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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x Annual report under Section 13 of 15(d) of the Securities
Exchange Act of 1934
__ For the fiscal year ended March 31, 1998
Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number: 0-22122
MICROS-TO-MAINFRAMES, INC.
(Exact name of Registrant as specified in Its charter)
New York 13-3354896
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification 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 June 15, 1998, was $5,555,011
(assuming solely for purposes of this calculation that all
directors and officers of the Registrant are "affiliates").
The number of shares outstanding of the Registrant's Common
Stock, par value $.001 per share, as of June 15, 1998, 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 22% of the Company's
current revenues, including a small amount of revenues derived
from maintenance and repair services.
On May 18, 1998, the Company acquired 19.9% of Pivot
Technologies, Inc. ("Pivot"), a remote network servicer, and an
option (the "Option") to cause the merger of Pivot into a to be
created wholly-owned subsidiary of the Company. No assurance can
be given that the Company will exercise the Option. In
connection with such acquisition, Pivot and the Company agreed
that Pivot would be its exclusive provider of remote network
services to such clients of the Company who desire such services.
Such agreement is generally for the term of the Option, unless
extended by the Company in its sole discretion, from time to
time, for a period not in excess of the earlier of ten (10) years
and the date the Company no longer has an equity interest in
Pivot (generally such time as, if ever, Pivot calls the Pivot
stock owned by the Company or the Company puts same to Pivot).
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 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 minicomputers, and the
microcomputer's versatility and ability to connect to and share
information with mainframe systems. The Company believes, based
on its knowledge of the industry and industry data, that the
microcomputer industry experienced a compound annual growth rate
of almost 50% from 1984 to 1988 and a more modest annual rate of
growth ranging from 10% to 17% since 1988. The Company believes
that the industry will continue to grow at 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
benefited from microcomputer users becoming more computer
literate, the emergence of industry standards and increased
inter-changeability of peripherals. As a result of the
foregoing, the microcomputer dealer distribution channel is
currently undergoing additional market segmentation into dealers
such as the Company, which are systems integrators which offer a
one-stop total solution for outsourcing.
PRODUCTS
The Company markets microcomputers, printers, displays,
video conferencing products, LAN and WAN products, plotters,
software and other peripheral products. MTM is an authorized
sales and service dealership of microcomputer equipment and
related products supplied primarily by major manufacturers,
including, but not limited to, Compaq Computer Corporation, IBM
Corporation, Dell Computer Corporation, Hewlett-Packard Company,
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
products 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, IBM and others.
MTM purchases certain products from distributors selling to
other dealers, at prices generally lower than the Company could
obtain directly from suppliers. The Company also obtains
products from a number of suppliers, including independent
distributors, on an individual purchase order basis rather than
through dealership agreements. MTM will also order specific
products from other manufacturers to satisfy a particular
customer requirement. The Company regularly evaluates new
products, both internally and through evaluations with its
customers. See "Business - Suppliers."
The microcomputer industry is characterized by numerous
hardware systems that utilize different and often incompatible
standards for hardware and software. The Company has the
capability to design systems and support services which include
products or components manufactured by numerous manufacturers
that address most applicable industry standards.
The Company is an authorized dealership for the various
standardized LAN systems, including 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 and Communication
Laboratory described below where they can test, design and create
LANs and WANs.
OUTSOURCED SUPPORT SERVICES
MTM support services include a wide range of services designed
for its customers' corporate planners and management needing a
single source for technical support issues, such as local and
wide area networks, gateways, bridges, system conversion
planning, hardware and software specifications, database and
database server development and implementation, videoconferencing
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 includes 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 and data
communications problem solving for clients.
NETWORK AND MAINFRAME CONNECTIVITY CONSULTING
MTM and its staff of networking consultants offer experience
at all levels of computers to provide management information
services (MIS) departments with consulting services ranging from
connectivity to enhancements, feasibility and implementation.
These services address critical issues such as performance,
reliability and compatibility with proven strategies and
products. MTM offers research and planning insight at all levels
of information flow from mainframes to minis to micros and within
each system. These consulting services provide clients with
access to a variety of options in designing and maintaining
systems.
CONNECTIVITY AND COMMUNICATION LABORATORY
The Company's Advanced Technology Group seeks to serve
customers' increasing communications requirements, including
their need to share data and resources using LANs and WANs. The
Company offers an array of connectivity services, including LAN
and WAN system design and configuration, videoconferencing
consulting, user training and installation. In addition, the
Company has established a Connectivity and Communication
Laboratory in its executive offices. This state-of-the-art
facility provides a multi-vendor environment to test connectivity
networks, create multi-vendor LANs and WANs and solution
prototypes, perform feasibility studies, perform pre-release and
new connectivity product testing, perform product compatibility
testing, product bulletproofing, procedures development, product
evaluation and optimization, replication, diagnosis and solution
of service problems and to generally provide a basis to address
support issues.
The Company's lab features several different LAN and WAN
operating systems from such manufacturers as Novell, IBM, SCO,
Microsoft Lan Manager and 3COM and includes the entire spectrum
of computer sizes.
NETWORK MANAGEMENT AND FINE-TUNING
The Company's Advanced Technology Group provides services
designed to resolve complex network and data communications
management issues for clients with existing multiple networks
and/or sites currently utilizing communication servers, gateways
to host computers and bridges linking multiple servers (a primary
storage device, normally a PC in a network). These services
include network security planning and implementation, data
integrity and redundancy, network fine-tuning and auditing,
performance testing, evaluation and optimization, corporate
electronic mail and site management.
1-800-PRODUCT SUPPORT
The Company's experienced support engineers provide product
support to resolve specific operating system and application
problems. The Company's toll-free 800 telephone support line can
be used for such problems as application software, installation
assistance, error message handling or shared device problems.
The applications supported include 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 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, Novellr 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 network
diagnosis, as well as technical information from IBM, Compaq,
Cisco, Microsoft, NEC, 3COM, and Fore Systems, Inc. These
databases provide the Company with technological advances from
major vendors as soon as the information is published. These, in
turn, allow the Company its flexibility to shift rapidly to
vendors whose products are expected to increase in demand as a
result of technological advances.
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 support
services, such as those provided by the Company. The Company
believes that these customers are increasingly relying on their
dealers and suppliers to provide, in addition to competitive
pricing, a one-stop solution-based approach to their data
processing requirements. The Company uses such an approach which
addresses purchasing, compatibility, maintenance, support,
training and obsolescence.
The Company has approximately 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, 1998, 1997 and 1996 ("Fiscal 1998",
"Fiscal 1997" and "Fiscal 1996"), approximately 13%, 13% and 16%,
respectively, of the Company's total revenues were derived from
sales to PaineWebber, Incorporated ("PaineWebber"). Even though
the Company's agreement with PaineWebber terminated in February
28, 1998, the Company is negotiating an extension thereof. The
Company is continuing to do business with PaineWebber on
generally the same terms as the expired agreement. While the
Company believes it will be successful in extending the
PaineWebber Agreement, no assurance thereof can be given. In any
event, sales to PaineWebber are negotiated on a case by case
basis. During Fiscal 1997, Bloomberg, L.P. ("Bloomberg")
accounted for approximately 16% of the Company's revenues even
though for Fiscal 1998 such percentage was less than 3%.
Although the Company's customer base has increased, the loss of
PaineWebber 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. During
Fiscal 1998, the Company contracted with BTG, Inc. ("BTG"), in
connection with the termination of the agreement and plan of
merger between the Company and BTG, to provide certain
"transition services" to BTG. It is not anticipated that any
relationship between the Company and BTG will continue after the
termination of the aforementioned service agreement.
As of June 15, 1998, the Company employed 30 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 and sales
personnel, of which there can be no assurance.
MTM also makes joint sales presentations with certain of the
Company's major suppliers to existing and prospective customers.
