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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30,
2003 or
[_] Transition report pursuant to 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 of (I.R.S. Employer
incorporation or organization) Identification Number)
614 Corporate Way, Valley Cottage, NY 10989
(Address of principal executive offices) (Zip Code)
(845) 268-5000
(Registrant's telephone number including area code)
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 whether the Registrant's is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act)
Yes __ No X
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable dates: The
number of shares outstanding of the Registrant's common Stock, par
value $.001 per share, as of August 12, 2003 was 4,736,152
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Micros-to-Mainframes, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Micros-to-Mainframes, Inc. and Subsidiaries as of June 30, 2003 and the
related condensed consolidated statements of operations and cash flows for
the three-month periods ended June 30, 2003 and 2002. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the condensed
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Micros-to-Mainframes and Subsidiaries as of March 31, 2003 and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the year then ended (not presented herein); and, in our report dated
May 20, 2003, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of March 31, 2003 is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
July 31, 2003
Part I Financial Information
Micros-to-Mainframes, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2003 March 31, 2003
Unaudited
ASSETS
Current Assets:
Cash and cash equivalents $ 147,457 $ 118,452
Accounts receivable - trade, net of allowance
of $938,000 and $873,000, respectively 15,073,274 13,459,765
Inventories 1,289,395 1,340,633
Prepaid expenses and other current assets 760,631 894,384
Deferred income taxes, net of
allowance of $314,000 23,000 23,000
----------------------------
Total current assets 17,293,757 15,836,234
Property and Equipment 9,232,589 9,097,464
Less accumulated deprecation and amortization 5,800,861 5,401,805
----------------------------
3,431,728 3,695,659
Goodwill 3,228,729 3,228,729
Other Assets 193,788 193,788
---------------------------
Total Assets $ 24,148,002 $ 22,954,410
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Secured notes payable $ 5,474,301 $ 4,765,637
Inventory financing agreement 2,804,735 2,333,004
Accounts payable and accrued expenses 2,183,623 2,114,980
Current portion of capital lease obligations 371,156 366,344
-----------------------------
Total current liabilities 10,833,815 9,579,965
Capital Lease Obligations,
net of current portion 12,400 109,797
Deferred income taxes 23,000 23,000
----------------------------
Total liabilities 10,869,215 9,712,762
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.001 par value; authorized
10,000,000 shares, issued and
outstanding 4,723,152 4,723 4,723
Additional paid-in capital 15,332,728 15,332,728
Accumulated deficit (2,058,664) (2,095,803)
------------------------------
Total shareholders' equity 13,278,787 13,241,648
------------------------------
Total Liabilities and Shareholders' Equity $ 24,148,002 $ 22,954,410
===============================
See Notes to Condensed Consolidated Financial Statements
Micros-to-Mainframes, Inc. and Subsidiaries
Condensed Consolidated Statements of Operation
Three Months ended June 30,
2003 2002
_______________________________
(Unaudited)
Net Revenues:
Products $ 8,367,376 $10,060,532
Service and related products revenue 5,271,376 5,369,013
-------------------------------
13,638,752 15,429,545
Costs and expenses:
Cost of products sold 8,039,110 9,459,453
Cost of services provided and related products 3,051,432 3,579,408
Selling, general and administrative expenses 2,408,322 3,178,537
-------------------------------
13,498,864 16,217,398
-------------------------------
Other income 1,897 7,417
Interest expense 104,646 78,688
-------------------------------
Income (loss) from operations before
provision (benefit) for income taxes 37,139 (859,124)
Provision (Benefit) for income taxes - (421,000)
-------------------------------
Net income (loss) $ 37,139 $ (438,124)
===============================
Net income (loss) per common shares:
Basic and diluted 0.01 (0.09)
Weighted average number of common shares
outstanding:
Basic 4,723,152 4,926,577
================================
Diluted 4,723,152 4,926,577
================================
See Notes to Condensed Consolidated Financial Statements
Micros-to-Mainframes, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended
June 30,
2003 2002
_____________________
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 37,139 $ (438,124)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating
activities:
Depreciation and amortization 399,056 375,135
Deferred income taxes - (421,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,613,509) (441,262)
