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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended March 31, 1997
Commission file number: 0-22122
MICROS-TO-MAINFRAMES, INC.
(Exact name of Registrant as specified in Its charter)
New York 13-3354896
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
614 Corporate Way, Valley Cottage, New York 10989
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (914) 268-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in the proxy statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of May 30, 1997, was $9,865,191 (assuming solely for
purposes of this calculation that all directors and officers of the
Registrant are "affiliates").
The number of shares outstanding of the Registrant's Common S tock,
par value $.001 per share, as of May 30, 1997, was 4,450,374.
Documents Incorporated by Reference: N/A
ITEM 1. BUSINESS
GENERAL
Micros-to-Mainframes, Inc. and its subsidiaries, MTM Advanced Technology,
Inc. and Data.Com RESULTS, Inc. (collectively, the "Company" or "MTM") serve as
a "one-stop" organization for data processing solutions by providing computer
hardware and software sales, systems design, installation, consulting,
maintenance and integration of microcomputer products, including the design and
implementation of wide area networks ("WAN's") and local area networks ("LANs").
The Company sells, installs and services microcomputers, microcomputer software
products, supplies, accessories and custom designed microcomputer systems. MTM
is primarily an authorized direct dealer and value added reseller. The Company
also serves as a systems integrator, by integrating into a single working
system, for a client, a group of hardware and software products from more than
40 major computer vendors including Compaq, Hewlett Packard, IBM, Dell, NEC ,
Seagate Technology, Apple, Cisco, Canon, Novell, Microsoft, Toshiba, 3COM,
Cubix, Fore Systems, Madge and numerous others.
MTM provides its customers, some Fortune 500 corporations and others
mostly considered to be in the Fortune 2000 category (hereinafter referred
to as "Fortune 2000 corporations" in the tri-state New York Metropolitan area,
with a wide range of related outsourced customer support services,
including network analysis and design, systems configuration, physical
installation, software loading, application training, continuing education,
maintenance and repair services. A network is the integration of two or
more computers and their components into a system that allows multiple
users to share the same information, communicate with the mainframe (a
computer with large capacity used primarily for massive data storage and
processing) or central networking system and all other computers and
peripheral equipment.
The outsourcing of computer services is a rapidly growing trend whereby a
client company obtains all or a portion of its data processing requirements
from a systems integrator, such as MTM, that specializes in the computer
service, product or application required by the client. Outsourcing is a fast
growing component of the data processing industry. The focus of the Company's
growth revolves around the Company's outsourced support services, which
include contract programming, network consulting and staff leasing in
addition to systems integration. Since 1991, the Company has been providing
customer support services and is focusing its current marketing efforts in
such areas. Such services account for about 10% of the Company's current
revenues, including a small amount of revenues derived from maintenance and
repair services.
On May 6, 1996, the Company acquired the business of Data.Com RESULTS, Inc.
("Data.Com"), a data communication and networking consultant and advanced
technology solutions provider primarily serving clients located in
Connecticut. This acquisition complements the Company's existing business
by expanding its client base throughout Connecticut and New England. The
Company expects to continue to expand its operations either internally or
through strategic acquisitions, with emphasis on its support services.
The Company's software support services include network and mainframe
connectivity (communication between computers and networks) consulting,
hardware and software maintenance, network management, videoconferencing
consulting and trouble-shooting support. The Company's clients have access
to person-to-person support services administered by a staff of highly
trained support engineers, generally via a toll-free 800 telephone call.
The Company's clients also have access to MTM/s consulting services for
LAN and WAN planning, detailed systems design, gateway (a device which
allows computer users to access data from networks to the mainframes or by
telephone), bridge (a device which allows computer users to communicate
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between networks and provides an expansion route for the existing network)
and security/disaster recovery, among other services.
The Company was incorporated on May 12, 1986 in the State of New York.
INDUSTRY
The microcomputer industry has become a multi-billion dollar industry
since its development in the late 1970's. Management believes that this is
attributable to rapid technological advances leading to the development of
significantly more powerful microcomputers at substantially lower prices
than larger minicomputers. The use of microcomputers has become widespread
throughout the workplace also because of the smaller size of microcomputers,
as compared to mini computers, and the microcomputer's versatility and
ability to connect to and share information with mainframe systems. The
Company believes, based on its knowledge of the industry and
industry data, that the microcomputer industry experienced a compound
annual growth rate of almost 50% from 1984 to 1988 and a more modest rate
ranging from 10% to 17% since 1988. The Company believes that the industry
will continue to grow at this modest rate in the future, although there can
be no assurance that it will.
Corporations purchase their computer hardware from a number of
sources, including manufacturer authorized dealers and value-added resellers,
such as MTM, retail stores and, with increasing importance, directly
from manufacturers through direct telemarketing and mail order
organizations. Direct sales have benefitted from microcomputer users
becoming more computer literate, the emergence of industry standards and
increased inter-changeability of peripherals. As a result of the
foregoing, the microcomputer dealer distribution channel is currently
undergoing additional market segmentation into dealers such as the
Company, which are systems integrators which offer a one-stop total
solution for outsourcing.
PRODUCTS
The Company markets microcomputers, printers, displays, video
conferencing products, LAN and WAN products, plotters, software and other
peripheral products. MTM is an authorized sales and service dealership of
microcomputer equipment and related products supplied primarily by major
manufacturers, including, but not limited to, Compaq Computer Corporation,
IBM Corporation, Dell Computer Corporation, Hewlett-Packard Company, Apple
Computer, Inc., Seagate Technology, Inc., Cisco Systems, Inc., Fore
Systems, Inc., Canon USA, Inc., Novell, Inc. and Toshiba American
Information. The Company offers a variety of pro ducts manufactured by
other companies, including NEC Technologies, Inc., 3COM Corporation, Cubix
Corporation, Madge Development Corp. and others , and software products
from major suppliers, including Microsoft Corporation, IB M and others.
MTM purchases certain products from Intelligent Electronics, Inc.
("IE") and MicroAge Computer Centers, Inc. ("MicroAge"), as described below,
which are distributors selling to other dealers, at prices generally
lower than the Company could obtain directly from suppliers. The Company
also obtains products from a number of suppliers, including independent
distributors, on an individual purchase order basis rather than through
dealership agreements. M TM will also order specific products from other
manufacturers to satisfy a particular customer requirement. The Company
regularly evaluates new products, both internally and through evaluations
with its customers.
The microcomputer industry is characterized by numerous hardware
systems that utilize different and often incompatible standards for hardware
and software. The Company has the capability to design systems and
support services which include products or components manufactured by
numerous manufacturers that address most applicable industry standards.
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The Company is an authorized dealership for the various standardized
LAN systems, including Novell, 3COM, Microsoft LAN Manager, the IBM Token
Ring Network, Ethernet and compatible alternatives. In addition, the Company
sells and services LAN and WAN products produced by the various
manufacturers which it represents. LAN and WAN systems allow various
microcomputers to communicate with other computers in a group and with
other microcomputers in other LANs and WANs. The Company's clients have
access to the Company's Connectivity an d Communication Laboratory
described below where they can test, design and create LANs and WANs.
OUTSOURCED SUPPORT SERVICES
MTM Support Services include a wide range of services designed for
its customers' corporate planners and management needing a single source
for technical support issues, such as local and wide area networks, gateways,
bridges, system conversion planning, hardware and software specifications,
database and database server development and implementation, video
conferencing and security/disaster recovery.
The outsourcing of computer services is a rapidly growing trend in
which a client company obtains all or a portion of its data processing
requirements from a systems integrator, such as the Company, that
specializes in the computer service, product or application required by
the client.
The Company believes that it is generally more cost-effective and more
efficient for its clients to purchase outsourcing services from the
Company than for them to provide equivalent services by hiring their own
service and support personnel.
The following services provide the Company/s clients with the ability
to outsource virtually all of their support issues with one company for a
wide variety of microcomputer hardware and software products. These services
generally provide the Company's clients with access via an 800 telephone
call to person-to-person support services administered by a staff of
highly trained support engineers in the Company's Advanced Technology
Group. The Advanced Technology Group and Technical Support consists of 44
technical support persons under the supervision of a Data Communications
Manager. This group is responsible for systems design and the
implementation of technology and the management of advanced technology
projects including LANs, WANs an d data communications problem solving for
clients.
NETWORK AND MAINFRAME CONNECTIVITY CONSULTING
MTM and its staff of networking consultants offer experience at all
levels of computers to provide management information services (MIS) departments
with consulting services ranging from connectivity to enhancements,
feasibility and implementation. These services address critical issues
such as performance, reliability and compatibility with proven strategies
and products. MTM offers research and planning insight at all levels of
information flow from mainframes to minis to micros and within each
system. These consulting services provide clients with access to a
variety of options in designing and maintaining systems.
CONNECTIVITY AND COMMUNICATION LABORATORY
The Company's Advanced Technology Group seeks to serve customers/
increasing communications requirements, including their need to share data
and resources using LANs and WANs. The Company offers an array of connectivity
services, including LAN and WAN system design and configuration,
videoconferencing consulting, user training and installation. In addition,
the Company has established a Connectivity and Communication Laboratory in
its executive offices. This state-of-the-art facility provides a multi-
vendor environment to test connectivity networks, create multi-vendor LANs
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and WANs and solution prototypes, perform feasibility studies, perform pre-
release and new connectivity product testing, perform product
compatibility testing, product bulletproofing, procedures development,
product evaluation and optimization, replication, diagnosis and solution of
service problems and to generally provide a basis to address support
issues.
The Company's lab features several different LAN and WAN operating
systems from such manufacturers as Novell, IBM, SCO, Microsoft Lan Manager
and 3COM and includes the entire spectrum of computer sizes.
NETWORK MANAGEMENT AND FINE-TUNING
The Company's Advanced Technology Group provides services designed to
resolve complex network and data communications management issues for
clients with existing multiple networks and/or sites currently utilizing
communication servers, gateways to host computers and bridges linking
multiple servers (a primary storage device, normally a PC in a network).
These services include network security planning and implementation, data
integrity and redundancy, network fine-tuning and auditing, performance
testing, evaluation and optimization, corporate electronic mail and site
management.
1-800-PRODUCT SUPPORT
The Company's experienced support engineers provide product support
to resolve specific operating system and application problems. The Company's
toll-free 800 telephone support line can be used for such problems
as application software, installation assistance, error message handling
or share d device problems. The applications supported include spread
sheets, word processing packages, communications, network and PC operating
systems, graphics, databases and various utilities.
The Company provides its clients with instant access to the latest
product support resources for known problems and resolutions, updates and
release information.