Certain of these suppliers' customer fulfillment option programs
allow customers who purchase directly from the supplier to apply
purchases from MTM to their purchase obligations under those
agreements. As a result, these customers have the flexibility of
purchasing products from the Company to take advantage of MTM's
added services and its ability to integrate multiple
manufacturers' products. Most major manufacturers have
instituted either a moratorium or a selective authorization
procedure on the approval of additional authorized dealership
locations. While in effect, such policies may preclude the
Company and 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 23%, 20% and 24%, respectively, of the Company's
revenues during Fiscal 1998, Fiscal 1997 and Fiscal 1996. All or
substantially all of such product purchase were directly through
Dell. Sales of Compaq products accounted for approximately 16%,
26% and 13%, respectively, of the Company's revenues during
Fiscal 1998, Fiscal 1997 and Fiscal 1996. Such sales were
substantially, if not all, through distributors. Sales of IBM
products accounted for approximately 26% and 13% 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 1998, Fiscal 1997, or Fiscal 1996. The Company's
sales of products purchased through MicroAge Computer Centers,
Inc. ("MicroAge") accounted for approximately 20% of the
Company's total revenues in Fiscal 1996 and sales of products
purchased through Intelligent Electronics, Inc. ("IE") accounted
for approximately 44% and 10% of total revenues in Fiscal 1997
and Fiscal 1996, respectively. The Company has no current
agreement with either MicroAge or IE and no longer conducts any
business with either MicroAge or IE. The Company's sales of
products purchased through Tech Data Corporation and Ingram Micro
Inc. during Fiscal 1998 accounted for approximately 27% and 17%,
respectively. Other than if Dell were to terminate its
arrangement with the Company and Compaq notifying distributors
that the Company was not an authorized agent thereof, management
does not believe that a termination of any one supplier's
agreement or distributor'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
provide protection for up to two months against declines in the
wholesale price of microcomputers and related products in the
Company's inventory. These arrangements typically take the form
of a cash payment or a credit against future purchases in an
amount equal to the difference between the price actually paid by
the Company for its inventory of that supplier's products and the
new dealer price.
The Company's suppliers permit the Company to pass through
to its customers all warranties and return policies applicable to
the suppliers' products. To date, the Company has experienced
little return of product and has been reimbursed by the suppliers
for most warranty work done for its customers. All service work
after the expiration of the warranty period is at the customer's
expense. The Company offers service contracts of varying lengths
under which the Company agrees to be responsible for all service
costs for a fixed term in exchange for a set fee paid by the
customer.
Software and other related products are purchased from
numerous industry suppliers. As is customary, the Company does
not have any long-term agreements or commitments with these
suppliers, because competitive sources of supply are generally
available for such products.
In response to discounted pricing by certain microcomputer
manufacturers, all major CPU hardware suppliers have instituted
aggressive price reductions. The heightened price competition
among hardware suppliers has resulted in declining gross margins
for many microcomputer resellers. Although discounted prices
have enabled the Company to increase its sales volume 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."
TECH DATA CORPORATION AND INGRAM MICRO INC.
The Company entered into a Program Agreement with Ingram
Micro Inc. as of December 5, 1997. Such agreement incorporated
therein interim agreements between the parties. Either party may
terminate such agreement without cause upon thirty (30) days
prior notice. Pursuant to the agreement, Ingram provides a
supplemental program to provide the Company (and other similarly
situated companies contracting with Ingram) with services
designed to assist the reseller in marketing and distributing its
product. The Company agreed under such agreement to name Ingram
as its primary supplier and to purchase from Ingram at least 65%
of its total product purchased from wholesale distributors. No
assurance can be given that such agreement will not be
prematurely terminated by Ingram.
The Company's agreement with Tech Data Corporation was for a
one year term commencing January 15, 1997, subject to an
automatic three month renewal. Such agreement was terminable
upon 30 day prior notice. Even though the term has expired, the
Company continues to conduct business with Tech Data on
substantially the same terms as the original agreement. Such
agreement generally sets forth the price to be charged the
Company for purchases based on a percentage above Tech Data's
landed cost. Even though the Company has no reason to believe
that Tech Data will not continue to do business on substantially
similar terms as provided in the agreement referred to above, no
assurance thereof can be given.
PIVOT
On May 18, 1998, the Company acquired 19.9% of Pivot
Technologies, Inc. ("Pivot"), a remote network servicer, and an
option (the "Option") to cause the merger of Pivot into a to be
created wholly-owned subsidiary of the Company. No assurance can
be given that the Company will exercise the Option. In
connection with such acquisition, Pivot and the Company agreed
that Pivot would be its exclusive provider of remote network
services to such clients of the Company who desire such services.
The aforementioned remote network service agreement is generally
for the term of the Option, unless extended by the Company in it
sole discretion, from time to time, for a period not in excess of
the earlier of ten (10) years and the date the Company no longer
has an equity interest in Pivot (generally such time as, if ever,
Pivot calls the Pivot stock owned by the Company or the Company
puts same to Pivot).
COMPETITION
The microcomputer market is highly competitive. The Company
is in direct competition with local, regional and national
distributors of microcomputer products and related services.
Several of these competitors offer most of the same basic
products as does the Company. The Company competes with other
resellers and believes its prices and delivery terms are
competitive. Many competitors may sell their products at lower
prices than the Company, but generally do not offer the same
range of support services after installation of equipment that
the Company offers to its customers.
In addition, the tri-state Metropolitan New York area and
New England, to which the Company markets its products and
services, are particularly characterized by highly discounted
pricing on microcomputer products from various sources of
competition. The Company faces competition from microcomputer
suppliers that sell their products through direct sales forces
and from manufacturers and distributors that emphasize mail order
and telemarketing.
Depending on the customer, the principal areas of
competition may include price, pre-sales and post-sales technical
support and service, availability of inventory and breadth of
product line. The Company has an insignificant market share of
sales in the microcomputer industry and the service markets which
the Company serves. Certain of the Company's competitors at the
regional and national level are substantially larger, have more
personnel, have materially greater financial and marketing
resources than the Company and operate within a larger geographic
area than does the Company.
Management believes that the Company will continue to be
able to compete effectively against its various competitors by
combining fair pricing with its wide range of customer support
services designed to provide its customers with high-end
technological services, multi-vendor technical support,
maintenance of their computer product needs, a dedicated, trained
staff of salespersons and technicians, complete solutions for
single user, multi-user or network systems and specialized
vertical market software.
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 protection may become important
to the Company, it is not considered essential to the success of
its business. The Company relies on the know-how, experience and
capabilities of its management, sales and service personnel. The
Company requires some of its employees to sign confidentiality or
non-competition agreements.
EMPLOYEES
As of June 15, 1998, the Company employed 155 persons, all
but four of whom are full-time personnel. Of these employees,
five are responsible for management, 30 are responsible for
sales, one is responsible for marketing, 102 for technical
support, three for distribution, seven for finance and seven for
administration. None of the Company's personnel is represented
by a union, and the Company considers its employee relations to
be good.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse are located in
approximately 11,000 square feet of space at a two-story facility
leased at 614 Corporate Way, Valley Cottage, New York. The lease
expires on August 31, 1998. 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 rental payment
is currently $6,400. Even though no assurance can be given, the
Company anticipates no difficulty in renewing the lease at the
current rate.
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 was $11,111 under a
lease which expired on May 11, 1998. The Company has agreed to
vacate such space by July 1, 1998. The Company entered into a
lease on June 17, 1998 for 8,433 square feet of office space at
270 Madison Avenue for an approximate term of 5 years and three
months. The monthly rent for the new space will be approximately
$22,550 for the first 2 years of the lease and approximately
$23,200 thereafter. 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
$5,213.35. The lease is terminable on six months' notice 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
In February 1998, the Company brought a civil action in the
Supreme Court of the State of New York for Rockland County for
breach of contract against KLM Royal Dutch Airlines alleging
damages in the amount of $141,004.23. This action has since been
removed to the United States District Court for the Southern
District of New York. The Company's management cannot predict
the final timing or outcome of this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 6, 1998, the approval and adoption of the
Agreement and Plan of Merger ("Merger Agreement") dated as of
August 29, 1997, by and among BTG, Inc. ("BTG"), BTG Merger Sub,
Inc. and the Company was submitted to a vote of the Company's
stockholders. Such stockholders subsequently approved and
adopted same. Subsequent to the approval and adoption, the
Merger Agreement was terminated. No other matters were submitted
to a vote of the Company's stockholders during the fourth quarter
of the fiscal year ended March 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company is listed on NASDAQ/NMS
under the symbol "MTMC".
