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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, 2001
[ ] 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 21 2001 was $4,192,227
(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 21, 2001, was 5,135,569.
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.
Part I
ITEM 1. BUSINESS
GENERAL:
Micros-to-Mainframes, Inc.
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 single source
provider of advanced technology solutions, including design and
consulting services, communication services and products,
internet/Intranet development services, and Network and Security
Managed Services. In addition, the Company delivers a total processing
solution 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 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. The Company also serves as a
Managed Service Provider (MSP) providing automated remote network,
system and security management solutions and related consulting and
engineering.
MTM provides its customers, which consists of certain Fortune 500
corporations and others which the Company believes are mostly 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 managed services and is focusing its current marketing
efforts in such areas. Such services account for about 28% of the
Company's current revenues, including a small amount of revenues
derived from maintenance and repair services.
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.
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. 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 $22,367,000
in revenue for Fiscal 2001. The Company is presently reviewing options
with its financial advisors for additional financing, subject to
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 a 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 and
IBM.
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 requriements 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 115 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 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 ships 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 renewable 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,
2001,("Fiscal 2001") 2000 ("Fiscal 2000") and 1999 ( "Fiscal 1999"),
approximately 19%, 19% and 21%, 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 an
agreement with PaineWebber. In Fiscal 2001 and 2000, A.I. Credit
Corp.("A.I. Credit") accounted for 17% and 19%, respectively, of the
Company's revenue. The Company has been working under an oral
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, 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 19, 2001, the Company employed 19 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 certain of 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 22%, 30% and 27% of the Company's revenues during Fiscal
2001, Fiscal 2000 and Fiscal 1999, respectively, All or
substantially all of such products were purchased directly from Dell.
Sales of Compaq products accounted for approximately 18%, 11% and 13%
of the Company's revenues during Fiscal 2001, Fiscal 2000 and Fiscal
1999, respectively. 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 2001, Fiscal 2000 or Fiscal 1999. The Company's sales
of products purchased through Tech Data Corporation ("Tech Data")
accounted for approximately 33%, 25% and 25% during Fiscal 2001,
Fiscal 2000 and Fiscal 1999, respectively. The Company's sales of
products purchased through Ingram Micro, Inc.("Ingram") accounted for
approximately 32%, 29% and 15% during Fiscal 2001, Fiscal 2000 and
Fiscal 1999, respectively. Management does not believe that a
termination of any one supplier's agreement or distributor's agreement
other than Dell or Compaq 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/WAN 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 also agreed 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 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 a Service Agreement with Dell on April
15, 1999. Under the Service 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 Service 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.
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 registered in the United States
Patent Office or in any state, but has several 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 19, 2001, the Company employed 157 persons, all but 2
of whom are full-time personnel. Of these employees, 5 are in
management, 20 are in sales and marketing, 115 are in technical
support, 3 are in distribution, 5 are in finance and 7 are in
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 $9,800. Even though no assurance can
be given, the Company anticipates no difficulty in renewing the lease
at the current market 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 five years and three months. The monthly rent for the space
is currently approximately $23,200. 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
current market rate. In connection with the acquisition of Pivot, the
Company assumed Pivot's lease dated August 4, 1997 and renewed on
October 13, 2000 for approximately 8,700 square feet at 614 Corporate
Way, Valley Cottage, New York. This lease expires on October 31,2002.
The monthly rent for such space is approximately $7,291. Even though
no assurance can be given, the Company anticipates no difficulty in
renewing the lease at the current market 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 sale prices of
the Common Stock for each quarterly period within the last two fiscal
years as reported by NASDAQ.
Period High Low
------- ------ ------
FISCAL YEAR
ENDED MARCH 31, 2000
----------------------------------
April 1 - June 30, 1999 $5.125 $3.250
July 1 - September 30, 1999 $3.513 $2.438
October 1 - December 31, 1999 $10.188 $2.500
January 1 - March 31, 2000 $19.625 $4.000
FISCAL YEAR
ENDED MARCH 31, 2001
-----------------------------------
April 1 - June 30, 2000 $14.625 $4.781
July 1 - September 30, 2000 $8.250 $3.500
October 1 - December 31, 2000 $4.938 $0.938
January 1 - March 31, 2001 $2.125 $1.00
As of June 20, 2001, Company had 109 record holders and in an
excess of 2,000 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.
The Company has received a Nasdaq Staff Determination
letter dated June 26, 2001, indicating that the Company was not in
compliance with Marketplace Rule 4450(a)(2) which requires a minimum
market value of public float of $5,000,000 for continued listing by
The Nasdaq National Market and that its Common Stock would be delisted
from the National Market at the opening of business on July 5, 2001.
The Company has requested a hearing before a Nasdaq Listing
Qualification Panel to review the Staff Determination. Delisting of
the Common Stock will be delayed pending the outcome of the hearing.