NETWORK TRAINING AND CONSULTING
The Company's Advanced Technology Group provides the Company' s
clients and their corporate management, as well as its own engineering and
sales personnel, with technical support and training. The Company's
support engineers have generally been trained by the major computer
vendors and receive additional training from courses given by computer
vendors, as well as by the Company's Data Communications Manager, on an as
needed basis and also in order to maintain their certifications with the
respective vendors. The Company offers comprehensive training sessions
for its customers featuring instruction by manufacturer-trained customer
support representatives. This department assists in post -sale customer
inquiries and network consultation and support via a toll-free 800
telephone number. The Company offers customer training seminars for
various microcomputer hardware and software products at its own facilities
and at customer sites.
PRODUCT MAINTENANCE
The Company offers contracts to its customers for both on-site and
off-site complete product maintenance and repair services. These maintenance
contracts generally provide for the Company to maintain microcomputer
equipment at the customer's location during regular business hours. Most
maintenance contracts are renewable annually. In addition, the Company
provides authorized warranty service and repair for equipment sold by it
and by others. The service department fulfills warranty requirements and
offers extended maintenance and repair agreements after the expiration of
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manufacturers/ warranties. The service department maintains complete
parts inventories for the products distributed by the Company and is
staffed by manufacturer-certified field engineers.
DIAGNOSTICS
The Company will ship one of its trouble-shooting tools (e.g. , HP
Advisor, Novell (r) LANalyzer or Network Analyzer) to a client to allow dial
in access for trouble-shooting network hardware and software related
problems. By displaying and capturing network traffic, the Company's
experienced systems engineers can analyze and determine the network
problem. In addition, through a remote dial-in system, the Company's
systems engineers can access a client/s network problems.
DATABASE
MTM has access to state-of-the-art technical databases which provide
it with information concerning technological advances from major vendors.
This assists the Company in trouble-shooting as it receives up-to-date
product information from a wide variety of vendors. The Company has either
been licensed, contracted or authorized to use the following databases :
Novell's technical database which Novell engineers use for research and net
work diagnosis, as well as technical information from IBM, Compaq, Cisco,
Microsoft, NEC, 3COM, and Fore Systems, Inc. These databases provide the
Company with technological advances from major vendors as soon as the
information is published. These, in turn, allow the Company its
flexibility to shift rapidly to vendor s whose products are expected to
increase in demand as a result of technological advances.
ACCESSORY PRODUCTS
The Company has formed new purchasing relationships with several
computer supply vendors, through which it resells diskettes, data tape,
compact disks, toner, ribbons and other related computer supplies. The
Company does not believe that it is dependent on any one vendor of
computer supplies, and the loss of any such vendor would not have a
material adverse impact on the Company.
MARKETING AND SALES
The Company's marketing efforts are focused on Fortune 500 corporations
and, to a greater degree, what may be categorized as Fortune
2000 corporations, professional firms and governmental and educational
institutions. Except for major corporate accounts, these customers
generally do not have internal computer support personnel. Management
believes that the increasing complexity of microcomputer systems,
increased usage of microcomputers in the workplace and the trend toward
network interconnecting will cause business and institutional customers to
require significant levels of outsourced customer sup port services, such
as those provided by the Company. The Company believes that these
customers are increasingly relying on their dealers and suppliers to
provide , in addition to competitive pricing, a one-stop solution-based
approach to their data processing requirements. The Company uses such an
approach which addresses purchasing, compatibility, maintenance, support,
training and obsolescence.
The Company has approximately 500 active clients. The Company's
customers are well diversified in such industries as securities, financial
institutions, pharmaceuticals, manufacturing, distribution, law and
accounting firms. For the fiscal years ended March 31, 1997, 1996 and
1995 ("Fiscal 1997", " Fiscal 1996" and "Fiscal 1995"), approximately 13%,
16% and 11%, respectively, of the Company's total revenues were derived
from sales to PaineWebber, Incorporated ("PaineWebber"). During Fiscal
1997, Bloomberg, L.P. ("Bloomberg" ) accounted for approximately 13% of the
company's revenues. During Fiscal 1996 a nd Fiscal 1995, A.I. Credit Corp.
("AI") accounted for approximately 18% and 29%, respectively, of the
Company's revenues. Although the Company's customer base has increased,
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the loss of PaineWebber, Bloomberg or AI as well as, to a lesser extent,
the loss of any other principal customer, would be expected to have a material
adverse effect on the Company's operations during the short term until
the Company is able to generate replacement business, although there can be
no assurance of obtaining such business.
As of May 15, 1997, the Company employed 25 salespersons who are paid
salaries, commissions and/or a combination of both. The Company's sales
executives regularly call on sales management at companies with solutions
for their computer problems. While the Company's marketing activities are
focused on Fortune 2000 corporations located in the tri-state Metropolitan
New York area and throughout New England, the Company sells its products
and services to branch offices of its customers, including Fortune 500
corporations, throughout the United States. The Company also relies on
customer referrals from its major suppliers and manufacturers who often
receive requests for a systems integrator to design and install their
systems.
The Company's sales executives generally participate in approximately
five hours of training per week concerning various topics, including product
knowledge, industry information and sales techniques. The Company's
ability to successfully expand its business will depend, in part, on its
ability to attract, hire and retain highly skilled and motivated marketing
an d sales personnel, of which there can be no assurance.
MTM also makes joint sales presentations with certain of the Company's
major suppliers to existing and prospective customers. Certain of these
suppliers/ customer fulfillment option programs allow customers who
purchase directly from the supplier to apply purchases from MTM to their
purchase obligations under those agreements. As a result, these customers
have the flexibility of purchasing products from the Company to take advantage
of MTM/s added services and its ability to integrate multiple
manufacturers / products. Most major manufacturers have instituted either
a moratorium or a selective authorization procedure on the approval of
additional authorized dealership locations. While in effect, such
policies may preclude the Company and its competitors from becoming
authorized dealers for new vendors.
SUPPLIERS
The Company purchases microcomputers and related products directly
from numerous suppliers as either an authorized dealer or a value added
reseller. The Company has entered into authorization agreements with its
major suppliers. Typically, these agreements provide that MTM has been
appointed, on a non-exclusive basis, as an authorized dealer and systems
integrator of specified products of the supplier at specified locations.
Most of the authorization agreements provide that the supplier may
terminate the agreement with or without cause upon 30 to 90 days notice or
immediately upon the occurrence of certain events. In addition, although
each agreement is generally subject to renewal on an annual basis, there
can be no assurance that such agreements will be renewed. The Company
believes that its relationships with its major suppliers are excellent.
Sales of Dell Computer products have accounted for approximately 20%,
24% and 31%, respectively, of the Company's revenues during Fiscal 1997,
Fiscal 1996 and Fiscal 1995. Sales of Compaq and IBM products accounted
for approximately 26% and 13%, respectively, of the Company's revenues
during Fiscal 1997 and Fiscal 1996. No other supplier's products accounted
for 10% or more of the Company's revenue during Fiscal 1997, Fiscal 1996
or Fiscal 1995. The Company's sales of products purchased through MicroAge
accounted for approximately 20% and 33% of the Company's total revenues in
Fiscal 1996 and Fiscal 1995 , respectively, and sales of products purchased
through IE accounted for approximately 44% and 10% of total revenues in
Fiscal 1997 and Fiscal 1996, respectively . The material provisions of the
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MicroAge contract are described below under the heading "IE and MicroAge".
Except for Dell and Compaq, management does not believe that a termination
of any one supplier's agreement would have a material adverse effect on the
Company.
The Company's future results of operations are dependent upon
continued demand for microcomputer products. Distributors in the
microcomputer industry currently face a number of adverse business
conditions, including price and gross profit margin pressures and market
consolidation. During the past five years, all major hardware vendors have
instituted extremely aggressive price reductions in response to lower
component costs and discount pricing by certain microcomputer
manufacturers. The increased price competition among major hardware
vendors has resulted in declining gross margins for many microcomputer
distributors and may result in a reduction in existing vendor subsidies.
Management of the Company believes that these current conditions, which are
forcing certain of the Company's direct competitors out of business, may
present the Company with opportunities to expand its business. There can
be no assurance, however, that the Company will be able to continue to
compete effectively in this industry, given the intense price reductions and
competition currently existing in the microcomputer industry.
Pursuant to the terms of most of its authorized dealership agreements,
the Company furnishes firm purchase orders 30 to 90 days in
advance of shipment. Under the terms of these agreements, the Company is
generally liable for up to a 5% restocking fee to many manufacturers for
the return of previously received merchandise. The Company has not
experienced any significant cancellation penalties or restocking fees.
The Company receives certain discretionary cost subsidies, typical
for the industry, from certain major suppliers to promote sales and support
activities relating to their products. The Company will typically earn
about 1 1/2% of its aggregate purchases. It has used these funds to
subsidize marketing, advertising and its Connectivity and Communication
Laboratory, where the Company has been able to expand into areas relating
to these suppliers/ products and sales, such as LAN sales and support.
MTM's current arrangements with major suppliers generally pro vide
protection for up to two months against declines in the wholesale price of
microcomputers and related products in the Company's inventory. These
arrangements typically take the form of a cash payment or a credit against
future purchases in an amount equal to the difference between the price
actually paid by the Company for its inventory of that supplier's products
and the new dealer price.
The Company's suppliers permit the Company to pass through to its
customers all warranties and return policies applicable to the suppliers'
products. To date, the Company has experienced little return of product
and has been reimbursed by the suppliers for most warranty work done for
its customers. All service work after the expiration of the warranty
period is at the customer's expense. The Company offers service contracts
of varying lengths under which the Company agrees to be responsible for all
service costs for a fixed term in exchange for a set fee paid by the
customer.
Software and other related products are purchased from numerous
industry suppliers. As is customary, the Company does not have any
long-term agreements or commitments with these suppliers, because competitive
sources of supply are generally available for such products.
In response to discounted pricing by certain microcomputer manufacturers,
all major CPU hardware suppliers have instituted aggressive price reductions.
The heightened price competition among hardware suppliers has resulted in
declining gross margins for many microcomputer resellers. Although discounted
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prices have enabled the Company to increase its sales volume over the past three
years, it has resulted in lower gross margins for some of the Company's product
lines. Network and service-related hardware products, however, have had
improving margins. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
IE AND MICROAGE
The Company operates as a reseller for IE and MicroAge. IE and
MicroAge are master resellers and distributors which market and distribute
information, technology, products and services through a network of
franchisees and affiliated resellers, such as MTM. Such products include
microcomputer systems, workstations, networking and telecommunications
equipment, software and related products. As a reseller, the Company has
purchased products and services through MicroAge since 1993 and through IE
since 1995.
The Company purchases products from IE and MicroAge on a cost-plus
basis (consisting of IE and MicroAge's cost of the products from a supplier
plus a mark-up) generally at lower prices than could be obtained
independently from suppliers. In certain instances, the Company has
access to suppliers through IE and MicroAge for which it is not otherwise
an authorized dealer. The Company is obligated to purchase a minimum of
$100,000 of products from Micro Age in each calendar quarter. The
Company's agreement with MicroAge may be terminated by either party on 60
days/ notice, and its agreement with IE may be terminated upon 30 days'
notice by the Company and upon 3 days' notice by IE. The Company does not
believe that it is dependent on either supplier, and that if it were to
suffer the loss of either supplier, adequate alternatives would exist.