Decrease in inventory 51,238 332,952
Decrease in prepaid expenses and
other current assets 133,751 150,462
Decrease in other assets 1,168
Increase in accounts payable
and accrued expenses 68,645 915,018
------------------------
Net cash (used in) provided by operating
activities (923,680) 474,349
------------------------
Cash flows from investing activities:
Acquisition of property and equipment (135,125) (332,059)
-------------------------
Net cash used in investing activities (135,125) (332,059)
-------------------------
Cash flows from financing activities:
Borrowing (Repayment) of secured notes payable 708,664 (1,376,636)
Increase in inventory financing 471,731 847,212
Purchases of common stock (299,800)
Payments on Capital lease obligations (92,585) (86,858)
--------------------------
Net cash provided by (used in) financing
activities 1,087,810 (916,082)
--------------------------
Net (decrease) increase in cash and cash
equivalents 29,005 (773,792)
Cash and cash equivalents at the beginning
of period 118,452 1,217,790
----------------------------
Cash and cash equivalents at the end of period $ 147,457 $ 443,998
============================
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 84,864 $ 88,080
See Notes to Condensed Consolidated Financial Statements
Micros-to-Mainframes, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Basis Presentation
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 revenues, 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, for its clients
where by it integrates into single working systems, a group of hardware and
software products from more than 40 major computer vendors including
Hewlett Packard/Compaq Computer Company, IBM Corporation, Dell Computer
Corporation, NEC Technologies, Inc., ISS Technology Inc., Citrix Systems,
Inc., Cisco Systems, Inc., Canon USA, Inc., Novell, Inc., Microsoft
Corporation, 3COM Corporation and Symantec Corporation. The Company also
serves as a Managed Service Provider (MSP) providing automated remote
network, system and security management solutions and related consulting
and engineering.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended June 30,
2003 are not necessarily indicative of the results that may be
expected for the Company's fiscal year ending March 31, 2004. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form
10-K (Commission file number: 0-22122) for the fiscal year ended
March 31, 2003.
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.
Reclassification
Certain of the March 31, 2003 balance sheet accounts were
reclassified to conform to the current period presentation.
Accounts Receivable:
Accounts receivable are reported at their outstanding unpaid
principal balances reduced by an allowance for doubtful accounts. The
Company estimates doubtful accounts based on historical bad debts, factors
related to specific customers' ability to pay, and current economic trends.
The Company also records allowances based on certain percentages and aged
receivables. The Company writes off accounts receivable against the
allowance when a balance is determined to be uncollectible.
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 $399,000 and $375,000 of
depreciation and amortization expense for the three month ended
June 30,2003 and 2002, respectively.
The following is the summary of property and equipment held by the
Company:
June 30 March 31,
At Costs
- --------- 2003 2003
Property and equipment
Furniture and Office Equipment $ 2,538,457 $ 2,505,714
Capital lease equipment 1,183,104 1,183,104
Software and software development costs 5,369,828 5,267,446
Leasehold improvements 141,200 141,200
-----------------------------
9,232,589 9,097,464
Less accumulated deprecation and amortization 5,800,861 5,401,805
-----------------------------
Net property and equipment $ 3,431,728 $3,695,659
=============================
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 June 30, 2003, 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 in accordance with SAB 101. For all
revenue billed, the revenue recognition criteria were met. Accordingly, no
deferred revenue has been recorded.
The Company recognizes revenue from sales of hardware when the
rights and risks of ownership have passed to the customer, which is upon
shipment or receipt by the customer, depending on the terms of the sales
contract. Revenue from sales of software not requiring significant
modification or customization is recognized upon delivery or installation.
Revenue from services is recognized upon performance and acceptance after
consideration of all the terms and conditions of the customer contract.
Service contracts generally do not extend over one year, and are billed
periodically as services are performed. Revenue from both products and
services is recognized provided that persuasive evidence of an arrangement
exists, the sales price is fixed and determinable, and collection of the
resulting receivable is reasonably assured. Payments arrangements with
customers generally do not include specific customer acceptance criteria.
