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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, 1999
_ 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 22, 1999 was $10,079,761
(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 22, 1999, was 4,825,569
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, certain 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 31% 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 or to increase its ownership in Pivot to 33.4%. The
Company exercised its right to increase its ownership in Pivot to 33.4%
on February 22, 1999. As of June 2, 1999, the Company entered into an
agreement with Pivot and merged Pivot into a second-tier wholly-owned
subsidiary of the Company. In connection with such acquisition, Anthony
Travaglini, the President of Pivot, became the Company's Chief Technology
Officer.
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.
On February 8, 1999, the Company opened two E-Commerce web sites to
enable the Company's clients can purchase the Company's products and/or
services on-line. E-Commerce complements the Company's existing business
by giving access to old and new clients to purchase the Company's
products and/or services through the site. The site became fully
operational on February 26, 1999.
The Company 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 benefitted from microcomputer users
becoming more computer literate, the emergence of industry standards and
increased inter-changeability of peripherals. As a result of the
foregoing, the microcomputer dealer distribution channel is currently
undergoing additional market segmentation into dealers such as the
Company, which are systems integrators which offer a one-stop total
solution for outsourcing.
PRODUCTS
The Company markets microcomputers, printers, displays, video
conferencing products, LAN and WAN products, plotters, software and other
peripheral products. MTM is an authorized sales and service dealership
of microcomputer equipment and related products supplied primarily by
major manufacturers, including, but not limited to, Compaq Computer
Corporation, IBM Corporation, Dell Computer Corporation, Hewlett-Packard
Company, Apple Computer, Inc., Seagate Technology, Inc., Cisco Systems,
Inc., Fore Systems, Inc., Canon USA, Inc., Novell, Inc. and Toshiba
American Information. The Company offers a variety of 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 126 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.
REMOTE NETWORK SERVICES
The Company, through Pivot, provides remote network services to its
clients. Remote network services are designed to monitor local wide area
and private virtual networks remotely from Pivot's offices at 614
Corporate Way in Valley Cottage, New York. In connection with the
Company's initial investment in Pivot, Pivot became the exclusive
provider of remote network services to the Company's clients.
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.
INSTALLATION SERVICE PROVIDER
The Company entered into a Master Services Agreement (the "Services
Agreement") with Dell Marketing L.P. ("Dell") on April 15, 1999 to become
a designated Dell installation service provider. Under the Services
Agreement, the Company became Dell's subcontractor for the purpose of
providing certain services to Dell customers, including, among other
things, installation services for workstations, desktops and notebooks,
systems upgrades, customer orientation and virus checks in exchange for
a fee to be paid by Dell for such services. The Services Agreement is
for a three year term, or unless otherwise terminated pursuant to the
Service Agreement, and is automatically renewed for additional one year
terms on each expiration date unless a written notice of termination is
given by either party at least one hundred twenty days prior to the
expiration date of the then current term.
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, on 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 650 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, 1999, 1998
and 1997 ("Fiscal 1999", "Fiscal 1998" and "Fiscal 1997"), approximately
21%, 13% and 13%, respectively, of the Company's total revenues were
derived from sales to PaineWebber, Incorporated ("PaineWebber"). Even
though the Company's agreement with PaineWebber terminated on February
28, 1998, the Company is continuing to do business with PaineWebber on
generally the same terms as the expired agreement. The Company is
continuing its efforts to negotiate a term agreement with PaineWebber.
While the Company believes it will be able to maintain its relationship
with PaineWebber, 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 and Fiscal 1999 such
percentage was less than 3% and 1%, respectively. In Fiscal 1999 Webster
Bank ("Webster") accounted for 7% of the Company's revenues. The Company
is in the process of finalizing a new Network and Desktop Services
Agreement which will supercede the current agreement, ending June 30,
1999, which will run through June 30, 2000, subject to Webster's right
to extend same from time to time through June 30, 2006 and its right to
terminate same on 90 days prior written notice. No assurance can be
given that Webster and the Company will enter into the new agreement or
that Webster will not exercise its right of early termination. 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. Such sales represented 1% of he Company's Fiscal 1999
total revenues. The aforementioned service agreement terminated during
Fiscal 1999. It is not anticipated that any relationship between the
Company and BTG will be continuing.
As of June 15, 1999, 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
27%, 23% and 20%, respectively, of the Company's revenues during Fiscal
1999, Fiscal 1998 and Fiscal 1997. All or substantially all of such
sales were directly through Dell. Sales of Compaq products accounted for
approximately 13%, 16% and 26%, respectively, of the Company's revenues
during Fiscal 1999, Fiscal 1998 and Fiscal 1997. Such sales were
substantially, if not all, through distributors. Sales of IBM products
accounted for approximately 26% of the Company's revenues during Fiscal
1997. No other supplier's products accounted for 10% or more of the
Company's revenue during Fiscal 1999, Fiscal 1998 or Fiscal 1997. The
Company's sales of products purchased through Intelligent Electronics,
Inc. ("IE") accounted for approximately 44% of total revenues in Fiscal
1997. The Company has no current agreement with IE and no longer
conducts any business with IE. The Company's sales of products purchased
through Tech Data Corporation accounted for approximately 25% and 27%,
respectively during Fiscal 1999 and Fiscal 1998. The Company's sales of
products purchased through Ingram Micro, Inc during Fiscal 1999 and 1998
were approximately 15% and 17%, respectively. Except for Dell terminating
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.
DELL COMPUTER
The Company entered into the Services Agreement with Dell Computer
on April 15, 1999. Under the Services Agreement, the Company became
Dells' subcontractor for the purpose of providing certain services to
Dell customers, including, among other things, installation services for
workstations, desktops and notebooks, systems upgrades, customer
orientation and virus checks in exchange for a fee to be paid by Dell for
such services. The Services Agreement is for a three year term, or
unless otherwise terminated pursuant to the Service Agreement, and is
automatically renewed for additional one year terms on each expiration
date unless a written notice of termination is given by either party at
least one hundred twenty days prior to the expiration date of the then
current term.