DATA.COM RESULTS, INC.
The Company's newest subsidiary, Data.Com, is a data communications,
WAN and LAN consultant and advanced technology solutions provider primarily
serving clients located in the State of Connecticut. The acquisition
of Data.Com was effective as of May 1, 1996.
The net purchase price for the assets and business was approximately
$484,000 in assumed net liabilities, and 87,000 shares of the Company's common
stock, $.001 par value ("Common Stock"), valued at approximately $407,000.
Additional consideration is payable in Common Stock, contingent upon
Data.Com's achieving certain levels of earnings before taxes, depreciation
and amortization through Fiscal 1999. The maximum number of shares to be
issued are 25,000 and 35,000 in Fiscal 1998 and 1999, respectively.
Robert Fries, the previous owner of the purchased business, joined the
Company as a Vice President and director and as the Co-President of
Data.Com. See " Item 11. Executive Compensation - Employment Agreement."
COMPETITION
The microcomputer market is highly competitive. The Company is in
direct competition with local, regional and national distributors of
microcomputer products and related services. Several of these competitors
offer most of the same basic products as does the Company. The Company
competes with other resellers and believes its prices and delivery terms
are competitive. Many competitors may sell their products at lower prices
than the Company, but generally do not offer the same range of support
services after installation of equipment that the Company offers to its
customers.
In addition, the tri-state Metropolitan New York area and New England,
to which the Company markets its products and services, are particularly
characterized by highly discounted pricing on microcomputer products from
various sources of competition. The Company faces competition from
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microcomputer suppliers that sell their products through direct sales forces and
from manufacturers and distributors that emphasize mail order and telemarketing.
Depending on the customer, the principal areas of competition may
include price, pre-sales and post-sales technical support and service,
availability of inventory and breadth of product line. The Company has an
insignificant market share of sales in the microcomputer industry and the
service markets which the Company serves. Certain of the Company's
competitors at the regional and national level are substantially larger,
have more personnel, have materially greater financial and marketing
resources than the Company and operate within a larger geographic area
than does the Company.
Management believes that the Company will continue to be able to
compete effectively against its various competitors by combining fair pricing
with its wide range of customer support services designed to provide
its customers with high-end technological services, multi-vendor technical
support, maintenance of their computer product needs, a dedicated, trained
staff of salespersons and technicians, complete solutions for single user,
multi-user or net work systems and specialized vertical market software.
BACKLOG
The Company generally delivers products from inventory to its
customers within one to two weeks of its receipt of purchase orders. As a
result, the Company believes that its backlog of unfilled customer orders
is not material.
PROPRIETARY INFORMATION
The Company holds no patents and has no trademarks registered in the
United States Patent and Trademark Office or in any state. If the Company
believes that trademark registration is significant in protecting its
product or service recognition, the Company may apply for registration of
various trademarks or service marks, including, but not limited to, the
names Micros-to-Mainframes, Data.Com and The Advanced Technology Group, in
which it believes that it has certain common-law rights. The Company may
also affix copyright notices on its support service, training and service
manuals. While such protect ion may become important to the Company, it is
not considered essential to the success of its business. The Company
relies on the know-how, experience and capabilities of its management,
sales and service personnel. The Company requires some of its employees
to sign confidentiality or non-competition agreements.
EMPLOYEES
As of May 20, 1996, the Company employed 125 persons, all but six of
whom are full-time personnel. Of these employees, five are responsible
for management, 25 are responsible for marketing and sales, 71 for technical
support, four for distribution, five for finance and eight for
purchasing and administration. None of the Company's personnel is
represented by a union, and the Company considers its employee relations to
be good.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse are located in
approximately 11,000 square feet of space at a two-story facility leased at
614 Corporate Way, Valley Cottage, New York. Approximately 35% of such
space is devoted to marketing and telephone sales, 15% to service and
customer support , 10% to administration, 10% to the Connectivity and
Communication Lab and 30% to warehouse space. The Company does not
maintain a retail showroom. The monthly payment is currently $6,400 under
a lease, expiring on August 31, 1997, as amended.
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The Company also leases 4,000 square feet of office space in the
Chrysler Building in New York City, which space is devoted to high technology
sales. The monthly payment is currently $11,111 under a lease expiring
on February 28, 1998. The Company also leases approximately 8,100 square
feet of office and warehouse space (only about 10% of this property is
devoted to warehouse space) in Rocky Hill, Connecticut. The monthly
payment on this lease is currently $4,853.81, which will increase to
$5,213.35 on August 1, 1997. The lease is terminable on six months' notice
after July 31, 1997 and expires on July 31, 1999.
The Company is also responsible for real estate taxes, insurance,
utilities and maintenance expenses concerning these premises.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, other
than customer claims arising, from time to time, in the ordinary course of
the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company/s stockholders
during the fourth quarter of the fiscal year ended March 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKH OLDER
MATTERS
The Common Stock of the Company is listed on NASDAQ/NMS under the
symbol "MTMC", and warrants of the Company were listed on NASDAQ/NMS until
December 22, 1995 under the symbol "MTMCW," when the warrants were
removed from trading.
The following table sets forth the high and low closing bid prices of
the Common Stock for the last two fiscal years, and the warrants through
December 22, 1995, as reported by NASDAQ. Bid quotations represent high
and low prices quoted between dealers, do not reflect retail mark-ups,
mark-downs or com missions and do not necessarily represent actual
transactions.
Bid
Security Period High Low
- -------- ---------------- ------ -------
COMMON
STOCK FISCAL YEAR ENDED MARCH 31, 1996
April 1 - June 30, 1995 $5.750 $3.125
July 1 - September 30, 1995 $8.625 $4.875
October 1 - December 31, 1995 $7.000 $4.500
January 1 - March 31, 1996 $6.750 $4.500
FISCAL YEAR ENDED MARCH 31, 1997
April 1-June 30, 1996 $5.875 $3.750
July 1-September 30, 1996 $4.750 $3.000
October 1 - December 31, 1996 $4.250 $2.125
January 1 - March 31, 1997 $3.750 $2.500
WARRANTS FISCAL YEAR ENDED MARCH 31, 1996
April 1 - June 30, 1995 $4.750 $0.625
July 1 - September 30, 1995 $4.750 $1.250
October 1 - December 22, 1995 $3.000 $0.250
On May 30, 1997, the closing bid and asked prices of a share of Common
Stock were $3.625 and $3.875, respectively, and the Company had in excess
of 2,000 beneficial holders of Common Stock.
The Company has not paid any cash dividends on Common Stock to date
and does not anticipate paying any in the foreseeable future. The Board
of Directors intends to retain earnings, if any, to support the growth of
the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the four fiscal years ended
March 31, 1997, 1996, 1995 and 1994, and the Nine Months Ended March 31,1993,
are derived from the financial statements of the Company. The data
should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.
-12-
Income Statement Data:
Nine Months
Year Ended March 31 Ended March 31
-----------------------------------------------------
1997 1996 1995 1994 1993
(In thousands; except earnings per share)
Net revenues $ 58,062 $ 47,326 $43,043 $ 29,028 $15,322
Cost of products sold 47,549 40,452 37,530 24,862 12,742
Technical personnel
salaries 2,420 1,109 778 562 242
Selling, general and
administrative
expenses 6,698 4,070 3,276 2,690 1,590
Compensatory stock
arrangement(1) 0 4,655 0 0 0
Interest expense 6 13 40 94 86
Income (loss) from
operations before
income taxes 1,530 (2,907) 1,514 820 662
Net income (loss) 910 (3,614) 878 478 387
Net income (loss) per
common share:
Primary $0.21 ($1.10) $0.40(2) $0.30(2) $0.33
Fully diluted (3) ($0.22) ($0.57)
Weighted average number
of common and common
equivalent shares used
in calculation:
Primary 4,436 3,251 2,194(2) 1,605(2) 1,175
Fully diluted (3) 3,183 2,104
Balance Sheet Data: At March 31
-----------------------------------------------------------
1997 1996 1995 1994 1993
(In thousands; except earnings per share )
Working Capital $ 10,386 $10,684 $4,648 $3,771 $ 773
Total Assets 20,428 16,209 9,420 8,486 5,247
Total Liabilities 8,085 5,208 4,554 4,501 4,307
Retained Earnings (Deficit) (469) (1,379) 2,235 1,357 879
Shareholders' Equity 12,343 11,000 4,866 3,985 940
_____________________
(1) Reflects a non-cash, non-recurring charge. See"Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(2) Share and per share data do not include 1,400,000 shares of the Company's
Preferred Stock issued in September 1993 and redeemed in September 1996 in
exchange for 980,000 shares of Common Stock (the "Preferred Stock").
(3) Assumes (i) that the Preferred Stock was converted to Common Stock for the
periods shown, (ii) that earnings were adjusted to reflect the necessary
earnings requirements for convertibility of the Preferred Stock and (iii)
that a charge to income for the compensatory element of the Preferred Stock
was recognized for each period in the three year period ended March 31,1996
based on the current market price at the end of each period.
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Report.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
items in the Company's Consolidated Statements of Operations expressed as a
percentage of sales for that period:
Year Ended March 31,
1997 1996 1995
Net sales..................... 100.00% 100.00% 100.00%
Cost of products sold......... 81.89 85.48 87.19
Technical personnel salaries. 4.17 2.34 1.81
Selling, general and
administrative expenses..... 11.54 8.60 7.61
Compensatory stock arrangement -- 9.84(1) --
Interest expense............ 0.01 0.03 0.09
Income (loss) from operations
before income taxes.............. 2.64 (6.14) 3.52
Net income(loss).................... 1.57 (7.64) 2.04
_______________________
(1) Reflects the non-cash non-recurring charge of $4,655,000 described below.
The Year Ended March 31, 1997 as compared to the Year Ended March 31, 1996.
The Company had net sales of approximately $58,062,000 for the Year
Ended March 31, 1997 ("Fiscal 1997"), as compared with approximately $47,326,000
for the Year Ended March 31, 1996 ("Fiscal 1996"). This increase
in sales of approximately 22% was attributable to increased sales of
equipment to both new and existing customers in Fiscal 1997, as well as to
increased revenues from support services, including approximately
$6,289,000 in revenue derived from the newly acquired subsidiary.
As a percentage of net sales, the cost of products sold for Fiscal
1997 decreased by 3.59% as compared to Fiscal 1996, due to increased
service revenues, which have higher margins than equipment sales, offset
by competitive market pressures on product sales.
