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 September 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 No.)
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 date: The
number of shares outstanding of the registrant's common stock, par
value $.001 per share, as of November 10, 2003 was 4,736,052
Part I Financial Information
Micros-to-Mainframes, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2003 March 31, 2003
Unaudited
ASSETS
Current Assets:
Cash and cash equivalents $ 114,902 $ 118,452
Accounts receivable - trade, net of allowance
of $979,000 and $873,000, respectively 18,187,500 13,459,765
Inventories 1,291,608 1,340,633
Prepaid expenses and other current assets 699,679 894,384
Deferred income taxes, net of
allowance of $314,000 23,000 23,000
---------------------------------
Total current assets 20,316,689 15,836,234
Property and Equipment 9,496,162 9,097,464
Less: accumulated deprecation and amortization 6,211,807 5,401,805
---------------------------------
3,284,355 3,695,659
Goodwill 3,228,729 3,228,729
Other Assets 189,373 193,788
---------------------------------
Total Assets $ 27,019,146 $22,954,410
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Secured notes payable $ 6,552,107 $ 4,765,637
Inventory financing agreement 4,263,846 2,333,004
Accounts payable and accrued expenses 3,268,496 2,114,980
Current portion of capital lease obligations 293,817 366,344
------------------------------
Total current liabilities 14,378,266 9,579,965
Capital Lease Obligations,
net of current portion 7,067 109,797
Deferred income taxes 23,000 23,000
----------------------------
Total liabilities 14,408,333 9,712,762
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.001 par value; authorized
10,000,000 shares, issued and
outstanding 4,723,052 4,723 4,723
Additional paid-in capital 15,332,728 15,332,728
Accumulated deficit (2,726,638) (2,095,803)
Total shareholders' equity 12,610,813 13,241,648
------------------------------
Total Liabilities and Shareholders' Equity $ 27,019,146 $ 22,954,410
===============================
See Notes to Condensed Consolidated Financial Statements
Micros-to-Mainframes, Inc. and Subsidiaries
Condensed Consolidated Statements of Operation
Six Months ended September 30,
2003 2002
Unaudited
-------------------------------
Net revenues:
Products $ 19,951,246 $ 19,100,460
Service and related products revenue 9,213,084 10,962,976
--------------------------------
29,164,330 30,063,436
Costs and expenses:
Cost of products sold 19,060,486 17,822,410
Cost of services provided and related products 5,501,280 7,036,385
Selling, general and administrative expenses 5,034,946 5,861,950
--------------------------------
29,596,712 30,720,745
Other income 3,152 33,276
Interest expense 201,605 154,914
---------------------------------
Loss before benefit for
income taxes (630,835) (778,947)
Benefit for income taxes - (382,000)
---------------------------------
Net loss $ (630,835) $ (396,947)
=================================
Net loss per common share:
Basic and diluted $ (0.13) $ (0.08)
=================================
Weighted average number of common shares
outstanding:
Basic 4,723,152 4,836,027
---------------------------------
Diluted 4,723,152 4,836,027
---------------------------------
See notes to condensed consolidated financial statements
Micros-to-Mainframes, Inc. and Subsidiaries
Condensed Consolidated Statements of Operation
Three Months ended September 30,
2003 2002
Unaudited
--------------------------------
Net revenues:
Products $ 11,583,870 $ 9,039,928
Service and related products revenue 3,941,708 5,593,963
--------------------------------
15,525,578 14,633,891
Costs and expenses:
Cost of products sold 11,021,376 8,362,957
Cost of services provided and related products 2,449,848 3,456,977
Selling, general and administrative expenses 2,626,624 2,683,413
--------------------------------
16,097,848 14,503,347
Other income 1,255 25,859
Interest expense 96,959 76,226
--------------------------------
(Loss) Income before provision for income taxes (667,974) 80,177
Provision for income taxes - 39,000
--------------------------------
Net (loss) Income (667,974) 41,177
================================
Net (loss) income per common share:
Basic and diluted $ (0.14) $ 0.01
Weighted average number of common shares
outstanding:
Basic 4,723,152 4,713,593
--------------------------------
Diluted 4,723,152 4,716,271
--------------------------------
See notes to condensed consolidated financial statements
Micros-to-Mainframes, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended
September 30,
2003 2002
-----------------------------
(Unaudited)
Cash flows from operating activities:
Net loss $ (630,835) $ (396,947)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 810,002 757,547
Deferred income taxes - (404,000)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivabl (4,727,735) 477,751
Decrease in inventory 49,025 255,587
Decrease in prepaid expenses and
other current assets 194,705 413,477
Decrease in refundable income tax - 687,337
Decrease in other assets 4,415 1,168
Increase (decrease) in accounts payable
and accrued expenses 1,153,516 116,260
------------------------------
Net cash (used in) provided by
operating activities (3,146,907) 1,908,180
------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (398,698) (622,387)
-------------------------------
Net cash used in investing activities (398,698) (622,387)
-------------------------------
Cash flows from financing activities:
Borrowing (repayment) of secured notes payable 1,786,470 (1,135,330)
Increase in inventory financing 1,930,842 310,265
Retirement of common stock - (342,476)
Payments on capital lease obligations (175,257) (182,658)
-------------------------------
Net cash provided by (used in)
financing activities 3,542,055 (1,350,199)
-------------------------------
Net decrease in cash and cash equivalents (3,550) (362,671)
Cash and cash equivalents at the
beginning of period 118,452 1,217,790
--------------------------------
Cash and cash equivalents at the end of period $ 114,902 $ 855,119
================================
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 256,195 $ 110,172
Income taxes $ 9,765 $ 23,067
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. ("DCR") (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
whereby 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 September 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 $810,000 and $758,000 of
depreciation and amortization expense for the six months ended
September 30, 2003 and 2002, respectively.