PIVOT
On May 18, 1998, the Company acquired 19.9% of Pivot 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 or to increase its ownership in Pivot to 33.4%. The
Company exercised its right to increase its ownership in Pivot to 33.4%
on February 22, 1999. As of June 2, 1999, the Company entered into an
agreement with Pivot and merged Pivot into a second-tier wholly-owned
subsidiary of the Company. In connection with such acquisition, Anthony
Travaglini, President of Pivot, became the Company's Chief Technology
Officer. As of the date hereof, Pivot has a limited number of customers
and its revenues are not significant to the Company. However, the
Company intends to further integrate its client base for the use of
services provided by Pivot.
COMPETITION
The microcomputer market is highly competitive. The Company is in
direct competition with local, regional and national distributors of
microcomputer products and related services. Several of these
competitors offer most of the same basic products as does the Company.
The Company competes with other resellers and believes its prices and
delivery terms are competitive. Many competitors may sell their products
at lower prices than the Company, but generally do not offer the same
range of support services after installation of equipment that the
Company offers to its customers.
In addition, the tri-state Metropolitan New York area and New
England, to which the Company markets its products and services, are
particularly characterized by highly discounted pricing on microcomputer
products from various sources of competition. The Company faces
competition from microcomputer suppliers that sell their products through
direct sales forces and from manufacturers and distributors that
emphasize mail order and telemarketing.
Depending on the customer, the principal areas of competition may
include price, pre-sales and post-sales technical support and service,
availability of inventory and breadth of product line. The Company has
an insignificant market share of sales in the microcomputer industry and
the service markets which the Company serves. Certain of the Company's
competitors at the regional and national level are substantially larger,
have more personnel, have materially greater financial and marketing
resources than the Company and operate within a larger geographic area
than does the Company.
Management believes that the Company will continue to be able to
compete effectively against its various competitors by combining fair
pricing with its wide range of customer support services designed to
provide its customers with high-end technological services, multi-vendor
technical support, maintenance of their computer product needs, a
dedicated, trained staff of salespersons and technicians, complete
solutions for single user, multi-user or network systems and specialized
vertical market software.
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, 1999, the Company employed 181 persons, all but two
of whom are full-time personnel. Of these employees, four are
responsible for management, 30 are responsible for sales marketing, one
responsible for marketing, 126 for technical support, three for
distribution, six for finance and 11 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, 2001. 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 $9,000. Even though no assurance can
be given, the Company anticipates no difficulty in renewing the lease at
the going rate.
The Company entered into a lease on June 17, 1998 for 8,433 square
feet of office space at 270 Madison Avenue for an approximate term of 5
years and three months. The monthly rent for the new space will be
approximately $22,500 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 $5,572.90. The lease is
terminable on six months' notice and expires on July 31, 1999. Even
though no assurance can be given, the Company anticipates no difficulty
in renewing the lease at the going rate. In connection with the Pivot
merger, the corporation surviving the merger become liable for Pivot's
obligations under its lease dated August 4, 1997 for approximately 2,500
square feet at 614 Corporate Way, Valley Cottage, New York. This lease
expires on August 31, 2000. The monthly rent for such space is
approximately $2,800.
The Company is also responsible for real estate taxes, insurance,
utilities and maintenance expenses concerning these premises.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a part to any material pending legal or
administrative proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is listed on NASDAQ/NMS under the
symbol "MTMC".
The following table sets forth the high and low 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, 1998
April 1 - June 30, 1997 $4.000 $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
FISCAL YEAR ENDED MARCH 31, 1999
April 1 - June 30, 1998 $3.500 $2.438
July 1 - September 30, 1998 $2.688 $2.000
October 1 - December 31, 1998 $2.688 $1.313
January 1 - March 31, 1999 $8.750 $1.906
On June 22, 1999, the closing bid and asked prices of a share of
Common Stock were $3.563 and $3.688, 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, 1999, 1998, 1997, 1996 and 1995, 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,
--------------------------------------------
1999 1998 1997 1996 1995
(In thousands; except earnings per share)
Net revenues $69,031 $69,601 $58,062 $47,326 $43,043
Cost of
products sold 45,749 51,912 47,549 40,452 37,530
Cost of
services provided 14,103 9,414 2,420 1,109 778
Selling,
general and
administrative
expenses(3) 8,598 7,796 6,698 4,070 3,276
Compensatory
stock
arrangement(1) 0 0 0 4,655 0
Interest expense 18 13 6 13 40
Other Income 953(4) 163 141 66 94
Income (loss)
from operations
before income taxes 1,516 629 1,530 (2,907) 1,514
Net income (loss) 910 342 910 (3,614) 878
Net income (loss) per
common share:
Basic $0.21 $0.08 $0.21 $(1.43) $0.40(2)
Diluted $0.21 $0.08 $0.20 $(1.43) $0.40(2)
Weighted average
number of common and
common equivalent
shares used in calculation:
Basic 4,415 4,450 4,425 2,533 2,176(2)
Diluted 4,437 4,484 4,491 2,533 2,188(2)
Balance Sheet Data: At March 31
-----------------------------------------------------------
1999 1998 1997 1996 1995
(In thousands)
Working Capital $10,630 $10,769 $10,418 $10,684 $4,648
Total Assets 22,950 22,077 20,460 16,209 9,420
Total Liabilities 9,279 9,391 8,117 5,208 4,554
Retained Earnings
(Deficit) 783 (127) (469) (1,379) 2,235
Shareholders' Equity 13,670 12,685 12,343 11,000 4,866
_______________________
(1) Reflects a non-cash non-recurring charge. See "Item 7. Management's
Discussion 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 with the aforementioned indirect cost.
(4) Includes $810,000 contractual payment from BTG, Inc. and interest
income of $107,000.
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,
-------------------------------------------
1999 1998 1997
Product Sales 69.33% 78.13% 88.95%
Services 30.67 21.87 11.05
---------------------------------
Net sales 100.00 100.00 100.00
Cost of Revenues 86.70 88.11 86.06
---------------------------------
13.30 11.89 13.94
Selling, general and
administrative expenses 12.45 11.20(1) 11.54
Interest expense 0.03 0.02 0.01
Other Income 1.38(2) 0 0
Income from operations
before income taxes 2.20 0.90 2.64
Net income (loss) 1.32 0.49 1.57
_______________________
(1) Includes $850,000 contractual payment from BTG, to offset the direct
(421,000) and indirect cost of the terminated merger.