For arrangements with multiple deliverables, delivered items are accounted
for separately provided that the delivered item has value to the customer
on a stand alone basis and there is objective and reliable evidence of the
fair value of the undelivered items.
The Company periodically receives discretionary cost reimbursements
from suppliers. These reimbursements are accounted for as reductions to
cost of revenues.
Shipping and handling costs are included in the cost of revenues.
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.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure," an amendment of
SFAS No. 123 SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," to require prominent disclosures in annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect in measuring compensation expense. The
disclosure requirements of SFAS No. 148 are effective for periods beginning
after December 15, 2002.
The Company has elected, in accordance with the provisions of SFAS
No. 123, as amended by SFAS No. 148, to apply the current accounting rules
under APB Opinion No. 25 and related interpretations in accounting for
employee stock options and, accordingly, has presented the disclosure-only
information as required by SFAS No. 123. If the Company had elected to
recognize compensation cost based on the fair value of the options granted
at the grant date as prescribed by SFAS No. 123, the Company's net income
(loss) and net income (loss) per common share for the Three months ended
June 30, 2003 and 2002 (pro forma effect has been adjusted for income
taxes) would approximate the pro forma amounts indicated in the table below
(dollars in thousands).
June 30,
2003 2002
--------------------
Net income (loss) - as reported..................... $ 37 ($438)
Net income (loss) - pro forma....................... 16 ( 479)
Basic net income (loss) per common share - as reported .01 (.09)
Diluted net income (loss) per common share - as reported .01 (.09)
Basic net income (loss) per common share - pro forma .00 (.09)
Diluted net income (loss) per common share - pro forma .00 (.09)
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 three months ended June 30,
2003 and 2002: risk-free interest rate of 2.8% and 4.5%, respectively; no
dividend yield for either period. A volatility factor of the expected
market price of the Company's common stock of $1.24 and $1.21,
respectively; and an expected life of 4.0 and 4.6 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.
Per Share Data
Basic net income per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted net income
per share is calculated using the weighted-average number of common shares
plus dilutive potential common shares outstanding during the period.
Dilutive securities have not been included in the weighted average shares
used for the calculation of earnings per share in periods of net loss
because the effect of such securities would be anti-dilutive. Because of
the Company's capital structure, all reported earnings pertain to common
shareholders and no other assumed adjustments are necessary.
Segment Information:
Micros To Mainframes, Inc. and subsidiaries sells as a single source
provider of advanced technology solutions, including design, consulting and
communication services. The Company also sells, installs and services
microcomputers, microcomputer software products and supplies, accessories
and custom designed microcomputer systems. The Company has aggregated its
business units into three reportable segments, PIT Corporation also known
as Pivot Technologies ("Pivot"), Data.Com ("DCR")and Micros to Mainframes
("MTM"). The accounting policies of the segments are the same as those
described in the summary of accounting policies. There are no material
intersegment revenues.
Each unit shares facilities, sales and administrative support.
Management evaluates performance on gross profits and operating results of
the three business segments. Summarized financial information concerning
the Company's reportable segments is shown on the following table.