There can be no assurance that the Panel will grant the Company's
request for continued listing. The Company also intends to apply for a
listing of its Common Stock on the Nasdaq SmallCap Market if the Panel
doses not grant the Company's request for continued listing.
Income Statement Data:
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the fiscal years ended
March 31, 2001, 2000, 1999, 1998 and 1997, are derived from the financial
statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notesand other financial
information included herein.
Income Statement Data:
Year Ended March 31,
---------------------------------------------------
2001 2000 1999 1998 1997
(In thousands; except earnings per share)
Net revenues $80,172 $72,823 $69,031 $69,602 $58,062
Cost of products sold 53,674 48,137 44,250 49,721 47,549
Cost of services provided 14,900 14,232 15,585 11,764 2,420
Selling, general and
administrative expenses 13,431 9,922 8,615 7,638(1) 6,698
Severance and other costs of
Terminated employees 677 0 0 0 0
Interest expense 439 177 18 13 6
Other Income 69 36 953(2) 163 141
Income (loss) from
operations before
income taxes (2,880) 391 1,516 629 1,530
Net income (loss) (2,279) 223 910 342 910
Net income (loss)
per common share:
Basic ($0.45) $0.05 $0.21 $0.08 $0.21
Diluted ($0.45) $0.05 $0.21 $0.08 $0.20
Weighted average
number of common
and common equivalent
shares used in calculation:
Basic 5,013 4,769 4,415 4,450 4,425
Diluted 5,013 4,901 4,437 4,484 4,491
Balance Sheet Data:
March 31,
---------------------------------------------------
2001 2000 1999 1998 1997
(In thousands)
Working Capital $7,835 $10,202 $10,630 $10,769 $10,418
Total Assets 30,248 24,950 22,950 22,077 20,460
Total Liabilities 15,584 8,965 9,279 9,391 8,117
Retained Earnings (Deficit) (1,273) 1,006 783 (127) (469)
Shareholders' Equity 14,664 15,985 13,670 12,685 12,343
_______________________
(1) 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.
(2) 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 a loss from operations before an
income tax benefit of approximately $2,880,000 for the year ended
March 31, 2001, compared with income from operations before
income taxes of approximately $391,000 in the prior year. The
decrease in income from operations before income taxes is
primarily due to (a) an increased in payroll of approximately
$2,500,000 in Fiscal 2001, resulting from hiring of new employees
for expansion of the Company, (b) an increase in expenses
related to the Company's investment in the service sector and its
sales force that resulted in increased in interest expense for
Fiscal 2001 of approximately $261,000. As a result of the loss in
the fiscal year ended March 31, 2001, the Company has
subsequently reduced the number of employees in all areas of the
Company. The Company plans to continue to invest in the service
sector of its business, including the Pivot automated remote
network management system, in Fiscal 2002.
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,
----------------------------------------------
2001 2000 1999
Product Sales 72.10% 71.42% 68.76%
Services 27.90 28.58 31.24
-------- ------- ------
Net sales 100.00 100.00 100.00
Cost of Products
and Services 85.53 85.64 86.68
-------- ------- ------
14.47 14.36 13.32
Selling, general and
administrative expenses 16.76 13.63 12.47
Severance and other costs of
terminated employees .84
Interest expense 0.54 0.24 0.03
Other Income 0.08 0.05 1.38(1)
Income (loss) from operations
before provision (benefit)
for income taxes (3.59) 0.54 2.20
Net income (loss) (2.84) 0.31 1.32
_______________________
(1) 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,
--------------------------------------------------
2001 2000 1999
Revenues 100.00% 100.00% 100.00%
Cost of products sold 92.85 92.56 93.22
--------- ------- ------
7.15% 7.44% 6.78%
========= ======= ======
Service Revenues
Revenues 100.00% 100.00% 100.00%
Cost of service revenues 66.61 68.37 72.27
------- ------ -----
33.39% 31.63% 27.73%
======= ====== =====
Year Ended March 31, 2001 and 2000
The Company had net sales of approximately $80,172,000
for the year ended March 31, 2001 ("Fiscal 2001") as compared
with approximately $72,823,000 for the year ended March 31,
2000 ("Fiscal 2000"). Product sales increased approximately
$5,795,000, or 11.1%, and Service sales increased by approximately
$1,552,000 or 7.46%, in Fiscal 2001. Product sales increased due to
higher demand 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 $454,000
or 3.0%, in Fiscal 2001 from Fiscal 2000. High-end service related
product sales increased by approximately $1,098,000, or 19.3%, in
Fiscal 2001 from Fiscal 2000. The Company plans to continue to invest
in the service sector of its business, including the automated remote
network management system, in Fiscal 2002.