The following is the summary of property and equipment held by the
Company:
September 30 March 31,
At Cost
2003 2003
Property and equipment
Furniture and office equipment $ 2,588,135 $ 2,505,714
Capital lease equipment 1,183,104 1,183,104
Software and software development costs 5,575,248 5,267,446
Leasehold improvements 149,675 141,200
-------------------------------
9,496,162 9,097,464
Less accumulated deprecation and amortization 6,211,807 5,401,805
-------------------------------
Net property and equipment $ 3,284,355 $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 September 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 more than one year, and are
billed periodically as services are performed. Revenue from both products and
services is recognized provided that persuasive evidence that 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
loss and net loss per common share for the six months ended September 30, 2003
and 2002 (pro forma effect having been adjusted for income taxes) would
approximate the pro forma amounts indicated in the table below (dollars in
thousands).
September 30,
2003 2002
---------------
Net loss - as reported................ . . . . . . . $ (631) $(397)
Net loss - pro forma....................... . . . . . (657) (435)
Basic net loss per common share - as reported . . . . (.13) (.08)
Diluted net loss per common share - as reported . . . (.13) (.08)
Basic net loss per common share - pro forma . . . . . (.14) (.09)
Diluted net loss per common share - pro forma . . . . (.14) (.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 six months ended September 30,
2003 and 2002: risk-free interest rate of 3.0% and 2.8%, respectively; no
dividend yield for either period, a volatility factor of the expected
market price of the Company's common stock of $1.31 and $0.76,
respectively; and an expected life of 4 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 act 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 segment 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 six months ended September 30, 2003
Consolidated
PIVOT DCR MTM Total
(In thousands)
_________________________________________________________________
Revenues:
Products 1,903 18,048 19,951
Services 878 3,638 4,697 9,213
Cost of good sold
Products 1,773 17,287 19,060
Services 299 2,402 2,799 5,501
Gross profit 579 1,366 2,659 4,603
Operating expenses 386 1,066 3,583 5,035
Interest expense 21 181 202
Other income 3 3
Income (loss) from
operations 172 299 (1,102) (631)
Segment assets 5,950 4,006 17,063 27,019
Capital expenditures 245 154 399
Depreciation expense 535 21 254 810
For the three months ended September 30, 2003
Consolidated
PIVOT DCR MTM Total
(In thousands)
_________________________________________________________________
Revenues:
Products 722 10,862 11,584
Services 487 1,548 1,907 3,942
Cost of good sold
Products 693 10,328 11,021
Services 119 1,025 1,305 2,450
Gross profit 368 552 1,136 2,055
Operating expenses 274 410 1,943 2,627
Interest expense 8 - 89 97
Other income 3 3
Income (loss) from
operations 86 142 (896) (668)
Capital expenditures 160 104 264
Depreciation expense 271 11 129 411
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
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 and 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.
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 segment also performs
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
six months ended September 30, 2003, the Company capitalized $235,000 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.