(2) Includes $810,000 contractual payment from BTG, Inc.
The following table sets forth revenues and cost of revenues as a
percentage of each category:
Year Ended March 31,
----------------------------------------------
1999 1998 1997
Product Sales
Revenues 100.00% 100.00% 100.00%
Cost of products sold 95.59 95.46 92.07
--------------------------------------------
4.41% 4.54% 7.93%
============================================
Service Revenues
Revenues 100.00% 100.00% 100.00%
Cost of revenues 66.61 61.84 37.71
-----------------------------------------
33.39% 38.16% 62.29%
=========================================
The Year Ended March 31, 1999 as compared to the Year Ended March 31, 1998.
The Company had net sales of approximately $69,031,000 for the Year
Ended March 31, 1999 ("Fiscal 1999"), as compared with approximately
$69,601,000 for the Year Ended March 31, 1998 ("Fiscal 1998"). This
decrease in sales of approximately 1% was primarily related to decrease
in equipment sales (12%) net of increased revenues from support services
(39%).
Service revenue in Fiscal 1999 increased approximately 39% to
$21,173,000 from $15,222,000 in Fiscal 1998. The cost of services
provided increased to $14,103,000 from $9,414,000, 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 1999 increased
31% to $5,938,000 from $4,517,000 in Fiscal 1998. This increase was due
to the Company's hiring of 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 28% in Fiscal 1999 and 30% in Fiscal
1998. The Company expects to continue to hire additional professional
technicians and engineers for the Advanced Technology Group (which
includes Pivot) 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 revenues sold decreased 1.4% compared to Fiscal 1998 due
to the Company's decrease in lower margin products sales net of an
increase in the higher margin sales of services and related sales.
The cost of product sales increased approximately 0.10% and services
and related sales increased approximately 5.0% from Fiscal 1998 due to
competitive market pressures effecting the mark-up on product sales and
services related sales. The Company currently faces a number of adverse
business conditions, including price and gross profit margin pressures
and market consolidation. 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 increased to
approximately $8,598,000 in Fiscal 1999 from approximately $7,796,000
from Fiscal 1998. Such increase was 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 increases
in direct costs. The increase in overhead expenses primarily related to
additional compensation costs for Company's personnel of approximately
$289,000. Payroll taxes and other employee benefits increased by an
aggregate of approximately $163,000. Telephone expenses related to sales
increased approximately $60,000. Legal and professional fees increased
approximately $163,000,and office rent expenses increased $112,000 due
to the Company's rental of a new facility in New York City.
Other Income increased to approximately $953,000 from approximately
$163,000 for Fiscal 1998. The increase was primarily due to the $810,000
contractual payment from BTG. Inc. for services contracted in Fiscal
1999, and interest and other income of approximately $143,000.
The effective income tax rate for Fiscal 1999 and 1998 was 40% and
46%, respectively. The effective income tax rate decreased 6% due to
several adjustments made to the current and prior year tax provisions.
Accordingly, net income increased to approximately $910,000 in
Fiscal 1999 from $342,000.
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"),and 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 primarily related to additional
compensation cost for sales personnel of approximately $530,000. Payroll
taxes, other employee benefits and training cost 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways, including
the following:
March 31,
---------------------------------------
1999 1998 1997
(Dollars in thousands, except current ratio data)
Cash and cash equivalents 679 3,992 2,880
Working capital 10,630 10,769 10,418
Current ratio 2.16:1 2.15:1 2.29:1
Secured notes payable 980 5 5
Working capital line
available 9,509 7,671 8,140
The Company had working capital of approximately $10,630,000 as of
March 31, 1999, a decrease of approximately $139,000 from March 31, 1998.
During Fiscal 1999, the Company's net cash used in operating
activities was approximately $2,642,000 resulting from an increase in
inventory of $96,000, an increase in accounts receivable of $2,891,000,
an increase in prepaid expenses and other current assets of $147,000, a
decrease in income tax payable of $373,000 and a decrease in deferred
revenue of $810,000 offset by a net income of approximately $910,000 and
a decrease in deferred income tax expenses of $372,000.
The Company used approximately $1,612,000 of cash in investing
activities, which amount is comprised of $408,000 for the purchase of
property, equipment and software, $1,080,000 to acquire shares of Pivot,
and $124,000 loaned to Pivot.
The Company had an increase in its net cash of $941,000 relating to
an increase in its financing activities, primarily from borrowing
$975,000 from its bank, receipt of the exercise price of options
exercised by employees of $153,000,net of the purchase and retirement of
common shares of $186,000.
As a result of the foregoing, the Company's cash decreased
approximately $3,313,000.
The Company has entered into several financing agreements for the
purchase of inventory. These agreements provided the Company with
aggregate credit lines of approximately $9,300,000 at March 31,1999 and
$6,800,000 at March 31, 1998 (with approximately $5,489,000 and
$2,676,000 unused at March 31, 1999 and 1998, respectively), and
generally provide for thirty day repayment terms. On January 19, 1999 the
Company negotiated and signed a new one-year $13,000,000 credit facility
with one of its current floor planners. Such facility replaced the $5
million revolving credit facility previously held by the Company. This
$13 million credit facility combines and expands on $5.5 million in
inventory financing and $5 million in accounts receivable financing
previously held separately by the floor planner and the aforementioned
bank. The new credit facility includes up to $8 million in inventory
financing based on the Company's inventory from time to time and $5
million in working capital financing based upon a percentage of the
Company's accounts receivable from time to time. The combined facility
is secured by the Company's inventory and accounts receivable (other than
inventory and accounts receivable directly financing by other floor
planners who have the lien thereon) and will better support the Company's
rapid growth by providing greater flexibility and more capital than
traditional financing options. The proceeds from such working capital
financing may be used in any manner the Company elects.