Gross profit in Fiscal 2001 increased to approximately
$11,598,000 from approximately $10,455,000 in Fiscal 2000, an increase
of 10.9%. Gross profit margins slightly increased to 14.5% in Fiscal
2001 as compared to 14.4% in the prior year. The gross profit margins
from product sales slightly decreased to 7.1% in Fiscal 2001 compared
to 7.4% in Fiscal 2000. The increase and 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 33.4% in Fiscal 2001 compared to 31.6% in Fiscal 2000.
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 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 $13,431,000 in Fiscal 2001 from approximately
$9,922,000 in Fiscal 2000, or 35.2%. This increase is primarily
attributable to (a) an increase in payroll of approximately
$2,500,000 in Fiscal 2001, resulting from hiring of new employees
for expansion of the Company, (b) an increase in expenses related
to the Company's investment in the service sector and its sales
force that resulted in increased interest expense for Fiscal 2001
of approximately $261,000, (c) additional administrative costs
incurred as a result of the opening of an additional office for
approximately $500,000, (d)an increase in costs in related to the
increase in the number of employees, including payroll taxes, benefits
and employee travel, increased approximately $506,000 and (e) an
increase in the Company's data communication costs of
approximately $141,000.
As a result of market conditions, and a loss in the
fiscal year, the Company implemented the expenditure reduction
plan, during the beginning of the fourth quarter. The costs of
severance pay of terminated employees and related costs was
$677,000.
Other income increased to approximately $69,000 in Fiscal 2001
from approximately $36,000 in Fiscal 2000. This increase is primarily
due to increased interest income from cash flow.
Interest expense increased in Fiscal 2000 to approximately
$439,000 from approximately $177,000 in the prior year due to the
increased investment in the service sector of the business and its
sales force.
The Company has recorded an approximately $600,000 income tax
benefit as a result of its current year loss. The effective tax rate
for Fiscal 2001 was 20.9%.
As the result , the net loss was approximately $2,279,000 for
the year ended March 31, 2001, compared with net income of
approximately $233,000 in the prior year.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways, including
the following:
March 31,
--------------------------------------------
2001 2000 1999
(Dollars in thousands, except current ratio data)
Cash and cash equivalents 1,206 1,055 679
Working capital 7,835 10,202 10,630
Current ratio 1.50:1 2.17:1 2.16:1
Secured notes payable 7,620 3,040 980
Working capital line
available 3,359 7,064 9,509
The Company had working capital of approximately $7,835,000 as of
March 31, 2001, a decrease of approximately $2,367 ,000 from March 31,
2000.
During Fiscal 2001, the Company's net cash used in operating
activities was approximately $3,519,000 resulting from current year
loss and non cash adjustments and an increase in account receivable
$3,987,000, an increase in prepaid assets of $424,000, an increase in
deferred taxes of $449,000, and offset by a increase in accounts
payable of $2,301,000, and a decrease in inventory of $80,000 and
other assets of $171,000.
The Company used approximately $1,700,000 of cash in investing
activities, which amount is comprised of $628,000 for the purchase of
property, equipment and software and $1,072,000 for capitalized
software labor costs.
The Company had an increase in its net cash provided by financing
activities of $5,369,000 primarily related to increased borrowings of
$4,580,000 from its bank and the receipt of funds from the options
exercised by employees of $10,500 and issuance common stock to
investor 820,000.
As a result of the foregoing, the Company's cash increased
approximately $150,000.
The Company has entered into two financing agreements for the
purchase of inventory. One of these agreements is a $15,000,000
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 (8.00% at March 31, 2001) 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 plus 1.5% per annum. As of March 31, 2001, the Company
had three LIBOR loans outstanding at rate of interest 6.5075%,
6.5575%,6.775.%
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 revolving
receivable financing facility was $7,620,000 and $3,040,000 at March
31, 2001 and 2000, respectively, with interest at the prime rate.
The Company also pays an unused credit 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 fiscal year 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 were 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 50 Chairman of the Board of
Directors
Steven H. Rothman 52 Chief Executive Officer,
President and a Director
Frank T. Wong 53 Vice President-Finance
and Secretary
Anthony R. Travaglini 48 Chief Technology Officer
William Lerner* 67 Director
Arnold J. Wasserman* 63 Director
Alvin E. Nashman* 73 Director
James W. Davis* 53 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 of the Company 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 of the Company 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.
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 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 and is the Chairman of the Compensation Committee. 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 33 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 nine years. Prior to that, Dr. Nashman
was a Director of Computer Sciences Corporation and the President of
its System Group.
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 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, 2000 to March 31, 2001, 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 other executive
officers who, based on their salary and bonus compensation from the
Company and its subsidiaries, were the most highly compensated
officers for the fiscal year ended March 31, 2001.