Service revenue in Fiscal 1997 increased 41% to $6,416,000 from
$4,537,000 in Fiscal 1996. Because of the increase in the Company's
service business, the Company hired additional technical personnel. On an
aggregate basis, technical personnel salaries in Fiscal 1997 increased
118% to $2,420,000 from $1,109,000 in Fiscal 1996. Technical personnel
salaries as a percentage of service revenues were 38% in Fiscal 1997 and
24% in Fiscal 1996. This increase was due to the Company's hiring more
technical personnel as part of its planning for future growth in its
consulting and service business. The Company is expected to continue to
hire additional professional technicians and engineers for the Advanced
Technology Group in order to meet the expected demand in the outsourcing
business for the coming year.
Selling, general and administrative ("SG&A") expenses were
approximately $6,698,000 for Fiscal 1997, as compared to approximately
$4,070,000 in Fiscal 1996. SG&A expenses as a percentage of net sales
-14-
increased to 11.54% in Fiscal 1997 from 8.6% in Fiscal 1996. This
increase was primarily attributable to the Company's overall increase in
overhead expenses and to the newly-formed subsidiary that acquired the
business of Data.Com RESULTS, Inc. (" Data.Com"), which had SG&A expenses of
approximately $1,513,000. Furthermore, due to the increase in sales volume,
sales commissions and salaries increased by $100,000, and other employee
payroll, benefits and payroll taxes increased by approximately $300,000.
The increases were also due to increases in occupancy expenses and telephone
expenses of approximately $222,000 for additional office space in New York
City.
Accordingly, net income increased to approximately $910,000 in Fiscal
1997 from a loss of $(3,614,000) in Fiscal 1996, which included the 1996
non-cash, non-recurring charge of $4,655,000.
The Year Ended March 31, 1996 as compared to the Year Ended March 31, 1995.
The Company had net sales of approximately $47,326,000 for Fiscal
1996, as compared with approximately $43,043,000 for the Year Ended March 31,
1995 ("Fiscal 1995"). This increase in sales of approximately 10% was
attributable to increased sales of equipment to both new and existing
customers in Fiscal 1996, as well as to increased revenues from support
services, which the Company began to offer in 1991.
As a percentage of net sales, the cost of products sold for Fiscal
1996 decreased by 1.71% as compared to Fiscal 1995, due to increased
service revenues, which have higher margins than equipment sales, offset
by competitive market pressures on product sales.
Service revenue in Fiscal 1996 increased 98% to $4,537,000 from
$2,290,000 in Fiscal 1995. Because of the increase in the Company's
service business, the Company hired additional technical personnel. On an
aggregate basis, technical personnel salaries in Fiscal 1996 increased 43%
to $1,109,000 from $778,000 in Fiscal 1995. Technical personnel salaries
as a percentage of service revenues were 24% in Fiscal 1996 and 34% in
Fiscal 1995. This decrease was due to greater utilization of technical
personnel on customer service contracts.
SG&A expenses were approximately $4,070,000 for Fiscal 1996, as
compared to approximately $3,276,000 in Fiscal 1995, SG&A expenses as a
percentage of net sales increased to 8.60% in Fiscal 1996 from 7.61%
in Fiscal 1995. As a whole, SG&A expenses increased by approximately
$794,000 in Fiscal 1996. This increase resulted primarily from expenses
related to increased sales volume , including increases in sales
commissions and salaries of $416,000, and other employee payroll, benefits
and payroll taxes of $71,000. The increase was also due to increases in
accounting and administrative salaries of $49,000, legal, accounting and
other professional fees of $104,000, and insurance of $102,000 .
The Company recognized a one-time charge against earnings in Fiscal
1996 in the amount of $4,655,000 relating to the compensatory nature of the
Preferred Stock. The charge was required to be recognized at such time as
the convertibility of the Company's Series A Preferred Stock (the "Preferred
Stock") was deemed probable. The Preferred Stock was convertible
into Common Stock, on a one for one basis, solely if the Company met
certain revenue and earnings thresholds. Such thresholds for
convertibility were considered probable in the fourth quarter of Fiscal
1996. In conjunction with this determination, the Company and the holders
of such Preferred Stock committed to accelerate the convertibility and fix
the amount of compensation expense to be charged to earnings. An
independent appraisal as to the equivalent value of the Preferred Stock and
the Common Stock concluded that the 1,400,000 shares of Preferred Stock
were equivalent to 980,000 shares of Common Stock. Based on the market
value of the Company's Common Stock at March 31, 1996, the Company
recognized the non-recurring, non-cash charge of $4,655,000 shown on the income
statement as "Compensatory stock arrangement". The shareholders of the
-15-
Company subsequently approved the arrangement, and the Preferred Stock was
exchanged for 980,000 shares of Common Stock in September 1996.
Based on the above factors, the Company had a net (loss) of approximately
($3,614,000) in Fiscal 1996 as compared to net income of $878,000 in
Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways, including the
following:
March 31,
1997 1996 1995
(Dollars in thousands, except current ratio data)
-------------------------------------------------
Cash and cash equivalents........ 2,880 5,285 1,167
Working capital.................. 10,386 10,684 4,648
Current ratio.................... 2.28:1 3.05:1 2:02:1
Secured notes payable............ 5 5 5
Working capital line available... 8,140 8,759 7,373
During Fiscal 1997, the Company used approximately $437,000 in cash
from operating activities. The cash used in operating activities resulted
from an increase in accounts receivable of $3,418,000 and an increase in
inventory of $96,000, offset by an increase in accounts payable and accrued
expenses of $1,886,000 and an increase in income tax payable of $55,000.
The Company used approximately $1,993,000 in investing activities for the
purchase of property, equipment and software of approximately $682,000
and the acquisition of Data.Com of approximately $1,311,000.
The Company finances much of its business through "floor-plan "
financings, which are alternate credit lines provided by manufacturers or
through lines of credit provided by vendors. The financing arrangements
have aggregate credit limits of approximately $8,300,000 and allow the
Company to borrow for between 30 and 60 days, interest-free. Interest is
charged to the Company only after the due date. These arrangements
generally provide for security interests in the related inventory and/or
accounts receivable and liens against all assets of the Company. The
Company also has a $5,000,000 revolving credit facility from a bank,
expiring on June 29, 1997, which the Company intends to renew. All
of the floor-plan borrowings are subordinated to the Company's bank revolver
except asto inventory and equipment, as to which the floor-planners hold a first
lien pursuant to intercreditor agreements. At March 31, 1997 and 1996, the
Company's total outstanding debt under the floor-plan arrangements was
approximately $5,155,000 and $2,536,000, respectively, and the revolver
balance was $5,000 at the end of each year.
The Company's current ratio decreased to 2.28:1 at March 31, 1997 from
3.05:1 at March 31, 1996.
The Company believes that expected cash flow from its operations
combined with available financing arrangements will be sufficient to satisfy
its expected cash requirements for the next 12 months and thereafter.
There can be no assurance, however, that changes in the Company's plans
or other events affecting the Company will not result in unexpected
expenditures or cash requirements.
ACQUISITION OF DATA.COM
On May 6, 1996, a newly formed subsidiary of MTM acquired substantially
all of the assets of Data.Com RESULTS, Inc. The net purchase
price for the assets was approximately $484,000 in assumed net liabilities,
and the issuance of 87,000 shares of Common Stock of the Company.
-16-
to the owner of the business sold (valued at approximately $407,000).
Data.Com is a data communications, wide area network and local area
network consultant and advanced technology solution s provider primarily
serving clients located in Connecticut.
In addition to the above consideration, contingent consideration is
payable in the Company's common stock based upon defined future levels of
Data.Com's earnings before taxes, depreciation and amortization ("EBTDA")
through the fiscal year ended March 31, 1999 ("Fiscal 1999"). The maximum
number of shares to be issued are 25,000 and 35,000 in Fiscal 1998 and
1999, respectively . The contingent consideration is not included in the
calculation of the acquisition cost. In addition to the above contingent
consideration, the Co-President of Data.Com will be issued 5,000 and
10,000 stock options in Fiscal 1998 and 1999, respectively, if Data.Com/s
EBTDA is greater than $1.25 million an d $1.35 million for Fiscal 1998 and
1999, respectively. The option price for any option so granted shall be
110% of the fair market value of the Company's common stock as at the
first day of the taxable year in which the respective options, if any, are
granted. The options shall not vest until the first day of the taxable
year following the year of grant, at which time all such options shall
vest. All compensation expense will be recognized during the target period,
when earnings targets are considered achievable, based on the market value
of the Company's common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in Part IV, immediately following Item 14 of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-17-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
Howard Pavony 46 Chairman of the Board
Steven H. Rothman 48 C.E.O., President and Direct or
Frank T. Wong 50 Vice President-Finance, Secretary
and Director
Robert A. Fries 44 Vice President and Director
Ramon Mota 35 Vice President-Technology
and Director
Joseph J. Farley* 73 Director
William Lerner* 63 Director
* Member of the Audit Committee and Compensation Committee.
Howard Pavony has served as Chairman of the Board since August 1996.
He served as the Company's President and a Director from May 1986 to August
1996. He has also served as Vice President of MTM Advanced Technology, Inc.
1997. since 1986. From 1977 until 1986, Mr Pavony was employed by Data
Research Associates ("DRA"), a computer hardware and accessories company,
rising to the positions of Vice President of Sales and member of the
Executive Board of DRA.
Steven H. Rothman has served as C.E.O. and President since Au gust
1996. He served as the Company's Vice President and a Director from the
Company's inception in May 1986 to August 1996. Mr. Rothman was the
Company's Secretary from May 1986 to September 1995. He has also served as
President o f MTM Advanced Technology, Inc. since 1986. From 1976 until
1986, Mr. Rothman was employed by DRA, rising to the positions of Director
of Marketing and member o f the Executive Board.
Frank Wong has served as the Company's Vice President-Finance since
February 1992, as a Director since June 1993 and as Secretary since
September 1995. Prior thereto, from 1975 to 1991, he served as Chief
Accountant of the Carvel Corporation, a franchise ice cream distributor.
Robert A. Fries has served as a Vice President and a Director of the
Company since May 6, 1996, when he joined the Company as a result of the
acquisition of Data.Com. He was President of Data.Com RESULTS, In c. from
June 1986 until he joined the Company and now serves as Co-President of
Data.Com.
Ramon Mota has served as a Director of the Company since May 6, 1996.
He joined the Company in October 1991, acting as a technical salesperson
for the Company and was promoted to Director of Technology in June 1992.
He became Vice President-Technology of the Company in April 1993. He also
has be en Co-President of Data.Com since May 1996. Prior thereto, from
1989 until 1991, Mr. Mota served as an engineer with Multitech System, Inc.
a modem manufacturing a nd data communications company.