The following table sets forth the high and low closing bid
prices of the Common Stock for the last two fiscal years as
reported by NASDAQ. Bid quotations represent high and low prices
quoted between dealers, do not reflect retail mark-ups, mark-
downs or commissions and do not necessarily represent actual
transactions.
Bid
Security Period High Low
COMMON
STOCK 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
FISCAL YEAR ENDED MARCH 31, 1998
April 1 - June 30, 1997 $4.00 $2.688
July 1 - September 30, 1997 $5.188 $3.688
October 1 - December 31, 1997 $4.875 $3.750
January 1 - March 31, 1998 $4.875 $2.500
On June 15, 1998, the closing bid and asked prices of a
share of Common Stock were $2.75 and $2.875, respectively, and
the Company had in excess of 1500 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 fiscal years
ended March 31, 1998, 1997, 1996 and 1995 and 1994, are derived
from the financial statements of the Company. The data should be
read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.
Income Statement Data:
Year Ended March 31
-------------------------------------------
1998 1997 1996 1995 1994
(In thousands; except earnings per share)
Net revenues $69,601 $ 58,062 $ 47,326 $43,043 $ 29,028
Cost of products sold 51,912 47,549 40,452 37,530 24,862
Cost of services
provided 9,414 2,420 1,109 778 562
Selling, general and
administrative
expenses (3) 7,796 6,698 4,070 3,276 2,690
Compensatory stock
arrangement(1) 0 0 4,655 0 0
Interest expense 13 6 13 40 94
Income (loss) from
operations before
income taxes 629 1,530 (2,907) 1,514 820
Net income (loss) 342 910 (3,614) 878 478
Net income (loss) per
common share:
Basic $.08 $0.21 ($1.43) 0.40(2) $0.37(2)
Diluted $.08 $0.20 ($1.43) $0.40(2) 0.37(2)
Weighted average number
of common and common
equivalent shares used
in calculation:
Basic 4,450 4,425 2,533 2,176(2) 2,176(2)
Diluted 4,484 4,491 2,533 2,188(2) 2,189(2)
Balance Sheet Data: At March 31
-----------------------------------------
1998 1997 1996 1995 1994
(In thousands)
Working Capital $10,769 $ 10,418 $10,684 $4,648 $3,771
Total Assets 22,077 20,460 16,209 9,420 8,486
Total Liabilities 9,391 8,117 5,208 4,554 4,501
Retained Earnings (Deficit) (127) (469) (1,379) 2,235 1,357
Shareholders' Equity 12,685 12,343 11,000 4,866 3,985
_____________________
(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) Reflects receipt of $850,000 from BTG to offset the direct
($421,000) and indirect costs of the terminated merger. Net
income and basic and diluted net income per share would have been
$85,000 and $0.02 respectively, excluding amounts associated with
the aforementioned indirect cost.
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 total revenue for that
period:
Year Ended March 31,
-----------------------------
1998 1997 1996
Product Sales 78.13% 88.95% 90.41%
Services 21.87 11.05 9.59
------- ------- --------
Net sales 100.00 100.00 100.00
Cost of Revenues 88.11 86.06 87.82
------ ------ -------
11.89 13.94 12.18
Cost of services provided
Selling, general and
administrative expenses 11.20(2) 11.54 8.60
Compensatory stock arrangement -- -- 9.84(1)
Interest expense 0.02 0.01 0.03
Income (loss) from operations
before income taxes 0.90 2.64 (6.14)
Net income(loss) .49 1.57 (7.64)
_______________________
(1) Reflects the non-cash non-recurring charge of $4,655,000
described below.
(2) Includes $850,000 of payments from BTG to offset the direct
($421,000) and indirect cost of the terminated merger.
The following table sets forth revenues and cost of revenues as a
percentage of each category:
Year Ended March 31,
1998 1997 1996
---------------------------------
Product sales:
Revenues 100.00% 100.00% 100.00%
Cost of products sold 95.46 92.07 94.54
------- ------ -------
4.54% 7.93% 5.46%
======= ======= =======
Service Revenues
Revenues 100.00% 100.00% 100.00%
Cost of revenues 61.84 37.71 24.44
------- ------- ------
38.16% 62.29% 75.56%
======= ======= ======
The Year Ended March 31, 1998 as compared to the Year Ended March 31, 1997.
The Company had net sales of approximately $69,601,000 for the Year
Ended March 31, 1998 ("Fiscal 1998"), as compared with
approximately $58,062,000 for the Year Ended March 31, 1997
("Fiscal 1997"). This increase in sales of approximately 20% was
primarily related to increased revenues from support services,
(137%) with a modest increase in equipment sales (5%).
Service revenue in Fiscal 1998 increased approximately 137%
to $15,222,000 from $6,416,000 in Fiscal 1997. The cost of
services provided increased to $9,414,000 from $2,420,000,
primarily as a result of the Company hiring additional technical
personnel and engaging third party vendors (such as CISCO, PIVOT,
ISG and various other subcontractors) to participate in the
providing of such services. On an aggregate basis, technical
personnel salaries in Fiscal 1998 increased 87% to $4,517,000
from $2,420,000 in Fiscal 1997. This increase was due to the
Company's hiring more technical personnel to meet current needs
and as part of its long-term planning for the future growth in
its consulting and service business. Technical personnel
salaries as a percentage of service revenues were 30% in Fiscal
1998 and 38% in Fiscal 1997. The Company expects to continue to
hire additional professional technicians and engineers for the
Advanced Technology Group in order to meet the expected demand in
the outsourcing and services business for the coming year and to
not be so dependent on third party service subcontractors in the
future. To the extent necessary, the Company will continue to use
subcontractors.
Costs of products sold increased 3.39% compared to Fiscal
1997 as a result of competitive market pressures effecting the
mark-up on product sales. The Company currently faces 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 including the Company and may result in a reduction
in existing vendor subsides. 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 microcomputer
industry.
Selling, general and administrative ("SG&A") expenses were
reduced by receipts of $850,000 from BTG to offset direct
($421,000) and indirect costs relating to the BTG merger (See
"Termination of Merger Agreement"), were approximately $7,796,000
for Fiscal 1998, as compared to approximately $6,698,000 in
Fiscal 1997. The increase in SG&A expenses ($1,948,000),
exclusive of the BTG payments ($850,000) were primarily
attributable to the Company's overall increase in overhead
expenses due to the increase in the Company's infrastructure to
support current and anticipated growth direct costs of the merger
and a provision of $100,000 to strengthen the company's allowance
for bad debts. The increase in overhead expenses primaily related
to additional compensation cost for sales of personnel of
approximately $530,000. Payroll taxes, other employee benefits and
training of employee increased by approximately $355,000.
Telephone expenses related to sales increased approximately
$120,000. Deprecation and amortization increased approximately
$116,000 due to the purchase of additional office equipment.
The effective income tax rate for Fiscal 1998 and 1997 was
46% and 41%, respectively. The reason the effective income tax
rate increased 5% was due to the several adjustments to prior
year tax provisions.
Accordingly, net income decreased to approximately $342,000
in Fiscal 1998 from $910,000.
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 23% 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 increased to 11.54% in Fiscal 1997 from
8.60% 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways,
including the following:
March 31,
------------------------
1998 1997 1996
(Dollars in thousands, except current ratio data)
Cash and cash equivalents 3,992 2,880 5,285
Working capital 10,769 10,386 10,684
Current ratio 2.15:1 2.29:1 3.05:1
Secured notes payable 5 5 5
Working capital line available 7,761 8,140 8,759
During Fiscal 1998, the Company's net cash provided by
operating activities was approximately $1,433,000. The cash
provided by operating activities resulted from a decrease in
inventory of $126,000, an increase in accounts payable and
accrued expenses of $260,000 and an increase in income tax
payable of $199,000 and an increase in deferred revenue of
$810,000, offset by an increase in accounts receivable of
$392,000 and deferred income tax of $350,000.