Long-Term
Annual Compensation Compensation
-------------------- --------------
Other(1) Securities
Name and Principal Annual Underlying
Position Year Salary($) Bonus($) Compensation Option(#)
- ------------------------------------------------------------------------------------
Howard Pavony 2001 $247,500 $20,000
Chairman of the Board 2000 $237,500 $20,000 $41,488 24,000
1999 $227,500 $40,000 $ - 50,000
Steven H. Rothman 2001 $247,500 $20,000
President and CEO 2000 $237,500 $20,000 $40,916 24,000
1999 $227,500 $40,000 $ - 50,000
Anthony Travaglini 2001 $175,000 $ - $ -
Chief Technology Officer 2000 $128,654 - -
(1) Other compensation primarily represents amounts paid by the
Company for life insurance premiums and leased automobiles that are
used in business by the executives. In prior years, these amounts were
below the reportable threshold.
OPTION GRANTS IN LAST FISCAL YEAR
The table below includes the number of stock options granted to
the executive officers named in the Summary Compensation Table during
the year ended March 31, 2001, exercise information and potential
realizable value.
Individual Grants
------------------------------------------------ Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of
Underlying Granted to Exercise of Price Appreciation
Options Employees in Base Price Expiration for Option Term
Granted Fiscal Year ($/Sh) Date 5% 10%
--------- ------------ ----------- --------- ------- -------
Howard Pavony 0 0 0 - 0 0
Steven H. Rothman 0 0 0 - 0 0
Anthony Travaglini 0 0
- --------------------
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, 2001.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired at FY-End (#) at FY-End(2)
on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($)(1) Unexercisable Unexercisable
- ----------------- ---------- -------------- ------------- -------------
Howard Pavony 0 0 134,000/0 0/0
Steven H. Rothman 0 0 134,000/0 0/0
Anthony Travaglini 0 0 0/0 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 $1.125 (the last
sale price of the Company's Common Stock on March 31, 2001 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 quarterly in advance. In addition, each independent
director receives $1,500 for attendance in person at each Board
meeting and $250 for participation 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. In recognition of the increased responsibilities of members
of the Audit Committee, the Chairman of the Audit Committee receives
$3,500 per year and each other member of the Audit Committee will
receive $2,500 per year.
Directors who are also officers of the Company currently receive
no cash compensation for serving on the Board of Directors, other than
reimbursement of reasonable expenses incurred in attending meetings.
For serving as a director, the Company's independent directors each
received in October 1999 options to purchase 25,500 shares of Common
Stock . 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 2001 was at the rate of $250,000.
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.
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 Performance 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 Performance 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 Performance 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, 2001, options to purchase 698,434 shares were
outstanding, options to purchase 176,166 shares had been exercised and
options to purchase 324,400 shares were available for future grants.
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) 1,007,403(3)(4) 19.6%
Howard Pavony(2) 999,056(3)(5) 19.5%
Anthony Travaglini(2) 238,565(6) 4.6%
William Lerner
423 East Beau Street
Washington, PA 15301 40,500(7) *
Arnold Wasserman
1 Brookwood Drive
West Caldwell, NJ 07006 45,500(7) *
Alvin E. Nashman
3609 Ridgeway Terrace
Falls Church, VA 22044 35,500(7) *
James W. Davis
17300 Boca Club Blvd.
Boca Raton, Fl 33487 27,000(7) *
All directors and
executive officers
as a group (nine persons) 2,402,279(8) 46.8%
__________________________
* Represents less than 1%.
(1) Based on 5,135,569 shares of Common Stock issued and
outstanding as of March 31, 2001.
(2) The address of this person is c/o the Company, 614
Corporate Way, Valley Cottage, New York 10989.
(3) Includes 134,000 shares that he may acquire upon exercise
of currently exercisable options.
(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) 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.
(7) Represents shares that he may acquire upon exercise of currently
exercisable options.
