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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, 2002
[ ] 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: (845) 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 20, 2002 was $5,160,301
(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 20, 2002 was 4,849,669
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 inclusive of highend hardware 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 represented
over $20,309,000 in revenue for Fiscal 2002.
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 tragic events of September 11, 2001 affected
all industries. Many companies reduced their capital expenditures in
2001 due to the economic downturn. This reduction adversely impacted
the growth we experienced in of the products and services revenue. The
Company believes this is temporary, and 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., Eizo Corporation., NEC Technologies, Inc., 3COM Corporation,
Cubix Corporation, Madge Development Corp., and software products from
major suppliers, including Microsoft Corporation and IBM Citrix
Systems, Inc., Cheek Point Software Technologies, Ltd., Computer
Associates and Symantec Corporation.
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 Microsoft, Novell, IBM,
Citrix, Compaq-SANS, and Cisco 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, 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 228 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 year ended March 31, 2002 ,
("Fiscal 2002") , approximately 20% of the revenue were derived from
Deutsche Bank of New York (Deutsche Bank). The Company has been
working under an oral agreement with Deutsche Bank to purchase
computer hardware and services. There is no long term agreement with
Deutsche Bank. For Fiscal 2002, the Company derived approximately 12%
of its revenue from Verizon Wireless. The Company entered into a
three year desktop maintenance and support contract with Verizon
Wireless, such contract expires in April 2005 and is renewable each
year thereafter. For the fiscal years ended March 31, 2002,
2001("Fiscal 2001") and 2000 ("Fiscal 2000"), approximately 12%, 19%
and 19% , 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 2002, 2001 and 2000, A.I. Credit Corp.("A.I. Credit") accounted
for 10%, 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 Deutsche Bank, Verizon
Wireless, PaineWebber and A.I. Credit, no assurance thereof can be
given. In any event, sales to Deutsche Bank, PaineWebber and A.I.
Credit are negotiated on a case by case basis. Although the
Company's customer base has increased, the loss of Deutsche Bank,
Verizon Wireless, PaineWebber or A.I. Credit, would be expected to
have a material adverse effect on the Company's operations.
As of June 14, 2002, the Company employed 28 salespersons, sales
assistants and marketing persons 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 10%,22% and 30% of the Company's revenues during Fiscal
2002, Fiscal 2001 and Fiscal 2000, respectively, All or
substantially all of such products were purchased directly from Dell.
Sales of Compaq products accounted for approximately 22%, 18%, and 11%
of the Company's revenues during Fiscal 2002, Fiscal 2001 and Fiscal
2000, respectively. Sales of Hewlett Packard products accounted for
10% of the Company revenues during Fiscal 2002. No other supplier's
products accounted for 10% or more of the Company's revenue during
Fiscal 2002, Fiscal 2001 or Fiscal 2000. The Company's sales of
products purchased through Tech Data Corporation ("Tech Data")
accounted for approximately 25%,33% and 25% during Fiscal 2002,
Fiscal 2001 and Fiscal 2000, respectively. The Company's sales of
products purchased through Ingram Micro, Inc.("Ingram") accounted for
approximately 28%, 32% and 29% during Fiscal 2002, Fiscal 2001 and
Fiscal 2000, respectively. Management does not believe that a
termination of any one supplier's agreement or distributor's agreement
other than Dell , Compaq or Hewlett Packard 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 June 20, 2002, Pivot had approximately 152 active customers. 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. 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 14, 2002, the Company employed 161 persons, all but 1
of whom are full-time personnel. Of these employees, 3 are in
management, 28 are in sales and marketing, 113 are in technical
support, 3 are in distribution, 5 are in finance and 8 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, 2004. 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 $10,094. 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, 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
FISCAL YEAR
ENDED MARCH 31, 2002
------------------------
April 1 - June 30, 2001 $ 1.350 $0.750
July 1 - September 30, 2001 $ 1.550 $0.900
October 1 - December 31, 2001 $ 1.600 $1.150
January 1 - March 31, 2002 $ 1.850 $1.300
As of June 5, 2002, Company had 99 record holders and an excess
of 1,700 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 Following table sets forth certain information as of the fiscal
year ended March 31, 2002 with respect to the Company's compensation
plans (including individual compensations arrangements) pursuant to
Item 201(d) of Regulation S-K.
EQUITY COMPENSATION PLAN INFORMATION TABLE
___________________________________________________________________________________________________
Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under.
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
_____________________________________________________________________________________________________
Equity compensation
plans approved by
security holders 1,100,334 $2.61 133,500
_____________________________________________________________________________________________________
Equity compensation
plans not approved by
security holders - - -
_____________________________________________________________________________________________________
Total 1,100,334 $2.61 133,500
_____________________________________________________________________________________________________
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the fiscal years ended
March 31,2002, 2001, 2000, 1999 and 1998, are derived from the
financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements, related notes
and other financial information included herein.