The Company used approximately $321,000 in investing
activities for the purchase of property, equipment and software.
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 $6,800,000 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 July 31, 1998, which the Company intends to
renew. All of the floor-plan borrowings are subordinated to the
Company's bank revolver except as to inventory and equipment, as
to which the floor-planners hold a first lien pursuant to
intercreditor agreements. At March 31, 1998 and 1997, the
Company's total outstanding debt under the floor-plan
arrangements was approximately $4,124,000 and $5,155,000,
respectively, and the revolver balance was $5,000 at the end of
each year.
The Company's current ratio decreased to 2.15:1 at March 31,
1998 from 2.29:1 at March 31, 1997.
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.
Termination of the Merger Agreement
On August 29, 1997, the Company entered into an Agreement
and Plan of Merger (The "Agreement") with BTG, Inc., a Virginia
corporation ("BTG"), and BTG Merger Sub, Inc., a wholly owned
subsidiary of BTG, pursuant to which the Company was to be
acquired by BTG for cash and stock valued at approximately $25
million.
On February 13, 1998, BTG, Inc. terminated the Agreement
with the Company. As a result of the default, BTG paid the
Company a $500,000 termination fee provided for in the Agreement.
In addition, BTG paid the Company an additional $350,000 for out-
of-pocket expenses in exchange for a release from future
liability which may arise as a result of the termination of the
Agreement. The Company recognized these payments as a reduction
to selling and administrative expenses, reflecting an offset
against the direct and indirect costs and expenses related to the
BTG merger.
The Company also entered into a cooperative marketing and
service agreement with BTG under which the Company received a non-
refundable advance payment of $900,000 from BTG for future
consulting services to be provided during the 10 months period
ending December 31, 1998. The Company is recognizing the revenue
ratably over the term of the contract. The Company recognized
$90,000 of income during the year ending March 31, 1998.The
Company is not required to provide services exceeding $900,000.
Merger with Pivot Technologies, Inc
On May 18, 1998 (the "Pivot Closing"), the Company acquired
19.9% of the shares (the "Shares") of Pivot Technologies, Inc.
("Pivot"), a remote network service provider, and an option (the
"Option") to cause the merger ("Merger") of Pivot into a to be
created wholly-owned subsidiary of the Company. No assurance can
be given that the Company will exercise the Option. The
aggregate purchase price for the Shares and the granting of the
Option was $475,000, together with the Company`s obligation to
contribute additional sums of $60,000, $68,000, $68,000, $75,000
and $75,000 respectively on each of the first five monthly
anniversaries of the Pivot Closing, subject to Pivot's material
compliance with their business plan. The Company further agreed
to lend Pivot up to an additional $125,000 in six equal monthly
installments commencing shortly after the acquisition of the
Shares and the Option. The loan is to be repaid without interest
on the first anniversary of the Pivot Closing or the redemption
of the Company's interest in Pivot.
The Option expires fifteen days after the end of the six
month anniversary of the Pivot Closing ("Initial Option Period"),
subject to extension. The Initial Option Period, shall be
extended to up to three additional one month terms upon the
payment of an additional $80,000 prior to the expiration of the
Initial Option Period and the commencement of each addition
extension period, respectively. If the Option is exercised, the
Company will own all the issued and outstanding stock of Pivot
upon the effectiveness of the Merger (the "Effective Time"). At
such time, Pivot's stockholders, other than the Company and its
affiliates, will receive (i) shares of the Company's Common
Stock, $.001 par value per share having an aggregate value of
$1,100,000 based on the thirty trading day average closing price
of the Company Common Stock prior to the Pivot Closing (the
average price was $2.916767 which would require distribution of
approximately 377,130 shares of the Company's Common Stock), (ii)
a number of five year warrants, to acquire 100,000 shares of the
Company Common Stock at $2.916767, with such warrants becoming
first exercisable one-third at the end of each of the first three
years after the exercise of the Option, (iii) $337,600 in cash,
and (iv) if the Company elects to exercise its Option during any
of the extension periods, an additional amount of cash equal to
fifty percent of the net profit after taxes generated by Pivot
during the period commencing on the day after the end of the
Initial Option Period and ending at the date the Option is
exercised.
If the Company extends the Initial Option Period for each of
the three periods referred to above, but elects prior to the 75th
day after the end of the Initial Option Period not to exercise
its Option, Pivot will transfer to the Company, for no additional
consideration, shares of Pivot Common Stock so that the Company
will own on an aggregate basis, a 33.4 % interest in Pivot on a
fully-diluted basis as determined as the date the Company elects
not to exercise its Option.
In the event the Company does not exercise its Option, Pivot
shall have the right for one hundred eighty days after the option
lapses to redeem all of its shares owned by the Company for 115%
of the amount contributed by the Company as a capital
contribution or to extend the Option period. The Company will
have a right to put shares back to Pivot in the event the Option
is not exercised at such time as Pivot receives suitable
additional funding. The put price is the greater of (X) 125% of
the amount contributed by the Company as a capital contribution
or (Y) in the event the additional funding is equity financing or
the issuance of convertible debt, the then fair market value
thereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in Part IV, immediately following
Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as
follows:
Name Age Position(s)
Howard Pavony 47 Chairman of the Board of
Directors
Steven H. Rothman 49 Chief Executive Officer,
President and a Director
Frank T. Wong 50 Vice President-Finance
and Secretary
Robert A. Fries 44 Vice President
Ramon Mota 36 Vice President-Technology
and a Director
William Lerner* 64 Director
Arnold J. Wasserman* 60 Director
___________
* Member of the Audit Committee and Compensation Committee.
Howard Pavony served as the Company's Co-Chief Executive
Officer, President and a Director since the Company's inception
in May 1986 and has served as Chairman of the Board of Directors
since September 1996. He has also served as Vice President of
MTM Advanced Technology, Inc. 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 served as the Company's Co-Chief Executive
Officer, Vice President, and a Director since the Company's
inception in May 1986 and has served as Chief Executive Officer,
President and Director since September 1996. Mr. Rothman was the
Company's Secretary from May 1986 to September 1995. He has also
served as President of 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 of the
Executive Board.
Frank Wong has served as the Company's Vice
President-Finance since February 1992, as a Director from June
1993 to March 1998 and as Secretary since September 1995. Prior
thereto, from 1975 to 1991, he served as Chief Accountant of the
Carvel Corporation, a franchise ice cream distributor.
Robert A. Fries has served as a Vice President and was a
Director of the Company from May 6, 1996 to March 31, 1998. He
joined the Company as a result of the acquisition of Data.Com.
He was President of Data.Com RESULTS, Inc. 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 been Co-
President of Data.Com since May 1996. Prior thereto, from 1989
until September 1991, Mr. Mota served as an engineer with
Multitech System, Inc. a modem manufacturing and data
communications company.
William Lerner has served as a Director of the Company since
September 1995 and is the Chairman of the Audit and Compensation
Committees. 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; and of Rent-Way, Inc., a NASDAQ listed company
engaged in the rent-to-own business.
Arnold J. Wasserman has, for the past 25 years, been a
principal of P & A Associates, a leasing/consulting firm. Prior
to that, he held positions with IBM and Litton Industries. Mr.
Wasserman has consulted with major corporations in the areas of
marketing, advertising and sales. He is a director of On-Sight
Sourcing, Inc. and Stratasys, Inc., both publicly traded
companies.
All directors hold office until the next annual meeting of
shareholders or until their successors are elected and qualify.
Officers are elected annually by, and serve at the discretion of,
the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's Officers, Directors and persons who own
more than ten percent of a registered class of the Company's
equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers,
Directors and ten percent shareholders are required by regulation
to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on the Company's copies of such forms
received or written representations from certain reporting
persons that no Form 5's were required for those persons, the
Company believes that, during the time period from April 1, 1997
to March 31, 1998, all filing requirements applicable to its
Officers, Directors and greater than ten percent beneficial
owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to,
earned by, or paid for all services rendered to the Company
during Fiscal 1998, Fiscal 1997 and Fiscal 1996 by certain
executive officers of the Company. No other executive officers
received compensation in excess of $100,000 during such years.