For the Three months ended June 30, 2003
Consolidated
PIVOT DCR MTM Total
(In thousands)
_________________________________________________________________
Revenues:
Products 1,181 7,186 8,367
Services 391 2,090 2,790 5,271
Cost of good sold
Products 1,080 6,959 8,039
Services 180 1,377 1,494 3,051
Gross profit 211 814 1,523 2,548
Operating expenses 112 656 1,640 2,408
Interest expense 13 92 105
Other income 2 2
Income (loss) from
operations 86 158 (207) 37
Segment assets 5,988 3,876 14,284 24,148
Capital expenditures 85 50 135
Depreciation expense 264 10 125 399
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public
filings made by Micros to Mainframes, Inc. ( collectively with its
subsidiaries, "MTM" or the "Company") are forward-looking within
the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements include, without
limitation, statements regarding the adoption by businesses of
new technology solutions, the use by businesses of outsourced
solutions, such as those offered by the Company, in connection
with such adoption and the outcome of litigation involving the
Company. Readers are cautioned that such forward-looking
statements, as well as others made by the Company, which may be
identified by words such as "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend,"
and similar expressions, are only predictions and are subject
to risks and uncertainties that could cause the company's actual
results and financial position to differ materially. Such risks
and uncertainties include, without limitation:
A significant decline in demand for the Company's services due to the
current slowdown in IT spending and general economic conditions associated
with providing information technology and engineering services;
The Company's ability to continue to attract, train and retain personnel
qualified to meet the requirements of its clients;
Possible adverse effects on the market price of the Company's common stock
due to the resale into the market of significant amounts of common stock;
The Company's ability to obtain financing on satisfactory terms;
The Company's ability to remain competitive in the intense IT markets which
it serves;
The risk of claims being made against the Company associated with providing
temporary staffing services;
The Company's ability to manage significant amounts of information, and
periodically expand and upgrade its information processing capabilities;
The Company's ability to remain in compliance with federal and state wage
and hour laws and regulations;
The accuracy of the Company's predictions as to the future need for the
Company's services;
Uncertainties relating to the allocation of costs and expenses to each of
the Company's operating segments;
The costs of conducting and the outcome of litigation involving the
Company; and
Other economic, competitive and governmental factors affecting the
Company's operations, markets, products and services.
Readers are cautioned not to place undue reliance on these forward- looking
statements, which speak only as of the date made. The Company undertakes no
obligation to publicly revise any of these forward-looking statements
The following discussion and analysis of financial condition and
results of operations of the Company should be read in conjunction
with the condensed consolidated financial statements and notes
thereto included elsewhere in this Quarterly Report on Form 10-Q
and with the Company's Annual Report on Form 10-K.
Overview
MTM is a provider of business and technology solutions, designed to
enhance and maximize the performance of its customers through the
adaptation and deployment of advanced information technology and
engineering services. The Company offices are located in the Tri-State New
York City metropolitan area. The Company delivers a total processing
solution by providing computer hardware and software revenues, 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, for its clients whereby it integrates
into single working systems, a group of hardware and software products from
more than 40 major computer vendors The Company provides a diversified and
extensive range of service offerings and computer products.
The Company's customers consist of clients in banking and finance,
insurance, pharmaceutical, utility, technology, manufacturing,
distribution, and education and government sectors. The Company believes
that the breadth of services it offers fosters long-term client
relationships, affords cross-selling opportunities and minimizes the
Company's dependence on any single technology or service sector.
Many of the Company's clients are facing challenging economic times.
This is creating uncertainty in their ability to pursue technology
projects, which had previously been considered of competitive importance.
Many companies have laid off portions of their employees and have reduced
investing in new computer systems, and greatly reduced the demand for
consulting services in attempts to maintain profitability. This has had a
direct impact on the Company's revenue.
The Company presently realizes revenue from client engagements that
range from the placement of contract and temporary technical consultants to
project assignments that entail the delivery of end-to-end solutions. These
services are primarily provided to the client at hourly rates that are
established for each of the Company's employees based upon their skill
level, experience and the type of work performed. The Company also provides
project management and consulting services are billed either by an agreed
upon fixed fee or hourly rates, or a combination of both. The billing rates
and profit margins for project management and solutions services are higher
than those for professional consulting services. The Company generally
endeavors to expand its revenues by stressing higher margin solution and
project management services. The majority of the Company's services are
provided under purchase orders. Formal contracts are utilized on more
complex assignments where the engagements are for longer terms or where
precise documentation on the nature and scope of the assignment is believed
to be necessary. Contracts, although they normally relate to longer-term
and more complex engagements, generally do not obligate the customer to
purchase minimum levels of services and are terminable by the customer on
60 to 90 days' notice.
Revenues are recognized when services and /or products are provided.