Income Statement Data:
Year Ended March 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
(In thousands, except earnings per share)
Net revenues $75,450 $80,172 $72,823 $69,031 $69,602
Cost of products sold 50,662 53,674 48,137 44,250 49,721
Cost of services provided 13,017 14,900 14,232 15,585 11,764
Selling, general and
Administrative expenses 11,077 13,431 9,922 8,615 7,638(1)
Severance and other costs of
Terminated employees 0 677 0 0 0
Interest expense 459 439 177 18 13
Other Income 37 69 36 953(2) 163
Income (loss) from
operations before
income taxes 272 (2,880) 391 1,516 629
Net income (loss) 389 (2,279) 223 910 342
Net income (loss)
per common share:
Basic $0.08 ($0.45) $0.05 $0.21 $0.08
Diluted $0.08 ($0.45) $0.05 $0.21 $0.08
Weighted average
number of common
and common
equivalent shares
used in
calculation:
Basic 5,033 5,013 4,769 4,415 4,450
Diluted 5,043 5,013 4,901 4,437 4,484
Balance Sheet Data:
At March 31,
--------------------------------------------
2002 2001 2000 1999 1998
(In thousands)
Working Capital $ 8,409 $7,835 $10,202 $10,630 $10,769
Total Assets 26,386 30,248 24,950 22,950 22,077
Total Liabilities 11,581 15,584 8,965 9,279 9,391
Retained Earnings
(Deficit) (885) (1,273) 1,006 783 (127)
Shareholders' Equity 14,806 14,664 15,985 13,670 12,685
_______________________
(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 income from operations before an income tax
benefit of approximately $272,000 for the year ended March 31, 2002,
compared with loss from operations before income taxes of
approximately $2,880,000 in the prior year. The increase in income
from operations before income taxes is primarily due to (a) a decrease
in payroll of approximately $2,400,000 in Fiscal 2002, resulting from
a decrease in employee payroll (b) a decrease of employee payroll
taxes and benefits related costs of approximately $266,000 (c) offset
by an increase in expenses related to the Company's investment in the
service sector and its sales force that resulted an increase in borrowing
during the year,in an increase in interest expense for Fiscal 2001 of
approximately $146,000. As a result in the fiscal year ended March 31, 2002,
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 2003.
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,
-----------------------------------------------
2002 2001 2000
Product sales 73.08% 72.10% 71.42%
Services 26.92 27.90 28.58
------- ----- ------
Net sales 100.00 100.00 100.00
Cost of products
and services 84.40 85.53 85.64
-------- ------- -------
15.60 14.47 14.36
Selling, general and
administrative expenses 14.68 16.76 13.63
Severance and other costs
of terminated employees - .84 -
Interest expense 0.61 0.54 0.24
Other income 0.05 0.08 0.05
Income (loss) from
operations before
Provision (benefit)
for income taxes 0.36 (3.59) 0.54
Net income (loss) 0.52 (2.84) 0.31
_______________________
The following table sets forth revenues and cost of revenues as a
percentage of each category:
Year Ended March 31,
------------------------------------------------
2002 2001 2000
------ ------ ------
Revenues 100.00% 100.00% 100.00%
Cost of products sold 91.88 92.85 92.56
----- ------- -------
8.12% 7.15% 7.44%
===== ====== ======
Service Revenues
Revenues 100.00% 100.00% 100.00%
Cost of service revenues 64.10 66.61 68.37
------- ------- ------
35.90% 33.39% 31.63%
======= ======= ======
Year Ended March 31, 2002 and 2001
The Company had net sales of approximately $75,450,000
for the year ended March 31, 2002 ("Fiscal 2002") as compared
with approximately $80,172,000 for the year ended March 31,
2001 ("Fiscal 2001"). Product sales decreased approximately
$2,663,000, or 4.6%, and Service sales decreased by approximately
$2,059,000 or 9.2%, in Fiscal 2002. The tragic events of September
11, 2002 affected some of the Company's customers. Many companies
reduced their capital expenditures in 2002 due to the economic
downturn. This reduction adversely impacted both the product and
service revenue.
Gross profit in Fiscal 2002 increased to approximately
$11,770,000 from approximately $11,598,000 in Fiscal 2001, an increase
of 1%. Gross profit margins increased to 15.6% in Fiscal 2002 as
compared to 14.5% in the prior year. The gross profit margins from
product sales slightly increased to 8.1% in Fiscal 2002 compared to
7.1% in Fiscal 2001. 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 35.9%
in Fiscal 2002 compared to 33.4% in Fiscal 2001. 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 utilization 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 will not be 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 and slow down in economy. 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 decreased to
approximately $11,077,000 in Fiscal 2002 from approximately
$13,431,000 in Fiscal 2001, or 17%. This decrease is primarily
attributable to a decrease in payroll of approximately $2,400,000 in
Fiscal 2002, from the layoff of employees, and a decrease in all
related employee costs, such as payroll taxes and benefits of
approximately $266,000, offset by an increase of bad debt expense of
approximately $290,000.
Other income decreased to approximately $37,000 in Fiscal
2002 from approximately $69,000 in Fiscal 2000. This decrease is
primarily due to decreased interest income from investing.
Interest expense increased in Fiscal 2002 to approximately
$459,000 from approximately $438,000 in the prior year. The borrowing
interest rate was 4.25% at March 31, 2002 and 6.5% at March 31,2001.
Due to the increased borrowing to finance the investment in the
service sector of the business and its sales force, interest expense
increased approximately $21,000.
A credit of $116,600 for income taxes from continuing operations
has been recorded at an effective rate of 43% for 2002 as compared to
a credit of $601,300, at an effective rate of 21% for 2001. At March
31, 2001, although realization was not assured, management believed it
was more likely than not that part of the deferred tax asset would be
realized, and, accordingly, had provided a reserve against the
deferred tax asset. As a result of the Job Creation and Workers
Assistance Act of 2002 which allowed the Company to carry back losses
to offset taxable income over five years instead of two years, the
Company adjusted its estimates and determined that all of the net
operating losses would be recognized in carrybacks and carryforwards
and removed all allowances recorded against all deferred tax assets.