Long-Term
Annual Compensation(1) Compensation
Shares
Name and Principal Underlying
Position Year Salary($) Bonus($) Options(#)
- ------------------ ------ ---------- -------- ---------
Howard Pavony 1998 $213,334 $ -- --
Chairman of the Board 1997 $185,417 $20,000 50,000
1996 $165,000 $20,000 10,000
Steven H. Rothman 1998 $213,334 $ -- --
President and CEO 1997 $185,417 $20,000 50,000
1996 $165,000 $20,000 10,000
Robert Fries 1998 $139,992 $ -- -
Vice President 1997 $103,326 -- 0
Ramon Mota 1998 $110,333 $ -- -
Vice-President 1997 $100,033 $ 9,000 5,000
Technology 1996 $ 95,000 $ 10,500 0
- --------------------
(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.
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, 1998, exercise information and
potential realizable value.
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired at FY-End(#) at FY-End($)
on Exer- Value Exercisable/ Exercisable/
Name cise (#) Realized Unexercisable Unexercisable
- -------------- ------- --------- -------------- --------------
Steven H. Rothman 0 0 80,000/30,000 $_ / $_
Howard Pavony 0 0 80,000/30,000 $_ / $_
Robert Fries 0 0 0/0 $0 / $0
Ramon Mota 0 0 25,000/5,000 $0 / $7,500
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY END OPTION
VALUES
The table below includes information regarding the value
realized on option exercises and the market value of unexercised
options held by the executive officers named in the Summary
Compensation Table during the year ended March 31, 1998.
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired at FY-End(#) at FY-End($)
on Exer- Value Exercisable/ Exercisable/
Name cise (#) Realized Unexercisable Unexercisable
- --------------- ------- -------- ------------ --------------
Steven H. Rothman 0 0 80,000/30,000 $_ / $_
Howard Pavony 0 0 80,000/30,000 $_ / $_
Robert Fries 0 0 0/0 $0 / $0
Ramon Mota 0 0 25,000/5,000 $0 / $7,500
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. 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 terms set forth
below. Each agreement renews annually after the term unless
either party elects to terminate. Salary for the fiscal year
ending March 31, 1998 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
entitled to participate in the Company's stock option plans and
any incentive bonus program established from time to time, as
determined by the Compensation Committee of the Board of
Directors. Further, the Company will maintain a $1,000,000 life
insurance policy on each executive's life, payable to the
beneficiaries named by him, and maintain disability insurance for
the benefit of each executive which will pay $150,000 per annum
to him in the event of his permanent disability. In the event
that there is a change in control of the Company, the executive
will be entitled, upon such change of control, to terminate his
employment and receive 2.9 times his annual salary as then in
effect.
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
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
Data.Com's earning certain minimum amounts; and a $400/month car
allowance.
STOCK OPTION PLANS
The Company has established a 1993 Stock Option Plan (the
"1993 Plan") and a 1996 Stock Option Plan (the "1996 Plan") and,
subject to Shareholder approval, a 1998 Stock Option Plan (the
"1998 Plan")
Pursuant to the 1993 Plan, as of the date hereof, the
Company has granted an aggregate of 267,500 stock options,
including the grant of 20,000 options to the current outside
directors of the Company on April 1, 1998. Of these, 113,333 are
currently exercisable, and 27,500 have been exercised to date.
117,500 options have been canceled to date or lapsed and made
available for regrant under the 1993 Plan.
An aggregate of 185,000 options have been granted to date
under the 1996 Plan. Of these, 25,000 are exercisable and
155,700 are unexercisable.4,300 options have been canceled to
date abd made available for request under the 1996 Plan. No
options have been exercised under the 1996 Plan, to date. No
options have been granted under the 1998 Plan.
As of the date hereof, Messrs. Pavony and Rothman each hold
incentive stock options expiring on October 19, 2000 to purchase
up to 10,000 shares of Common Stock at $6.125 per share and
incentive stock options expiring on August 31, 2001 to purchase
50,000 shares of Common Stock at $4.43 per share( in addtion,
each had option to purchase 50,000 shares of Common Stock lapse
om May 9, 1998); Mr. Mota holds incentive stock options expiring
on June 21, 1998 (issued in Fuscal 1994) to purchase up to 5,000
shares of Common Stock at $3.375 per share, incentive stock
options expiring on February 24, 1999 (issue in Fiscal 1994) to
purchase up to 15,000 shares of Common Stock at $1.25 per share,
incentive stock options expiring on November 30, 2001 to purchase
up to 5,000 shares of Common Stock at $2.50 per share and
incentive stock options expiring on March 31, 2002 to purchase up
to 5,000 shares of Common Stock at $3.875 per share; Mr. Wong
holds incentive stock options expiring on June 21, 1998 to
purchase 5,000 shares of Common Stock at $3.375 per share and
incentive stock options expiring on July 10, 2000 to purchase up
to 10,000 shares of Common Stock at $5.125 per share; Mr. Lerner
holds options expiring on September 14, 2000 to purchase up to
2,500 shares of Common Stock at $7.00 per share, options expiring
on August 19, 2001 to purchase up to 2,500 shares of Common Stock
at $4.0625 per share and options expiring on March 31, 2008 to
purchase up to 10,000 shares of Common Stock at $2.75 per share;
and Mr. Wasserman holds options expiring March 31, 2008 to
purchase up to 10,000 shares of Common Stock at $2.75 per share.
SUMMARY OF THE PLANS
The 1993 Plan, the 1996 Plan, and the 1998 Plan (each, a
"Plan"), provide for the grant of options to qualified employees
(including officers and directors) of the Company, and its
subsidiaries, independent contractors, consultants 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 (and no interested 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
exercise price of options may not be less than 100% (no such
limitation with respect to the 1998 Plan) 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 and with respect to the 1998 Plan, by
the cancellation of a number of options having an "in-the-money"
value equal to the average price of the Options Shares issued.
Options granted under the 1993 Plan and the 1996 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. Under the 1998 Plan,
incentive stock options are as treated above, while non-qualified
stock options may at the options of the Board of Directors or
Compensation Committee, be transferable. 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 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.
The 1998 Plan provides for the grant of options to purchase
up to an aggregate of 250,000 Option Shares. Options granted
under the 1998 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
MANAGEMENT
The following table sets forth, as of the date hereof,
certain information concerning those persons known to the
Company, based on information obtained from such persons, with
respect to the beneficial ownership (as such term is defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of Common
Shares and Preferred Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding Common
Shares and Preferred Stock, (ii) each Director, (iii) each
executive officer named in the Summary Compensation Table and
(iv) all Directors and executive officers as a group.
Amount and Nature
of Beneficial Ownership Percent of Class (1)
Name and Address Common Common
of Beneficial Owner Shares Shares
- ------------------- --------------------- ---------------------
Steven H. Rothman(2) 1,108,625 (3)(4) 24.9%
Howard Pavony(2) 1,107,500 (3)(5) 24.9%
Robert A. Fries
71 Peria Drive
Rocky Hill, CT 06061 87,000 2.0%
Ramon Mota(2) 25,065 (3) *
William Lerner
423 East Beau Street
Washington, PA 15301 5,000 (3) *
Arnold Wasserman
1 Brookwood Drive
WestCaldwell, NJ 07006 0 (3) *
All Directors and
executive officers
as a group (6 persons) 2,333,190 (3)(4)(5) 52.4%
- -----------------
* Represents less than 1%.
(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 30,000 shares of Common Stock, options to
purchase 25,000 shares held by Ramon Mota and to purchase
5,000 shares held by Mr. Lerner which are currently
exercisable. Does not include options held by each of
Messrs. Pavony and Rothman to purchase 30,000 shares option
held by Mr. Mota to purchase 5,000 shares which are not
currently exercisable and options to purchase 10,000 shares
held by Messrs. Lerner and Wasserman currently not
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements.