-18-
Joseph J. Farley has served as a Director of the Company since
September 1995. From January 1982 to November 1990, Mr. Farley served as a
Vice President and Director of Marketing for Helm Resources, Inc. ("Helm"),
an American Stock Exchange listed company engaged in providing financial
services an d management assistance to small and mid-market companies. Mr.
Farley continue s to serve as a director of Helm. Prior thereto, Mr.
Farley was employed by IBM for thirty-two years. Mr. Farley held various
positions with IBM in engineering, marketing and field engineering.
William Lerner has served as a Director of the Company since September
1995. Mr. Lerner has been engaged in the private practice of corporate
and securities law in New York and Pennsylvania since 1991. From 1990 to
1991, Mr. Lerner was Vice President and general counsel to Hon
Development Company, a California real estate development company.
From 1986 to 1990, Mr . Lerner was a Vice President and general counsel of The
Geneva Companies, a California based business valuation and mergers and
acquisitions firm specializing in privately owned middle-market companies.
Mr. Lerner previously served as the Director of Compliance with the
American Stock Exchange and as a Branch Chief, Enforcement Attorney for the
Securities and Exchange Commission. Mr. Lerner serves as a director of
Helm; of Seitel, Inc., a New York Stock Exchange listed company engaged in
several facets of the oil and gas business; of Rent-Way , Inc., a Nasdaq
listed company engaged in the rent-to-own business; and of Co-Counsel,
Inc., a Nasdaq listed company that provides part-time or contract lawyers
to businesses and corporations on a nationwide basis.
All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualify. Officers are
elected annually by, and serve at the discretion of, the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers, Directors and persons who own more than ten percent of
a registered class of the Company's equity securities, to file reports of
owner ship and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and ten percent shareholders are required
by regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on the Company's copies of such forms received or
written representations from certain reporting persons that no Form 5's
were required for those persons , the Company believes that, during the
time period from April 1, 1996 to March 31, 1997, all filing requirements
applicable to its Officers, Directors and greater than ten percent
beneficial owners were complied with, except that each of Messrs. Rothman,
Pavony, Farley, Lerner and Mota filed one late Form 4 reporting, in each
case, one transaction.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned
by, or paid for all services rendered to the Company during Fiscal 1997,
Fiscal 1996 and Fiscal 1995 by certain executive officers of the Company.
No other executive officers received compensation in excess of $100,000
during such years.
-19-
Long-Term
Annual Compensation(1) Compensation
--------------------- Shares
Name and Principal Underlying
Position Year Salary($) Bonus($) Options(#)
- ---------------------- ------ ----------- -------- -----------
Howard Pavony 1997 $185,417 $20,000 50,000
Chairman of the Board 1996 $165,000 $20,000 10,000
1995 $165,000 $20,000 0
Steven H. Rothman 1997 $185,417 $20,000 50,000
President and CEO 1996 $165,000 $20,000 10,000
1995 $165,000 $20,000 0
Robert Fries 1997 $103,326 $25,000(2) 0
Vice President
Ramon Mota 1997 $100,033 $ 9,000 5,000
Vice-President 1996 $ 95,000 $ 10,500 0
Technology
- -------------------------
(1) The compensation figures shown do not include the cost to the
Company of benefits, including the use of automobiles leased or car allowances
paid by the Company, premiums for life and health insurance and any
other personal benefits provided by the Company to such persons, which
are, in the aggregate, below reportable thresholds.
(2) $25,000 bonus was accrued pursuant to the Purchase Agreement
dated May 6, 1996, although the exact amount of the bonus has not yet been
determined or paid.
OPTION GRANTS IN LAST FISCAL YEAR
The table below includes the number of stock options granted to the
executive officers named in the Summary Compensation Table during the year
ended March 31, 1997, exercise information and potential realizable value.
Individual Grants Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Price Appreciation
Options Employees in Exercise Expiration for Option Term
Name Granted(#) Fiscal Year Price($/sh) Date 5 %($) 10%($)
- --------------- ------------- ----------- ----------- ---------- -------------------
Steven H. Rothman 50,000 31.3% $4.43 8/31/2001 $0 $30,000
Howard Pavony 50,000 31.3% $4.43 8/31/2001 $0 $30,000
Robert Fries - - - - $0 $0
Ramon Mota 5,000 3.1% $2.50 11/30/2001 $7,450 $12,650
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY END OPTION VALUES
The table below includes information regarding the value realized on
option exercises and the market value of unexercised options held by the
executive officers named in the Summary Compensation Table during the year
ended March 31, 1997.
-20-
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired at FY-End(#) at FY-End($)
Name on Exer- Value Exercisable / Exercisable\
cise (#) Realized Unexercisable Unexercisable
- ---------- --------- ---------- --------------- --------------
Steven H. Rothman -0- -0- 70,000/40,000 $0/$0
Howard Pavony -0- -0- 70,000/40,000 $0/$0
Robert Fries -0- -0- 0/0 $0/$0
Ramon Mota -0- -0- 18,750/6,250 $28,200/$3,150
DIRECTOR FEES
The Company's independent directors receive an annual fee of $9,000
payable in quarterly installments in advance. In addition, each independent
director receives $1,500 for attendance in person at each Board meeting
and $250 for participating in each telephonic board meeting held. Each
independent director also received ten-year options to purchase 2,500
shares of Common Stock, exercisable, beginning August 20, 1996, at $4.0625
per share. See /Stock Option Plans" below, for the terms of stock options
granted to the Company's directors. Members of the Audit Committee and
Compensation Committee are appointed annually and serve at the discretion
of the Board of Directors. Each member of each Committee will receive
$1,000 for each meeting attended in excess of five meetings of such
committee per year.
Management directors currently receive no cash compensation for serving
on the Board of Directors other than reimbursement of reasonable expenses
incurred in attending meetings. Certain of the Company's directors have
received stock options from the Company. See "Stock Option Plans" below.
EMPLOYMENT AGREEMENTS
On September 1, 1996, Steven H. Rothman and Howard Pavony, respectively
the Chief Executive Officer and Chairman of the Board of Directors of the
Company, each entered into a five year employment agreement with the Company
on the following terms. Each agreement renews annually after the term un
less either party elects to terminate. Salary for the fiscal year ending
Marc h 31, 1997 was at the rate of $200,000. Under each agreement, the
executive receives annual increases in salary equal to the greater of (i)
the percentage increase in the Consumer Price Index; and (ii) $10,000.
Each executive is entitle d to participate in the Company/s stock option
plans and the Company's Incentive Bonus Program, the amounts of such
incentive compensation being determined by the Compensation Committee of
the Board of Directors. Further, the Company will maintain a $1,000,000
life insurance policy on each executive's life, payable to the
beneficiaries named by him, and maintain disability insurance for the
benefit of each executive which will pay $150,000 per annum to him in the
event of his permanent disability. In the event that there is a change in
control of the Company, the executive will be entitled, upon such change
of control, to terminate his employment and receive 2.9 times his annual
salary a s then in effect.
On April 1, 1996, the Company and Mr. Mota entered into a three -year
employment agreement providing for a base salary of $98,000 in the first
year, $105,000 in the second year and $115,000 in the third year; a bonus
depending upon the earnings generated by the Advanced Technology Group;
grants of five-year options to purchase up to 5,000 shares of Common Stock
in each of the first two years of the term; and a $300 to $400/month car
-21-
allowance. The Company further agreed to use its best efforts to
designate Mr. Mota as a member of the Board of Directors during the
initial term of the agreement.
Simultaneously with the acquisition of Data.Com, on May 6, 1996 , the
Company and Mr. Fries entered into a three-year employment agreement
providing for a base salary of $140,000; a bonus of 6% of earnings of
Data.Com, but in no event more than $60,000 with respect to a fiscal year;
grants of up to a total of 20,000 incentive stock options over the three
years, subject to defined future level of Data.Com's EBTDA; and a $400/month
car allowance. The Company further agreed to use its best efforts to
designate Mr. Fries as a member of the Board of Directors during the
initial term of the agreement.
STOCK OPTION PLANS
The Company has established a 1993 Stock Option Plan (the "1993 Plan")
and a 1996 Stock Option Plan (the "1996 Plan").
Pursuant to the 1993 Plan, as of the date hereof, the Company h as
granted an aggregate of 247,500 stock options. Of these, 202,500 are
currently exercisable, and 27,500 have been exercised to date. 17,500
options have been canceled to date and are available for regrant under the
1993 Plan. An aggregate of 145,000 options have been granted to date
under the 1996 Plan. Of these, 25,000 are exercisable and 120,000 are
unexercisable. No options have been exercised under the 1996 Plan, to
date. Messrs. Pavony and Rothman each hold five -year incentive stock
options to purchase up to 50,000 shares of Common Stock at $ 3.375 per
share, 10,000 shares of the Common Stock at $6.125 per share and a n
additional 50,000 shares of Common Stock at $4.43 per share. Mr. Mota
holds incentive stock options to purchase up to 15,000 shares of Common
Stock at $1.25 per share, 5,000 shares of Common Stock at $3.375 per share
and an additional 5,000 shares of Common Stock at $2.50 per share. Mr.
Wong holds incentive stock options to purchase 5,000 shares of Common
Stock at $3.375 per share and 10,0 00 shares of Common Stock at $5.125 per
share. Messrs Farley and Lerner each hold options to purchase up to 2,500
shares of Common Stock at $7.00 per share and an additional 2,500 shares of
Common Stock at $4.0625 per share.
SUMMARY OF THE PLANS
Both the 1993 Plan and the 1996 Plan (each, a "Plan"), provide for the
grant of options to qualified employees (including officers and director s)
of the Company, and its subsidiaries, independent contractors, consultant s
and certain other individuals to purchase shares of Common Stock. Each
Plan must be administered by the Board of Directors or a committee of at
least two disinterested members of the Board of Directors (the
"Compensation Committee"). The Board or the Compensation Committee has
complete discretion to select the optionee and to establish the terms and
conditions of each option, subject to the provisions of the respective
Plan. The than 100% of the fair market value of the Common Stock as of the
date of grant (110% of the fair market value if the grant is an Incentive
Option to an employee who owns more than 10% of the outstanding Common
Stock). Options may not be exercised more than 10 years after the date of
grant. An option may be exercised by tendering payment of the purchase
price to the Company or, at the discretion of the Board of Directors or
Compensation Committee, by delivery of shares of Common Stock having a
fair market value equal to the exercise price or through a cashless
exercise involving the cancellation of a portion of the shares underlying
the options ("Option Shares") having a fair market value equal to the
exercise price of the Option Shares issued. Options granted under a Plan
are not transferable and may be exercised only by the respective grantees
during their lifetimes or by their heirs, executors or administrators in
the event of death. Option Shares that are canceled or terminated may
later be re-granted. The number of options outstanding and the exercise
price thereof are subject to adjustment in the case of certain
-22-
transactions such as mergers, recapitalizations, stock splits or stock
dividends.