As the result, net income was approximately $389,000 for the
year ended March 31, 2002, compared with a net loss of approximately
$2,279,000 in the prior year.
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 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 $117,000
income tax benefit as a result of its current year income.
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 $389,000 in March 31,2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways, including
the following:
March 31,
-----------------------------------------
2002 2001 2000
(Dollars in thousands, except current ratio data)
Cash and cash equivalents 1,218 1,206 1,055
Working capital 8,409 7,835 10,202
Current ratio 1.80:1 1.50:1 2.17:1
Secured notes payable 5,236 7,620 3,040
Working capital line available 9,035 3,359 7,064
The Company had working capital of approximately $8,409,000 as of
March 31, 2002, an increase of approximately $574,000 from March 31, 2001.
During Fiscal 2002, the Company's net cash provided in operating
activities was approximately $4,096,000 resulting from current year
net income of approximately $389,000, decrease in accounts receivable
of approximately $5,087,000, increase in deferred taxes asset and
liabilities approximately $745,000, decrease in Prepaid and other
assets of approximately $211,000, offset by decrease in accounts
payable approximately $3,012,000, increase in refundable income tax
of $687,8000 and inventory approximately $36,000.
The Company used approximately $2,258,000 of cash in investing
activities, which amount is comprised of $189,000 for the purchase of
property, equipment and software and $995,000 for capitalized
software labor costs and approximately $1,074,000 in capital lease
equipment .
The Company had a decrease in its net cash used by financing
activities of approximately $1,826,000, primarily related to repay
its borrowings of approximately $2,384,000 to its financing
facilities, repurchase of common stock of approximately $247,000,
payment of capital lease obligation of approximately $269,000, offset
by proceeds from capital equipment to financing company of
approximately $1,074,000 .
As a result of the foregoing, the Company's cash increased
approximately $12,000.
During Fiscal 2002, the Company entered credit agreements with
two banks on its major credit facility. The new facilty was effective as
of January 17, 2002 which replaced the expired credit facility.
On January 17, 2002, the Company entered into a $16,000,000
financing facility with a financial institution. This credit facility
is comprised of a floor plan agreement and a revolving receivable
financing facility, 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 floor-plan agreements
generally allow the Company to borrow for a period of 30 days interest
free. Interest is charged to the Company only after the due date. In
addition, the agreements provide for minimum amounts of tangible net
worth and specified financial ratios. The borrowing interest rate on
the revolving receivables financing loan is a per annum rate one half
of one percentage point (0.5%) below the base rate. The base rate is
the prime rate as listed in The Wall Street Journal. The Company's
borrowing rate is 4.25% as of March 31, 2002.
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 Company's total outstanding debt under the revolving receivable
financing facility was $5,235,827 and $7,620,000 at March 31, 2002 and
2001, respectively. The Company is charged a facility management fee
of $40,000 per annum.
Application of Critical Accounting Policies
As discussed in the Notes to the financial statements, we reviewed
our goodwill for impairment as of March 31, 2002. The recorded
goodwill is a result of the acquisition of PTI Corporation
(formerly known as PIVOT Technologies, Inc.), a subsidiary of
Micros to Mainframes. We determined the fair value of the PTI
Corporation (formerly known as PIVOT Technologies, Inc.)
operations through a discounted cash flow method. This analysis
was based on a projection of future sales and earnings for a
discrete period of five years plus an assumed average growth rate
for all years beyond the initial projected period.
We develop our budgets based on recent sales data for existing
products, planned timing of new product launches, and customer
commitments related to existing and newly developed products. In
estimating future sales and growth rates, we used our internal
budgets and make comparisons to other competitors.
We believe that the accounting estimate related to goodwill
impairment is a "critical accounting estimate" because: (1) it is
highly susceptible to change from period to period because it
requires Company management to make assumptions about future
sales, cost of sales, growth rates over the next five years of the
subsidiary; and (2) the impact that recognizing an impairment
would have on the assets reported on our balance sheet as well as
our net income would be material. Management's assumptions about
future sales prices, future sales volumes, and growth rates
require significant judgment because actual sales prices and
volumes have fluctuated in the past and are expected to continue
to do so. If Management's assumptions change then the Company
could be required to recognize an impairment loss, equal to the
difference between the fair value of the goodwill and the reported
amount of the goodwill. Management has discussed the development
and selection of this critical accounting estimate with the audit
committee of our board of directors relating to it in Management's
discussion, and analysis.
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.
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 51 Chairman of the Board of Directors
Steven H. Rothman 53 Chief Executive Officer, President and
a Director
Frank T. Wong 55 Vice President-Finance and Secretary
William Lerner* 68 Director
Arnold J. Wasserman* 64 Director
Alvin E. Nashman* 74 Director
James W. Davis* 54 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.
William Lerner has served as a Director of the Company since
September 1995. Mr. Lerner has been engaged in the private practice of
corporate and securities law in New York and Pennsylvania since 1991.
