microcomputer industry.
Selling, general and administrative expenses increased to
approximately $9,922,000 in Fiscal 2000 from approximately $8,615,000 in
Fiscal 1999, or 15.2%. This increase is primarily attributable to (a)
additional administrative costs incurred as a result of the Pivot acquisition,
(b) additional goodwill amortization of approximately $175,000 from the Pivot
acquisition and (c) additional investment in the infrastructure of the Company
as it grows its service related business. The Company's compensation and
related costs increased in Fiscal 2000 by approximately $911,000 from Fiscal
1999. The Company's data communication costs increased by approximately
$59,000 in Fiscal 2000. Additionally, the Company increased its rent expense
by approximately $73,000 due to an increase in warehousing space and the
acquisition of Pivot.
Other income decreased to approximately $36,000 in Fiscal 2000
from approximately $953,000 in Fiscal 1999. This decrease is primarily a
result of $810,000 of nonrecurring income in Fiscal 1999 from the termination
of the merger agreement with BTG and a reduction of interest income of
approximately $73,000 due to the Company's increased investment in the service
sector of its business, which includes the Pivot automated remote network
management system.
Interest expense increased in Fiscal 2000 to approximately
$177,000 from approximately $18,000 in the prior year due to the increased
investment in the service sector of the business.
The effective income tax rate for Fiscal 2000 and 1999 was 43% and
40%, respectively. The effective income tax rate increased primarily as a
result of certain nondeductible expenses related to the Pivot acquisition.
Net income was approximately $223,000 for the year ended
March 31, 2000, compared with net income of approximately $910,000 in the
prior year. The decrease in net income is primarily due to (a) $810,000 of
nonrecurring income in Fiscal 1999 resulting from the termination of the
merger agreement with BTG, (b) goodwill amortization recorded in Fiscal 2000
of approximately $175,000 resulting from the June 1999 acquisition of Pivot,
and (c) an increase in cash requirements due to the Company's investment in
the service sector of its business that resulted in increased interest expense
for Fiscal 2000 from Fiscal 1999 of approximately $159,000 and reduced
interest income of approximately $73,000 from the prior year. The Company
intends to continue to invest in the service sector of its business, including
the Pivot automated remote network management system, in the coming year.
Year Ended March 31, 1999 and 1998
The Company had net sales of approximately $69,031,000 for the year
ended March 31, 1999 ("Fiscal 1999"), as compared with approximately
$69,601,000 for the year ended March 31, 1998 ("Fiscal 1998"). This decrease
in net sales of approximately 1% was primarily related to a decrease in
equipment sales (11%) net of increased revenues from support services (35%).
Service revenue in Fiscal 1999 increased approximately 35% to
$21,564,000 from $16,005,000 in Fiscal 1998. The cost of services provided
increased to $15,585,000 from $11,764,000, primarily as a result of the
Company hiring additional technical personnel and engaging third party vendors
(such as Cisco, Pivot, ISG and various other subcontractors) to participate in
the providing of such services. The Company hired more technical personnel to
meet current needs and as part of its long-term planning for the future growth
in its consulting and service business. The Company expects to continue to
hire additional professional technicians and engineers for the Advanced
Technology Group (which includes Pivot) in order to meet the expected demand
in the outsourcing and services business for the coming year and to not be so
dependent on third party service subcontractors in the future. To the extent
necessary, the Company will continue to use subcontractors.
Gross profit in Fiscal 1999 increased to approximately $9,196,000
from approximately $8,117,000 in Fiscal 1998, an increase of 13.3%. Gross
profit margins increased to 13.3% in Fiscal 1999 as compared to 11.7% in the
prior year. The gross profit margins from product sales decreased to 6.8% in
Fiscal 1999 compared to 7.2% in Fiscal 1998. The decrease in gross profit
margins from product sales is primarily related to the mix of products sold
within the year. The gross profit margins from service sales increased to
27.7% in Fiscal 1999 compared to 26.5% in Fiscal 1999. The increase in gross
profit margins from service sales primarily is a result of a decrease in the
use of outside contractors to perform certain services.
The Company continues to face competitive market pressures which
impact on the mark-up on product sales and services related sales. The Company
currently faces a number of adverse business conditions, including price and
gross profit margin pressures and market consolidation. In recent years, all
major hardware vendors have instituted extremely aggressive price reductions
in response to lower component costs and discount pricing by certain
microcomputer manufacturers. The increased price competition among major
hardware vendors has resulted in declining gross profit margins for many
microcomputer distributors, including the Company, and may result in a
reduction in existing vendor subsidies. Management of the Company believes
that these current conditions, which are forcing certain of the Company's
direct competitors out of business, may present the Company with opportunities
to expand its business. There can be no assurance, however, that the Company
will be able to continue to compete effectively in this industry, given the
intense price reductions and competition currently existing in the
microcomputer industry.
Selling, general and administrative expenses increased to approximately
$8,615,000 in Fiscal 1999 from approximately $7,638,000 from Fiscal 1998.
Such increase was primarily attributable to the Company's overall increase in
overhead expenses due to the increase in the Company's infrastructure to
support current and anticipated increases in direct costs. The increase in
overhead expenses primarily related to additional compensation costs for
Company's personnel of approximately $289,000. Payroll taxes and other
employee benefits increased by an aggregate of approximately $163,000.
Telephone expenses related to sales increased approximately $60,000. Legal and
professional fees increased approximately $163,000, and office rent expenses
increased $112,000 due to the Company's rental of a new facility in New York
City.
Other income increased to approximately $953,000 from approximately
$163,000 for Fiscal 1998. The increase was primarily due to the nonrecurring
income of $810,000 from the termination of the merger agreement with BTG.
The effective income tax rate for Fiscal 1999 and 1998 was 40% and 46%,
respectively. The effective income tax rate decreased by 13% due to several
adjustments made to the current and prior year tax provisions.
Accordingly, net income increased to approximately $910,000 in Fiscal
1999 from $342,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways, including the
following:
March 31,
-----------------------------------------------
2000 1999 1998
(Dollars in thousands, except current ratio data)
Cash and cash equivalents 1,055 679 3,992
Working capital 10,202 10,630 10,769
Current ratio 2.17:1 2.16:1 2.15:1
Secured notes payable 3,040 980 5
Working capital line
available 7,064 9,509 7,671
The Company had working capital of approximately $10,202,000 as of March
31, 2000, a decrease of approximately $428,000 from March 31, 1999.
During Fiscal 2000, the Company's net cash used in operating activities
was approximately $435,000 resulting from an increase in inventory of
$479,000, an increase in accounts payable and accrued expenses of $2,636,000,
an increase in prepaid expenses and other current assets of $524,000, an
increase in other assets of $286,000 and offset by a decrease in accounts
receivable of $2,404,000.
The Company used approximately $1,391,000 of cash in investing
activities, which amount is comprised of $1,028,000 for the purchase of
property, equipment and software and $363,000 to acquire Pivot.
The Company had an increase in its net cash provided by financing
activities of $2,203,000 primarily related to increased borrowings of
$2,060,000 from its bank and the receipt of funds from the options exercised
by employees of $171,000.
As a result of the foregoing, the Company's cash increased approximately
$377,000.
The Company has entered into two financing agreements for the purchase
of inventory. One of these agreements is a $13,000,000 credit facility. This
credit facility includes an $8,000,000 floor plan agreement and a $5,000,000
revolving receivable financing facility. The combined facility is secured by
the Company's assets (other than inventories and accounts receivable directly
financed by other floor planners who have the lien thereon).
On the revolving receivable financing facility, the Company has a choice
of two types of loans: (i) the prime rate loan, in which interest is
calculated at the prime rate (9.00% at March 31, 2000) on the daily contract
balance, and (ii) the LIBOR loan, in which the unpaid principal amount of
LIBOR loans shall bear interest prior to maturity at a rate per annum equal to
the LIBOR in effect for each interest period (6.13% at March 31, 2000), plus
1.5% per annum.
The other financing agreement is a $1,300,000 floor plan agreement and is
secured by the Company's assets (other than inventories and accounts
receivable directly financed by other floor planners who have the lien
thereon).