The floor-plan agreements generally allow the Company to borrow with
respect to inventory financing for a period of 30 to 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
On March 31, 1999, the Company's total outstanding debt under the
$13 million credit facility with one if its floor planners with respect
to the working capital financing portion of such debt was $980,000
(bearing interest at the prime rate), with a balance of $4,020,000
available under such line, and with respect to inventory financing
portion of such debt was $3,758,384, with a balance of $4,241,616
available under such line. In addition, on March 31, 1999, the Company's
outstanding debt under another floor planner's $1.3 million inventory
credit facility was $52,834, with a balance of $1,247,166 available under
such line. On March 31, 1998 the Company's total outstanding debt under
the $5,000,000 credit facility with one of its lenders with respect to
working capital financing was $5,000, with interest payable at the
lender's Alternate Base Rate (ABR), with a balance of $4,995,000
available under such line. The Company's total outstanding debt on March
31, 1998 under the $5,500,000 credit facility with one of its floor
planners with respect to inventory financing was $3,923,336 with a
balance of $1,576,664 available under such line. In addition, on March
31, 1998, the Company's outstanding debt on another floor planner's $1.3
million inventory credit facility was $200,992, with a balance of
$1,109,008 available under such line.
In addition, the Company and its floor planners agreed on two types
of interest rates with respect to any borrowings to fund working
capital: (i) the prime rate loan, in which the Company agreed to pay
interest to the floor planner on daily contract balance of prime rate;
and (ii) the LIBOR rate loan, in which the Company agrees that the unpaid
principal amount of LIBOR loans shall bear interest prior to maturity at
a rate per annum equal to the LIBOR rate in effect for each interest
period, plus 1.5% per annum.
The Company's current ratio increased to 2.16:1 at March 31, 1999
from 2.15:1 at March 31, 1998.
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 recognized the revenue ratably over the term of the contract.
The Company recognized $90,000 of income during the year ending March
31, 1998 and $810,000 of income during Fiscal 1999.
Merger with Pivot Technologies, Inc
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, the
Company paid Pivot (exclusive of the merger consideration payable upon
any exercise of the Option)$475,000 and agreed to make further payments
if Pivot was in material compliance with its Business Plan, as defined
in the Purchase and Option Agreement, up to an aggregate of $346,000 over
a five month period commencing one month after Closing. The Company
further agreed to lend Pivot up to an additional $125,000 in six (6)
equal monthly installments. Such loan was payable, without interest,
twelve months after its issuance, or upon redemption of the Company's
interest in the event the Option was not exercised. The Option had a term
of six (6) months (the "Initial Option Period") and could be extended for
up to three additional one month terms upon the payment of an additional
$80,000 prior to the expiration of the Initial Option Period and the
commencement of each additional extension period, respectively. On
February 22, 1999, the company exercised its rights to increase ownership
to 33.4% from 19.9%.
On June 2, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") consummating a merger (the "Merger") with
Pivot and the principal shareholders of Pivot ("Pivot Shareholders").
Pursuant to the Merger Agreement, the non-Company Pivot Shareholders
received 377,129 shares of Common Stock, five (5) year warrants to
acquire 100,000 shares of Common Stock at an exercise price of $2.916767
per share and $362,603 in cash.
The shares of Common Stock which the Pivot Shareholders received
in connection with the Merger Agreement are subject to Lock-up Agreements
which have a two year restriction on resale. Twenty-five percent of the
shares subject to the lock-up will be released therefrom on the first
anniversary of the Merger, and the remainder thereof shall be released
on the second anniversary thereof. The Lock-up Agreements grant the
Company a right of first offer should any of the Pivot Shareholders elect
to sell such Registrant Common Stock in a non-public transaction.
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
On March 29, 1999, the Company appointed Goldstein Golub Kessler LLP
("GGK") as the Company's independent certified public accountants for
Fiscal 1999. GGK replaced Ernst & Young LLP, the Company's independent
certified public auditors for Fiscal 1998 and Fiscal 1997.
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 48 Chairman of the Board of
Directors
Steven H. Rothman 50 Chief Executive Officer,
President and a Director
Frank T. Wong 51 Vice President-Finance
and Secretary
William Lerner* 65 Director
Arnold J. Wasserman* 61 Director
Alvin Nashman 71 Director
Anthony R. Travaglini 46 Chief Technology Officer
_______________
* 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.
William Learner has served as a Director of the company since
September 1995. Mr. Lerner has been engaged in the private
practice of corporate and securities law in New York and
Pennsylvania since 1991. His career included service with the U.S.
Securities and Exchange Commission, the American Stock Exchange,
and as counsel to a major investment banking/securities brokerage
firm. Mr. Lerner is a director of Seitel, Inc. (a NYSE list oil
and gas producing company that owns one of the largest seismic
data libraries in North America). Rent- way, Inc. (a NYSE listed
company that is a 2nd largest in the rental-purchase industry),
and Helm Resources, Inc. (an OTC-Bulletin Board company that
provides financing and management services to middle market public
companies), Mr. Lerner also provides corporate secretarial
services to a number of other public companies including Computer
Research, Inc., (OTC- Bulletin Board, a leading provider of the
computer accounting services to the brokerage and banking
industries).
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.
Alvin E. Nashman has been an independent consultant for major
corporations in the field of computer service for the past six years.
He is a director of several computer service companies, including Haifax
Corporation, an American Stock Exchange listed company; and Andrulis
Corporation, Spaceworks, Teoco, Inc., Federal Sources, Inc., Trawick
Associates and Performance Engineering Corporation, all privately held
companies.
Anthony R. Travaglini became the Company's Chief Technology Officer
in June 1999 when the Company acquired Pivot Technologies, Inc. Mr.
Travaglini founded Pivot in August 1997 and served as its President until
Pivot was acquired by the Company. Prior to founding Pivot, Mr.
Travaglini was responsible for network, systems and administration
management for multiple divisions of PepsiCo. from April 1992 until
August 1997. While at PepsiCo., he supervised the design, development
and implementation of PepsiCo.'s enterprise management system. Mr.
Travaglini also served as Vice President of Trading Technologies at
Shearson-Lehman Brothers from February 1988 to April 1992 and a senior
UNIX systems administrator at Solomon Brothers from December 1982 to
February 1987.