His career included service with the U.S. Securities and Exchange
Commission, the American Stock Exchange, and as counsel to a major
investment banking/securities brokerage firm. Mr. Lerner is a director
of Seitel, Inc. (a NYSE listed oil and gas producing company that owns
one of the largest seismic data libraries in North America), Rent-way,
Inc. (a NYSE listed company that is the second largest in the
rental-purchase industry), and The Cortland Funds, a money market fund
managed by Reich & Tang, Inc; offered primarily to customers of banks
and brokerage firms. Mr. Lerner also provides corporate secretarial
services to a number of other public companies
Arnold J. Wasserman has served as a Director of the Company since
March 1998 and is the Chairman of the Audit Committee. He also is the
lead independent director. 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, 2002.
Long-Term
Annual Compensation Compensation
-------------------- --------------
Other(1) Securities
Name and Principal Annual Underlying
Position Year Salary($) Bonus($) Compensation Option(#)
- ------------------------------------------------------------------------------------
Howard Pavony 2002 $258,750 -
Chairman of the Board 2001 $247,500 $20,000
2000 $237,500 $20,000 $41,488 24,000
Steven H. Rothman 2002 $258,750
President and CEO 2001 $247,500 $20,000
2000 $237,500 $20,000 $40,916 24,000
Anthony Travaglini (2) 2002 $185,417
Chief Technology Officer 2001 $175,000 $ - $ - -
2000 $128,654
- ------------------------------------------------------------------------------------
(1) Other compensation primarily represents amounts paid by the
Company for life insurance premiums and leased automobiles that are
used in business by the executives. In prior years, these amounts were
below the reportable threshold.
(2) Mr. Travaglini terminated his employment on February 28, 2002
OPTION GRANTS IN LAST FISCAL YEAR
The table below includes the number of stock options granted to
the executive officers named in the Summary Compensation Table during
the year ended March 31, 2002, exercise information and potential
realizable value.
Individual Grants
------------------------------------------------ Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of
Underlying Granted to Exercise of Price Appreciation
Options Employees in Base Price Expiration for Option Term
Name Granted Fiscal Year ($/Sh) Date 5% 10%
- ------------- --------- ------------ ----------- --------- ------- -------
Howard Pavony 50,000 14.3% $1.29 9-10-2012 $6,515 $ 10,375
Steven H. Rothman 50,000 14.3% $1.29 9-10-2012 $6,515 $ 10,375
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, 2002.
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 $68,500/0
Steven H. Rothman 0 0 134,000/0 $68,500/0
Anthony Travaglini (3) 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 $1.37 (the last
sale price of the Company's Common Stock on March 31, 2002 as reported
by the Nasdaq National Market) and the exercise price of the shares of
the Company's Common Stock underlying the options.
(3) Mr. Travaglini terminated his employment on February 28, 2002.
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. For serving as a director, the Company's
independent directors who served over three years each received in
September 2001 options to purchase 30,000 shares of Common Stock,
vesting over a three years term through September 2003.One Director
who served less than three years , received options in September 2001
to purchase 20,000 shares of Common Stock, vesting in September 2002
and 2003 . See "Stock Option Plans" below. The lead independent
director receives an additional $1,000 per month.
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.
EMPLOYMENT AGREEMENTS
On September 1, 2001, Steven H. Rothman and Howard Pavony,
respectively the Chief Executive Officer and Chairman of the Board of
Directors of the Company entered into an amendments to their
Employment Agreement dated as September 1, 1996, that was to expire on
that date to extend the term of the agreement to September 1, 2002.
The salary for the extended term was $265,000 per annum. Pursuant to
their agreements, each executive receives incentive compensation if
pre-tax income for fiscal year ending at least $400,000, in an amount
equal to the sum of (i) $5,000, plus (ii) 5% of pre-tax income in
excess of $400,000, but not more than $500,000, plus (iii) 6% of pre-
tax income on excess of $500,000. In no event shall the amount of cash
bonus exceed 60% of the Employee's Fixed Compensation. The agreement
also provided each executive an allowance for automobiles. Further,
under the agreement, the Company maintains a $1,000,000 life
insurance policy on each executive's life, payable to the
beneficiaries named by him, and maintains 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 entered into an employment agreement with Anthony Travaglini
for 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. Mr. Travaglini terminated his employment on February 28,
2002.
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, 2002, options to purchase 910,334 shares were
outstanding, and options to purchase 133,500 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(1) Percent (1)
- ------------------------- ----------------------------- ----------
Steven H. Rothman(2) 920,486 (3)(4) 18.5%
Howard Pavony(2) 914,456(3) 18.4%
Anthony Travaglini(7) 238,565(8) 4.9%
17 Elliots Alley
Valley Cottage, NY 10989
William Lerner
423 East Beau Street
Washington, PA 15301 50,500(5) 1.0%
Arnold Wasserman
1 Brookwood Drive
West Caldwell, NJ 07006 55,500(5) 1.1%
Alvin E. Nashman
3609 Ridgeway Terrace
Falls Church, VA 22044 45,500(5) *
James W. Davis
17300 Boca Club Blvd.
Boca Raton, Fl 33487 35,000(5) *
All directors and
executive officers
as a group (7 persons) 2,035,697(6) 38.3%
__________________________
* Represents less than 1%.
(1) Unless otherwise indicated, each person has sole investment and
voting power with respect to the shares indicated, subject to
community property laws, where applicable. For purposes of
this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares which such person has the
right to acquire within 60 days after March 31, 2002. For purposes
of computing the percentage of outstanding shares held by each
person or group of persons named above on March 31,2002, any security
which such person or group of persons has the right to acquire within
60 days after such date is deemed to be outstanding for the purpose of
computing the percentage ownership of such person or persons, but is
not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(2) The address of this person is c/o Micros-to-Mainframes, Inc.,
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.