The financing agreements are effective until notice of termination is
given by either party (within a specific time-frame, as defined). The floor-
plan agreements generally allow the Company to borrow for a period of 30 to 60
days interest free. Interest is charged to the Company only after the due
date. In addition, one of these agreements provides for minimum amounts of
tangible net worth and specified financial ratios.
The Company's total outstanding debt under the $5,000,000 revolving
receivable financing facility was $3,040,000 and $980,000 at March 31, 2000
and 1999, respectively, and bear interest at the prime rate. The Company also
pays an unused line fee of .125% per annum on the daily average of the unused
amount of the revolving receivable financing facility.
The Company believes that expected cash flow from its operations
combined with available financing arrangements will be sufficient to satisfy
its expected cash requirements for the next 12 months and thereafter. There
can be no assurance, however, that changes in the Company's plans or other
events affecting the Company will not result in unexpected expenditures or
cash requirements.
Termination of the Merger Agreement
On August 29, 1997, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with BTG, a Virginia corporation ("BTG"), and BTG
Merger Sub, Inc., a wholly owned subsidiary of BTG, pursuant to which the
Company was to be acquired by BTG for cash and stock valued at approximately
$25 million.
On February 13, 1998, BTG terminated the Agreement with the Company. As
a result of the default, BTG paid the Company a $500,000 termination fee
provided for in the Agreement. In addition, BTG paid the Company an additional
$350,000 for out-of-pocket expenses in exchange for a release from future
liability which may arise as a result of the termination of the Agreement. The
Company recognized these payments as a reduction to selling and administrative
expenses in Fiscal 1998, reflecting an offset against the direct and indirect
costs and expenses related to the BTG merger.
The Company also entered into a cooperative marketing and service
agreement with BTG under which the Company received a non-refundable advance
payment of $900,000 from BTG for future consulting services to be provided
during the 10 months period ending December 31, 1998. The Company recognized
the revenue ratably over the term of the contract. The Company recognized
$90,000 of income during Fiscal 1998 and $810,000 of income during Fiscal
1999.
Merger with Pivot
On May 18, 1998, the Company acquired 19.9% of Pivot, an automated
remote network service provider, and an Option to cause the merger of Pivot
into a wholly-owned subsidiary of the Company. In consideration for the Option
and the Pivot Shares, the Company paid Pivot (exclusive of the merger
consideration payable upon any exercise of the Option) $475,000 and agreed to
make further payments if Pivot was in material compliance with its Business
Plan, as defined in the Purchase and Option Agreement, up to an aggregate of
$346,000 over a five month period commencing one month after Closing. The
Company further agreed to lend Pivot up to an additional $125,000 in six (6)
equal monthly installments. Such loan was payable, without interest, twelve
months after its issuance, or upon redemption of the Company's interest in the
event the Option was not exercised. The Option had a term of six (6) months
(the "Initial Option Period") and could be extended for up to three additional
one month terms upon the payment of an additional $80,000 prior to the
expiration of the Initial Option Period and the commencement of each
additional extension period, respectively. On February 22, 1999, the Company
exercised its rights to increase ownership to 33.4% from 19.9%.
On June 2, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") consummating a merger (the "Merger") with
Pivot and the principal shareholders of Pivot ("Pivot Shareholders"). Pursuant
to the Merger Agreement, the non-Company Pivot Shareholders received 377,129
shares of Common Stock, five (5) year warrants to acquire 100,000 shares of
Common Stock at an exercise price of $2.916767 per share and $261,300 in
cash. The Company also paid $100,000 to the Pivot shareholders in
consideration for the shareholders' consent not to compete.
The shares of Common Stock which the Pivot Shareholders received in
connection with the Merger Agreement are subject to Lock-up Agreements which
have a two year restriction on resale. Twenty-five percent of the shares
subject to the lock-up were released on June 2, 2000, and the remaining shares
will be released on June 2, 2001. The Lock-up Agreements grant the Company a
right of first offer should any of the Pivot Shareholders elect to sell their
common stock in a non-public transaction.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in Part IV, immediately following Item 14 of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position(s)
- --------------------------------------------------------------------------
Howard Pavony 49 Chairman of the Board of
Directors
Steven H. Rothman 51 Chief Executive Officer,
President and a Director
David Schwartz 40 Chief Financial Officer
Frank T. Wong 52 Vice President-Finance and
Secretary
Anthony R. Travaglini 47 Chief Technology Officer
William Lerner* 66 Director
Arnold J. Wasserman* 62 Director
Alvin Nashman* 72 Director
James W. Davis* 52 Director
______________
* Member of the Audit Committee and Compensation Committee.
Howard Pavony has served as Chairman of the Board of Directors of the
Company since September 1996. He served as Co-Chief Executive Officer and
President of the Company from May 1986 to August 1996. He has been a Director
since 1986. From 1977 until 1986, Mr. Pavony was employed by Data Research
Associates ("DRA"), a computer hardware and accessories company, rising to the
positions of Vice President of Sales and member of the Executive Board of DRA.
Steven H. Rothman has served as Chief Executive Officer and President of
the Company since September 1996. He served as Co-Chief Executive Officer and
Vice President of the Company from May 1986 to August 1996. He has been a
Director since 1986. From 1976 until 1986, Mr. Rothman was employed by DRA,
rising to the positions of Director of Marketing and member of the Executive
Board.
David Schwartz has been Chief Financial Officer of the Company since
May 1, 2000. He was the Chief Financial Officer and Treasurer of Just Toys,
Inc. (a toy manufacturer and distributor) from November 1996 through May 2000.
From January 1996 through November 1996, Mr. Schwartz was self-employed as a
consultant to a number of companies in the consumer products business. From
May 1994 through December 1995, he was the Chief Financial Officer of Philips
Industries, Inc.(a distributor of women's hair and cosmetic accessories). From
December 1990 through May 1994, Mr. Schwartz was the Controller of Ameriscribe
Management Services, Inc. (a provider of outsourced facilities and backoffice
management services).
Frank T. Wong has served as the Company's Vice President-Finance since
February 1992, as a Director from June 1993 to March 1998 and as Secretary
since September 1995. Prior thereto, from 1975 to 1991, he served as Chief
Accountant of the Carvel Corporation, a franchise ice cream distributor.
Anthony R. Travaglini became the Company's Chief Technology Officer in
June 1999 when the Company acquired Pivot. Mr. Travaglini founded Pivot in
August 1997 and served as its President until it was acquired by the Company.
From April 1992 until August 1997, Mr. Travaglini was responsible for network,
systems and administration management for multiple divisions of PepsiCo. While
at PepsiCo., he supervised the design, development and implementation of
PepsiCo.'s enterprise management system. Mr. Travaglini also served as Vice
President of Trading Technologies at Shearson-Lehman Brothers from 1988 to
1992 and a senior UNIX systems administrator at Salomon Brothers from 1982 to
1988.
William Lerner has served as a Director of the Company since September
1995. Mr. Lerner has been engaged in the private practice of corporate and
securities law in New York and Pennsylvania since 1991. His career included
service with the U.S. Securities and Exchange Commission, the American Stock
Exchange, and as counsel to a major investment banking/securities brokerage
firm. Mr. Lerner is a director of Seitel, Inc. (a NYSE listed oil and gas
producing company that owns one of the largest seismic data libraries in North
America), Rent-way, Inc. (a NYSE listed company that is the second largest in
the rental-purchase industry), and Helm Resources, Inc. (an OTC company that
provides financing and management services to middle market public companies).
Mr. Lerner also provides corporate secretarial services to a number of other
public companies including Computer Research, Inc. (an OTC company that is a
leading provider of computer accounting services to the brokerage and banking
industries).
Arnold J. Wasserman has served as a Director of the Company since March
1998 and is the Chairman of the Audit Committee. Mr. Wasserman has, for the
past 25 years, been a principal of P & A Associates, a leasing/consulting
firm. Prior to that, he held positions with IBM and Litton Industries. Mr.
Wasserman has consulted with major corporations in the areas of marketing,
advertising and sales. He is a director of Stratasys, Inc., a publicly
traded company.