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, 1998 to March 31, 1999, 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 1999,
Fiscal 1998 and Fiscal 1997 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($) Options(#)
Long-Term
Annual Compensation(1) Compensation
--------------------- ------------
Shares
Name and Principal Underlying
Position Year Salary($) Bonus($) Options(#)
- ----------------- --- --------- ------- ------------
Howard Pavony 1999 $227,501 $40,000 50,000
Chairman of the Board 1998 $213,334 $ -- --
1997 $185,417 $20,000 50,000
Steven H. Rothman 1999 $227,501 $40,000 50,000
President and CEO 1998 $213,334 $ -- --
1997 $185,417 $20,000 50,000
Robert Fries (2) 1998 $139,992 $ -- --
1997 $103,326 -- --
Ramon Mota (3) 1999 $125,126 $5,000 5,000
1998 $110,333 $ -- 5,000
1997 $100,033 $ 9,000 5,000
__________________
(1) The compensation figures shown do not include the cost to the
Company of benefits, including the use of automobiles leased or car
allowances paid by the Company, premiums for life and health
insurance and any other personal benefits provided by the Company
to such persons, which are, in the aggregate, below reportable
thresholds.
(2) Mr. Fries an executive officer of the Company through March 31, 1998.
(3) Mr. Mota voluntarily terminated his agreement with the Company
on December 31, 1998. Mr. Mota was paid a consulting fee of $10,000
for 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The table below includes the number of stock options granted to the
executive officers named in the Summary Compensation Table during the
year ended March 31, 1999, exercise information and potential realizable
value.
Individual Grants Potential Realizable
------------------- ---------------------
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Price Appreciation
Options Employees in Exercise Expiration for Option Term
Granted(#) Fiscal Year Price($/sh) Date 5%($) 10%($)
---------- ------------ ----------- --------- ------- -------
Steven H. Rothman 50,000 20.0% 2.25 7/13/08 $118,125 $123,750
Howard Pavony 50,000 20.0% 2.25 7/13/08 $118,125 $123,750
Robert Fries 0 0.0% -- -- $0 $0
Ramon Mota 5,000 2.0% 2.25 (1) $11,812.50 $12,375
- -----------------------
(1) Mr. Mota voluntarily terminated his agreement with the Company on
December 31, 1998 and his unexercised stock options were cancelled.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The table below includes information regarding the value realized
on option exercises and the market value of unexercised options held by
the executive officers named in the Summary Compensation Table during the
year ended March 31, 1999.
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired at FY-End(#) at FY-End($)
on Exer- Value Exercisable/ Exercisable/
Name cise (#) Realized Unexercisable Unexercisable
Steven H. Rothman 0 0 90,000/20,000 $67,500/$0
Howard Pavony 0 0 90,000/20,000 $67,500/$0
Robert Fries 0 0 0/0 $0/$0
Ramon Mota 15,000 $20,625 0/0 $0/$0
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, 1999 was at the rate of
$227,501. 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. Mr. Mota voluntarily left the
employ of the Company on December 31, 1998 and his employment agreement
was terminated. Mr. Mota received a consulting fee of $10,000 for
services performed in 1999.
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. Mr. Fries' agreement was automatically
extended for an additional year through April 30, 2000.
Simultaneously with the acquisition of Pivot on June 2, 1999, the
Company and Mr. Travaglini entered into an employment agreement with a
term ending on March 31, 2002 providing for a base salary of $150,000
based on an April 1 to March 31 Fiscal Year; $175,000 for the second year
and $185,000 for the third year; bonus and stock options based on the
earnings of the Company's business with respect to which Mr. Travaglini
has management responsibility; and a $500/month car allowance.
STOCK OPTION PLANS
The Company has established a 1993 Stock Option Plan (the "1993
Plan"), a 1996 Stock Option Plan (the "1996 Plan") and 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 462,500 stock options. Of these, 155,000 are
currently exercisable, and 84,166 have been exercised to date. 220,000
options have been canceled to date or lapsed and made available for
regrant under the 1993 Plan.
An aggregate of 235,000 options have been granted to date under the
1996 Plan. Of these, 108,700 are exercisable and 14,000 have been
exercised to date. 21,300 options have been canceled to date and made
available for regrant under the 1996 Plan. 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, 2005 to purchase up to
10,000 shares of Common Stock at $2.25 per share, incentive stock
options expiring on July 13, 2008 to purchase up to 50,000 share of
Common Stock at $2.25 per share and incentive stock options expiring on
August 31, 2001 to purchase up to 50,000 shares of Common Stock at $4.43
per share; Mr. Lerner holds options expiring on September 14, 2005 to
purchase up to 2,500 shares of Common Stock at $2.25 per share, options
expiring on August 19, 2006 to purchase up to 2,500 shares of Common
Stock at $2.25 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
Messrs. Wasserman and Nashman each hold options expiring March 31, 2008
and October 15, 2008,respectively, to purchase up to 10,000 shares of
Common Stock at $2.75 per share and $1.625, respectively.
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) 1,065,625 (3)(4) 21.60%
Howard Pavony(2) 1,054,500 (3)(5) 21.4%
Frank Wong(2) 3,755 (6) *
Anthony Travaglini(2) 238,565 (7) 4.9%
William Lerner
423 East Beau Street
Washington, PA 15301 15,000 (3) *
Arnold Wasserman
1 Brookwood Drive
West Caldwell, NJ 07006 10,000 (3) *
Alvin E. Nashman
3609 Ridgeway Terrace
Falls Church, VA 22044 10,000 (3) *
All Directors and
executive officers
as a group (7 persons) 2,394,445 (3)(4)(5) 46.7%
- -----------------------------
* Represents less than 1%.
(1) Based on 4,825,569 shares of Common Stock issued and outstanding as
of June 22, 1999.
(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 90,000 shares of Common Stock, options to purchase 7,000
shares held by Mr. Lerner and options to purchase 2,000 shares each
by Messrs. Wasserman and Nashman, respectively, which are currently
exercisable. Also includes options held by each of Messrs. Pavony
and Rothman to purchase 20,000 shares and options held by Messrs.
Lerner, Wasserman and Nashman to purchase 8,000 shares each,
respectively, which are not currently exercisable.