(5) Represents shares that he may acquire upon exercise of
currently exercisable options.
(6) Includes 465,000 shares that may be acquired upon exercise of
currently exercisable options. Does not include shares owned
by Mr.Travaglini who teminated his employment as of February 28,2002.
(7) Mr. Travaglini terminated his employment on February 28, 2002.
(8) Included warrants to purchase 50,000 shares, at execise a price
of $2.92 per share.
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, 2002 and 2001 F-2
Consolidated Statements of Income for the years ended March 31,
2002, 2001 and 2000 F-3
Consolidated Statements of Changes in Shareholders' Equity for
the years ended March 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the years ended March
31, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6 - F16
(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)
2.3 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)
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)
10.9 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)
10.15 Pledge and Escrow Agreement among the Company, Data.Com
and Mr. Fries, dated May 6, 1996. (4)
10.18 Employment Agreement between the Company and Steven H.
Rothman, dated September 1, 1996. (6)
10.19 Amendment No 1 to Employment Agreement with Steve H.
Rothman dated as of September 1, 2001
10.20 Employment Agreement between the Company and Howard Pavony,
dated September 1, 1996. (6)
10.21 Amendment No.1 to Employment Agreement with Howard Pavony
dated as of September 1, 2001
10.23 Business Financing Agreement between Deutsche
Financial Services Corporation and the Company, dated
January 19, 1999 (8)
10.24 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)
10.26 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 1996 Stock Option Plan and 1998 Stock Option Plan (17)
10.29 Long Term Performance Plan 2000. (15)
10.30 Business Financing Agreement between Textron Financial
Corporation and the Company, dated January 17, 2002 (16)
21.1 Subsidiaries of the Company (14)
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.
16. Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended December 31, 2001.
17. Incorporated by reference from the Company's Registration
Statement Form S-8 filed on February 19, 1999.
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, 2002 and 2001 and
the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
March 31, 2002. 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, 2002 and
2001 and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 2002 in conformity
with accounting principles generally accepted in the United States of
America.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 21, 2002
F-1
MICROS-TO-MAINFRAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------
March 31, 2002 2001
- ------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,217,790 $ 1,205,874
Accounts receivable - trade, net of allowance
of $335,000 and $457,000, respectively 13,504,056 18,591,369
Inventories 1,863,370 1,827,691
Prepaid expenses and other current assets 1,314,006 1,524,795
Refundable income taxes 862,000 174,200
Deferred income taxes, net of allowance of
$112,000 in 2001 155,000 88,000
- ------------------------------------------------------------------------------
Total current assets 18,916,222 23,411,929
- ------------------------------------------------------------------------------
Property and Equipment:
Leasehold improvements 141,200 135,500
Furniture, fixtures and other equipment 4,577,958 3,320,344
Software development costs 3,139,184 2,144,184
- ------------------------------------------------------------------------------
7,858,342 5,600,028
Less accumulated deprecation and amortization 3,797,562 2,492,102
- ------------------------------------------------------------------------------
4,060,780 3,107,926
Goodwill 3,228,729 3,228,729
Deferred Income Taxes, net of allowance
of $285,600 in 2001 - 224,400
Other Assets 180,495 274,701
- ------------------------------------------------------------------------------
Total Assets $ 26,386,226 $ 30,247,685
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Secured notes payable $ 5,235,837 $ 7,620,000
Accounts payable and accrued expenses 4,919,341 7,931,429
Current portion of capital lease obligations 352,379 28,201
- ------------------------------------------------------------------------------
Total current liabilities 10,507,557 15,579,630
Capital Lease Obligations, net of current portion 484,943 4,027
Deferred Income Taxes 588,000 -
- ------------------------------------------------------------------------------
Total liabilities 11,580,500 15,583,657
- ------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.001 par value; authorized
10,000,000 shares, issued and outstanding 4,957,569
shares and 5,135,569 shares, respectively 4,958 5,136
Additional paid-in capital 15,685,456 15,932,256
Accumulated deficit (884,689) (1,273,364)
- -------------------------------------------------------------------------------
Total shareholders' equity 14,805,725 14,664,028
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 26,386,226 $ 30,247,685
===============================================================================
See Notes to Consolidated Financial Statements
F-2
MICROS-TO-MAINFRAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
Year ended March 31, 2002 2001 2000
- ------------------------------------------------------------------------------
Net revenue:
Products $ 55,141,478 $ 57,804,277 $ 52,007,761
Services 20,308,509 22,367,274 20,815,158
- ------------------------------------------------------------------------------
75,449,987 80,171,551 72,822,919
- ------------------------------------------------------------------------------
Costs and expenses:
Cost of products sold 50,662,203 53,674,101 48,136,232
Cost of services provided 13,017,319 14,899,902 14,231,868
Selling, general and administrative
expenses 11,076,877 13,431,019 9,922,444
Severance and other costs of
terminated employees 677,000
- ------------------------------------------------------------------------------
74,756,399 82,682,022 72,290,544
- ------------------------------------------------------------------------------
Other income 37,298 68,708 35,829
Interest expense 458,811 438,517 177,290
- ------------------------------------------------------------------------------
Income (loss) from operations before
provision (benefit) for income taxes 272,075 (2,880,280) 390,914
Provision (benefit) for income taxes (116,600) (601,300) 168,000
- ------------------------------------------------------------------------------
Net income (loss) $ 388,675 $ (2,278,980) $ 222,914
==============================================================================
Net income (loss) per common shares:
Basic and diluted $ 0.08 $ (0.45) $ 0.05