Five customers collectively generated approximately 62% of the Company's
accounts receivable - trade at September 30, 2003. The largest accounts
receivable, representing approximately $4,672,000 or 24% of the total accounts
receivable, is from a telecommunications company. Another receivable,
representing approximately $3,571,000 or 19% of the total accounts receivable,
was generated in connection with a federally funded project for the Board of
Education of Bridgeport, Connecticut. The Company has been advised that
approximately $2,400,000 due under the project has been authorized for payment
and the Company expects to receive payment prior to December 31, 2003. The
remaining balance due under the project has been submitted for payment
authorization and the Company expects to receive such payment prior to
March 31,2004. Three other Company customers each accounted for approximately
6% of the accounts receivable at September 30,2003.
The loss of any principal customer may have a material adverse effect on the
Company's financial position and results of operations.
Three and Six Months Ended September 30, 2003, as compared to Three and Six
Months Ended September 30, 2002
The Company had net revenues of approximately $29,164,000 for the six months
ended September 30, 2003(the "2004 Period"), as compared to approximately
$30,063,000 for the six months ended September 30, 2002 (the "2003 Period").The
Company had net revenues of approximately $15,526,000 for the three months
ended September 30, 2003 ("Second Quarter 2004"), as compared to approximately
$14,634,000 for the three months Ended September 30, 2002 ("Second Quarter
2003"). Product sales were comprised primarily of desktop and turnkey computer
components. Services and related product sales included maintenance and
consulting services, high-end computer products and sales of the Pivot
automated remote network management system and high-end service related
product sales.
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 Net Revenue
Six Months ended Three Months ended
September 30, September 30,
2003 2002 2003 2002
Products ................ 68.41% 63.53% 74.61% 61.77%
Services and related
product revenue . .. . . 31.59 36.47 25.39 38.23
Net revenues.............. 100.00 100.00 100.00 100.00
Cost of product sold (as a
% of product revenue).. 95.54 93.31 95.14 92.51
Cost of services provided and
related products
(as a % of services and
related product revenue)...59.71 64.18 62.15 61.80
Total direct costs (as a % of
net revenues)....... 84.22 82.69 86.77 80.77
Selling, general and
administrative expenses. 17.26 19.50 16.92 18.34
Income (Loss) before
Income taxes. ...... . . (2.46) (2.60) (4.86) 0.55
Net (Loss) Income............( 2.16) (1.32) (4.30) 0.28
Revenue by Product and Service
Product sales increased 4.5% or approximately $851,000 to $19,951,000 for the
2004 Period from $19,100,000 for the 2003 Period. In the Second Quarter 2004,
product sales increased 28% or approximately $2,544,000 to $11,584,000 from
$9,040,000 in the Second Quarter 2003. A decision by one of the company's
major customers to upgrade its computer system led to the increase in product
hardware sales. On a going forward basis, there is no assurance that such
increases will continue. Such increases are not considered the trend of
the current IT market.
Services and service related sales decreased 16% or approximately $1,750,000 to
$9,213,000 for the 2004 Period from $10,963,000 for the 2003 Period; a decrease
of 29.5% or approximately $1,652,000 to $3,942,000 for the Second Quarter 2004
from $5,594,000 for the Second Quarter 2003. This decrease was resulted
primarily from a continued industry-wide slowdown in technology spending due to
the general weakness in the U.S. economy. This reduction had a direct impact on
the Company's revenue. Given these conditions, the Company's strategy is to
aggressively pursue higher margin service revenue, avoid sales with low
margins and concentrate in the service end of the business.
Gross Profit.
Gross profit is the difference between net revenues from product sales and
cost of products sold. Cost of products sold includes the direct costs of
products sold and freight expenses, offset by rebates from manufacturers. The
gross profit decreased by 2.2% in the 2004 Period and by 2.6% in the Second
Quarter 2004 from the prior year's comparable period and quarter. The decrease
in gross profit margins is due to the competitive market, which had an adverse
impact on selling prices.
The cost of services and related product revenue includes the personnel
costs associated with providing technical services along with the products
and parts related to the service contract. Gross profit increased by 4.5%
for the 2004 Period and decreased slightly by 0.4% in the Second Quarter 2004
from the prior year's comparable period and quarter. The 2004 Period increase
in gross profit margins from service sales resulted primarily from a decrease
in the use of outside contractors to perform certain services and the
increased use of the Company's technical and engineering staff. The Company
expects to continue hiring 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.