Independent Auditors' Report F-1
Consolidated Balance Sheets at March 31, 1998 and 1997 F-2
Consolidated Statements of Income for F-3
the years ended March 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' F-4
Equity for the years ended March 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the
the years ended March 31, 1998, 1997and 1996 F-5
Notes to Consolidated Financial Statements F-6
(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, 1 996 by and
among DATA.COM RESULTS, INC. ("DATA.COM"), the sole
shareholder of DATA.COM, the Company and the Company's
wholly-owned subsidiary, DATA.COM DIRECT, INC. (4)
2.2 Stock Purchase and Option Agreement dated May 15, 1998 by
and among the Company, Pivot Technologies, Inc. and certain
Pivot Shareholders. (7)
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 Certificate of Amendment filed September 10, 1996. (6)
3.3 By-Laws of the Company.(1)
10.1 Lease Agreement between the Company and Asso ciates of
Rockland County dated July 30, 1989 (1)
10.2 Revised 1993 Employee Stock Option Plan.(1)
10.3 Revolving Credit Line Agreement between The Bank of New
York and the Company.(1)
10.4 Modification and Extension Agreement dated N ovember 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 Amendment to Lease between the Company and associates of
Rockland County dated as of July 23, 1992. (1)
10.7 Dealer Addendum, as amended, to IBM Agreement for
Authorized Dealers and Industry Remarketers.(1)
10.8 Master Purchase Agreement between Paine Webber Incorporated
and the Company.(1)
10.9 Agreement for Wholesale Financing between Deutsche
Financial Service (f/k/a/ ITT Commercial Finance Corp.) and
the Company.(1)
10.10 September 13, 1993 amendment to Paine Webber Incorporated
agreement.(1)
10.11 Extension Agreement between the Bank of New York and the
Company dated March 3, 1994.(2)
10.12 Agreement of Cancellation and Termination of Franchise
Agreement and general release, dated March 28, 1995.(3)
10.13 Amendment to Revolving Loan Agreement between the Company
and the Bank of New York, dated March 28, 1995.(3)
10.14 Pledge and Escrow Agreement dated as of May 6, 1996 among
the Company, Data.Com and Mr. Fries.(4)
10.15 Employment Agreement dated as of May 6, 1996 between the
Company and Mr. Fries.(4)
10.16 Employment Agreement dated April 1, 1996 between the Company
and Mr. Mota.(5)
10.17 Lease Extension between the Company and Associates of Rockland
County dated as of February 29, 1996.(5)
10.18 Employment Agreement between the Company and Steven H.
Rothman, dated September 1, 1996.(6)
10.19 Employment Agreement between the Company and Howard Pavony,
dated September 1, 1996.(6)
10.20 Agreement and Plan of Merger by and among the Company, a to
be formed wholly-owned subsidiary, and Pivot Shareholders,
to be entered into if Option is exercised pursuant to Stock
Purchase and Option Agreement referred to in 2.2 above.(7)
10.21 Lease Agreement between 270 Madison Limited Partnership as
landlord and the Company as tenant for space located at 270
Madison Avenue.
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. 33-62932NY).
2. Incorporated by reference from the Company's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1994.
3. Incorporated by reference from the Company's Current Report
on Form 8-K dated March 28, 1995.
4. Incorporated by reference from the Company's Current Report
on Form 8-K dated May 6, 1996.
5. Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1996.
6. Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997.
7. Incorporated by reference from the Company's Current Report
on Form 8-K dated May 15, 1998.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated May 15,
1998, reporting that it had entered into an agreement to acquire a
19.9% interest in Pivot Technologies, Inc. and an option to cause
the merger thereof into the Company.
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, 1998 and 1997 and the related
consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended March
31, 1998. 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, 1998 and
1997 and the consolidated results of its operations and its cash flows
for each of the three years in the period ended March 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
May 29, 1998
F-1
Micros-To-Mainframes, Inc.
Consolidated Balance Sheets
March 31,
1998 1997
------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,991,593 $ 2,879,578
Accounts receivable - trade, less allowance
of $140,000 and $41,000 14,000,562 13,707,458
Inventory 1,332,322 1,458,467
Prepaid expenses and other current assets 396,618 410,817
Deferred income taxes 402,400 47,000
--------------------------
Total current assets 20,123,495 18,503,320
Property and equipment:
Leasehold improvements 100,206 97,426
Furniture, fixtures and other equipment 1,852,350 1,555,840
--------------------------
1,952,556 1,653,266
Less accumulated deprecation
and amortization 877,683 626,940
-------------------------
1,074,873 1,026,326
Goodwill, net of accumulated amortization
of $113,819 and $54,450 777,181 836,550
Other assets 100,951 94,294
--------------------------
Total assets $22,076,500 $20,460,490
==========================
Liabilities and shareholders' equity
Current liabilities:
Secured notes payable $ 5,000 5,000
Accounts payable and accrued expenses 8,166,141 7,905,693
Income taxes payable 373,284 174,553
Deferred revenue 810,000 -
-------------------------
Total current liabilities 9,354,425 8,085,246
Deferred income taxes 37,000 32,000
-------------------------
Total liabilities 9,391,425 8,117,246
Shareholders' equity:
Common stock, $.001 par value; 10,000,000
shares authorized; 4,450,374 shares issued
and outstanding at March 31, 1998 and 1997 4,450 4,450
Additional paid-in capital 12,807,900 12,807,900
Retained equity (deficit) (127,275) (469,106)
------------------------
Total shareholders' equity 12,685,075 12,343,244
-------------------------
Total liabilities and shareholders' equity $22,076,500 $20,428,490
=========================
See accompanying notes.
F-2
Micros-To-Mainframes, Inc.
Consolidated Statements of Operations
Year ended March 31,
1998 1997 1996
---------------------------------
Net revenues:
Products $54,378,851 $51,646,003 $42,789,681
Services 15,222,379 6,416,470 4,536,656
--------------------------------------
69,601,230 58,062,473 47,326,337
Costs and expenses:
Cost of products sold 51,912,015 47,548,895 40,452,206
Cost of services provided 9,413,815 2,419,527 1,108,941
Selling, general and administrative
expenses 7,796,253 6,698,265 4,070,111
Compensatory stock arrangement - - 4,655,000
--------------------------------------
69,122,083 56,666,687 50,286,258
Other income 163,121 140,788 66,179
Interest expense 13,437 6,136 13,325
---------------------------------------
Income (loss) from operations before
income taxes 628,831 1,530,438 (2,907,067)
Provision for income taxes 287,000 620,450 707,000
----------------------------------------
Net income (loss) $ 341,831 $ 909,988 $(3,614,067)
========================================
Net income (loss) per common share:
Basic $ .08 $ .21 $ (1.43)
========================================
Diluted $ .08 $ .20 $ (1.43)
========================================
Weighted average number of common
and common equivalent shares used
in calculation:
Basic 4,450,374 4,425,073 2,532,777
=========================================
Diluted 4,483,881 4,491,319 2,532,777
=========================================
See accompanying notes.
F-3
Micros-To-Mainframes, Inc.
Consolidated Statements of Changes in
Shareholders' Equity
Preferred Stock Common Stock
--------------- ---------------
Number Number Additional Retained
of of Paid-In Earnings/
Shares Amount Shares Amount Capital (Deficit) Total
----------------------------------------------------------------------------
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
arrangement 4,655,000 4,655,000
Net loss (3,614,067) (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
Conversion of preferred
stock (1,400,000) (1,400) 980,000 980 420 -
Issuance of common
stock:
Employee options
exercised 20,000 20 24,980 25,000
Acquisition of
subsidiary 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
Net income - - - - - 341,831 341,831
---------------------------------------------------------------------------
Balance at March 31,1998 - $ - 4,450,374 $4,450 $12,807,900 $ (127,275) $12,685,075
===========================================================================
See accompanying notes.
F-4
Micros-To-Mainframes, Inc.