==============================================================================
Weighted-average number of common
shares outstanding:
Basic 5,033,726 5,012,718 4,768,618
- ------------------------------------------------------------------------------
Diluted 5,042,908 5,012,718 4,901,317
==============================================================================
See Notes to Consolidated Financial Statements
F-3
MICROS-TO-MAINFRAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------
Retained
Common Stock Additional Earnings
Number Paid-in (Accumulated
of Shares Amount Capital Deficit) Total
- -------------------------------------------------------------------------------------
Balance at April 1, 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
Repurchase of common stock (178,000) (178) (246,800) - (246,978)
Net income - - - 388,675 388,675
- --------------------------------------------------------------------------------------------
Balance at March 31, 2002 4,957,569 $ 4,958 $15,685,456$ (884,689) $14,805,725
============================================================================================
See Notes to Consolidated Financial Statements
F-4
MICROS-TO-MAINFRAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------
Year ended March 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 388,675 $ (2,278,980) $ 222,914
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,305,460 815,005 506,924
Amortization of goodwill - 252,706 240,588
Deferred income taxes 745,400 (449,200) 130,400
Loss from investment in Pivot Technologies, Inc. - - 5,224
Other - - (19,291)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 5,087,313 (3,987,408) 2,404,384
(Increase) decrease in inventories (35,679) 80,391 (479,346)
Decrease (increase) in prepaid expenses and
other current assets 210,789 (250,006) (524,271)
Increase in refundable income taxes (687,800) (174,200) -
(Increase) decrease in other assets 94,206 171,480 (286,103)
Increase (decrease) in accounts payable and
accrued expenses (3,012,087) 2,300,862 (2,635,974)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,096,277 (3,519,350) (434,551)
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (2,258,314) (1,699,937) (1,027,946)
Investment in, advances to and purchase of
subsidiary,net of cash acquired - - (363,483)
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (2,258,314) (1,699,937) (1,391,429)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
(Repayment) borrowing of secured notes payable (2,384,163) 4,580,000 2,060,000
Proceeds from issuance of common stock from
private placement offering - 820,012 -
Proceeds from exercise of stock options - 10,500 170,876
Purchases and retirement of common stock (246,978) - -
Proceeds from capital lease obligations 1,074,428 - -
Payments on capital lease obligations (269,334) (40,783) (28,144)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,826,047) 5,369,729 2,202,732
- ---------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 11,916 150,442 376,752
Cash and cash equivalents at beginning of year 1,205,874 1,055,432 678,680
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,217,790 $ 1,205,874 $ 1,055,432
=============================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 482,910 $ 416,448 $ 160,000
=============================================================================================
Income taxes $ 12,370 $ 7,800 $ 32,500
=============================================================================================
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
=============================================================================================
See Notes to Consolidated Financial Statements
F-5
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 and 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
42%, 37% and 15% for the year ended March 31, 2002. The
cost of sales of products purchased from the Company's
three largest suppliers were 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
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
accounting principles generally accepted in the United
States of America 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 and
money market funds. The Company considers all highly
liquid investments purchased with a maturity of three
months or less to be cash equivalents. Such investments
are stated at cost, which approximates fair value, and are
considered cash equivalents for purposes of reporting cash
flows.
F-7
Inventories:
Inventories, comprised principally of computer hardware and
software, are stated at the lower of cost or market using
the first-in, first-out ("FIFO") method.
Property and Equipment:
Property and equipment is stated at cost and is depreciated
using the straight-line method. Furniture, fixtures and
other equipment and software development costs have useful
lives ranging from 3 to 7 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 $1,305,000, $815,000 and
$507,000 in depreciation and amortization expense,
exclusive of amortization of goodwill, for the years ended
March 31, 2002, 2001 and 2000, 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.
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 discounted cash flows. At March 31, 2002, 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.
Revenue Recognition:
The Company recognizes revenue upon the shipment of ordered
merchandise and as technical services are rendered.
Shipping and handling costs are included in cost of sales.
F-8
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. Diluted earnings per common
share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares
attributed to outstanding options and warrants to purchase
common stock.
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 15% and 14% of the
trade receivables at March 31, 2002 and 2001, respectively.
One other customer was approximately 11% of the Company's
trade receivables at March 31, 2002. One customer
accounted for approximately 20%, 19% and 19% of the
Company's revenue for the years ended March 31, 2002, 2001
and 2000, respectively. Three other customers accounted for
approximately 12%, 12% and 10% of the Company's revenue for
the year ended March 31, 2002. The loss of a principal
customer would be expected to have a material adverse
effect on the Company's operations during the short term
until the Company is able to generate replacement business,
although there can be no assurance of obtaining such
business.
Credit is extended to customers based on an evaluation of
their financial condition, and collateral is generally not
required. The evaluation of financial condition is
performed to reduce the risk of loss. The Company has not
historically experienced any material losses due to
uncollectible accounts receivable.