Alvin E. Nashman has served as a Director of the Company since August
1998 and is the Chairman of the Compensation Committee. He has been an
independent consultant for major corporations in the field of computer service
for the past seven years. Prior to that, Dr. Nashman was a Director of
Computer Sciences Corporation and the President of its System Group. He is a
director and consultant to several computer services companies, including
Halifax Corporation and PEC Solutions, Inc., each of which is a publicly-
traded company, as well as several privately held companies, including
Andruilis Corporation, James Monroe BankCorp., Invertix Corporation
(telecommunication test equipment), SI International, Inc. (computer systems
integration company), e-Greenbiz.com Inc. (business-to-business portal for
horticultural industry), Unitech Inc. and Trawick Associates.
James W. Davis became a Director of the Company in June 2000. Since
January 1999, he has been Senior Partner at Key West Technologies, LLC., a
business consulting partnership advising a number of firms with regard to
technology, e-commerce, the Internet and business management. From January
1997 through January 1999, he served as the President and Chief Executive
Officer of MRT micro, ASA/Inc., a communications software company. From
September 1996 to January 1997, Mr. Davis was a Visiting Research Scholar at
the Communications Technology Center at Florida Atlantic University. In March
1995, Mr. Davis founded Key West Technologies, Inc., a computer hardware and
software company. In February 1996, Key West Technologies, Inc. was acquired
by Interaxx Television Network, Inc. Mr. Davis served as Chief of Executive
Officer of Interaxx Television Network, Inc. from February 1996 until January
1997. Mr. Davis has also served as Director for Intel Corp.'s Home Computing
Laboratory, which was responsible for developing a consumer-focused Pentium
platform strategy, and as Senior Technical Staff Member at International
Business Machines Corp., where he worked for twenty-five years. While at IBM,
he was also a member of IBM's Academy of Science and Technology and Chief
Technical Officer of the IBM PC Company Premium Brand. He is currently a
director of American Vantage Companies, a NASDAQ SmallCap listed company in
the Internet and gaming industries
All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualify. Officers are elected
annually by, and serve at the discretion of, the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and ten percent shareholders are required by
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on the Company's copies of such forms received or written
representations from certain reporting persons that no Form 5's were required
for those persons, the Company believes that, during the time period from
April 1, 1999 to March 31, 2000, all filing requirements applicable to its
Officers, Directors and greater than ten percent beneficial owners were
complied with.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain compensation information for
the chief executive officer of the Company and the only other executive
officers who, based on salary and bonus compensation from the Company and its
subsidiaries, were the most highly compensated officers for the fiscal year
ended March 31, 2000.
Long-Term
Annual Compensation Compensation
-------------------- ------------
Shares
Name and Principal Underlying
Position Year Salary($) Bonus($) Other(1) Options(#)
- ----------------- ---- --------- -------- -------- ----------
Howard Pavony 2000 $237,500 $20,000 $41,488 24,000
Chairman of the Board 1999 $227,500 $40,000 $ - 50,000
1998 $213,334 $ - $ - -
Steven H. Rothman 2000 $237,500 $20,000 $40,916 24,000
President and CEO 1999 $227,500 $40,000 $ - 50,000
1998 $213,334 $ - $ - -
Anthony Travaglini
Chief Technology Officer 2000 $128,654 $ - $ - -
_______________
(1) Other compensation primarily represents amounts paid by the Company for
life insurance premiums and leased automobiles that are used in
business by the executives. In prior years, these amounts were below the
reportable threshold.
OPTION GRANTS IN LAST FISCAL YEAR
The table below includes the number of stock options granted to the
executive officers named in the Summary Compensation Table during the year
ended March 31, 2000, exercise information and potential realizable value.
Individual Grants
----------------------------------------- Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of
Underlying Granted to Exercise Price Appreciation
Options Employees in Price Expiration for Option Term
Granted Fiscal Year Per Share Date 5% 10%
--------- ------------ --------- ---------- --- ---
Howard Pavony 5,200 1.5% $2.6875 10/11/09 $ 8,789 $22,273
18,800 5.3% $2.9563 10/11/04 $ 15,355 $33,931
Steven H. Rothman 5,200 1.5% $2.6875 10/11/09 $ 8,789 $22,273
18,800 5.3% $2.9563 10/11/04 $ 15,355 $33,931
Anthony Travaglini - - - - -
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY END OPTION VALUES
The table below includes information regarding the value realized
on option exercises and the market value of unexercised options held by
the executive officers named in the Summary Compensation Table during
the year ended March 31, 2000.
Number of
Securities Value of
Underlying Unexercised
Number of Unexercised In-The-Money
Shares Options Options
Acquired at FY-End at FY-End(2)
on Value Exercisable/ Exercisable/
Name Excerise Realized(1) Unexercisable Unexercisable
- --------------- ---------- ----------- ------------- -------------
Howard Pavony - - 124,000/10,000 $1,400,748/$99,450
Steven H. Rothman - - 124,000/10,000 $1,400,748/$99,450
Anthony Travaglini - - -/- $0/$0
- ----------------------------
(1) Calculated by determining the difference between the last sale
price of the Company's Common Stock on the date of exercise
as reported by the Nasdaq National Market and the exercise price.
(2) Calculated by determining the difference between $14.375 (the last
sale price of the Company's Common Stock on March 31, 2000 as
reported by the Nasdaq National Market) and the exercise price of
the shares of the Company's Common Stock underlying the options.
DIRECTOR FEES
The Company's independent directors receive an annual fee of $9,000
payable in quarterly installments in advance. In addition, each independent
director receives $1,500 for attendance in person at each Board meeting and
$250 for participating in each telephonic board meeting held. Members of the
Audit Committee and Compensation Committee are appointed annually and serve at
the discretion of the Board of Directors. Each member of each Committee will
receive $1,000 for each meeting attended in excess of five meetings of such
committee per year.
Management directors currently receive no cash compensation for serving
on the Board of Directors other than reimbursement of reasonable expenses
incurred in attending meetings. Certain of the Company's directors have
received stock options from the Company. See "Stock Option Plans" below.
EMPLOYMENT AGREEMENTS
On September 1, 1996, Steven H. Rothman and Howard Pavony, respectively
the Chief Executive Officer and Chairman of the Board of Directors of the
Company, each entered into a five-year employment agreement with the Company
on the terms set forth below. Each agreement renews annually after the term
unless either party elects to terminate. Salary for Fiscal 2000 was at the
rate of $237,500. Pursuant to their agreements, each executive receives
annual increases in salary equal to the greater of (i) the percentage increase
in the Consumer Price Index; and (ii) $10,000. Each executive is entitled to
participate in the Company's stock option plans and any incentive bonus
program established from time to time, as determined by the Compensation
Committee of the Board of Directors. Further, the Company will maintain a
$1,000,000 life insurance policy on each executive's life, payable to the
beneficiaries named by him, and maintain disability insurance for the benefit
of each executive which will pay $150,000 per annum to him in the event of his
permanent disability. In the event that there is a change in control of the
Company, the executive will be entitled, upon such change of control, to
terminate his employment and receive 2.9 times his annual salary as then in
effect.
On May 1, 2000, David Schwartz, the Chief Financial Officer of the
Company, entered into an employment agreement whose initial term expires on
April 30, 2001, but automatically extends for successive twelve-month renewal
terms unless either party elects to terminate at least 90 days prior to the
end of the initial term or any renewal term. The agreement provides for an
annual base salary of $185,000; certain bonuses dependent on achieving
specific management goals including raising funds for the Company and the
implementation of certain financial systems; the grant of options to purchase
25,000 shares of the Company's Common Stock; and a $650 per month car
allowance.
Simultaneously with the acquisition of Pivot on June 2, 1999, the
Company and Mr. Travaglini entered into an employment agreement with a term
ending on March 31, 2002 providing for a base salary of $150,000 based on an
April 1 to March 31 fiscal year; $175,000 for the second year and $185,000 for
the third year; bonus and stock options based on the earnings of the Company's
business with respect to which Mr. Travaglini has management responsibility;
and a $500 per month car allowance.
STOCK OPTION PLANS
The Company has adopted the following stock plans: the 1993 Stock Option
Plan, which provides for the grant of options to purchase 250,000 shares of
Common Stock; the 1996 Stock Option Plan, which provides for the grant of
options to purchase 350,000 shares of Common Stock; the 1998 Stock Option
Plan, which provides for the grant of options to purchase 250,000 shares of
Common Stock, and the 2000 Long Term Incentive Plan, which provides for stock
awards of up to 350,000 shares of Common Stock. Employees (including
officers), directors and others who provide services to the Company and its
subsidiaries are eligible to participate in the plans. The plans are
administered by the Board of Directors or the Compensation Committee.