(8) Includes 417,500 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, 2001 and 2000 F-2
Consolidated Statements of Income for the years ended March 31,
2001, 2000 and 1999 F-3
Consolidated Statements of Changes in Shareholders' Equity for
the years ended March 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years ended March
31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6-F19
(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)
4.2 Form of Placement Agent Warrant (10)
4.3 Form of Investor Warrant (Included as Exhibit A to Exhibit 4.2) (10)
10.1 Lease Agreement between the Company and Associates of
Rockland County dated July 30, 1989. (1)
10.2 Amendment to Lease between the Company and Associates
of Rockland County dated July 23, 1992. (1)
10.3 Lease Extension between the Company and Associates of
Rockland County dated February 29, 1996. (5)
10.4 Revised 1993 Employee Stock Option Plan. (1)
10.5 Revolving Credit Line Agreement between The Bank of
New York and the Company. (1)
10.6 Modification and Extension Agreement (to Agreement in 10.5 above)
between The Bank of New York and the Company dated November 12, 1992. (1)
10.7 Extension Agreement (to Agreement in 10.5 above)
between The Bank of New York and the Company dated March 3, 1994. (2)
10.8 Amendment to Revolving Loan Agreement between the Company
and The Bank of New York dated March 28, 1995. (3)
10.9 Remarketer/Integrator Agreement between Dell Marketing
L.P. and Company, as amended. (1)
10.10 Dealer Addendum, as amended, to IBM Agreement for
Authorized Dealers and Industry Remarketers. (1)
10.11 Master Purchase Agreement between PaineWebber
Incorporated and the Company. (1)
10.12 September 13, 1993 amendment to PaineWebber
Incorporated Agreement
10.13 Agreement for Wholesale Financing between Deutsche
Financial Service (f/k/a/ ITT Commercial Finance Corp.) and
the Company. (1)
10.14 Agreement of Cancellation and Termination of Franchise
Agreement and General Release between ______ and _______,
dated March 28, 1995. (3)
10.15 Pledge and Escrow Agreement among the Company, Data.Com
and Mr. Fries, dated May 6, 1996. (4)
10.16 Employment Agreement between the Company and Mr. Fries,
dated May 6, 1996. (4)
10.17 Employment Agreement between the Company and Mr. Mota,
dated April 1, 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 the Option is exercised
pursuant to the Stock Purchase and Option Agreement
referred to in 2.2 above. (7)
10.21 Business Financing Agreement between Deutsche
Financial Services Corporation and the Company, dated
January 19, 1999 (8)
10.22 Addendum to Business Financing Agreement (set forth in 10.22)
and Agreement for Wholesale Financing (set forth in 10.13). (8)
10.23 Addendum to Agreement for Wholesale Financing (set forth in 10.13). (8)
10.24 Employment Agreement dated June 2, 1999 by and among the
Company, Pivot and Anthony Travaglini. (9)
10.25 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. (11)
10.26 Lease Agreement between 270 Madison Limited Partnership
as landlord and the Company as tenant for space located at
270 Madison Avenue. (12)
10.27 Master Services Agreement dated April 15, 1999, between the
Company and Dell Marketing L.P. (13)
10.28 Employment Agreement dated as of May 1, 2000 between
the Company and David Schwartz. (14)
10.29 Long Term Performance Plan 2000. (15)
21.1 Subsidiaries of the Company.
23.2 Consent from Goldstein Golub Kessler LLP, independent accountants.
__________________
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 Registration
Statement on Form S-3 dated November 13, 2000.
11. Incorporated by reference from the Company's Current Report
on Form 8-K/A dated December 21, 1999.
12. Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998.
13. Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1999.
14. Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2000.
15. Incorporated by reference from the Company's Annual Proxy
Statement for its Fiscal 2000 Annual Meeting of Shareholders, as
filed on September 25, 2000.
(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, 2001 and 2000 and the
related consolidated statements of operations, shareholders' equity, and cash
flows foreach of the three years in the period ended March 31, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 17, 2001
F-1
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
March 31, 2001 2000
- -----------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,205,874 $ 1,055,432
Accounts receivable - trade, net of allowance
of $ 457,000 and $140,000 18,591,369 14,603,961
Inventories 1,827,691 1,908,082
Prepaid expenses and other current assets 1,524,795 1,252,689
Deferred and refundable income taxes, net
of allowance of $112,000 262,200 84,500
- -----------------------------------------------------------------------------
Total current assets 23,414,929 18,904,664
- -----------------------------------------------------------------------------
Property and Equipment:
Leasehold improvements 135,500 117,294
Furniture, fixtures and other equipment 3,320,344 2,710,613
Software development costs 2,144,184 1,072,184
- -----------------------------------------------------------------------------
5,600,028 3,900,091
Less accumulated depreciation and amortization 2,492,102 1,677,097
- -----------------------------------------------------------------------------
3,107,926 2,222,994
- -----------------------------------------------------------------------------
Goodwill, net of accumulated amortization of
$666,499 and $413,807, respectively 3,228,729 3,376,421
Deferred income taxes, net of allowance of $285,600 224,400 -
Other assets 274,701 446,181
- ------------------------------------------------------------------------------
Total Assets $30,247,685 $24,950,260
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Secured notes payable $ 7,620,000 $ 3,040,000
Accounts payable and accrued expenses 7,931,429 5,630,567
Current portion of capital lease obligations 28,201 32,247
- ------------------------------------------------------------------------------
Total current liabilities 15,579,630 8,702,814
Capital lease obligation, net of current portion 4,027 40,764
Deferred income taxes - 221,300
- ------------------------------------------------------------------------------
Total liabilities 15,583,657 8,964,878
- ------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.001 par value; authorized
10,000,000 shares; issued and outstanding
5,135,569 and 4,878,069 shares 5,136 4,878
Additional paid-in capital 15,932,256 14,974,888
(Accumulated deficit) retained earnings (1,273,364) 1,005,616
- ------------------------------------------------------------------------------
Total shareholders' equity 14,664,028 15,985,382
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $30,247,685 $24,950,260
==============================================================================
See Notes to Consolidated Financial Statements
F-2