F-9
Recent Accounting Pronouncements:
As of April 1, 2001, the Company has adopted Statement
Financial Accounting Standards ("SFAS") No. 142, Goodwill
and Other Intangible Assets. SFAS No. 142 eliminates the
amortization of goodwill and certain other intangible
assets. It also requires the Company to complete a test for
impairment of these assets annually, as well as a
transitional goodwill impairment test within six months
from the date of adoption. The Company has completed this
impairment test, and has found no impairment. SFAS No. 142
also requires disclosure of what net income (loss) would
have been in all periods presented had SFAS No. 142 been in
effect. The following table is provided to disclose what
net income would have been had SFAS No. 142 been adopted in
prior periods:
Year ended March 31, 2002 2001 2000
- -------------------------------------------------------------------------
(in thousands, except per share amounts)
Reported net income (loss) $ 389 $(2,279) $223
Add back: goodwill amortization net of
income tax 154 147
- ------------------------------------------------------------------------
Adjusted net income (loss) $ 389 $(2,125) $370
========================================================================
Basic earnings per share as reported $ .08 $ (.45) $.05
========================================================================
Adjusted basic earnings per share $ .08 $ (.42) $.08
========================================================================
Accumulated amortization amounted to apporximately
$666,000 at March 31, 2001.
The Company does not believe that any other recently issued,
but not yet effective, accounting standards if currently
adopted would have a material effect on the Company's
consolidated financial position and results of operations.
2. CREDIT FACILITIES:
On January 17, 2002, the Company has entered into a
$16,000,000 financing facility with a financial
institution. This credit facility is comprised of a floor
plan agreement and a revolving receivable financing
facility, 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
floor-plan agreements generally allow the Company to borrow
for a period of 30 days interest free. Interest is charged
to the Company only after the due date. In addition, the
agreements provide for minimum amounts of tangible net
worth and specified financial ratios. The borrowing
interest rate on the revolving receivables financing loan
is a per annum rate one half of one percentage point (0.5%)
below the base rate. The base rate is the prime rate as
listed in The Wall Street Journal. The Company's borrowing
rate is 4.25% as of March 31, 2002.
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).
F-9
The Company's total outstanding debt under the revolving
receivable financing facility was $5,235,827 and $7,620,000
at March 31, 2002 and 2001, respectively. The Company is
charged a facility management fee of $40,000 per annum.
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, 2002 and 2001, 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 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, 2002, 2001 and 2000, and changes during the years then
ended, is presented below:
2002 2001 2000
- ----------------------------------------------------------------------------
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 698,434 $3.43 647,534 $3.23 358,034 $3.04
Expired - - (15,000) 2.88 - -
Canceled (137,000) 3.18 (27,600) 3.18 (9,000) 4.32
Granted 348,900 1.31 111,000 3.19 353,000 3.61
Exercised - - (17,500) 2.04 (54,500) 3.14
- ----------------------------------------------------------------------------
Outstanding at
end of year 910,334 $2.34 698,434 $3.43 647,534 $3.23
============================================================================
F-10
The weighted-average exercise price of the total options
outstanding at March 31, 2002 is $2.34 and the weighted-
average contractual life is 5.73 years.
The weighted-average fair value of options granted during
the years ended March 31, 2002, 2001 and 2000 is $1.18,
$2.25 and $2.42, respectively.
There were 659,134, 440,544 and, 375,034 options exercisable
at March 31, 2002, 2001 and 2000, respectively. The
weighted-average exercise price of the total options
exercisable at March 31, 2002 is $2.69.
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 SFAS No. 123, Accounting
for Stock-Based Compensation, requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB Opinion No. 25, because
the exercise price of the Company's employee stock options
are equal to or greater than the market price of the
underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income (loss) and
earnings per share is required by SFAS 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, 2002, 2001 and 2000: risk-free interest rate of
4.5%, 5.8% and 6.0% respectively; no dividend yield; a
volatility factor of the expected market price of the
Company's common stock of 1.21, 1.25 and .75, respectively;
and an expected life of 4.6, 5.0 and 7.7 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, 2002 2001 2000
- ------------------------------------------------------------------------------
Pro forma net income (loss) $75,400 $(2,653,075) $(266,647)
==============================================================================
Pro forma income (loss) per share - basic $ .01 $ (.53) $ (.06)
==============================================================================
Pro forma income (loss) per share - diluted $ .01 $ (.53) $ (.05)
==============================================================================
F-11
The application of the pro forma disclosures presented above
are not representative of the effects that SFAS No. 123 may
have on net earnings and earnings per share in future years
due to the timing of stock option grants and considering
that options vest over several years.
Earnings per Share:
The following table presents the computation of basic and
diluted income (loss) per share:
Year ended March 31, 2002 2001 2000
- -----------------------------------------------------------------------------
Numerator:
Net income (loss) $ 388,675 $(2,278,980) $ 222,914
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares $5,033,726 $ 5,012,718 $ 4,768,618
Dilutive effect of employee stock
options and warrants 9,182 - 132,699
- -----------------------------------------------------------------------------
Denominator for diluted earnings
per share $5,042,908 $ 5,012,718 $ 4,901,317
=============================================================================
Net income (loss) per share - basic $ .08 $ (.45) $ .05
=============================================================================
Net income (loss) per share - diluted $ .08 $ (.45) $ .05
=============================================================================
Options to purchase 618,534, 278,122 and 78,265 shares of
common stock, outstanding as of March 31, 2002, 2001 and
2000, 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, 2002 2001
- --------------------------------------------------------------------------
Trade accounts payable (includes
obligations under floor-plan agreements) $4,549,564 $6,860,679
Sales and other taxes payable 101,228 201,694
Accrued commissions 30,000 229,239
Accrued other 238,549 639,817
- --------------------------------------------------------------------------
$4,919,341 $7,931,429
==========================================================================
F-12
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.