Costs of services and costs of related products primarily consist of
salaries, cost of outsourced labor and hardware products necessary to
complete the projects. Selling, general and administrative expenses
primary consist of salaries and benefits of personnel responsible for
administrative, finance, operative, sales and marketing activities and all
other corporate overhead expenses. Corporate overhead expenses include
rent, telephone charges, insurance premiums, accounting and legal fees,
deprecation and amortization expenses. Depreciation primarily relates to
the fixed assets and amortization related to software development costs.
Revenue Recognition
The Company derives its revenues from several sources. The Company's
segments perform service engineering services, and resale of computers and
related products. The Information Technology Services segments also perform
project services. The services segment also includes revenue from sales of
high-end computers products.
The Company recognizes revenue in accordance with SAB 101. For all
revenue reflected in the financial statements, the revenue recognition
criteria were met and, accordingly, no deferred revenue has been recorded.
The Company recognizes revenue from sales of hardware when the rights
and risks of ownership have passed to the customer, which is upon shipment
or receipt by the customer, depending on the terms of the sales contract/
purchase order. Revenue from sales of software not requiring significant
modification or customization is recognized upon delivery or installation.
Revenue from services is recognized upon performance and acceptance after
consideration of all the terms and conditions of the customer contract /
purchase order. Service agreements with customers generally do not extend
for more than one year, and are billed periodically as services are
performed. Revenue from both products and services is recognized provided
that persuasive evidence of an arrangement exists, the price is fixed and
determinable, and collection of the resulting receivable is reasonably
assured. Payment arrangements with customers generally do not include
specific customer acceptance criteria. For arrangements with multiple
deliverables, delivered items are accounted for separately provided that
the delivered item has value to the customer on a stand alone basis and
there is objective and reliable evidence of the fair value of the
undelivered items.
The Company periodically receives discretionary cost reimbursements
from suppliers. These reimbursements are accounted for as reductions to
cost of revenues.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments
that affect the reported amount of assets and liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities at
the date of the Company's financial statements. Actual results may differ
from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions.
The Company believes that its critical accounting policies include those
described below.
Goodwill and Intangibles
The Company recorded goodwill as a result of the acquisitions by the
Company of PTI Corporation (formerly known as PIVOT Technologies, Inc.),
and Data.Com Results, Inc. The Company determined the fair value of both
companies' operations through a discounted cash flow method. This analysis
was based on a projection of future revenues and earnings for a discrete
period of three 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
revenue 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 since it requires Company management to
make assumptions about future revenues, cost of revenues, and growth rates
over the next five years of the acquired entity; 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 Company's Audit Committee and independent auditors.
Software Development Costs:
In accordance with the Statement of Position ("SOP") 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for Internal Use,"
certain costs related to the development are capitalized and are amortized
on a straight-line basis over their estimated useful lives. During the
three months ended June 30, 2003, the Company capitalized $85,000 of
software costs in conformity with SOP 98-1.
We believe that the accounting estimate related to Software development
costs is a "critical accounting estimate" because: (1) software developed
by the company may be obsolete before the five year expected useful life
assumed by management, and (2) the impact of recognizing the asset
impairment could have a negative effect to the asset reported on the
balance sheet and net income.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based on payment history and the customer's current
credit worthiness, as determined by a review of their current credit
information. The Company continuously monitors collections and payments
from its customers and maintains a provision for estimated credit losses
based on historical experience and any specific customer collection issues
that have been identified. While such credit losses have historically been
within the Company's expectations and the provisions established, the
Company could not guarantee that it will continue to experience the same
credit loss rates that it has in the past.
Four customers generated fifty percent of the Company's trade
receivables. One of the receivables was generated in connection with a
federally funded project. This receivable represented approximately
$3,521,000 or 22% of the Company's trade receivables in the three months
ended June 30, 2003. The federally funded program had been reviewed and
approved. Three of the Company's customers accounted for approximately 13%,
8%, 7% of the trade receivables as of June 30,2003. The loss of a principal
customer may have a material adverse effect on the Company's operations.