The 1993 Plan provides for the grant of options to purchase up to an
aggregate of 250,000 Option Shares. Options granted under the 1993 Plan
may or may not be "incentive stock options" as defined in Section 422 of
the Code ("ISOs"), and non-qualified stock options ("NQSOs") may be granted
in tandem with Stock Appreciation Rights ("SARs") or Stock Depreciation
Rights, depending upon the terms established by the Board or the
Compensation Committee at the time of grant.
The 1996 Plan provides for the grant of options to purchase up to an
aggregate of 350,000 Option Shares. Options granted under the 1996 Plan
may be ISOs or NQSOs and may be granted in tandem with SARs, depending upon
the terms established by the Board or the Compensation Committee at the
time of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no compensation committee (or Board of Directors) interlock
relationships with respect to the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANA GEMENT
The following table sets forth, as of the date hereof, certain
information concerning those persons known to the Company, based on
information obtained from such persons, with respect to the beneficial
ownership (as such te rm is defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of Common Shares and Preferred Stock by (i) each
person known by the Company to be the owner of more than 5% of the
outstanding Common Shares and Preferred Stock, (ii) each Director, (iii)
each executive officer named in the Summary Compensation Table and (iv)
all Directors and executive officers as a group.
Amount and Nature
of Beneficial Ownership Percent of Class (1 )
Name and Address Common Common
of Beneficial Owner Shares Shares
Steven H. Rothman(2) 1,148,625(3)(4) 24.5%
Howard Pavony(2) 1,147,500(3)(5) 25.4%
Frank T. Wong(2) 14,805(3)(6) *
Robert A. Fries
71 Peria Drive
Rocky Hill, CT 06061 87,000 2.0%
Ramon Mota(2) 18,815(3) *
Joseph J. Farley
78 Sawmill Road
Stamford, CT 06903 5,000(3) *
William Lerner
423 East Beau Street
Washington, PA 15301 5,000(3) *
All Directors and
executive officers
as a group (7 persons) 2,426,745(3)(4)(5)(6) 53.2%
*Represents less than 1%.
-23-
(1) Based on 4,450,374 shares of Common Stock issued and outstanding as of
the date of this Report.
(2) The address of this person is c/o the Company, 614 Corporate Way,
Valley Cottage, New York 10989.
(3) Includes options held by Steven Rothman and Howard Pavony each to
purchase 70,000 shares of Common Stock, options to purchase 13,750 shares
held by Frank Wong, to purchase 18,750 shares held by Ramon Mota and to
purchase 5,000 shares held by each of Messrs. Farley and Lerner which are
currently exercisable. Does not include options held by each of Messrs.
Pavony and Rothman to purchase 40,000 shares, by Mr. Wong to purchase 1,250
Common Shares and by Mr. Mota to purchase 6,250 shares which are not
currently exercisable.
(4) Includes 1,125 shares held by the wife of Mr. Rothman. Also includes
an aggregate of 169,139 shares of Common Stock held in trust for Mr.
Rothman/s three children. Mr. Rothman disclaims beneficial ownership of
all of such shares.
(5) Includes an aggregate of 164,044 shares held in trust for Mr. Pavony's
two children. Mr. Pavony disclaims beneficial ownership of all of such
shares.
(6) Includes 1,000 shares held by the wife of Mr. Wong.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 24, 1996, the Company entered into a Conversion Agreement with
each of Messrs. Pavony and Rothman, pursuant to which, after the receipt
of the consent of the stockholders of the Company in August 1996, such
officers and certain trusts for the benefit of their children exchanged with
the Company 1,400,000 shares of Series A Preferred Stock for 980,000
shares of Common Stock. An independent appraiser had concluded that the
value of the Preferred Stock and Common Stock exchanged was approximately
equivalent.
The Company believes that the terms for the foregoing transaction
are on terms no less favorable than could be obtained from unrelated
third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements.
Independent Auditors/ Report F-1
Consolidated Balance Sheets at March 31, 1997 and 1996 F-2
Consolidated Statements of Income for
the years ended March 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Changes in Shareholders/
Equity for the years ended March 31, 1997, 1996
and 1995 F-4
Consolidated Statements of Cash Flows for the
the years ended March 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
-24-
(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because of the
absence of the conditions under which they are required or because
the required information, where material, is shown in the Consolidated
Financial Statements or the notes thereto.
(3) Exhibits
2.1 Asset Purchase Agreement, dated as of May 1, 1996, by and
among Data.Com, Mr. Fries, the Company and the Company's
wholly-owned subsidiary.(4)
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 Certificate of Amendment filed September 10, 1996. (6)
3.3 By-Laws of the Company.(1)
10.1 Revised 1993 Employee Stock Option Plan.(1)
10.2 Independent Computer Dealer Agreement between the Company and
MicroAge Computer Centers, Inc. dated February 23, 1993.(1)
10.3 Revolving Credit Line Agreement between The Bank of New York
and the Company.(1)
10.4 Modification and Extension Agreement dated November 12,
1992 between the Bank of New York and the Company.(1)
10.5 Remarketer/Integrator Agreement between Dell Marketing L.P.
and Company, as amended.(1)
10.6 Dealer Addendum, as amended, to IBM Agreement for
Authorized Dealers and Industry Remarketers.(1)
10.7 Master Purchase Agreement between Paine Webber Incorporated
and the Company.(1)
10.8 Agreement for Wholesale Financing between Deutsche Financial
Service (f/k/a/ ITT Commercial Finance Corp.) and t he
Company.(1)
10.9 September 13, 1993 amendment to Paine Webber Incorporated
agreement.(1)
10.10 Extension Agreement between the Bank of New York and
the Company dated March 3, 1994.(2)
10.11 Amendment to Revolving Loan Agreement between the
Company and the Bank of New York, dated March 28, 1995.(3)
10.12 Pledge and Escrow Agreement dated as of May 6, 1996
among the Company, Data.Com and Mr. Fries.(4)
10.13 Employment Agreement dated as of May 6, 1996 between
the Company and Mr. Fries.(4)
10.14 Employment Agreement dated April 1, 1996 between the
Company and Mr. Mota.
-25-
10.15 Form of Employment Agreement between the Company and
Steven H. Rothman, dated September 1, 1996.
10.16 Form of Employment Agreement between the Company and
Howard Pavony, dated September 1, 1996.
11.1 Statement Re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.(5)
27.1 Financial Data Schedule.
1. Incorporated by reference from the Company's Registration Statement
on Form SB-2 for October 26, 1993 (No. 33-62932-NY).
2. Incorporated by reference from the Company's Annual Report on
Form 10- KSB for the fiscal year ended March 31, 1994.
3. Incorporated by reference from the Company's Current Report o n Form
8-K dated March 28, 1995.
4. Incorporated by reference from the Company's Current Report o n Form
8-K dated May 6, 1996.
5. Incorporated by reference from the Company's Annual Report on Form 10-
K for the fiscal year ended March 31, 1996.
6. Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
last quarter of Fiscal 1997.
-26-
Report of Independent Auditors
Board of Directors and Shareholders
Micros-To-Mainframes, Inc.
We have audited the accompanying consolidated balance sheets of Micros-
To-Mainframes, Inc. as of March 31, 1997 and 1996 and the related
consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Micros-To-Mainframes, Inc. at March 31, 1997 and
1996 and the consolidated results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
May 15, 1997
F-1
Micros-To-Mainframes, Inc.
Consolidated Balance Sheets
March 31,
1997 1996
------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,879,578 $ 5,284,587
Accounts receivable - trade, less
allowance of $41,000 13,707,458 8,844,204
Inventory 1,458,467 1,331,000
Prepaid expenses and other current assets 410,817 412,460
Deferred income taxes 15,000 20,000
-------------------------
Total current assets 18,471,320 15,892,251
Property and equipment:
Leasehold improvements 97,426 24,363
Furniture, fixtures and other equipment 1,510,044 641,385
Transportation equipment 45,796 39,275
-------------------------
1,653,266 705,023
Less accumulated depreciation and amortization 626,940 457,884
-------------------------
1,026,326 247,139
Goodwill, net of accumulated amortization of $54,450 836,550 -
Other assets 94,294 69,162
-------------------------
Total assets $20,428,490 $16,208,552
=========================
Liabilities and shareholders' equity
Current liabilities:
Secured notes payable $ 5,000 $ 5,000
Accounts payable and accrued expenses 7,905,693 5,083,969
Income taxes payable 174,553 119,140
-------------------------
Total current liabilities 8,085,246 5,208,109
Shareholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized and none issued at March 31, 1997;
1,400,000 shares authorized and issued at
March 31, 1996; liquidation preference,
$140,000 at March 31, 1996 - 1,400
Common stock, $.001 par value; 10,000,000 shares
authorized; 4,450,374 and 3,363,374 shares issued
and outstanding at March 31, 1997 and 1996 4,450 3,363
Additional paid-in capital 12,807,900 12,374,774
Retained deficit (469,106) (1,379,094)
-------------------------
Total shareholders' equity 12,343,244 11,000,443
-------------------------
Total liabilities and shareholders' equity $20,428,490 $16,208,552
==========================
See accompanying notes.
F-2
Micros-To-Mainframes, Inc.
Consolidated Statements of Income
Year ended March 31,
1997 1996 1995
--------------------------------------
Net revenues:
Products $51,646,003 $42,789,681 $40,752,849
Services 6,416,470 4,536,656 2,290,422
--------------------------------------
58,062,473 47,326,337 43,043,271
Costs and expenses:
Cost of products sold 47,548,895 40,452,206 37,530,399
Technical personnel salaries 2,419,527 1,108,941 777,619
Selling, general and
administrative
expenses 6,698,265 4,070,111 3,276,358
Compensatory stock arrangement - 4,655,000 -
Interest expense 6,136 13,325 39,570
------------------------------------
56,672,823 50,299,583 41,623,946
Other income 140,788 66,179 94,275
------------------------------------
Income (loss) from operations 1,530,438 (2,907,067) 1,513,600
before income taxes
Provision for income taxes 620,450 707,000 635,200
------------------------------------
Net income (loss) $ 909,988 $(3,614,067) $ 878,400
====================================
Net income (loss) per common share:
Primary $ .21 $ (1.10) $ .40
=====================================
Fully-diluted $ (.22)
=====================================
Weighted average number of common
and common equivalent shares used in
calculation:
Primary 4,436,059 3,251,042 2,193,991
====================================
Fully-diluted 3,182,508
====================================
See accompanying notes.
F-3
Micros-To-Mainframes, Inc.