The provision (benefit) for income taxes consists of the following:
Year ended March 31, 2002 2001 2000
- ----------------------------------------------------------------------
Federal:
Current $(862,000) $(152,100) $ 42,900
Deferred 708,500 (345,500) 97,800
- ----------------------------------------------------------------------
(153,500) (497,600) 140,700
State:
Current - - (5,300)
Deferred 36,900 (103,700) 32,600
- ----------------------------------------------------------------------
$(116,600) $(601,300) $168,000
======================================================================
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, 2002 2001 2000
- ----------------------------------------------------------------------
Tax expense at statutory rates applied
to pretax earnings $ 92,500 $(979,000) $133,000
State income taxes, net of federal
benefit 20,500 (69,100 21,000
Changes in valuation allowance (397,600) 397,600 -
Other permanent items 41,700 - -
Adjustment to prior provisions 126,300 - -
Non deductible goodwill amortization 65,700
Other, net (16,500) 14,000
- -----------------------------------------------------------------------
$(116,600) $(601,300) $168,000
=======================================================================
The tax effects of temporary differences that give rise to
the net short-term deferred income tax asset at March 31,
2002 and 2001 are presented below:
March 31, 2002 2001
- ------------------------------------------------------------------------
Reserve for bad debts $131,000 $ 178,000
Inventory 24,000 22,000
Valuation allowance - (112,000)
- -------------------------------------------------------------------------
Total short-term deferred income tax asset $155,000 $ 88,000
=========================================================================
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 $(1,055,400) $ (682,000)
Property and equipment - (2,600)
Capitalized leases - 29,600
Net operating loss 436,600 1,165,000
Research and development credit 30,800
Valuation allowance - (285,600)
- ------------------------------------------------------------------------
Net long-term deferred income
tax asset (liability) $ (588,000) $ 224,400
========================================================================
The Company intends to carry back approximately $2,536,000
of net operating losses which are available to offset
taxable income through the year 1997 and to carry forward
(1) $737,000 to offset federal taxable income and (2)
$3,721,000 of available state carryforwards to offset state
taxable income through the year 2022. Realization of the
benefit of the carryforward losses depends on generating
sufficient taxable income before expiration of the loss
carryforwards. At March 31, 2001, although realization was
not assured, management believed it was more likely than
not that part of the deferred tax asset would be realized,
and, accordingly, had provided a reserve against the
deferred tax asset. As a result of the Job Creation and
Workers Assistance Act of 2002 which allowed the Company to
carry back losses to offset taxable income over five years
instead of two years, the Company adjusted its estimates
and determined that all of the net operating losses would
be recognized in carrybacks and carryforwards and removed
all allowances recorded against all deferred tax assets.
For the years ended March 31, 2001 and 2000, the Company
recognized for income tax purposes a tax benefit of $22,100
and $112,700, 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 and 2000.
6. COMMITMENTS AND CONTINGENCIES:
Leases:
The Company leases three locations for its administrative
and operational functions under operating leases expiring at
various dates through September 2006. 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.
F-14
Approximate future minimum annual lease payments under
noncancelable operating leases are as follows:
Year ending March 31,
2003 $398,000
2004 195,000
2005 38,000
2006 11,000
- -------------------------------------------
$642,000
===========================================
Rental expense for operating leases including amounts from
cancelable leases approximated $836,000, $735,000 and
$645,000 for the years ended March 31, 2002, 2001 and 2000,
respectively.
Employment Agreements:
The Company has entered into employment agreements which
require the payment of approximately $567,000 and $275,000
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 pretax 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, 34,000 and $31,000 to
the plan for the years ended March 31, 2002, 2001 and 2000,
respectively.
8.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
of Year Expenses Deductions of Year
- --------------------------------------------------------------------------
(in thousands)
Year ended March 31,
2000 $140 - - $140
2001 140 $317 - 457
2002 457 262 $384(a) 335
- ---------------------------------------------------------------------------
(a) Write-off of uncollectible accounts receivable
F-15
9. QUARTERLY RESULTS OF OPERATIONS (unaudited):
The following is a summary of the quarterly results of
operations for the years ended March 31, 2002, 2001 and 2000:
June 30 September 30 December 31 March 31
- ------------------------------------------------------------------------------
(in thousands, except per share data)
2002:
- -----
Net revenue $19,867 $17,591 $22,658 $15,334
Cost of products sold 14,452 12,088 15,069 9,053
Cost of services provided 2,469 2,891 4,503 3,154
Net income 91 91 101 106
Net income per common share:
Basic $ .02 $ .02 $ .02 $ .02
Diluted $ .02 $ .02 $ .02 $ .02
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
- -----------------------------------------------------------------------------
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.
F-16
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 26, 2002
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 26, 2002
Howard Pavony
/s/ Steven H. Rothman Chief Executive Officer, June 26, 2002
Steven H. Rothman President and Director
(Principal Executive Officer)
/s/ Frank T. Wong Vice President - Finance June 26, 2002
Frank T. Wong (Principal Financial and
Accounting Officer)
/s/ William Lerner Director June 26, 2002
William Lerner
/s/ Arnold J. Wasserman Director June 26, 2002
Arnold J. Wasserman
/s/ Alvin E. Nashman Director June 26, 2002
Alvin E. Nashman
/s/ James W. Davis Director June 26, 2002
James W. Davis