Options granted under the plans may be incentive stock options or ISOs
(as defined in Section 422 of the Internal Revenue Code of 1986, as amended),
or non-qualified stock options. Non-qualified stock options may be granted in
tandem with stock appreciation rights. The exercise price of options may not
be less than 100% of the fair market value of the Common Stock as of the date
of grant, except that this limitation does not apply to options granted under
the 1998 Stock Option Plan and the exercise price of ISOs granted to an
employee who owns more than ten percent of the outstanding Common Stock may
not be less than 110% of the fair market value as of the date of grant.
Options may not be exercised more than 10 years after the date of grant, or
five years in the case of ISOs granted to an employee who owns more than 10%
of the outstanding Common Stock. An option may be exercised by tendering
payment of the purchase price to the Company or, at the discretion of the
Board of Directors or Compensation Committee, by delivery of shares of Common
Stock having a fair market value equal to the exercise price. The number of
shares that may be acquired upon exercise of an option and the exercise price
of an option are subject to adjustment in the event of a merger,
recapitalization, stock split or stock dividend.
The 2000 Long Term Incentive Plan permits the grant of any form of
award, including stock options, stock appreciation rights, and stock or cash
awards. Awards under the 2000 Long Term Incentive Plan may be in stock or
denominated in units of stock, which may be subject to restrictions on
transfer and include forfeiture provisions.
As of March 31, 2000, options to purchase 647,534 shares were
outstanding, options to purchase 158,666 shares had been exercised and options
to purchase 43,800 shares were available for future grants. No options have
been granted under the 2000 Plan as of March 31, 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no compensation committee (or Board of Directors) interlock
relationships with respect to the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof, certain
information concerning those persons known to the Company, based on
information obtained from such persons, with respect to the beneficial
ownership (as such term is defined in Rule 13d-3 under the Securities Exchange
Act of 1934) of Common Shares and Preferred Stock by (i) each person known by
the Company to be the owner of more than 5% of the outstanding Common Shares
and Preferred Stock, (ii) each Director, (iii) each executive officer named in
the Summary Compensation Table and (iv) all Directors and executive officers
as a group.
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Ownership Percent (1)
- -------------------- ----------------------- -----------
Steven H. Rothman(2) 987,403(3)(4) 19.7%
Howard Pavony(2) 979,056(3)(5) 19.6%
Anthony Travaglini(2) 238,565(7) 4.8%
William Lerner
423 East Beau Street
Washington, PA 15301 23,500(6) *
Arnold Wasserman
1 Brookwood Drive
West Caldwell, NJ 07006 18,500(6) *
Alvin E. Nashman
3609 Ridgeway Terrace
Falls Church, VA 22044 18,500(6) *
James W. Davis
17300 Boca Club Blvd.
Boca Raton, Fl 33487 -0- *
All directors and
executive officers
as a group (nine persons) 2,284,279 (8) 43.5%
__________________________
* Represents less than 1%.
(1) Based on 4,880,569 shares of Common Stock issued and outstanding as of
June 19, 2000.
(2) The address of this person is c/o the Company, 614 Corporate Way, Valley
Cottage, New York 10989.
(3) Includes 124,000 shares that he may acquire upon exercise of currently
exercisable options. Does not include 10,000 shares that he may acquire
upon exercise of options that are not exercisable within 60 days after
June 19, 2000.
(4) Includes 1,125 shares held by his spouse. Does not include an aggregate
of 55,544 shares held in trust for his three children, as to which he
disclaims beneficial ownership.
(5) Does not include an aggregate of 52,444 shares held in trust for his
children, as to which he disclaims beneficial ownership.
(6) Represents shares that he may acquire upon exercise of current
exercisable options.
(7) Includes 50,000 shares that he may acquire upon exercise of a warrant
and 188,565 shares subject to a lock-up agreement that
restricts the resale of 47,142 shares until June 2, 2000 and 141,423
shares until June 2, 2001. The Company has the right to purchase shares
released from the lock-up agreement if Mr. Travaglini elects to sell
them in a private transaction.
(8) Includes 373,500 shares that may be acquired upon exercise of currently
exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Independent Auditors' Reports F-1
Consolidated Balance Sheets at March 31, 2000 and 1999 F-3
Consolidated Statements of Income for F-4
the years ended March 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' F-5
Equity for the years ended March 31, 2000, 1999
and 1998
Consolidated Statements of Cash Flows for the
the years ended March 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because of the
absence of the conditions under which they are required or because the
required information, where material, is shown in the Consolidated
Financial Statements or the notes thereto.
(3) Exhibits
2.1 Asset Purchase Agreement dated as of May 1, 1996 by and
among DATA.COM RESULTS, INC. ("DATA.COM"), the sole
shareholder of DATA.COM, the Company and the Company's
wholly-owned subsidiary, DATA.COM DIRECT, INC. (4)
2.2 Stock Purchase and Option Agreement dated May 15, 1998 by
and among the Company, Pivot Technologies, Inc. and certain
Pivot Shareholders. (7)
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 Certificate of Amendment filed September 10, 1996. (6)
3.3 By-Laws of the Company.(1)
4.1 Form of Warrant issued by the Company to Pivot
Shareholders.(9)
10.1 Lease Agreement between the Company and Associates of
Rockland County dated July 30, 1989 (1)
10.2 Revised 1993 Employee Stock Option Plan.(1)
10.3 Revolving Credit Line Agreement between The Bank of New
York and the Company.(1)
10.4 Modification and Extension Agreement dated November 12,
1992 between the Bank of New York and the Company.(1)
10.5 Remarketer/Integrator Agreement between Dell Marketing L.P.
and Company, as amended.(1)
10.6 Amendment to Lease between the Company and associates of
Rockland County dated as of July 23, 1992. (1)
10.7 Dealer Addendum, as amended, to IBM Agreement for
Authorized Dealers and Industry Remarketers.(1)
10.8 Master Purchase Agreement between PaineWebber Incorporated
and the Company.(1)
10.9 Agreement for Wholesale Financing between Deutsche
Financial Service (f/k/a/ ITT Commercial Finance Corp.) and
the Company.(1)
10.10 September 13, 1993 amendment to PaineWebber Incorporated
agreement.(1)
10.11 Extension Agreement between the Bank of New York and the
Company dated March 3, 1994.(2)
10.12 Agreement of Cancellation and Termination of Franchise
Agreement and general release, dated March 28, 1995.(3)
10.13 Amendment to Revolving Loan Agreement between the Company
and the Bank of New York, dated March 28, 1995.(3)
10.14 Pledge and Escrow Agreement dated as of May 6, 1996 among
the Company, Data.Com and Mr. Fries.(4)
10.15 Employment Agreement dated as of May 6, 1996 between the
Company and Mr. Fries.(4)
10.16 Employment Agreement dated April 1, 1996 between the
Company and Mr. Mota.(5)
10.17 Lease Extension between the Company and Associates of
Rockland County dated as of February 29, 1996.(5)
10.18 Employment Agreement between the Company and Steven H.
Rothman, dated September 1, 1996.(6)
10.19 Employment Agreement between the Company and Howard Pavony,
dated September 1, 1996.(6)
10.20 Agreement and Plan of Merger by and among the Company, a
wholly-owned subsidiary of the Company, and Pivot
Shareholders, to be entered into if Option is exercised
pursuant to Stock Purchase and Option Agreement referred to
in 2.2 above.(7)
10.21 Lease Agreement between 270 Madison Limited Partnership as
landlord and the Company as tenant for space located at 270
Madison Avenue.
10.22 Business Financing Agreement as of January 19, 1999
Deutsche Financial Services Corporation and Micros-to-
Mainframes, Inc. (8)
10.23 Addendum to Agreement for Wholesale Financing (8)
10.24 Addendum to Business Financing Agreement and Agreement for
Wholesale Financing.(8)
10.25 Master Services Agreement dated April 15, 1999, between
Micros-to-Mainframes, Inc. and Dell Marketing L.P.