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Year ended March 31, 2001 2000 1999
Net revenue:
Products $57,804,277 $52,007,761 $47,466,428
Services 22,367,274 20,815,158 21,564,252
- -------------------------------------------------------------------------------
80,171,551 72,822,919 69,030,680
Costs and expenses:
Cost of products sold 53,674,101 48,136,232 44,249,335
Cost of services provided 14,899,902 14,231,868 15,585,148
Selling, general and administrative
expenses 13,431,019 9,922,444 8,615,241
Severance and other costs of
terminated employees 677,000
- -------------------------------------------------------------------------------
82,682,022 72,290,544 68,449,724
- -------------------------------------------------------------------------------
Other income 68,708 35,829 953,053
Interest expense 438,517 177,290 18,232
- -------------------------------------------------------------------------------
Income (loss) from operations before
provision (benefit) for income taxes (2,880,280) 390,914 1,515,777
Provision (benefit) for income taxes (601,300) 168,000 605,800
- -------------------------------------------------------------------------------
Net income (loss) $ (2,278,980) $ 222,914 $ 909,977
===============================================================================
Net income (loss) per common share:
Basic and diluted $(.45) $ .05 $ .21
===============================================================================
Weighted-average number of common
shares outstanding:
Basic 5,012,718 4,768,618 4,414,564
===============================================================================
Diluted 5,012,718 4,901,317 4,437,013
================================================================================
See Notes to Consolidated Financial Statements
F-3
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 April 1, 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
Exercise of stock options 3,500 4 10,496 10,500
Exercise of stock options in connection
with purchase of Pivot 14,000 14 105,000 105,014
Issuance of common stock in connection
with private placement offering 240,000 240 819,772 820,012
Tax benefit related to employee stock
options 22,100 22,100
Net loss (2,278,980) (2,278,980)
- ---------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 5,135,569 $ 5,136 $ 15,932,256 $ (1,273,364) $ 14,664,028
=========================================================================================================
See Notes to Consolidated Financial Statements
F-4
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------
Year ended March 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (2,278,980) $ 222,914 $ 909,977
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 815,005 506,924 299,490
Amortization of goodwill 252,706 240,588 59,400
Deferred income taxes (449,200) 130,400 371,800
Stock option issued to nonemployee - 32,220
Loss from investment in Pivot Technologies, Inc. 5,224 13,291
Other (19,291) -
Changes in operating assets and liabilities, net
of effects of acquisition:
(Increase) decrease in accounts receivable (3,987,408) 2,404,384 (2,890,508)
(Increase) decrease in inventories 80,391 (479,346) (96,414)
Increase in prepaid expenses and other current assets (424,206) (524,271) (146,580)
(Increase) decrease in other assets 171,480 (286,103) (54,127)
(Decrease) increase in accounts payable and
accrued expenses 2,300,862 (2,635,974) 42,801
Decrease in income taxes payable - (373,284)
Decrease in deferred revenue - (810,000)
- --------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,519,350) (434,551) (2,641,934)
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (1,699,937) (1,027,946) (407,871)
Loan to Pivot Technologies, Inc. - (124,000)
Investment in, advances to and purchase of
subsidiary, net of cash acquired (363,483) (1,080,508)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,699,937) (1,391,429) (1,612,379)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in secured notes payable 4,580,000 2,060,000 975,000
Proceeds from issuance of common stock from private
placement offering 820,012
Purchase and retirement of common stock - (186,349)
Proceeds from exercise of stock options 10,500 170,876 152,749
Payments on capital lease obligations (40,783) (28,144) -
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,369,729 2,202,732 941,400
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 150,442 376,752 (3,312,913)
Cash and cash equivalents at beginning of year 1,055,432 678,680 3,991,593
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $1,205,874 $ 1,055,432 $ 678,680
====================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $416,448 $ 160,000 $ 9,300
=====================================================================================================
Income taxes $ 7,800 $ 32,500 $ 750,000
=====================================================================================================
Supplemental schedule of noncash investing and
financing activities:
Forgiveness of loan to Pivot Technologies, Inc. - $ 124,000 -
Exercise of stock options in connection with
purchase of Pivot $105,014
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 $ 22,100 $ 112,700 $ 76,646
See Notes to Consolidated Financial Statements
F-5
- --------------------------------------------------------------------------
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
- --------------------------------------------------------------------------
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 33%, 32% and 29% for the year ended March 31,
2001. The cost of sales of products purchased from the Company's three
largest suppliers were 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
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-6
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 $815,000, $507,000 and $299,000 in
depreciation expense for the years ended March 31, 2001, 2000, and 1999,
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, 2001, 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-7
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 (loss) per common share is calculated by dividing net income
(loss) 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
14% and 18% of the trade receivables at March 31, 2001 and 2000,
respectively. Three other customers were each approximately 12% of the
Company's trade receivables at March 31, 2001. One customer accounted for
approximately 19%, 19%, and 21% of the Company's revenue for the years
ended March 31, 2001, 2000 and 1999, respectively. Another customer
accounted for 17% of the Company's revenue for the year ended March 31,
2001. 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-8
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 $15,000,000 credit facility
comprising a floor plan agreement and a 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 (8% at March 31, 2001) 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 ,plus 1.5% per annum
(6.5 % at March 31, 2001).