Three Months Ended June 30, 2003, as compared to Three Months Ended June 30,
2002
Revenue
The Company had net revenue of approximately $13,639,000 for the three
months ended June 30, 2003 ("First Quarter 2004"), as compared to
approximately $15,430,000 for the three months ended June 30, 2002 ("First
Quarter 2003"), decease of approximately 11.6% or approximately $1,791,000.
The following table sets forth, for the periods indicated, certain items in
the Company's Consolidated Statements of Operations expressed as a percentage
of that period's net revenues.
Percentage of Revenues
Three Months Ended June 30,
2003 2002
Product revenue......................... 61.35% 65.20%
Service and related
Product revenue.... .................. 38.65 34.80
Net revenue............................. 100.00 100.00
Cost of products revenue( as a % of
product revenue..................... 96.08 94.03
Cost of service provided and
Related product revenue
(as a % of services and
related product revenue) ....... . 57.89 66.67
Total direct cost(as a % of
Net revenue) . . . . . . . . . . . 81.32 84.51
Selling, general and
administrative expenses............. 17.66 20.60
Income (loss) before provision (benefit)
for income taxes . . . . ..... 0.27 (5.57)
Net(loss) income......................... 0.27 (2.84)
Revenue by Product and Service
The decline in both product and service segments were primarily
attributable to a softness in the "IT market" and a softness in overall
economic conditions, resulting in a hesitancy by customers to launch new
capital spending programs. Product revenues decreased approximately 17% or
$1,693,000. Services and related product revenue, which included the sales of
the Pivot automated remote network management system and high-end service
related product, decreased slightly by approximately 1.8% or approximately
$98,000 in the First Quarter 2004. Many of the company's clients have reduced
their capital expenditures and projects for IT expenditures due to the
economic slow down. These reductions have a direct impact on the Company's
revenues. In light of these conditions, the Company's strategy is to secure
higher margin revenue and not to aggressively pursue sales with low margins,
while increasing its service revenue.
Gross Profit
Gross profit is the difference between net revenues from product
revenues and cost of products sold. Cost of products sold includes the
direct costs of products sold and freight expenses, offset by rebates from
manufacturers. Gross profit in First Quarter 2004 increased to
approximately $2,548,000 from $2,392,000 in First Quarter 2003, a increase
of 6.5%. Gross profit margins increased to 18.7% in First Quarter 2004 as
compared to 15.5% in the First Quarter 2003.
The gross profit margins from product revenue decreased to 3.9% in First
Quarter 2004 compared to 5.9% in First Quarter 2003. The decrease in gross
profit margins from product sales is related to the competitive market, which
resulted in an adverse impact on selling prices.
The gross profit margins from service sales increased to approximately
42.1% in First Quarter 2004 compared to 33.3% in First Quarter 2003. 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 continue to lower its
dependency on third party service subcontractors in the future. To the
extent necessary, the Company will continue to use subcontractors.
Technical personnel salaries charged to cost of service sales increased 10%
to $1,689,000 from $1,542,000 from the First Quarter 2003.
The Company continues to face competitive market pressures which
impact the gross profit on its product revenue and service related revenue.
The Company currently faces a number of adverse business conditions,
including price and gross profit margin pressures, market consolidation and
a slow down in the general 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 in the future. 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 and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were
approximately $2,408,000 in the First Quarter 2004 as compared to $3,179,000
in the First Quarter 2003, a decrease of $770,000 or 25%. SG&A expenses as a
percentage of net revenues were 17.66% in the First Quarter 2004 and 20.6%
the First Quarter 2003. The decrease between the period primarily is due to
the general reduction of payroll, payroll taxes and employee benefits from
laying off employees during the First Quarter 2004.
Other Income and Interest Expense
Other income was approximately $1,000 in the First Quarter 2004 and
$7,000 in the First Quarter 2003. Interest expense increased $26,000 in the
First Quarter 2004 to $105,000 from approximately $79,000 in the First
Quarter 2003, due to an increase in collateral borrowing from its bank
which is subject to higher interest rates.