Consolidated Statements of Cash Flows
Year ended March 31,
1998 1997 1996
-------------------------------
Operating activities
Net income (loss) $ 341,831 $ 909,988 $(3,614,067)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 331,976 223,506 90,269
Compensatory stock arrangement - - 4,655,000
Deferred income taxes (350,400) - -
Bad debt expense 99,000 - -
Other non-cash charges (credits) - 5,000 (14,000)
Changes in operating assets and
liabilities, net of effects of
acquisition in 1997:
Accounts receivable (392,104) (3,418,345) (2,121,743)
Inventory 126,145 (96,068) (278,951)
Prepaid expenses and other current
assets 14,199 22,609 (158,679)
Other assets (6,657) (25,132) (38,883)
Accounts payable and accrued expenses 260,448 1,886,072 801,777
Income taxes payable 198,731 55,413 (147,314)
Deferred revenue 810,000 - -
-----------------------------------------
Net cash provided by (used in) operating
activities 1,433,169 (436,957) (826,591)
Investing activities
Purchase of property and equipment (321,154) (682,034) (149,304)
Purchase of subsidiary, net of cash
acquired - (1,311,018) -
-----------------------------------------
Net cash used in investing activities (321,154) (1,993,052) (149,304)
Financing activities
Net proceeds from issuance of common
stock - 25,000 5,093,474
-----------------------------------------
Net cash provided by financing
activities - 25,000 5,093,474
----------------------------------------
Increase (decrease) in cash 1,112,015 (2,405,009) 4,117,579
Cash and cash equivalents at beginning
of year 2,879,578 5,284,587 1,167,008
---------------------------------------
Cash and cash equivalents at end of year $ 3,991,593 $2,879,578 $ 5,284,587
========================================
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., hereafter, collectively referred to as the
"Company". Significant intercompany accounts and transactions have
been eliminated. The Company is a premier provider of network analysis
& diagnostics, management, architecture, design, implementation and
support services serving the New York Tri-State area. The Company
practices in Network Protocol Analysis, Network OS Consulting,
Internet & Network Security, Integrated Communications, and Life Cycle
Managed Services create a comprehensive computer and communication
services suite. Their many corporate, commercial, and institutional
clients choose the Company for best practices support from the end
user to the enterprise.
The Company purchases microcomputers and related products directly
from suppliers as either an authorized dealer or a value added
reseller. The Company has entered into authorization agreements with
major suppliers which can be terminated by the supplier, with or
without cause, upon 30 to 90 days notice, or immediately upon the
occurrence of certain events. Sales of products purchased from the
Company's two largest suppliers were 23% and 16% in fiscal 1998. In
fiscal 1997, product from three of the Company's largest suppliers
accounted for 20%, 26%, and 13% of sales. In fiscal 1996, product from
these three suppliers accounted for 24% , 26%, and 13% of sales. The
Company believes that it has excellent relationships with its major
suppliers, however, there can be no assurance that the aforementioned
agreements will be renewed. If these agreements are not renewed the
Company may have difficulty obtaining inventory at a cost which would
allow for resale at a competitive market price.
Certain amounts have been reclassified to conform to current year
presentation.
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.
F-6
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost and are depreciated using
the straight-line method. Furniture, fixtures and other equipment have
useful lives ranging from 3 to 7 years.
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 $273,000, $169,000 and $90,000 in
depreciation expense for the years ended March 31, 1998, 1997 and
1996, respectively.
Goodwill
The goodwill is being amortized using the straight-line method over 15
years (see Note 7).
Impairment of Long-Lived Assets
Long-lived assets, including goodwill, are reviewed for impairment and
written down to fair value whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
At March 31, 1998, no such impairment existed. The Company measures
the potential impairment of long-lived assets, including goodwill, by
the undiscounted value of expected operating cash flow in relation to
the assets to which it applies.
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, certain deferred contract revenues, the 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.
F-7
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("FAS No. 128"), which supersedes APB
Opinion No. 15, "Earnings Per Share", and specifies the computation,
presentation, and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock or potential
common stock. FAS No. 128 replaces primary and fully diluted EPS with
basic and diluted EPS, respectively. It also requires dual
presentation of Basic EPS and Diluted EPS on the face of the income
statement and requires a reconciliation of the numerator and
denominator of the Basic EPS computation to the numerator and
denominator of the Diluted EPS computation.
Basic EPS, unlike Primary EPS, excludes all dilution while Diluted
EPS, like Fully Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
Earnings per share for 1997 and 1996 have been restated to conform to
the requirements of FAS No. 128.
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 the Company's largest customer approximated 26% of
trade receivables at March 31, 1998. Receivables from two major
customers approximated 18% and 13% of the Company's trade receivables
at March 31, 1997. One customer accounted for approximately 13% of the
Company's revenue for fiscal 1998. Two customers each accounted for
13% of the Company's revenues in fiscal 1997, and 18% and 16% in
fiscal 1996. The loss of a principal customer would be expected to
have a material adverse effect on the Company's operations during the
short term until the Company is able to generate replacement business,
although there can be no assurance of obtaining such business.
Credit is extended to customers based on an evaluation of their
financial condition, and collateral is generally not required. The
evaluation of financial condition is performed to reduce the risk of
loss. The Company has not historically experienced any material losses
due to uncollectible accounts receivable.
F-8
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
2. Credit Facilities
The Company has entered into several financing agreements for the
purchase of inventory. These agreements aggregate approximately
$6,800,000 at March 31, 1998 and $8,300,000 (approximately $2,676,000
and $3,145,000 unused) at March 31, 1998 and 1997, respectively, and
generally provide for thirty day repayment terms. Current borrowings
under these agreements are included in accounts payable and accrued
liabilities. 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. These
agreements will remain in effect until terminated by either party. 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 expiring July 31, 1998 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, 1998 and 1997, the Company had $5,000 outstanding under this
facility with interest payable at the bank's ABR of 8.50%.
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 1998, 1997 and 1996 aggregated
approximately $13,000, $6,000 and $1,000, respectively.
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.
F-9
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
3. Shareholders' Equity (continued)
Preferred Shares
In the fourth quarter of fiscal 1996, the thresholds for
convertibility of 1,400,000 shares of preferred stock 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, 1998, there were no preferred shares 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-10
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, 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 issued 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
Option issued during the year - - 40,000 $2.875 -$3.875
Options canceled during the year - - (4,300) $2.875
--------- --------
Outstanding at March 31, 1998 220,000 $1.25 - $7.00 180,700 $2.50-$4.43
The weighted-average exercise price of the total options outstanding
at March 31,1998 is $3.82 and the weighted-average contractual life is
8.2 years.
The weighted-average fair value of options granted during fiscal 1998
and 1997 is $2.77 and $3.41, respectively.
There were 213,333 and 202,500 options exercisable at March 31, 1998
and 1997, under the 1993 Plan and 25,000 options exercisable at March
31, 1998 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 options equal 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 1998 and 1997
and 1996, respectively: risk-free interest rate 6.0%; no dividend
yield; a volatility factor of the expected market price of the
Company's Common Stock of 0.57, 0.78 and 0.91 and an expected life of
8.0, 8.5 and 8.1 years.
F-11
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 is as follows:
Year ended March 31,
1998 1997 1996
---------------------------------
Pro forma net income (loss) $301,225 $883,825 $(3,702,449)
==================================
Pro forma income (loss) per share -
basic and diluted $ .07 $ .20 $ (1.46)
==================================
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.