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 revolving receivable
financing facility was $7,620,000 and $3,040,000 at March 31, 2001 and
2000, respectively, and bears 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, 2001 and 2000 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 2000 Employee Stock Option Plan
(the "2000 Plan") was adopted by the Company in September 2000. The plans
F-9
provide for granting of options, including incentive stock options,
nonqualified stock 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, 250,000 and 350,000 shares of common stock
under the 1993 Plan, the 1996 Plan, the 1998 Plan and the 2000 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, 2001, 2000
and 1999, and changes during the years then ended, is presented below:
2001 2000 1999
- -------------------------------------------------------------------------------------------
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 647,534 $3.33 358,034 $3.04 400,700 $3.76
Expired (15,000) 2.88 - - (200,000) $3.87
Canceled (27,600) 3.18 (9,000) $4.32 (22,000) $3.10
Granted 111,000 3.19 353,000 $3.61 250,000 $2.30
Exercised (17,500) 2.40 (54,500) $3.14 (70,666) $2.16
- -------------------------------------------------------------------------------------------
Outstanding at
end of year 698,434 3.43 647,534 $3.33 358,034 $3.04
===========================================================================================
The weighted-average exercise price of the total options outstanding at
March 31, 2001 is $3.43 and the weighted-average contractual life is 6.07
years.
The weighted-average fair value of options granted during the years ended
March 31, 2001, 2000 and 1999 is $2.25, $2.42 and $2.31, respectively.
There were 440,544, 375,034 and 263,700 options exercisable at March 31,
2001, 2000 and 1999, respectively. The weighted-average exercise price of
the total options exercisable at March 31, 2001 is $3.18. .
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
F-10
options are equal to or greater than the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
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, 2001, 2000 and
1999: risk-free interest rate 5.8%, 6.0% and 5.1%, respectively; no
dividend yield; a volatility factor of the expected market price of the
Company's common stock of 1.25, .75, and 1.88, respectively, and an
expected life of 5.0, 7.7 and 9.2 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, 2001 2000 1999
- ----------------------------------------------------------------------------
Pro forma net income (loss) $(2,653,075) $(266,647) $444,307
=============================================================================
Pro forma income (loss) per share- basic $(.53) $ (.06) $ .10
=============================================================================
Pro forma income (loss) per share -
diluted $(.53) $ (.05) $ .10
=============================================================================
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-11
Earnings per Share:
The following table presents the computation of basic and diluted income
(loss) per share:
Year ended March 31, 2001 2000 1999
- ------------------------------------------------------------------------------
Numerator:
Net income (loss) $ (2,287,980) $ 222,914 $ 909,977
==============================================================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 5,012,718 4,768,618 4,414,564
Dilutive effect of employee stock
options and warrants 132,699 22,449
- ------------------------------------------------------------------------------
Denominator for diluted earnings
per share 5,012,718 4,901,317 4,437,013
==============================================================================
Net income (loss) per share - basic $ (.45) $ .05 $ .21
==============================================================================
Net income per share - diluted $ (.45) $ .05 $ .21
==============================================================================
Options to purchase 278,122, 78,265 and 154,700 shares of common stock,
outstanding as of March 31, 2001, 2000, and 1999, 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, 2001 2000
- -----------------------------------------------------------------------------
Trade accounts payable (includes
obligations under floor plan agreements) $6,860,679 $4,923,661
Sales and other taxes payable 201,694 262,347
Accrued commissions 229,239 140,862
Accrued other 639,817 303,697
- -----------------------------------------------------------------------------
$7,931,429 $5,630,567
=============================================================================
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-12
The provision (benefit) for income taxes consists of the following:
Year ended March 31, 2001 2000 1999
- --------------------------------------------------------------------------
Federal:
Current (benefit) $(152,100) $ 42,900 $184,500
Deferred (345,500) 97,800 299,000
- ---------------------------------------------------------------------------
(497,600) 140,700 483,500
State:
Current (5,300) 49,500
Deferred (103,700) 32,600 72,800
- ---------------------------------------------------------------------------
$(601,300) $168,000 $605,800
===========================================================================
The reconciliations of income tax (benefit) computed at the federal
statutory tax rates to actual income tax expense (benefit) are as follows:
Year ended March 31, 2001 2000 1999
- ----------------------------------------------------------------------------