(4) Includes 1,125 shares held by the wife of Mr. Rothman. Also
includes an aggregate of 169,139 shares of Common Stock held in
trust for Mr. Rothman's three children. Mr. Rothman disclaims
beneficial ownership of all of such shares.
(5) Includes an aggregate of 164,044 shares held in trust for Mr.
Pavony's two children. Mr. Pavony disclaims beneficial ownership
of all of such shares.
(6) Includes 1,000 shares held by Mr. Wong's wife.
(7) Includes 188,564 shares of Common Stock which are subject to a Lock-
Up Agreement which restricts the resale of 47,141 shares for one
year and 141,423 shares for two years and grants the Company a right
of first offer should Mr. Travaglini elect to sell such Common Stock
in a private transaction. Also includes a five-year warrant to
purchase 50,000 shares of Common Stock of the Company at $2.916767
per Share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Independent Auditors' Report F-1-2
Consolidated Balance Sheets at March 31, 1999 and 1998 F-3
Consolidated Statements of Income for F- 4
the years ended March 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' F-5
Equity for the years ended March 31, 1999, 1998
and 1997
Consolidated Statements of Cash Flows for the
the years ended March 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because of
the absence of the conditions under which they are required or
because the required information, where material, is shown in the
Consolidated Financial Statements or the notes thereto.
(3) Exhibits
2.1 Asset Purchase Agreement dated as of May 1, 1996 by and
among DATA.COM RESULTS, INC. ("DATA.COM"), the sole
shareholder of DATA.COM, the Company and the Company's
wholly-owned subsidiary, DATA.COM DIRECT, INC. (4)
2.2 Stock Purchase and Option Agreement dated May 15, 1998
by and among the Company, Pivot Technologies, Inc. and
certain Pivot Shareholders. (7)
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 Certificate of Amendment filed September 10, 1996. (6)
3.3 By-Laws of the Company.(1)
4.1 Form of Warrant issued by the Company to Pivot
Shareholders.(9)
10.1 Lease Agreement between the Company and Associates 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 November 12,
1992 between the Bank of New York and the Company.(1)
10.5 Remarketer/Integrator Agreement between Dell Marketing
L.P. and Company, as amended.(1)
10.6 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.
10.22 Business Financing Agreement as of January 19, 1999
Deutsche Financial Services Corporation and Micros-to-
Mainframes, Inc. (8)
10.23 Addendum to Agreement for Wholesale Financing
Deutsche Financial Services Corporation and Micros-
to-Mainframes, Inc. (8)
10.24 Addendum to Business Financing Agreement and Agreement
for Wholesale Financing with Deutsche Financial
Services Corporation.(8)
10.25 Master Services Agreement dated April 15, 1999, between
Micros-to-Mainframes, Inc. and Dell Marketing L.P.
10.26 Agreement and Plan of Merger dated June 2, 1999 by and
among the Company, Registrant Mergerco and Pivot
Shareholders. (9)
10.27 Employment Agreement dated June 2, 1999 by and among the
Company, Pivot and Anthony Travaglini. (9)
21.1 Subsidiaries of the Company.(5)
23.2 Consent from Independent accountants on 1996 and 1998
Stock Options Plans (1) Letter from Goldstein Golub
Kessler LLP, (2) Letter from Ernst & Young LLP.
27.1 Financial Data Schedule.
- -------------------
1. Incorporated by reference from the Company's Registration Statement
on Form SB-2 for October 26, 1993 (No. 33-62932-NY).
2. Incorporated by reference from the Company's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1994.
3. Incorporated by reference from the Company's Current Report 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.
8 Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1998.
9. Incorporated by reference from the Company's Current Report on Form
8-K dated June 8, 1999.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated June 8, 1999,
reporting that it had acquired Pivot Technologies, Inc.
REPORT OF INDEPENDENT AUDITORS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Reports F-2 - F-3
Consolidated Balance Sheets as of March 31, 1999 and 1998 F-4
Consolidated Statements of Income for the Years Ended March 31,
1999, 1998 and 1997 F-5
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended March 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the Years Ended March 31,
1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8 - F-20
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Micros-To-Mainframes, Inc.
We have audited the accompanying consolidated balance sheet of
Micros-To-Mainframes, Inc. and Subsidiaries as of March 31, 1999
and the related consolidated statements of income, shareholders'
equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Micros-To-Mainframes, Inc. and Subsidiaries as of March
31, 1999 and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted
accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 14, 1999, except for Note 10, paragraph 4,
as to which the date is June 2, 1999
F-2
Report of Independent Auditors
Board of Directors and Shareholders
Micros-To-Mainframes, Inc.