10.26 Agreement and Plan of Merger dated June 2, 1999 by and
among the Company, Pivot Acquisition Corporation, Pivot
Technologies, Inc. and certain shareholders of Pivot. (10)
10.27 Employment Agreement dated June 2, 1999 by and among the
Company, Pivot and Anthony Travaglini. (9)
10.28 Employment Agreement dated as of May 1, 2000 between the
Company and David Schwartz.
21.1 Subsidiaries of the Company.
23.2 Consent from Independent Accountants on 1996 and 1998
Stock Option Plans (1) Letter from Goldstein Golub
Kessler LLP, (2) Letter from Ernst & Young LLP
27.1 Financial Data Schedule.
1. Incorporated by reference from the Company's Registration Statement on
Form SB-2 for October 26, 1993 (No. 33-62932-NY).
2. Incorporated by reference from the Company's Annual Report on Form 10-
KSB for the fiscal year ended March 31, 1994.
3. Incorporated by reference from the Company's Current Report on Form 8-K
dated March 28, 1995.
4. Incorporated by reference from the Company's Current Report on Form 8-K
dated May 6, 1996.
5. Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996.
6. Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997.
7. Incorporated by reference from the Company's Current Report on Form 8-K
dated June 1, 1998.
8 Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 1998.
9. Incorporated by reference from the Company's Current Report on Form 8-K
dated June 8, 1999.
10. Incorporated by reference from the Company's Current Report on Form 8-
K/A dated December 21, 1999.
(b) Reports on Form 8-K.
None.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Micros-to-Mainframes, Inc.
We have audited the accompanying consolidated balance sheets of Micros-
to-Mainframes, Inc. and subsidiaries as of March 31, 2000 and 1999 and
the related consolidated statements of income, shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Micros-to-Mainframes, Inc. and subsidiaries as of March 31, 2000 and 1999
and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 18, 2000
F-1
Report of Independent Auditors
Board of Directors and Shareholders
Micros-To-Mainframes, Inc.
We have audited the accompanying consolidated statements of income,
changes in shareholders' equity and cash flows of Micros-To-Mainframes,
Inc. for the year ended March 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of Micros-To-Mainframes, Inc. for the year
ended March 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
May 29, 1998
F-2
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------
March 31, 2000 1999
- ----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,055,432 $ 678,680
Accounts receivable - trade,
net of allowance of $140,000 14,603,961 16,891,070
Inventories 1,908,082 1,428,736
Prepaid expenses and other current assets 1,252,689 736,844
Deferred income taxes 84,500 84,100
- -----------------------------------------------------------------------------
Total current assets 18,904,664 19,819,430
- -----------------------------------------------------------------------------
Property and Equipment:
Leasehold improvements 117,294 111,584
Furniture, fixtures and other equipment 2,710,613 2,121,043
Software development costs 1,072,184 127,800
- -----------------------------------------------------------------------------
3,900,091 2,360,427
Less accumulated depreciation and amortization 1,677,097 1,170,173
- -----------------------------------------------------------------------------
2,222,994 1,190,254
- -----------------------------------------------------------------------------
Goodwill, net of accumulated amortization
of $413,807 and $173,219 3,376,421 717,781
Investment in Pivot Technologies, Inc. - 1,067,217
Other assets 446,181 155,078
- -----------------------------------------------------------------------------
Total Assets $24,950,260 $22,949,760
=============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Secured notes payable $ 3,040,000 $ 980,000
Accounts payable and accrued expenses 5,630,567 8,208,942
Current portion of capital lease obligations 32,247 -
- -----------------------------------------------------------------------------
Total current liabilities 8,702,814 9,188,942
Capital lease obligation, net of current portion 40,764 -
Deferred income taxes 221,300 90,500
- -----------------------------------------------------------------------------
Total liabilities 8,964,878 9,279,442
- -----------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.001 par value; authorized
10,000,000 shares; issued and outstanding
4,878,069 and 4,446,440 shares 4,878 4,446
Additional paid-in capital 14,974,888 12,883,170
Retained earnings 1,005,616 782,702
- -----------------------------------------------------------------------------
Total shareholders' equity 15,985,382 13,670,318
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $24,950,260 $22,949,760
=============================================================================
See notes to Consolidated Financial Statements
F-3
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------
Year ended March 31, 2000 1999 1998
Net revenue:
Products $52,007,761 $47,466,428 $53,596,313
Services 20,815,158 21,564,252 16,004,917
- ----------------------------------------------------------------------------
72,822,919 69,030,680 69,601,230
- ----------------------------------------------------------------------------
Costs and expenses:
Cost of products sold 48,136,232 44,249,335 49,720,505
Cost of services provided 14,231,868 15,585,148 11,763,898
Selling, general and
administrative expenses 9,922,444 8,615,241 7,637,680
- ----------------------------------------------------------------------------
72,290,544 68,449,724 69,122,083
- ----------------------------------------------------------------------------
Other income 35,829 953,053 163,121
Interest expense 177,290 18,232 13,437
- ----------------------------------------------------------------------------
Income from operations
before income taxes 390,914 1,515,777 628,831
Provision for income taxes 168,000 605,800 287,000
- ----------------------------------------------------------------------------
Net income $ 222,914 $ 909,977 $ 341,831
============================================================================
Net income per common share:
Basic and diluted $ .05 $ .21 $ .08
============================================================================
Weighted-average number of common
shares outstanding:
Basic 4,768,618 4,414,564 4,450,374
============================================================================
Diluted 4,901,317 4,437,013 4,483,881
============================================================================
See notes to Consolidated Financial Statements
F-4
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Common Stock Additional Earnings
Number Paid-in (Accumulated
of Shares Amount Capital Deficit) Total
- -------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 4,450,374 $4,450 $12,807,900 $(469,106) $12,343,244
Net income - - - 341,831 341,831
- -------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 4,450,374 4,450 12,807,900 (127,275) 12,685,075
Common stock purchased and retired (74,600) (74) (186,275) - (186,349)
Exercise of stock options 70,666 70 152,679 - 152,749
Issuance of nonemployee stock options - - 32,220 - 32,220
Tax benefit related to employee stock
options - - 76,646 - 76,646
Net income - - - 909,977 909,977
- -------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 4,446,440 4,446 12,883,170 782,702 13,670,318
Exercise of stock options 54,500 55 170,821 - 170,876
Issuance of common stock in connection
with purchase of Pivot 377,129 377 1,437,427 - 1,437,804
Issuance of warrants in connection with
purchase of Pivot - - 370,770 - 370,770
Tax benefit related to employee stock
options - - 112,700 - 112,700
Net income - - - 222,914 222,914
- -------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 4,878,069 $4,878 $14,974,888 $1,005,616 $15,985,382
=======================================================================================================
See notes to Consolidated Financial Statements
F-5
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
Year ended March 31, 2000 1999 1998
Cash flows from operating activities:
Net income $ 222,914 $ 909,977 $ 341,831
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 506,924 299,490 272,607
Amortization of goodwill 240,588 59,400 59,369
Deferred income taxes 130,400 371,800 (350,400)
Stock option issued to nonemployee - 32,220 -
Loss from investment in Pivot
Technologies, Inc. 5,224 13,291 -
Bad debt expense - - 99,000
Other (19,291) - -
Changes in operating assets and liabilities,
net of effects of acquisition:
Decrease (Increase) in accounts receivable 2,404,384 (2,890,508) (392,104)
(Increase) decrease in inventories (479,346) (96,414) 126,145
(Increase) decrease in prepaid expenses
and other current assets (524,271) (146,580) 14,199
Increase in other assets (286,103) (54,127) (6,657)
(Decrease) increase in accounts payable
and accrued expenses (2,635,974) 42,801 260,448
(Decrease) increase in income
taxes payable - (373,284) 198,731
(Decrease) increase in deferred revenue - (810,000) 810,000
- ------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (434,551) (2,641,934) 1,433,169
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (1,027,946) (407,871) (321,154)
Loan to Pivot Technologies, Inc. - (124,000) -
Investment in, advances to and purchase of
subsidiary, net of cash acquired (363,483) (1,080,508) -
- ------------------------------------------------------------------------------
Cash used in investing activities (1,391,429) (1,612,379) (321,154)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in secured notes payable 2,060,000 975,000 -
Purchase and retirement of common stock - (186,349) -
Proceeds from exercise of stock options 170,876 152,749 -
Payments on capital lease obligations (28,144) - -
- ------------------------------------------------------------------------------
Net cash provided by
financing activities 2,202,732 941,400 -
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 376,752 (3,312,913) 1,112,015
Cash and cash equivalents at
beginning of year 678,680 3,991,593 2,879,578
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of year $1,055,432 $678,680 $3,991,593
==============================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 160,000 $ 9,300 $ 13,000
=============================================================================
Income taxes $ 32,500 $ 750,000 $ 557,000
=============================================================================
Supplemental schedule of noncash
investing activity:
Forgiveness of loan to Pivot
Technologies, Inc. $ 124,000 - -
=============================================================================
Supplemental schedule of noncash financing activity:
Issuance of common stock in connection
with purchase of Pivot $1,437,804 - -
=============================================================================
Issuance of warrants in connection
with purchase of Pivot $ 370,770 - -
=============================================================================
Tax benefit related to stock options $ 112,700 $ 76,646 -
=============================================================================
See notes to Consolidated Financial Statements
F-6
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Nature of Operations:
The accompanying consolidated financial statements include the accounts
of Micros-to-Mainframes, Inc. and its wholly owned subsidiaries, Data.Com
RESULTS, Inc. ("Data.Com"), MTM Advanced Technology, Inc. ("MTM"),
and PTI Corporation, formerly known as Pivot Technologies, Inc. ("Pivot"),
hereinafter collectively referred to as the "Company." Significant
intercompany accounts and transactions have been eliminated. The Company
is a premier provider of network analysis and diagnostics, management,
remote network management, architecture, design, implementation and support
services serving the New York Tri-State Area. The Company practices in
Network Protocol Analysis, Network OS Consulting, Internet & Network
Security, Integrated Communications and Life Cycle Managed Services, which
create a comprehensive computer and communication services suite.