Earnings Per Share
The following table presents the computation of basic and diluted
income (loss) per share:
1998 1997 1996
-----------------------------------
Numerator:
Net income (loss) $ 341,831 $ 909,988 $(3,614,067)
===================================
Denominator:
Denominator for basic earnings
per share-weighted-average shares 4,450,374 4,425,073 2,532,777
Dilutive effect of employee
stock options and warrants 33,507 66,246 -
------------------------------------
Denominator for diluted earnings
per share 4,483,881 4,491,319 2,532,777
-------------------------------------
Net income (loss) per share-basic $ .08 $ .21 $ (1.43)
====================================
Net income (loss) per share-diluted $ .08 $ .20 $ (1.43)
====================================
F-12
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
3. Shareholders' Equity (continued)
Options to purchase 45,000 and 155,000 shares of common stock,
outstanding as of March 31, 1998 and 1997, respectively, were not
included in the computation of diluted earnings per share because
their inclusion would be antidilutive. Options to purchase 225,000
shares of common stock as of March 31, 1996 were not included in the
computation of diluted earnings per share because the Company had a
net loss in 1996, and therefore, the inclusion of those options would
be antidilutive. The conversion of the Company's preferred stock into
980,000 shares of common stock were excluded from the March 31, 1996
calculation of diluted earnings per share as the specified earnings
targets had not been met at such date.
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,
1998 1997 1996
-----------------------------
Federal:
Current $513,100 $463,450 $568,300
Deferred (289,000) 5,000 (14,000)
-------------------------------
224,100 468,450 554,300
State:
Current 124,300 152,000 152,700
Deferred (61,400) - -
-------------------------------
$287,000 $620,450 $707,000
==============================
The reconciliations of income tax computed at the federal statutory
tax rates to actual income tax expense are as follows:
Year ended March 31,
1998 1997 1996
-------------------------------
Tax expense (benefit) at statutory
rates applied to pretax earnings $213,800 $520,000 $(988,000)
Compensatory stock arrangement
without tax benefit - - 1,583,000
State income taxes, net of federal
benefit 41,500 100,000 101,000
Other 31,700 450 11,000
-------------------------------
$287,000 $620,450 $ 707,000
===============================
F-13
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
Significant components of the Company's deferred tax assets and
liabilities are as follows:
1998 1997
-------------------------
Deferred tax assets:
Reserve for bad debts $ 54,000 $ 17,000
Inventory reserve 24,000 21,000
Deferred revenue 313,000 -
Other, net 11,400 9,000
---------------------
402,400 47,000
Deferred tax liabilities:
Depreciation 37,000 32,000
----------------------
Net deferred tax assets $365,400 $ 15,000
======================
Income taxes paid during fiscal 1998, 1997 and 1996 aggregated
approximately $557,000, $560,000, and $871,000, respectively.
5. Commitments and Contingencies
Leases
The Company leases three locations for its administrative and
operational functions under operating leases through August 2002. The
Company is presently negotiating the renewal terms for its Valley
Cottage, NY and Manhattan locations. 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, 1999 $114,900
March 31, 2000 53,150
March 31, 2001 22,325
March 31, 2002 3,380
March 31, 2003 -
--------
$193,755
========
Rental expense for operating leases approximated $356,000, $460,000
and $210,000, respectively, for fiscal 1998, 1997 and 1996.
F-14
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
6. Employee Savings Plan
The Company has an employee savings plan which qualifies under Section
401(k) of the Internal Revenue Code. Under the plan, all employees who
are at least 21 years of age and have completed one year of service
are eligible to defer up to 15% of their pre-tax compensation, but not
more than $9,500 per calendar year. The Company matches 10% of
employee contributions to a maximum of six percent of the employees
salary. The Company contributed approximately $18,000 and $12,000 to
the plan in fiscal 1998 and 1997 respectively.
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
("EBTDA") 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
1998 or 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:
Basic .22 (1.49)
Diluted .21 (1.49)
F-15
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
8. Termination of the Merger Agreement
On August 29, 1997, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with BTG, Inc., a Virginia corporation
("BTG"), and BTG Merger Sub, Inc., a wholly-owned subsidiary of BTG,
pursuant to which the Company was to be acquired by BTG for cash and
stock valued at approximately $25 million.
On February 13, 1998, BTG, Inc. terminated the Agreement with the
Company. As a result of the default BTG paid the Company a $500,000
termination fee. In addition, BTG paid the Company for out-of-pocket
expenses of $350,000 in exchange for a release from future liability
which may arise as a result of the termination of the Agreement. The
Company recognized these payments as a reduction to selling, general
and administrative expenses, reflecting an offset against the direct
and indirect costs and expenses related to the BTG merger.
The Company also entered into a cooperative marketing and service
agreement with BTG, under which the Company received a non-refundable
payment of $900,000 from BTG for consulting services to be provided
during the 10 month period ending December 31, 1998. The Company is
recognizing this revenue ratably over the term of the contract. The
Company recognized $90,000 of income during the year ended March 31,
1998. The Company is not required to provide services exceeding
$900,000.
F-16
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
9. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for
the years ended March 31, 1998, 1997 and 1996:
June 30 September 30 December 31 March 31
-------------------------------------------------
(In Thousands, except per-share data)
Fiscal 1998
Net revenues $17,576 $17,338 $15,835 $18,852
Cost of products sold 13,656 13,333 11,162 13,761
Cost of services provided 1,887 1,992 2,467 3,068
Net income 130 128 73 11 (1)
Net income per common
share:
Basic .03 .03 .02 .00 (1)
Diluted .03 .03 .02 .00 (1)
Fiscal 1997
Net revenues $13,311 $13,450 $13,679 $17,622
Cost of products sold 10,999 11,245 11,024 14,289
Cost of services provided 427 539 655 798
Net income (loss) 256 79 171 404
Net income (loss) per
common share:
Basic .06 .02 .04 .09
Diluted .06 .02 .04 .09
Earnings per common share calculations for each of the quarters were
based on the weighted average number of shares outstanding for each
period, and the sum of the quarters may not necessarily be equal to
the full year earnings per common share amount.
(1)Includes a termination fee of $850,000 (approximately $370,000
after tax) received from BTG. This amount was recognized as a
reduction to selling, general and administrative expenses, as an
offset against the direct and indirect costs and expenses related
to the BTG merger.
F-17
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
10. Subsequent Events
On May 18, 1998, the Company acquired 19.9% of Pivot Technologies,
Inc. ("Pivot"), a remote network servicer, and an option (the
"Option") to cause the merger of Pivot into a to be created wholly-
owned subsidiary of the Company. In consideration for the Option and
the Pivot Shares, Micros-to-Mainframes paid Pivot (exclusive of the
merger consideration payable upon any exercise of the Option) $475,000
and agreed to make further payments if Pivot is in material compliance
with its Business Plan, as defined in the Purchase and Option
Agreement, up to an aggregate of $346,000 over a five month period
commencing one month after Closing. The Company further agreed to lend
Pivot up to an additional $125,000 in six (6) equal monthly
installments. Such loan is payable, without interest, twelve months
after its issuance, or upon redemption of MTM's interest in the event
the Option is exercised. No assurance can be given that the Company
will exercise the Option. Pursuant to the Option, the shareholders of
Pivot (exclusive of MTM) would receive 377,130 shares of MTM's Common
Stock, five (5) year warrants to acquire 100,000 shares of MTM's
Common Stock at $2.916767 per share, with such warrants becoming first
exercisable one-third at the end of each of the first three years
after the exercise of the Option, and $337,600 in cash. The Option has
a term of six (6) months, and may be extended for up to three
additional one month terms upon the payment of an additional $80,000
prior to the expiration of the Initial Option Period and the
commencement of each additional extension period, respectively. The
Company will have certain other rights if the Option is not exercised
or if Pivot receives additional funding.
F-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: June 19, 1998
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 19,1998
- ----------------
Howard Pavony
/s/ Steven H. Rothman President, June 19,1998
- --------------------
Steven H. Rothman Principal Executive
Officer and Director
/s/ Frank Wong Vice President-Finance June 19,1998
- ---------------------
Frank Wong (Principal Financial and
Accounting Officer)
/s/ Ramon Mota Vice President-Technology June 19, 1998
- ---------------------
Ramon Mota
/s/ William Lerner Director June 19, 1998
- -----------------------
William Lerner
/s/ Arnold J. Wasserman Director June 19, 1998
- ------------------------
Arnold J. Wasserman
EXHIBIT INDEX
Exhibit No. Description
10.18 Lease Agreement between 270 Madison Limited
Partnership as landlord and the Company as tenant
for space located at 270 Madison Avenue.
27.1 Financial Data Schedule.