Consolidated Statements of Changes in
Shareholders' Equity
Preferred Stock Common Stock
---------------- -------------- Retained
Number of Number of Additional Earnings/
Shares Amount Shares Amount Paid-In Capital (Deficit) Total
--------------------------------------------------------------------------------------
Balance at March 31, 1994 1,400,000 $ 1,400 2,175,810 $2,176 $ 2,624,687 $ 1,356,573 $ 3,984,836
Issuance of common
stock as compensation 1,600 2 2,798 2,800
Net income 878,400 878,400
--------------------------------------------------------------------------------------
Balance at March 31, 1995 1,400,000 1,400 2,177,410 2,178 2,627,485 2,234,973 4,866,036
Issuance of common stock:
Employee options exercised 7,500 7 14,680 14,687
Underwriter Representative
Warrants exercised 100,000 100 438,650 438,750
Warrants exercised and redeemed
less offering expenses of
$78,076 1,078,464 1,078 4,638,959 4,640,037
Compensatory stock 4,655,000 4,655,000
Net loss (3,614,067)
------------------------------------------------------------------------------------
Balance at March 31, 1996 1,400,000 1,400 3,363,374 3,363 12,374,774 (1,379,094) 11,000,443
1996
Conversion of preferred stock (1,400,000)(1,400) 980,000 980 420 -
Issuance of common stock:
Employee options execised 20,000 20 24,980 25,000
Acquisition of subsidary 87,000 87 407,726 407,813
Net income 909,988 909,988
-------------------------------------------------------------------------------------
Balance at March 31, 1997 - $ - 4,450,374 $4,450 $12,807,900 $ (469,106) $12,343,244
=====================================================================================
See accompanying notes.
F-4
Micros-To-Mainframes, Inc.
Consolidated Statements of Cash Flows
Year ended March 31,
1997 1996 1995
------------------------------------------
Operating activities
Net income (loss) $ 909,988 $(3,614,067) $ 878,400
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Gain on sale of franchise rights - - (94,275)
Depreciation and amortization 223,506 90,269 96,290
Compensatory stock arrangement - 4,655,000 -
Other non-cash charges (credits) 5,000 (14,000) 10,800
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (3,418,345) (2,121,743) (1,864,712)
Inventory (96,068) (278,951) 71,164
Prepaid expenses and other current assets 22,609 (158,679) (68,339)
Other assets (25,132) (38,883) (15,829)
Accounts payable and accrued expenses 1,886,072 801,777 1,442,544
Income taxes payable 55,413 (147,314) 110,731
------------------------------------------
Net cash provided by (used in) operating
activities (436,957) (826,591) 566,774
Investing activities
Sale of franchise rights, net of expenses - - 103,059
Purchase of property and equipment (682,034) (149,304) (93,465)
Purchase of subsidiary, net of cash acquired (1,311,018) - -
-----------------------------------------
Net cash provided by (used in)
Investing activities (1,993,052) (149,304) 9,594
Net proceeds from issuance of common stock 25,000 5,093,474 -
Payments on secured notes payable - - (1,500,692)
----------------------------------------
Net cash provided by (used in)
financing activities 25,000 5,093,474 (1,500,692)
----------------------------------------
Increase (decrease) in cash (2,405,009) 4,117,579 (924,324)
Cash and cash equivalents at beginning of year 5,284,587 1,167,008 2,091,332
---------------------------------------
Cash and cash equivalents at end of year $2,879,578 $5,284,587 $1,167,008
=======================================
See accompanying notes.
F-5
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
The accompanying consolidated financial statements include the
accounts of Micros-To-Mainframes, Inc. and its wholly-owned
subsidiaries, Data.Com RESULTS, Inc., "Data.Com" (see Note 7) and MTM
Advanced Technology, Inc. (see Note 6), hereafter, collectively
referred to as the "Company". Significant intercompany accounts and
transactions have been eliminated. The Company is an authorized direct
dealer and value-added computer reseller providing hardware, software,
consulting and integration services to customers primarily located in
the tri-state New York metropolitan area.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of
deposit, commercial paper and money market funds holding similar
investments. The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash
equivalents. Such investments are stated at cost which approximates
fair value, and are considered cash equivalents for purposes of
reporting cash flows.
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 are stated at cost and are depreciated using
the straight-line method over the following useful lives:
Furniture, fixtures and other equipment 3-7
Transportation equipment 5
Leasehold improvements are depreciated 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 $169,000, $90,000 and $90,000 in
depreciation expense for the years ended March 31, 1997, 1996 and
1995, respectively.
Goodwill
Goodwill of $891,000 relates to the purchase of Data.Com in May 1996
(see Note 7). The goodwill is being amortized using the straight-line
method over 15 years.
F-5
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred income taxes are provided, using the liability method, for
temporary differences between financial and tax reporting, which arise
principally from the deductions related to the allowances for doubtful
accounts, basis of inventory and differences arising from book versus
tax depreciation methods.
Revenue Recognition
The Company recognizes revenue upon the shipment of ordered
merchandise and as technical services are rendered.
Fair Value of Financial Instruments
The estimated fair value of amounts reported in the consolidated
financial statements have been determined by using available market
information and appropriate valuation methodologies. All current
assets and current liabilities are carried at their cost, which
approximates fair value, because of their short term nature.
Stock Based Compensation
The Company has granted stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company has accounted for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and intends to
continue to do so.
Earnings (Loss) Per Share
Primary and fully diluted earnings (loss) per common share have been
computed based upon the weighted average number of common and common
equivalent shares outstanding. Common equivalent shares result from
the assumed exercise of outstanding stock options, warrants, and
Representative's warrants that have a dilutive effect when applying
the treasury stock method.
Primary earnings per share assumes, in addition to the above, that the
Company's 1.4 million convertible preferred shares were converted to
980,000 common shares as of the beginning of the fourth quarter of
Fiscal 1996 (see Note 3).
Fully diluted earnings per share assumes, in addition to the above,
(i) that the Company's convertible preferred shares were converted to
common shares for all periods, (ii) that earnings were adjusted to
reflect the necessary earnings requirements for convertibility of the
preferred shares, and (iii) that the charge to income for the
compensatory element of the convertible preferred stock was recognized
for each period in the two year period ended March 31, 1996 based on
the current market price at the end of each period.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which is effective for both
interim and annual financial statements for periods ending after
December 15, 1997. Earlier application is not permitted. The statement
which will be adopted by the Company in the third quarter of the year
ending March 31, 1998 and will simplify the calculation of earnings
per share. The adoption of Statement 128 will have a minimal effect on
the Company's results of operations.
F-7
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents and trade accounts receivable. The Company places
its cash with high credit quality institutions. At times, such amounts
may be in excess of the FDIC insurance limits.
The Company's customers are primarily mid to large size corporations
in diversified industries located in the New York tri-state area.
Receivables from two major customers at March 31, 1997 approximated
18% and 13%, respectively, of the Company's trade receivables.
Receivables from two major customers at March 31, 1996 approximated
22% and 10%, respectively, of the Company's trade receivables. Two
customers each accounted for approximately 13% of the Company's
revenue for fiscal 1997, 18% and 16%, respectively, of the Company's
revenue for fiscal 1996 and 29% and 11%, respectively, of the
Company's revenue for fiscal 1995. The loss of either principal
customer would be expected to have a material adverse effect on the
Company's operations during the short term until the Company is able
to generate replacement business, although there can be no assurance
of obtaining such business.
2. Credit Facilities
The Company has entered into several financing agreements for the
purchase of inventory. Lines of credit under these agreements
aggregate approximately $8,300,000 (approximately $3,145,000 unused)
at March 31, 1997 and $6,300,000 (approximately $3,764,000 unused) at
March 31, 1996, respectively, and generally provide for thirty day
repayment terms. These agreements are secured by the related inventory
and/or accounts receivable and liens against all assets of the
Company. In addition, one of these agreements provides for minimum
amounts of tangible net worth and specified financial ratios. All such
borrowings are subordinated to the bank financing, except as to
inventory and equipment, pursuant to an intercreditor agreement (see
below).
A revolving credit facility renewed in August 1994, amended in March
1995 and expiring June 29, 1997 allows the Company to borrow up to
$5,000,000 with an interest rate of either (1) the bank's Alternate
Base Rate (ABR); or (2) the Eurodollar rate plus 2%, depending on
certain factors as stipulated in the agreement. At March 31, 1997 and
1996, the Company had $5,000 outstanding under this facility with
interest payable at the bank's ABR of 8.50%, and 8.25%, respectively.
The revolving credit facility provides, among other matters for: (i) a
general security interest first lien on all of the Company's assets (a
second lien to the extent a first lien on inventory and/or accounts
receivable is held under the financing agreements described above);
(ii) unconditional guarantees of MTM Advanced Technology, Inc. and
(iii) requirements, including limitations on additional borrowings,
minimum levels of shareholders' equity, restrictions on certain
transactions, including the payment of dividends, and specified
financial ratios.
Interest paid during fiscal 1997, 1996 and 1995 aggregated
approximately $6,000, $1,000 and $40,000, respectively.
F-8
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
3. Shareholders' Equity
In connection with the Company's initial public offering of common
stock, the Company issued 1,000,000 Warrants entitling the holders to
purchase common shares, and 100,000 Representative's Warrants
entitling the holders to purchase units (consisting of one common
share and one warrant). The 1,000,000 Warrants entitled the holders to
purchase shares of common stock at an exercise price of $4.375 per
share from October 26, 1993 through October 26, 1997. The 100,000
Representative's Warrants entitled the holders to purchase units at an
exercise price of $4.3875 per unit, from October 26, 1994 through
October 26, 1998. During fiscal 1996, substantially all of the
Company's Warrants and all of the Representative's Warrants were
exercised resulting in the issuance of 1,178,464 shares of common
stock.
Preferred Shares
The 1,400,000 convertible preferred shares were convertible into
common stock (1 to 1) at the option of the holders, solely if the
Company's net sales in any four consecutive fiscal quarters aggregates
$50 million or more and its net income amounts to $1,500,000 or more,
or such proportionately higher amount of net income (3% of net sales)
on net sales in excess of $50 million.
In the fourth quarter of fiscal 1996, the thresholds for
convertibility were considered probable. In conjunction with this
determination, the Company and the holders of the preferred shares
committed to accelerate the convertibility and fix the amount of
compensation expense to be charged to earnings. The Board of Directors
and the preferred shareholders agreed subject to the receipt of
necessary stockholders' consent and an independent appraisal as to the
equivalent value of the preferred stock and the common stock, to the
conversion of the preferred shares into common shares. The appraisal
concluded that the 1,400,000 preferred shares were equivalent to
980,000 common shares. The conversion was consummated upon stockholder
approval at the August 20, 1996 meeting of Company stockholders. Based
on the market value of the Company's common stock at March 31, 1996,
the Company recognized a non-recurring, non-cash charge of $4,655,000.
In addition, at the Annual Meeting of Shareholders on August 20, 1996,
the Company amended its Certificate of Incorporation, eliminating the
old Series A Preferred Stock and authorizing a new class of 2,000,000
shares of "blank check" preferred stock, par value $.001 per share. As
of March 31, 1997, no preferred shares are issued and outstanding.