The Company purchases microcomputers and related products directly from
suppliers as either an authorized dealer or a value-added reseller. The
Company has entered into authorization agreements with major suppliers
which can be terminated by the supplier, with or without cause, upon 30
to 90 days notice, or immediately upon the occurrence of certain events.
The cost of sales of products purchased from the Company's three largest
suppliers accounted for 40%, 28% and 24% for the year ended March 31, 2000.
The cost of sales of products purchased from the Company's three largest
suppliers were 33%, 28% and 17% for the year ended March 31, 1999.
The cost of sales of products purchased from the Company's two
largest suppliers were 23% and 16% for the year ended March 31, 1998.
The Company believes that it has excellent relationships with its major
suppliers,however, there can be no assurance that the aforementioned
agreements will be renewed. If these agreements are not renewed the
Company may have difficulty obtaining inventory at a cost which would
allow for resale at a competitive market price.
Certain prior years' amounts have been reclassified to conform to
current-year presentation.
Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash and cash equivalents generally consist of cash, certificates of deposit,
commercial paper and money market funds holding similar investments. The
Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents. Such investments are stated
at cost, which approximates fair value, and are considered cash equivalents
for purposes of reporting cash flows.
F-7
Inventories:
Inventories, comprised principally of computer hardware and software, are
stated at the lower of cost or market using the first-in, first-out ("FIFO")
method.
Property and Equipment:
Property and equipment is stated at cost and is depreciated using the
straight-line method. Furniture, fixtures and other equipment and software
development costs have useful lives ranging from three to seven years.
Leasehold improvements are amortized over the shorter of the lease term or
economic life of the related improvement. Expenditures which extend
the useful lives of existing assets are capitalized. Maintenance and repair
costs are charged to operations as incurred.
The Company incurred approximately $507,000, $299,000, and $273,000 in
depreciation expense for the years ended March 31, 2000, 1999, and 1998,
respectively.
Software Development Costs:
The costs of software developed for internal use incurred during the
preliminary project stage are expensed as incurred. Direct costs incurred
during the application development stage are capitalized. Costs incurred
during the post implementation/operation stage are expensed as incurred.
Capitalized software development costs are amortized on a straight-line
basis over their estimated useful lives.
Goodwill:
Goodwill is amortized using the straight-line method over 15 years (see
Note 8).
Impairment of Long-lived Assets:
The Company identifies and records impairment on long-lived assets, including
capitalized software development costs and goodwill, when events and
circumstances indicate that such assets have been impaired. The Company
periodically evaluates the recoverability of its long-lived assets based on
expected undiscounted cash flows, and recognizes impairment, if any, based
on expected discounted cash flows. At March 31, 2000, no such impairment
existed.
Income Taxes:
Deferred income taxes are provided, using the asset and liability method,
for temporary differences between financial and tax reporting, which
arise principally from the deductions related to the allowances for doubtful
accounts, certain capitalized software costs, the basis of inventory and
differences arising from book versus tax depreciation methods. The Company
files a consolidated federal income tax return and a separate state income
tax return for each of its subsidiaries.
F-8
Revenue Recognition:
The Company recognizes revenue upon the shipment of ordered merchandise and
as technical services are rendered.
Fair Value of Financial Instruments:
The estimated fair value of amounts reported in the consolidated financial
statements have been determined by using available market information and
appropriate valuation methodologies. All current assets are carried at
their cost and current liabilities at their contract amount, which
approximate fair value, because of their short-term nature.
Accounting for Stock-based Compensation:
The Company has granted stock options for a fixed number of shares to
employees with an exercise price equal to or greater than the fair
value of the shares at the date of grant. The Company has accounted for
stock option grants in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees.
Earnings per Share:
Net income per common share is calculated by dividing net income by the
number of shares of common stock outstanding.
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents and trade accounts receivable. The Company places its
cash with high credit quality institutions. At times, such amounts may be
in excess of the FDIC insurance limits.
The Company's customers are primarily mid- to large-sized corporations in
diversified industries located in the New York Tri-State Area. Receivables
from one of the Company's largest customers were approximately 18% and 21%
of the trade receivables at March 31, 2000 and 1999, respectively. Two
other customers were each approximately 13% of the Company's trade receivables
at March 31, 2000. One customer accounted for approximately 19%, 21%, and 13%
of the Company's revenue for the years ended March 31, 2000, 1999 and
1998, respectively. Another customer accounted for 19% of the Company's
revenue for the year ended March 31, 2000. The loss of a principal customer
would be expected to have a material adverse effect on the Company's
operations during the short term until the Company is able to generate
replacement business, although there can be no assurance of obtaining such
business.
Credit is extended to customers based on an evaluation of their financial
condition, and collateral is generally not required. The evaluation of
financial condition is performed to reduce the risk of loss. The Company
has not historically experienced any material losses due to uncollectible
accounts receivable.
F-9
Recent Accounting Pronouncements:
Management does not believe that any recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying consolidated financial statements.
2. CREDIT FACILITIES:
The Company has entered into two financing agreements for the purchase of
inventory. One of these agreements is a $13,000,000 credit facility. This
credit facility includes an $8,000,000 floor plan agreement and a $5,000,000
revolving receivable financing facility. The combined facility is secured
by the Company's assets (other than inventories and accounts receivable
directly financed by other floor planners who have the lien thereon).
On the revolving receivable financing facility, the Company has a choice
of two types of loans: (i) the prime rate loan, in which interest is
calculated at the prime rate (9.00% at March 31, 2000) on the daily
contract balance, and (ii) the LIBOR loan, in which the unpaid principal
amount of LIBOR loans shall bear interest prior to maturity at a rate per
annum equal to the LIBOR in effect for each interest period (6.13% at
March 31, 2000), plus 1.5% per annum.
The other financing agreement is a $1,300,000 floor plan agreement and is
secured by the Company's assets (other than inventories and accounts
receivable directly financed by other floor planners who have the
lien thereon).
The financing agreements are effective until notice of termination is
given by either party (within a specific time-frame, as defined). The
floor-plan agreements generally allow the Company to borrow for a
period of 30 to 60 days interest free. Interest is charged to the Company
only after the due date. In addition, one of these agreements provides
for minimum amounts of tangible net worth and specified financial ratios.
The Company's total outstanding debt under the $5,000,000 revolving
receivable financing facility was $3,040,000 and $980,000 at March 31,
2000 and 1999, respectively, and bear interest at the prime rate.