Income Taxes
The effective income tax rate for the First Quarter 2004 was 0%.
Net Income and (Loss):
As a result of the forgoing, the Company had net income of
approximately $37,000 in the First Quarter 2004 compared to a net
loss of $438,000 in the First Quarter 2003. The basic and
dilutive earnings (loss) per common share were $0.01 in the First
Quarter 2004 compared to ($0.09) in the First Quarter 2003.
Recently Issued Accounting Standard
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS)No. 142,"Goodwill
and Intangible Assets". SFAS No.142 is effective for fiscal years beginning
after December 15, 2001. SFAS No. 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them; accordingly, the Company no longer amortizes goodwill and
indefinite lived intangible assets.
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF 00-
21, "Accounting for Revenue Arrangements with Multiple Deliverables. "This
consensus provides guidance in determining when a revenue arrangement with
multiple deliverables should be divided into separate units of accounting
and, if separation is appropriate, how the arrangement consideration should
be allocated to the identified accounting units. The provisions of EITF 00-
21 are effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company will evaluate multiple element
arrangements in accordance with this EITF conclusion upon its effective
date for new arrangements into which it enters.
The Company does not believe that any other recently issued but not
yet effective accounting standards will have a material effect on the
Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways, including the
following:
June 30, March 31,
2003 2003
(Dollars in thousands,
except current ratio data)
Cash and cash equivalents............... $ 147 $ 118
Working capital ......................... $ 6,460 $ 6,256
Current ratio .......................... 1.59:1 1.65:1
Secured notes payable .................. $ 5,474 $ 4,766
Working capital lines available.......... $ 4,420 $10,201
The Company had working capital of approximately $6,460,000 as of June
30, 2003, an increase of approximately $204,000 from March 31, 2003.
For the three months ended June 30, 2003, the Company generated its
cash flow primarily from increased use of its bank line. The cash was used
to finance its accounts receivable, which increased to approximately
$15,073,000 from $13,460,000. One of the Company's largest customers is a
federal government funded City Board of Education, which represented
approximately $3,521,000 and or 22% of the Company's trade receivables in
the three months ended June 30, 2003; the federally funded program was
being reviewed and it had been approved, causing the normal funding process
to be delayed.
During the period ending June 30, 2003, the Company had net cash
provided by operating activities of approximately $924,000, primary
consisting of an increase in accounts receivable of approximately
$1,614,000, an offset by increase in payable and accrued expenses of
$69,000, a decrease of inventory of approximately $51,000, a decrease in
prepaid expenses and other current assets of approximately $134,000, and an
operating net profit of approximately $37,000.
The Company had net cash used in investing activities of
approximately $135,000 consisting of the acquisition of property and
equipment of approximately $50,000, and approximately $85,000 from costs
incurred in the development of computer software.
The Company had a increase in its net cash provided by financing
activities of approximately $1,088,000 in the First Quarter, primarily
related to the borrowings of approximately $709,000 from its financing
facilities, increase in inventory financing of approximately $472,000,
offset by payment of a capital lease obligation of approximately $93,000.
As a result of the foregoing, the Company had a net increase in cash
of approximately $29,000.
The Company has entered into two separate credit agreements with two
banks. One of these agreements is a $12,000,000 financing facility. 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 which have liens thereon). 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 liens 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 of one half of one
percentage point (0.5%) below the base rate. In the event that the loan
amount is in excess of the eligible collateral, the per annum rate is four
percentage point above the base rate (4.00%), and the financing company may
charge the Company 0.0075% on the over advance amount. The base rate is the
prime rate as listed in The Wall Street Journal. The Company's loan balance
is $4,059,391 at the borrowing rate of 3.75% and $1,414,910 on the loan at
borrowing rate of 8.25% as of June 30, 2003. The total outstanding due
under the floor plan lines is $2,804,735 as of June 30, 2003.
The Company's total outstanding debt under the revolving receivable
financing facility was $5,474,301 and $4,765,637 at June 30, 2003 and March
31, 2003, respectively. The Company is charged a facility management fee
of $40,000 per annum for this financing facility.