Tax expense at statutory rates applied
to pretax earnings ($979,000) $133,000 $515,000
Nondeductable goodwill amortization 65,700
State income taxes, net of federal
benefit (69,100) 21,000 76,500
Valuation allowance 397,600
Other, net (16,500) 14,000 14,300
- ----------------------------------------------------------------------------
$(601,300) $168,000 $605,800
============================================================================
The tax effects of temporary differences that give rise to the net short-
term deferred and refundable income tax asset at March 31, 2001 and 2000
are presented below:
March 31, 2001 2000
- ----------------------------------------------------------------------------
Reserve for bad debts $178,000 $54,600
Inventory reserve 22,000 -
Valuation allowance (112,000)
Other, net 29,900
- -----------------------------------------------------------------------------
Total short-term deferred income tax asset $88,000 $84,500
=============================================================================
F-13
The tax effects of temporary differences that give rise to the net long-
term deferred income tax asset (liability) are presented below:
Capitalized software, net $(682,000) ($210,200)
Property and equipment (2,600) (43,500)
Capitalized leases 29,600 32,400
Net operating loss 1,165,000 -
Valuation allowance (285,600) -
- ------------------------------------------------------------------------------
Net long-term deferred income tax
asset (liability) $224,400 $(221,300)
==============================================================================
The Company has recorded a deferred tax asset of approximately $1,165,000
reflecting the benefit of $2,987,000 in loss carryforwards, which are
available to offset taxable income through the year 2021. Realization
depends on generating sufficient taxable income before expiration of the
loss carryforwards. Although realization is not assured, management
believes it is more likely than not that part of the deferred tax asset
will be realized, and accordingly has provided a reserve against the
deferred tax asset. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during carryforward period are reduced.
For the years ended March 31, 2001, 2000 and 1999, the Company recognized
for income tax purposes a tax benefit of $ 22,100, $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, 2001, 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,
2002 $493,000
2003 374,000
2004 156,000
- --------------------------------------------------------------------------
$1,023,000
==========================================================================
Rental expense for operating leases approximated $735,000, $645,000, and
$572,000 for the years ended March 31, 2001, 2000 and 1999, respectively.
F-15
Employment Agreements:
The Company has entered into employment agreements which require the
payment of approximately $836,000 and $76,000 for the next two 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 $34,000, $31,000 and
$25,000 to the plan in the years ended March 31, 2001, 2000 and 1999,
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 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 in 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.
F-16
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, 2001, total goodwill arising from the purchase of Pivot
aggregated approximately $ 3,004,000.
Results of operations for Pivot from June 2, 1999 through March 31, 2001
are included in the Company's consolidated income statement for the year
ended March 31, 2000 and 2001.
The following summarized pro forma results of operations for the year ended
March 31, 2000 have been prepared assuming the acquisition occurred at the
beginning of the period.
March 31, 2000 1999
- ---------------------------------------------------------------------------
Net sales $72,31,309 $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
F-17
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,
1999 $140 - $140
2000 140 - 140
2001 140 317 457
- ---------------------------------------------------------------------------
F-18
11. QUARTERLY RESULTS OF OPERATIONS (unaudited):
The following is a summary of the quarterly results of operations for the
years ended March 31, 2001, 2000 and 1999:
June 30 September 30 December 31 March 31
- ------------------------------------------------------------------------------
(in thousands, except per share data)
2001:
- -----
Net revenue $21,628 $20,819 $18,570 $19,155
Cost of products sold 15,229 13,758 12,039 12,648
Cost of services provided 3,560 3,134 4,244 3,962
Net income (loss) (8) 34 (899) (1,406)
Net income (loss) per common share:
Basic $ - $ .01 $ (.18) $ (.28)
Diluted $ - $ .01 $ (.18) $ (.28)
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
- ------------------------------------------------------------------------------
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.
F-19
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 27, 2001
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 27, 2001
Howard Pavony
/s/ Steven H. Rothman Chief Executive Officer, June 27, 2001
Steven H. Rothman President and Director
(Principal Executive Officer)
/s/ Frank T. Wong Vice President - Finance June 27, 2001
Frank T. Wong (Principal Financial and
Accounting Officer)
/s/ William Lerner Director June 27, 2001
William Lerner
/s/ Arnold J. Wasserman Director June 27, 2001
Arnold J. Wasserman
/s/ Alvin E. Nashman Director June 27, 2001
Alvin E. Nashman
/s/ James W. Davis Director June 27, 2001
James W. Davis