The Company continues to face competitive market pressures, which impact the
gross profit on its product and service related revenues. The Company currently
faces a number of adverse business conditions, including price and gross margin
pressures, market consolidation and a slow down in the general U.S. 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 grossprofit 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 $5,035,000 in the 2004 Period as compared to approximately
$5,862,000 in the 2003 Period and approximately $2,627,000 for the Second
Quarter 2004 compared to approximately $2,683,000 for the Second Quarter
2003. This represented a decrease of approximately 14% for SG&A during the
2004 Period as compared to the 2003 Period and a decrease of approximately
2.1% during the Second Quarter 2004 as compared to the Second Quarter 2003.
The decreases between the period and quarter are primarily due to the general
reduction of payroll, payroll taxes and employee benefits from employee
layoffs during the 2004 Period.
Other Income and Interest Expense
Other income was approximately $3,000 in the 2004 Period as compared to
approximately $33,000 in the 2003 Period. In the Second Quarter 2004, other
income was approximately $1,000 as compared to approximately $26,000 in the
Second Quarter 2003. The decrease was due to the reduction of interest income
as compared to the receipt of interest that the Company received from a tax
refund in the prior year. Interest expense increased to approximately $202,000
in the 2004 Period from approximately $155,000 in the 2003 Period and to
approximately $97,000 in the Second Quarter 2004 from approximately $76,000 in
the Second Quarter 2003. The increases in interest expense resulted from
increased borrowing levels from its bank in the 2004 Period and Second Quarter
2004 as compared to the prior year period and quarter.
Income Taxes
The effective income tax rate for the 2004 Period and 2004 Quarter was
0%. The effective tax rate for the 2003 Period and Quarter was 49%.
Net Income and Loss
As a result of the foregoing, the Company had a net loss of approximately
$631,000 in the 2004 Period compared to a net loss of approximately $397,000
in the 2003 Period. The Company incurred a $668,000 net loss in the Second
Quarter 2004 as compared to net income of approximately $41,000 for the
Second Quarter 2002. The basic and diluted loss per share was $0.13 in the
2004 Period, as compared to net loss per share of $0.08 for the 2003 Period.
The basic and diluted net loss per share was $0.14 for the Second Quarter
2004 as compared to $0.01 net income per share in the Second 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.
On May 15, 2003, FASB issued SFAS No. 150,"Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments:
* mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets;
* instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets, including put options and
forward purchase contracts; and
* obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as
a market index, or varies inversely with the value of the issuers'
shares.
SFAS No. 150 does not apply to features embedded in a financial instrument
that is not a derivative in its entirety.
Most of the guidance in SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise iseffective at the
beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 is not expected to have a material
effect on the Company's consolidated financial position, results of
operations, or cash flows.
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:
September 30, March 31,
2003 2003
(Dollars in thousands,
except current ratio data)
Cash and cash equivalents............... $ 115 $ 118
Working capital ......................... $ 5,938 $ 6,256
Current ratio .......................... 1.41:1 1.65:1
Secured notes payable .................. $ 6,552 $ 4,766
Working capital lines available.......... $ 2,484 $10,201
The Company had working capital of approximately $5,938,000 as of September
30, 2003, representing a decrease of approximately $318,000 from March 31, 2003.
For the six months ended September 30, 2003, the Company met its cash
requirements primarily from increased use of its bank line. The cash was used
to finance its accounts receivable, which increased to approximately
$18,188,000 from $13,460,000. The Company's largest customer is a
telecommunications company, which represented approximately $4,672,000 or 24%
of the Company's accounts receivable. The second largest customer is a
federal government funded City Board of Education, which represented
approximately $3,571,000, or 18.5% of the Company's trade receivables in the
six months ended September 30,2003. While the federally funded program was
has been reviewed and approved, the normal funding process has been delayed.
During the period ending September 30, 2003, the Company had net cash used
in operating activities of approximately $3,147,000, consisting primarily of
an increase in accounts receivable of approximately $4,728,000, and an
operating loss of $631,000. This cash shortfall was offset by an increase
in payables and accrued expenses of $1,154,000, a $49,000 decrease in inventory
and a decrease in prepaid expenses and other current assets of approximately
$195,000.
The Company reported net cash used in investing activities of
approximately $399,000 consisting of the acquisition of property and equipment
of approximately $108,000, and approximately $291,000 from costs incurred in
the development of computer software and network buildup in a newly leased
office.
The Company reported an approximate $3,542,000 increase in its net cash
provided by financing activities in the six months ended September 30, 2003.
This increase is primarily related to $1,786,000 in borrowings from financing
facilities and a $1,931,000 increase in inventory financing, offset by payment
of a $175,000 capital lease obligation.
As a result of the foregoing, the Company incurred a net decrease in cash
of approximately $3,550.