The Company also pays an unused line fee of .125% per annum on the daily
average of the unused amount of the revolving receivable financing facility.
3. SHAREHOLDERS' EQUITY:
Preferred Stock:
The Company has authorized 2,000,000 shares of "blank check" preferred stock,
par value $.001 per share. As of March 31, 2000 and 1999, there were no
preferred shares issued.
Stock Options:
The 1993 Employee Stock Option Plan (the "1993 Plan") was adopted by the
Company in May 1993; the 1996 Stock Option Plan (the "1996 Plan") was approved
by the shareholders of the Company on August 20, 1996; and the 1998 Stock
Option Plan (the "1998 Plan") was approved by the shareholders of the Company
on October 16, 1998. The plans provide for granting of options, including
incentive stock options, nonqualified stock
F-10
options and stock appreciation rights to qualified employees (including
officers and directors) of the Company, independent contractors, consultants
and other individuals, to purchase up to an aggregate of 250,000, 350,000
and 250,000 shares of common stock under the 1993 Plan, the 1996 Plan and the
1998 Plan, respectively. The exercise price of options generally may not be
less than 100% of the fair market value of the Company's common stock at the
date of grant. Options may not be exercised more than 10 years after
the date of grant. Options granted under the plans become exercisable in
accordance with different vesting schedules depending on the duration of the
options.
A summary of the status of the Company's options as of March 31, 2000, 1999
and 1998, and changes during the years then ended is presented below:
2000 1999 1998
- ---------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------
Outstanding at
beginning of year 358,034 $3.04 400,700 $3.76 365,000 $3.81
Expired - - (150,000) $3.38 - -
Canceled (9,000) $4.32 (22,000) $3.10 (4,300) $2.875
Repriced - - (50,000) $5.33 - -
- - 50,000 $2.25 - -
Granted 353,000 $3.61 200,000 $2.31 40,000 $3.25
Exercised (54,500) $3.14 (70,666) $2.16 - -
- --------------------------------------------------------------------------
Outstanding at
end of year 647,534 $3.33 358,034 $3.04 400,700 $3.76
==========================================================================
The weighted-average exercise price of the total options outstanding at
March 31, 2000 is $3.33 and the weighted-average contractual life is
7.25 years.
The weighted-average fair value of options granted during the years ended
March 31, 2000, 1999 and 1998 is $2.42, $2.31 and $2.77, respectively.
There were 375,034 and 263,700 options exercisable at March 31, 2000 and
1999, respectively. The weighted-average exercise price of the total options
exercisable at March 31, 2000 is $2.80.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board ("FASB")Statement No. 123, Accounting
for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under
APB Opinion No. 25, because the exercise price of the Company's employee
stock options are equal to or greater than the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
F-11
Pro forma information regarding net income and earnings per share is required
by FASB No. 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of the statement.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended March 31, 2000, 1999 and 1998: risk-free
interest rate 6.0%, 5.1% and 6.0%, respectively; no dividend yield; a
volatility factor of the expected market price of the Company's common stock
of .75, 1.88 and .57,respectively, and an expected life of 7.7, 9.2, and
8.0 years, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
Year ended March 31, 2000 1999 1998
- ----------------------------------------------------------------------------------
Pro forma net income (loss) $(266,647) $444,307 $301,225
===================================================================================
Pro forma income (loss) per share - basic $ (.06) $ .10 $ .07
===================================================================================
Pro forma income (loss) per share -
diluted $ (.05) $ .10 $ .07
===================================================================================
In accordance with the provisions of FASB No. 123, the pro forma disclosures
include only the effect of stock options granted in years beginning after
December 15, 1994. The application of the pro forma disclosures presented
above are not representative of the effects that FASB No. 123 may have on
net earnings and EPS in future years due to the timing of stock option
grants and considering that options vest over several years.
F-12
Earnings per Share:
The following table presents the computation of basic
and diluted income per share:
Year ended March 31, 2000 1999 1998
- -----------------------------------------------------------------------------
Numerator:
Net income $ 222,914 $ 909,977 $ 341,831
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 4,768,618 4,414,564 4,450,374
Dilutive effect of employee stock
options and warrants 132,699 22,449 33,507
- -----------------------------------------------------------------------------
Denominator for diluted earnings
per share 4,901,317 4,437,013 4,483,881
=============================================================================
Net income per share - basic $ .05 $ .21 $ .08
=============================================================================
Net income per share - diluted $ .05 $ .21 $ .08
=============================================================================
Options to purchase 78,265, 154,700 and 45,000 shares
of common stock, outstanding as of March 31, 2000,
1999, and 1998, respectively, were not included in the
computation of diluted earnings per share because
their inclusion would be antidilutive.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
March 31, 2000 1999
- ---------------------------------------------------------------------------
Trade accounts payable (includes
obligations under floor plan agreements) $4,923,661 $7,011,921
Sales and other taxes payable 262,347 497,247
Accrued commissions 140,862 256,618
Accrued other 303,697 443,156
- ---------------------------------------------------------------------------
$5,630,567 $8,208,942
===========================================================================
5. INCOME TAXES:
The asset and liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
F-13
The provision for income taxes consists of the following:
Year ended March 31, 2000 1999 1998
- -----------------------------------------------------------------------------
Federal:
Current $ 42,900 $184,500 $ 513,100
Deferred 97,800 299,000 (289,000)
---------------------------------------------------------------------------
140,700 483,500 224,100
State:
Current (5,300) 49,500 124,300
Deferred 32,600 72,800 (61,400)
- -----------------------------------------------------------------------------
$168,000 $605,800 $ 287,000
=============================================================================
The reconciliations of income tax computed at the federal statutory
tax rates to actual income tax expense are as follows:
Year ended March 31, 2000 1999 1998
- ----------------------------------------------------------------------------
Tax expense at statutory rates applied
to pretax earnings $133,000 $515,000 $213,800
State income taxes, net of federal
benefit 21,000 76,500 41,500
Other 14,000 14,300 31,700
- ----------------------------------------------------------------------------
$168,000 $605,800 $287,000
============================================================================
The tax effects of temporary differences that give rise to the net short-term
deferred income tax asset at March 31, 2000 and 1999 are presented below:
March 31, 2000 1999
- ---------------------------------------------------------------------------
Reserve for bad debts $54,600 $ 54,600
Inventory reserve - 15,600
Other, net 29,900 13,900
- ---------------------------------------------------------------------------
Total short-term deferred income tax asset $84,500 $84,100
===========================================================================
The tax effects of temporary differences that give rise to the net long-term
deferred income tax liability are presented below:
Capitalized software, net $210,200 $44,900
Depreciation 43,500 45,600
Capitalized leases (32,400) -
- --------------------------------------------------------------------------
Net long-term deferred income tax liability $221,300 $90,500
==========================================================================
F-14
For the years ended March 31, 2000 and 1999, the Company recognized for
income tax purposes a tax benefit of $112,700 and $76,646, respectively, for
compensation expense related to its incentive stock option plan for which no
corresponding charge to operations has been recorded. Such amounts have been
added to additional paid-in capital for the years ended March 31, 2000
and 1999.
6. COMMITMENTS AND CONTINGENCIES:
Leases:
The Company leases four locations for its administrative and operational
functions under operating leases expiring at various dates through
September 2003. Certain leases are subject to escalation based on the
Company's share of increases in operating expenses. In addition, the
Company leases four cars for the use of certain of its officers, as well as
office equipment.
Approximate future minimum annual lease payments under noncancelable
operating leases are as follows:
Year ending March 31,
2001 $ 456,000
2002 385,000
2003 302,000
2004 139,000
- --------------------------------------------------------------
$1,282,000
==============================================================
Rental expense for operating leases approximated $645,000, $572,000, and
$356,000 for the years ended March 31, 2000, 1999, and 1998, respectively.
Employment Agreements:
The Company has entered into employment agreements which require the
payment of approximately $1,200,000, $741,000 and $76,000 for the next
three years. In addition, certain of the agreements provide for bonus
compensation based on certain performance goals, as defined.