We have audited the accompanying consolidated balance sheet of Micros-To-
Mainframes, Inc. as of March 31, 1998 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for
each of the two 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 the
consolidated results of its operations and its cash flows for each of the
two 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-3
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------
March 31, 1999 1998
- -----------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 678,680 $ 3,991,593
Accounts receivable - trade,less allowance
of $140,000 16,891,070 14,000,562
Inventories 1,428,736 1,332,322
Prepaid expenses and other current assets 736,844 396,618
Deferred income taxes 84,100 402,400
- ------------------------------------------------------------------------------
Total current assets 19,819,430 20,123,495
- ------------------------------------------------------------------------------
Property and Equipment:
Leasehold improvements 111,584 100,206
Furniture, fixtures and other equipment 2,248,843 1,852,350
- ------------------------------------------------------------------------------
2,360,427 1,952,556
Less accumulated depreciation and amortization 1,170,173 877,683
- ------------------------------------------------------------------------------
1,190,254 1,074,873
Goodwill, net of accumulated amortization
of $173,219 and $113,819, respectively 717,781 777,181
Investment in Pivot Technologies, Inc. 1,067,217 -
Other Assets 155,078 100,951
- ------------------------------------------------------------------------------
Total Assets $22,949,760 $22,076,500
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Secured notes payable $ 980,000 $ 5,000
Inventory financing agreements 3,811,218 4,124,000
Accounts payable and accrued expenses 4,397,724 4,042,141
Income taxes payable - 373,284
Deferred revenue - 810,000
-----------------------------------------------------------------------------
Total current liabilities 9,188,942 9,354,425
Deferred Income Taxes 90,500 37,000
- ------------------------------------------------------------------------------
Total liabilities 9,279,442 9,391,425
- ------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.001 par value; authorized
10,000,000 shares; issued and outstanding
4,446,440 and 4,450,374 shares, respectively 4,446 4,450
Additional paid-in capital 12,883,170 12,807,900
Retained earnings (accumulated deficit) 782,702 (127,275)
-----------------------------------------------------------------------------
Shareholders' equity 13,670,318 12,685,075
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $22,949,760 $22,076,500
==============================================================================
F-4
See Notes to consolidated Financial Statemnets
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENT OF INCOME
- -----------------------------------------------------------------------------
Year ended March 31, 1999 1998 1997
Net revenue:
Products $47,857,812 $54,378,851 $51,646,003
Services 21,172,868 15,222,379 6,416,470
- ------------------------------------------------------------------------------
69,030,680 69,601,230 58,062,473
- ------------------------------------------------------------------------------
Costs and expenses:
Cost of products sold 45,749,463 51,912,015 47,548,895
Cost of services provided 14,102,562 9,413,815 2,419,527
Selling, general and
administrative expenses 8,597,699 7,796,253 6,698,265
- ------------------------------------------------------------------------------
68,449,724 69,122,083 56,666,687
- ------------------------------------------------------------------------------
Other income 953,053 163,121 140,788
Interest expense 18,232 13,437 6,136
- ------------------------------------------------------------------------------
Income from operations
before income taxes 1,515,777 628,831 1,530,438
Provision for income taxes 605,800 287,000 620,450
- ------------------------------------------------------------------------------
Net income $ 909,977 $ 341,831 $ 909,988
==============================================================================
Net income per common share:
Basic $ .21 $ .08 $ .21
==========================================================================
Diluted $ .21 $ .08 $ .20
==========================================================================
Weighted-average number of shares
used in calculation:
Basic 4,414,564 4,450,374 4,425,073
==========================================================================
Diluted 4,437,013 4,483,881 4,491,319
==========================================================================
See Notes to consolidated Financial Statemnets
F-5
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Retained
Preferred Stock Common Stock Additional Earnings
Number Number Paid-in (Accumulated
of Shares Amount of Shares Amount Capital Deficit) Total
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:
Exercise of stock options - - 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
Common stock purchased and retired - - (74,600) (74) (186,275) - (186,349)
Exercise of stock options - - 70,666 70 152,679 - 152,749
Issuance of nonemployee stock options - - - - 32,220 - 32,220
Tax benefit related to employee stock
options - - - - 76,646 - 76,646
Net income - - - - - 909,977 909,977
- --------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 - - 4,446,440 $4,446 $12,883,170 $ 782,702 $13,670,318
====================================================================================================================
See Notes to consolidated Financial Statemnets
F-6
MICROS-TO-MAINFRAMES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------
Year ended March 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 909,977 $ 341,831 $ 909,988
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 299,490 272,607 169,056
Amortization of goodwill 59,400 59,369 54,450
Deferred income taxes 371,800 (350,400) -
Stock option issued to nonemployee 32,220 - -
Loss from investment in Pivot Technologies,Inc. 13,291 - -
Bad debt expense - 99,000 -
Other noncash charges - - 5,000
Changes in operating assets and liabilities,
net of effects of acquisition in 1997:
Increase in accounts receivable (2,890,508) (392,104) (3,418,345)
(Increase) decrease in inventories (96,414) 126,145 (96,068)
(Increase) decrease in prepaid expenses
and other current assets (146,580) 14,199 22,609
Increase in other assets (54,127) (6,657) (25,132)
Increase (decrease) in inventory
financing agreements (312,782) (1,031,000) 2,619,000
Increase (decrease) in accounts payable
and accrued expenses 355,583 1,291,448 (732,928)
Increase (decrease) in income taxes payable (373,284) 198,731 55,413
Increase (decrease) in deferred revenue (810,000) 810,000 -
- ------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (2,641,934) 1,433,169 (436,957)
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (407,871) (321,154) (682,034)
Investment in Pivot Technologies, Inc. (1,080,508) - -
Loan to Pivot Technologies, Inc. (124,000) - -
Purchase of subsidiary, net of cash acquired - - (1,311,018)
- ------------------------------------------------------------------------------------------
Cash used in investing activities (1,612,379) (321,154) (1,993,052)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in secured notes payable 975,000 - -
Purchase and retirement of common stock (186,349) - -
Proceeds from exercise of stock options 152,749 - 25,000
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 941,400 - 25,000
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (3,312,913) 1,112,015 (2,405,009)
Cash and cash equivalents at beginning
of year 3,991,593 2,879,578 5,284,587
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 678,680 $3,991,593 $ 2,879,578
=========================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,300 $ 13,000 $ 6,000
==========================================================================================
Income taxes $ 750,000 $ 557,000 $ 560,000
===========================================================================================
Supplemental schedule of noncash financing activity:
Tax benefit related to stock options $ 76,646 - -
===========================================================================================
See Notes to consolidated Financial Statemnets
F-7
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") and
MTM Advanced Technology, Inc. ("MTM"), hereinafter
collectively referred to as the "Company." Significant
intercompany accounts and transactions have been
eliminated. The Company is a premier provider of network
analysis and diagnostics, management, 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.
The Company purchases microcomputers and related products
directly from suppliers as either an authorized dealer or a
value-added reseller. The Company has entered into
authorization agreements with major suppliers which can be
terminated by the supplier, with or without cause, upon 30
to 90 days notice, or immediately upon the occurrence of
certain events. The cost of sales of products purchased from the
Company's three largest suppliers accounted for 33%, 28%
and 17% for the year ended March 31, 1999. The cost of sales of
products purchased from the Company's two largest suppliers
were 23% and 16% for the year ended March 31, 1998. For
the year ended March 31, 1997, products from three of the
Company's largest suppliers accounted for 20%, 26%, and 13%
of the cost 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 prior years' amounts have been reclassified to
conform to current-year presentation.
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 consolidated financial
statements and accompanying notes. Actual results could
differ from those estimates.