The Company has entered into two separate credit agreements with two
finance companies.
The first agreement is a $12,000,000 financing facility (the "Financing
Facility"). This Financing Facility is comprised of a "floor plan" credit
arrangement and a revolving receivable financing arrangement. The Financing
Facility is secured by all of the Company's assets other than inventory and
accounts receivable financed under other arrangements providing for liens on
such inventory and accounts receivable. This Financing Facility is scheduled
to expire on January 17, 2004. The Company has received a required
three-month notification from the lender stating the lender's intention not to
renew the Financing Facility at the end of the term of the Financing Facility.
The Company is currently negotiating with the present lender in an attempt to
renew the Financing Facility and with other financial institutions for a
potential new facility on terms similar or more beneficial to the Company than
currently exist under the Financing Facility. No assurance can be given that
the Company will be able to secure a renewal of the Financing Facility or a
new credit facility, whether comparable to the terms of the Financing Facility
or otherwise. The failure to secure a renewal or other credit facility could
adversely affect the Company's financial condition and results of operations.
The second credit agreement is a $1,300,000 floor plan arrangement that
also is secured by the Company's assets other than inventory and accounts
receivable financed under other arrangements providing for liens on such
inventory and accounts receivable. This floor-plan arrangement (along with the
"floor plan" arrangement under the Financing Facility) generally allows the
Company to borrow funds for inventory purchases for periods of 30 days
interest free. Interest is charged to the Company only after the due date
provided. The floor plan financing arrangement under the Financing Facility,
does not contain covenants requiring the Company to maintain specified
tangible net worth and other financial ratios. The Company was in compliance
with all the terms within the floor plan finance agreement as of
September 30, 2003.
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 points 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 $4,442,945 at the borrowing
rate of 3.5% and $2,109,162 on the loan at a borrowing rate of 8.00% as of
September 30, 2003. Such rate has been subsequently reviewed by the bank and
increased to 6% above prime rate as of November 10, 2003. The total
outstanding amount due under the floor plan lines was $4,263,846 as of
September 30, 2003.
The Company's total outstanding debt under the revolving receivable
financing facility was $6,552,107 and $4,765,637 at September 30, 2003 and
March 31, 2003, respectively. The Company is charged a facility management
fee of $40,000 per annum for this financing facility.
The Company's current ratio decreased to 1.41:1 at September 30, 2003 from
1.65:1 at March 31, 2003.
The Company's sources of liquidity include, but are not limited to, funds
from operations and funds available under the two aforementioned credit
facilities. Its capital requirements depend on a variety of factors, including
but not limited to, the rate of increase or decrease in the Company's existing
business base; the success, timing and amounts of investment required to bring
new products on-line; revenue growth or decline; and potential acquisitions.
Management believes that the Company has the financial resources to meet its
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 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 4. Submission of Matters to a Vote of Security Holders
Thee Company's Annual Meeting of Stockholders was held on
November 7, 2003. At the Annual Meeting the following individuals
consisting of the candidates nominated by Company's Board of Directors
were elected directors by the votes indicated., the following proposals
were adopted by the vote specified below:
For Withheld
Election
Authority
1. Election of Directors:
Howard A Pavony 4,326,454 278,323
Steven H Rothman 4,326,454 278,323
William Lerner 4,426,054 178,723
Arnold J Wasserman 4,265,593 339,184
Alvin E. Nashman 4,426,054 178,723
No other matter was presented for voting at the Annual Meeting.
Item 6 Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed on the quarterly report Form 10-Q
Exhibits
3.10 By-laws as amended on November 12, 2003
31.1 Certification of Howard A. Pavony pursuant to Exchange Act Rule 13a-
14(a)
promulgated under the Exchange Act.
31.2 Certification of Steven H. Rothman pursuant to Exchange Act Rule 13a-
14(a)
promulgated under the Exchange Act.
32.1 Certification of Howard A. Pavony pursuant to Exchange Act Rule 13a-
14(b) promulgated under the Exchange Act.
32.2 Certification of Steven H Rothman pursuant to Exchange Act Rule 13a-
14(b) promulgated under the Exchange Act
(b) The Registrant did not file any Current Reports on Form 8-K
during the period covered by this Quarterly report on Form 10-Q.
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 : November 12, 2003 By: /s/ Howard A. Pavony
Howard A. Pavony
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date : November 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 : November 12, 2003 By: /s/ Frank T. Wong
Frank T. Wong
Vice President - Finance
and Secretary