7. EMPLOYEE SAVINGS PLAN:
The Company has an employee savings plan which qualifies under Section 401(k)
of the Internal Revenue Code. Under the plan, all employees who are at least
21 years of age and have completed one year of service are eligible to defer
up to 15% of their pre-tax compensation, but not more than the limit
prescribed by the Internal Revenue Service. The Company matches 10% of
employee contributions to a maximum of 6% of the employee's salary. The
Company contributed approximately $31,000, $25,000 and $18,000 to the plan
in the years ended March 31, 2000, 1999 and 1998, respectively.
8. ACQUISITION OF PIVOT TECHNOLOGIES, INC.:
PTI Corporation, formerly known as Pivot Technologies,Inc. ("Pivot"),
a remote network servicer, was merged into a wholly owned subsidiary
of the Company in a three-part step-acquisition. The acquisition has been
accounted for using the purchase method of accounting, and, accordingly,
the purchase price has been allocated to the share of assets
F-15
acquired and the liabilities assumed based upon the fair values at the
dates of acquisition.
On May 18, 1998, the Company acquired 19.9% of Pivot and an option
(the "Option") to cause the merger of Pivot into a wholly owned subsidiary
of the Company. In consideration for the Option and the Pivot shares,
the Company paid Pivot (exclusive of the merger consideration payable
upon any exercise of the Option)$475,000 and made further payments, as
defined in the Purchase and Option Agreement, of $346,000 over a
five-month period commencing one month after closing. The Company also
incurred acquisition costs of approximately $26,000.
The Option had an initial term of six months and was extended for three
additional one-month terms for additional cash consideration of $240,000.
The election not to exercise the Option at the end of the additional three
months gave the Company the right to increase its ownership of Pivot to 33.4%
for no further consideration. On February 22, 1999, the Company increased
its ownership to 33.4%.
The investment in Pivot at March 31, 1999 is accounted for under the equity
method of accounting whereby earnings or losses from the investment are
reflected in the Company's earnings based on the Company's pro-rata ownership
interest. The net loss from this investment for the year ended
March 31, 1999 aggregated approximately $13,000. The excess of the
Company's carrying value over the proportionate share of the underlying
net assets of Pivot purchased aggregated approximately $905,000 and is being
amortized over a period of 15 years.
In addition, the Company lent Pivot $124,000 which is included in prepaid
expenses and other current assets at March 31, 1999. The loan was forgiven
by MTM and included in the purchase price of Pivot on June 2, 1999.
On June 2, 1999, the Company acquired the remaining 66.6% ownership of
Pivot. In consideration, Pivot shareholders received 377,129 shares of
the Company's common stock; five-year warrants to acquire 100,000
shares of the Company's common stock at $2.916767 per share, exercisable
immediately; and $261,300 in cash. The Company also paid $100,000 to the
Pivot shareholders in consideration for the shareholders' covenant not to
compete. The approximate value of the consideration paid totaled $2,170,000.
The Company also incurred additional acquisition costs of approximately
$50,000. The excess of the Company's carrying value over the proportionate
share of the underlying net assets of Pivot purchased aggregated
approximately $1,994,000 and is being amortized over a period of 15 years.
At March 31, 2000, total goodwill arising from the purchase of Pivot
aggregated approximately $2,899,000.
Results of operations for Pivot from June 2, 1999 through March 31, 2000
are included in the Company's consolidated income statement for the year
ended March 31, 2000.
F-16
The following summarized pro forma results of operations for the years
ended March 31, 2000 and 1999 have been prepared assuming the acquisition
occurred at the beginning of the period.
March 31, 2000 1999
- ------------------------------------------------------------------------
Net sales $72,831,309 $69,079,454
Net income $ 213,906 $ 668,938
Earnings per share:
Basic and diluted $ .04 $ .15
- -----------------------------------------------------------------------
9. TERMINATION OF THE MERGER AGREEMENT:
On August 29, 1997, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with BTG, Inc. ("BTG"), a Virginia corporation,
and BTG Merger Sub, Inc., a wholly owned subsidiary of BTG, pursuant to
which the Company was to be acquired by BTG for cash and stock valued at
approximately $25,000,000.
On February 13, 1998, BTG terminated the Agreement with the Company. As
a result of the default BTG paid the Company a $500,000 termination fee.
In addition, BTG paid the Company for out-of-pocket expenses of $350,000
in exchange for a release from future liability which may arise as a
result of the termination of the Agreement. The Company recognized
these payments as a reduction to selling, general and administrative
expenses, reflecting an offset against the direct and indirect costs and
expenses related to the BTG merger.
The Company also entered into a cooperative marketing and service agreement
with BTG under which the Company received a nonrefundable payment of $900,000
from BTG for consulting services to be provided during the 10-month period
ended December 31, 1998. The Company recognized $810,000 and $90,000 of
income related to this payment during the years ended March 31, 1999 and
1998, respectively. The Company was not required to provide services
exceeding $900,000.
10. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Information relating to the allowance for doubtful accounts is as follows:
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses of Year
- --------------------------------------------------------------------------
(in thousands)
Year ended March 31,
1998 $ 41 $99 $140
1999 140 - 140
2000 140 - 140
- --------------------------------------------------------------------------
F-17
11. QUARTERLY RESULTS OF OPERATIONS (unaudited):
The following is a summary of the quarterly results of operations for the
years ended March 31, 2000, 1999 and 1998:
June 30 September 30 December 31 March 31
- --------------------------------------------------------------------------------------
(in thousands, except per share data)
2000:
- ----
Net revenue $18,363 $19,024 $17,644 $17,792
Cost of products sold 12,356 12,623 12,038 11,119
Cost of services provided 3,510 3,937 3,201 3,584
Net income 73 52 63 35
Net income per common share:
Basic $ .02 $ .01 $ .01 $ .01
Diluted $ .02 $ .01 $ .01 $ .01
1999:
- -----
Net revenue $17,073 $15,066 $17,313 $19,579
Cost of products sold 11,840 9,675 11,716 12,518
Cost of services provided 2,905 3,003 3,119 5,076
Net income 207 (1) 215 (1) 135 (1) 353
Net income per common share:
Basic $ .05 (1) $ .05 (1) $ .03 (1) $ .08
Diluted $ .05 (1) $ .05 (1) $ .03 (1) $ .08
1998:
Net revenue $17,576 $17,338 $15,835 $18,852
Cost of products sold 13,656 13,333 11,162 13,761
Cost of services provided 1,887 1,992 2,467 3,068
Net income 130 128 73 11 (2)
Net income per common share:
Basic $ .03 $ .03 $ .02 $ .00 (2)
Diluted $ .03 $ .03 $ .02 $ .00 (2)
- --------------------------------------------------------------------------------------
Earnings per common share calculations for each of the quarters were based on
the weighted-average number of shares outstanding for each period, and the
sum of the quarters may not necessarily be equal to the full year earnings per
common share amount.
(1) Includes a $270,000 (approximately $159,000 after tax) contractual
payment from BTG.
(2) Includes a termination fee of $850,000 (approximately $370,000 after tax)
received from BTG. This amount was recognized as a reduction to selling,
general and administrative expenses, as an offset against the direct and
indirect costs and expenses related to the BTG merger.
F-18
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.
Dated: June 28, 2000
MICROS-TO-MAINFRAMES, INC.
By: /s/Steven H. Rothman
Steven H. Rothman
Chief Executive Officer
and President (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Howard Pavony Chairman of the Board June 28, 2000
Howard Pavony
/s/ Steven H. Rothman Chief Executive Officer, June 28, 2000
Steven H. Rothman President and Director
(Principal Executive Officer)
/s/ David Schwartz Chief Financial Officer June 28, 2000
David Schwartz (Principal Financial and
Accounting Officer)
/s/ William Lerner Director June 28, 2000
William Lerner
/s/ Arnold J. Wasserman Director June 28, 2000
Arnold J. Wasserman
/s/ Alvin E. Nashman Director June 28, 2000
Alvin E. Nashman
/s/ James W. Davis Director June 28, 2000
James W. Davis
EXHIBIT INDEX
Exhibit No. Description
10.28 Employment Agreement dated as of May 1, 2000 between the
Company and David Schwartz.
21.1 Subsidiaries of the Company.
23.2 Consent from Independent Accountants on 1996 and 1998 Stock
Option Plans (1) Letter from Goldstein Golub Kessler LLP,
(2) Letter from Ernst & Young LLP.
27.1 Financial Data Schedule.