Employee Stock Option Plan
The 1993 Employee Stock Option Plan (the 1993 Plan) was adopted by the
Company in May 1993 and the 1996 Stock Option Plan (the 1996 Plan) was
approved by the shareholders of the Company on August 20, 1996. The
Plans provide for granting of options, including incentive stock
options, non-qualified stock options and stock appreciation rights to
qualified employees (including officers and directors) of the Company,
independent contractors, consultants and other individuals, to
purchase up to an aggregate of 250,000 and 350,000 shares of common
stock in the 1993 Plan and 1996 Plan, respectively. The exercise price
of options generally, may not be less than 100% of the fair market
value of the Company's common stock at the date of grant. Options may
not be exercised more than ten years after the date of grant. Options
granted under the Plans become exercisable in accordance with
different vesting schedules depending on the duration of the options.
F-9
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
3. Shareholders' Equity (continued)
Information regarding the Company's stock option plans is summarized
below:
1993 Plan 1996 Plan
----------------------------------------------------
Number Option Number Option
of Exercise of Exercise
Options Price Per Options Price Per
Share Share
---------------------------------------------------
Outstanding at March 31, 1994 200,000 $1.25 -3.375
Terminated and canceled (5,000) $3.375
---------
Outstanding at March 31, 1995 195,000 $1.25 -$3.375
Terminated and canceled (2,500) $3.375
Options issued during the year 40,000 $5.125 -$7.00
Options exercised during the year (7,500) $1.25 -$3.375
--------
Outstanding at March 31, 1996 225,000 $1.25 -$7.00
Options during the year 15,000 $3.94 -$4.06 145,000 $2.50 -$4.43
Options exercised during the year (20,000) $1.25 -
--------- -------
Outstanding at March 31, 1997 220,000 $1.25 -$7.00 145,000 $2.50 -$4.43
The weighted-average exercise price of the total options outstanding
at March 31, 1997 is $3.63 and the weight-average contractual life is
8.2 years.
The weighted-average fair value of options granted during fiscal 1997
and 1996 is $3.41 and $4.91, respectively.
There were 202,500 and 175,000 options exercisable at March 31, 1997
and 1996, under the 1993 Plan and 25,000 options exercisable at March
31, 1997 under the 1996 Plan.
The Company has elected to follow APB 25 and related interpretations
in accounting for its employee stock options because, as discussed
below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 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 fiscal 1997 and 1996,
respectively: risk-free interest rates of 6.5% and 6.0%; no dividend
yield; a volatility factor of the expected market price of the
Company's Common Stock of 0.78 and 0.91 and an expected life of 8.5
and 8.1 years.
F-10
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
3. Shareholders' Equity (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information are as follows:
Year ended March 31,
1997 1996
----------------------
Pro forma net income (loss) $883,825 $(3,702,449)
======================
Pro forma earnings (loss) per share - primary $ .20 $(1.14)
======================
In accordance with the provisions of Statement 123, the pro forma
disclosures include only the effect of stock options granted in fiscal
years beginning after December 15, 1994. The application of the pro
forma disclosures presented above are not representative of the
effects of Statement 123 may have on net earnings and earnings per
share in future years due to the timing of stock option grants and
considering that options vest over several years.
4. Income Taxes
The liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
The provision for income taxes consists of the following:
Year ended March 31,
1997 1996 1995
---------------------------
Federal:
Current $463,450 $568,300 $476,800
Deferred 5,000 (14,000) 8,000
---------------------------
468,450 554,300 484,800
State:
Current 152,000 152,700 150,400
---------------------------
$620,450 $707,000 $635,200
===========================
F-11
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
The reconciliations of income tax computed at the federal statutory
tax rates to actual income tax expense are as follows:
Year ended March 31,
1997 1996 1995
-----------------------------
Tax expense (benefit) at statutory rates
applied to pretax earnings $520,000 $(988,000) $515,000
Compensatory stock arrangement
without tax benefit - 1,583,000 -
State income taxes, net of federal
benefit 100,000 101,000 99,000
Other 450 11,000 21,200
---------------------------------
$620,450 $707,00 $635,20
=================================
As of March 31, 1997, gross deferred tax assets totaled $47,000 and
gross deferred tax liabilities totaled $32,000.
Income taxes paid during fiscal 1997, 1996 and 1995 aggregated
approximately $560,000, $871,000 and $521,000, respectively.
5. Commitments and Contingencies
Leases
The Company leases three locations for its administrative and
operational functions under operating leases through July 1999. In
addition, the Company leases five cars for the use of certain
employees, including its officers, as well as office equipment.
Future minimum annual lease payments under operating leases are as
follows:
Twelve months ending:
March 31, 1998 $432,000
March 31, 1999 120,000
March 31, 2000 29,000
---------
$581,000
=========
Rental expense for operating leases approximated $460,000, $210,000
and $130,000, respectively, for fiscal 1997, 1996 and 1995.
Employee Savings Plan
In the current year, the Company established an employee savings plan.
This plan is currently being reviewed by the Internal Revenue Service
for qualification under Section 401(k) of the Internal Revenue Code.
Under the plan, all eligible and participating employees may defer up
to 15% of their pre-tax compensation, but not more than $9,500 per
calendar year. The Company matches 10% of six percent of the employees
contribution. The Company contributed approximately $12,000 to the
plan in fiscal 1997.
F-12
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
6. Sale of Franchise Rights
In March 1995, the Company sold the franchise rights of Richard Young
Products North, Inc. back to its franchisor for $108,000, resulting in
a gain, net of expenses, of $94,275 which is presented as other
income. The after-tax effect on net income per common share for 1995
was approximately $.025. In conjunction with this transaction, Richard
Young Products North, Inc. changed its name to MTM Advanced
Technologies, Inc.
7. Acquisition of Data.Com RESULTS, Inc.
On May 6, 1996, a subsidiary of the Company, acquired substantially
all of the assets of Data.Com, in exchange for issuance of 87,000
shares of common stock of the company (valued at approximately
$407,000), and the assumption of certain of Data.Com's payables
(primarily trade). Data.Com is a data communication, wide area network
(WAN) and local area network (LAN) consultant and advanced technology
solutions provider primarily serving clients located in Connecticut.
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to
the assets acquired and the liabilities assumed based upon the fair
values at the date of acquisition. The excess of the purchase price
over the fair values of the net assets acquired was approximately
$891,000 and has been recorded as goodwill, which is being amortized
on a straight-line basis over 15 years.
In addition to the above consideration, contingent consideration is
payable in the Company's common stock based upon defined future levels
of Data.Com's earnings before taxes, depreciation, and amortization
("EBDTA") through Fiscal 1999. The maximum number of shares to be
issued are 25,000, 25,000, and 35,000 in Fiscal 1997, 1998, and 1999,
respectively. The contingent consideration is not included in the
calculation of the acquisition cost. No shares were issued in Fiscal
1997. Compensation expense will be recognized during the target
period; when such targets are considered achievable, based on the
market value of the Company's common stock.
In addition to the above contingent consideration, the president of
Data.Com will be issued 5,000 and 10,000 stock options in Fiscal 1998
and 1999, respectively, if Data.Com's EBTDA is greater than $1.25
million and $1.35 million for 1998 and 1999, respectively. The option
price for any option so granted shall be 110% of the fair market value
of the Company's common stock as at the first day of the taxable year
in which the respective options, if any, are granted. The options
shall not vest until the first day of the taxable year following the
year of grant, at which time all such options shall vest. Compensation
expense will be recognized during the target period; when such targets
are considered achievable, based on the market value of the Company's
common stock.
The following summarized pro forma results of operations for the years
ended March 31, 1997 and 1996 and have been prepared assuming the
acquisition occurred at the beginning of the respective periods.
1997 1996
--------------------------
Net Sales $58,907,524 $52,518,181
Net Income (loss) 957,704 (3,775,433)
Earnings (loss) per share-primary .22 (1.13)
F-13
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
8. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for
the years ended March 31, 1997, 1996 and 1995.
June 30 September 30 December 31 March 31
------------------------------------------------
(In Thousands, except per-share data)
Fiscal 1997
Net revenues $13,311 $13,450 $13,679 $17,622
Cost of products sold 10,999 11,245 11,024 14,289d
Technical personnel salaries 427 539 655 798
Net income (loss) 256 79 171 404
Net income (loss) per
common share:
Primary .06 .02 .04 .09
Fiscal 1996
Net revenues $10,934 $11,187 $13,414 $11,791
Cost of products sold 9,274 9,694 11,552 9,869
Technical personnel salaries 239 281 281 371
Net income (loss) 247 155 337 (4,353)
Net income (loss) per
common share:
Primary .11 .06 .12 (.99)
Fully-diluted (.86) (1.39) (.90)
Fiscal 1995
Net revenues $ 8,590 $ 9,596 $13,630 $11,227
Cost of products sold 7,462 8,354 12,270 9,444
Technical personnel salaries 170 195 207 206
Other income-sale of
franchise rights 94
Net income 109 122 177 470
Net income (loss) per
common share:
Primary .05 .06 .08 .21
Fully-diluted (.22) (.05) (.64)
The results for the fourth quarter 1996, include a charge of
$4,655,000 relating to the conversion of the Company's preferred
shares (see Note 3). Earnings per common share calculations for each
of the quarters were based on the weighted average number of shares
outstanding for each period, and the sum of the quarters may not
necessarily be equal to the full year earnings per common share
amount.
F-14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report t o be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: June 6, 1997
MICROS-TO-MAINFRAMES, INC.
By: /s/ Steven H. Rothman
Steven H. Rothman
CEO and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Howard Pavony Chairman of the Board June 6, 1997
- ---------------------
Howard Pavony
/s/ Steven H. Rothman President, June 6, 1997
- --------------------- Principal Executive
Steven H. Rothman Officer and Director
/s/ Frank T. Wong Vice President-Finance June 6, 1997
- ---------------------- (Principal Financial and
Frank T. Wong Accounting Officer),
Secretary and Director
/s/ Robert A. Fries Vice President June 6, 1997
- --------------------- and Director
Robert A. Fries
/s/ Ramon Mota Vice President-Technology June 6, 1997
- -------------------- and Director
Ramon Mota
Director June 6, 1997
- --------------------
Joseph J. Farley
/s/ William Lerner Director June 6, 1997
- --------------------
William Lerner
EXHIBIT INDEX
Exhibit No. Description
10.14 Employment Agreement dated April 1, 1996 between the Company
and Mr. Mota.
10.15 Form of Employment Agreement between the Company and Steven H.
Rothman, dated September 1, 1996.
10.16 Form of Employment Agreement between the Company and Howard
Pavony, dated September 1, 1996.
11.1 Statement Re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.