As of June 30, 2003, the Company remains in compliance of all
covenants required under the financing facility.
The Company's current ratio decreased to 1.59:1 at June 30, 2003 from
1.65:1 at March 31, 2003.
Our sources of liquidity include, but are not limited to, funds
from operations and funds available under the two aforementioned
credit facilities. Our capital requirements depend on a variety of
factors, including but not limited to, the rate of increase or
decrease in our existing business base; the success, timing, and
amounts of investment required to bring new products on-line; revenue
growth or decline; and potential acquisitions. We believe that we
have the financial resources to meet our future business requirements
through the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
Item 4. Controls and Procedures
The Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design of the Company's disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act") as of the end of the period
covered on this Quarterly Report on Form 10-K. Based on the
evaluation, these officers including the Chief Executive Officer and
the Chief Financial Officer, concluded the Company's disclosure
controls and procedures were effective, in all material respects, to
ensure that the information required to be disclosed in the reports
the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
There have been no significant changes (including corrective
actions with regard to significant deficiencies and material
weaknesses) in the Company's internal controls or in other factors
subsequent to the date the Company carried out its evaluation that
could significantly affect these controls.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
References is made to the disclosures contained in item 3 of the Company's
Annual report on Form 10-K, for the fiscal year ended March 31, 2003, for
information concerning material legal proceeding involving the company
Item 6 Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed on the quarterly report Form 10-Q
Exhibits
31.1 Certification on Howard A Pavony pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
31.2 Certification on Steven H Rothman pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
32.1 Certification on Howard A Pavony pursuant to Rule 13a-14(b)
promulgated under the Exchange Act.
32.2 Certification on Steven H Rothman pursuant to Rule 13a-14(b)
promulgated under the Exchange Act
(b) The Registrant did not file ant Current Reports on Form 8-K
during the period covered by the report.
SIGNATURES
Pursuant to the requirements 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.
MICROS-TO-MAINFRAMES, INC.
Date : August 12, 2003 By: /s/ Howard A. Pavony
Howard A. Pavony
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date : August 12, 2003 By: /s/ Steven H. Rothman
Steven H. Rothman
Chief Financial Officer
Chairman of the Board
of Directors
(Principal Financial and
Accounting Officer)
Date : August 12, 2003 By: /s/ Frank T. Wong
Frank T. Wong
Vice President - Finance
and Secretary
Exhibit 31.1
CERTIFICATION
I, Howard Pavony, President and CEO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Micros-to-
Mainframes, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant,including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 12, 2003
Name: s/s Howard Pavony
President and CEO
Exhibit 31.2
CERTIFICATION
I, Steve H. Rothman, Chief Financial Officer , certify that:
1. I have reviewed this quarterly report on Form 10-Q of Micros-to-
Mainframes, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant,including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 12, 2003
Name: s/s Steven H. Rothman
Chief Financial Officer
Exhibit 32.1
CERTIFICATION
I, Howard Pavony, President and Chief Executive Officer of Micros-To-
Mainframes Inc., hereby certify, pursuant to 18 U.S.C. Section 1350, as
enacted by Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended
June 30,2003 (the "Periodic Report") which this statement accompanies
fully complies with the requirements of Section 13(a)of the Securities
Exchange Act of 1934; and
(2) the information contained in the Periodic Report fairly presents,
in all material respects, the financial condition and results of operations
of Micros-to-Mainframes, Inc.
Dated: August 12, 2003
s/s Howard Pavony
------------------
Howard Pavony
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION
I, Steve H. Rothman, Chief Financial Officer of Micros-to-Mainframes,Inc.
hereby certify, pursuant to 18 U.S.C.Section 1350, as enacted by Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2003 (the "Periodic Report") which this statement accompanies
fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934; and
(2) the information contained in the Periodic Report fairly
presents, in all material respects, the financial condition and results of
operations of Micros -to- Mainframes, Inc.
Dated: August 12, 2003
s/s Steven H. Rothman
-------------------------
Steven H. Rothman
Chief Financial Officer