Cash and Cash Equivalents:
Cash and cash equivalents generally consist of cash,
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-8
Property and Equipment:
Property and equipment is stated at cost and is depreciated
using the straight-line method. Furniture, fixtures and
other equipment have useful lives ranging from three to
seven years. Leasehold improvements are amortized over the
shorter of the lease term or economic life of the related
improvement. Expenditures which extend the useful lives of
existing assets are capitalized. Maintenance and repair
costs are charged to operations as incurred.
The Company incurred approximately $299,000, $273,000 and
$169,000 in depreciation expense for the years ended March
31, 1999, 1998 and 1997, respectively.
Goodwill:
Goodwill is amortized using the straight-line method over
15 years (see Notes 8 and 10).
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,
1999, 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 asset and
liability method, for temporary differences between
financial and tax reporting, which arise principally from
the deductions related to the allowances for doubtful
accounts, certain capitalized software costs, the basis of
inventory and differences arising from book versus tax
depreciation methods. The Company files a consolidated
federal income tax return and separate state income tax
returns.
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.
Accounting for Stock-based Compensation:
The Company has granted stock options for a fixed number of
shares to employees with an exercise price equal to the
fair value of the shares at the date of grant. The Company
F-9
has accounted for stock option grants in accordance with
Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and intends to
continue to do so.
Net Income per Share of Common Stock:
The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings per Share, 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.
SFAS 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.
EPS for 1997 have been restated to conform to the
requirements of SFAS 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-sized
corporations in diversified industries located in the New
York Tri-State Area. Receivables from one of the Company's
largest customers were approximately 21% and 26% of the
trade receivables at March 31, 1999 and 1998, respectively.
One customer accounted for approximately 21% and 13% of the
Company's revenue for the years ended March 31, 1999 and
1998, respectively. Two customers each accounted for 13%
of the Company's revenue in the year ended March 31, 1997.
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-10
Recent Accounting Pronouncements:
In March 1998, the Accounting Standards Executive Committee
issued Statement of Position ("SOP") 98-1, Accounting for
Costs of Computer Software Developed or Obtained for
Internal Use. This statement provides guidance on
accounting for the costs of software developed or obtained
for internal use and is effective for years beginning after
December 15, 1998. The Company adopted this standard for
the current year. Management does not believe that any
other recently issued, but not yet effective, accounting
standards if currently adopted would have a material effect
on the accompanying consolidated financial statements.
2. CREDIT FACILITIES:
The Company has entered into two financing agreements for
the purchase of inventory ("floor plan agreements"). These
agreements aggregate approximately $9,300,000 and
$6,800,000 (approximately $5,489,000 and $2,676,000 unused)
at March 31, 1999 and 1998, respectively, and generally
provide for 30-day repayment terms.
The floor-plan agreements generally allow the Company to
borrow for a period of 30 to 60 days interest free.
Interest is charged to the Company only after the due date.
In addition, one of these agreements provides for minimum
amounts of tangible net worth and specified financial
ratios.
On January 19, 1999, the Company entered into a new one-
year $13,000,000 credit facility with one of its current
floor planners. This $13,000,000 credit facility includes
an $8,000,000 floor plan agreement and a $5,000,000
revolving receivable financing facility. The combined
facility is secured by the Company's assets (other than
inventories and accounts receivable directly financed by
other floor planners who have the lien thereon).
In addition, the Company has a choice of two types of
loans: (i) the prime rate loan, in which interest is
calculated at the prime rate (7.75% at March 31, 1999) on
the daily contract balance, and (ii) the LIBOR loan, in
which the unpaid principal amount of LIBOR loans shall bear
interest prior to maturity at a rate per annum equal to the
LIBOR in effect for each interest period, plus 1.5% per
annum (6.44% at March 31, 1999).
On March 31, 1999, the Company's total outstanding debt
under the $5,000,000 revolving receivable financing
facility was $980,000 which bears interest at the prime
rate. The Company also pays an unused line fee of .125%
per annum on the daily average of the unused amount of the
revolving receivable financing facility. On March 31,
1998, the Company's outstanding debt under a bank revolving
line of credit was $5,000 with interest payable at the
bank's alternate base rate of 8.50%.
3. SHAREHOLDERS' EQUITY:
Preferred Stock:
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
F-11
authorizing a new class of 2,000,000 shares of "blank
check" preferred stock, par value $.001 per share. As of March 31, 1999,
there were no preferred shares issued and outstanding.
Stock Options:
The 1993 Employee Stock Option Plan (the "1993 Plan") was
adopted by the Company in May 1993; the 1996 Stock Option
Plan (the "1996 Plan") was approved by the shareholders of
the Company on August 20, 1996; and the 1998 Stock Option
Plan (the "1998 Plan") was approved by the shareholders of
the Company on October 16, 1998. The plans provide for
granting of options, including incentive stock options,
nonqualified stock options and stock appreciation rights to
qualified employees (including officers and directors) of
the Company, independent contractors, consultants and other
individuals, to purchase up to an aggregate of 250,000,
350,000 and 250,000 shares of common stock under the 1993
Plan, the 1996 Plan and the 1998 Plan, respectively. The
exercise price of options generally may not be less than
100% of the fair market value of the Company's common stock
at the date of grant. Options may not be exercised more
than 10 years after the date of grant. Options granted
under the plans become exercisable in accordance with
different vesting schedules depending on the duration of
the options.
Information regarding the Company's stock option plans is
summarized below:
1993 Plan 1996 Plan
- -------------------------------------------------------------------------------------------------
Number of Option Exercise Number of Option Exercise
Options Price per Share Options Price per Share
- --------------------------------------------------------------------------------------------------
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
Options 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
Options expired during the year (150,000) $3.375 - -
Options canceled during the year (5,000) $2.25 (17,000) $2.50 - $3.875
Options repriced during the year (50,000) $3.9375 - $7.00 - -
50,000 $2.25 - -
Options issued during the year 150,000 $2.25 50,000 $1.625 - $2.75
Options exercised during the year (56,666) $1.25 - $2.25 (14,000) $2.875
- ------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1999 158,334 199,700
======================================================================================================
There have been no transactions relating to the 1998 Plan.
F-12
The weighted-average exercise price of the total options
outstanding at March 31, 1999 is $3.04 and the weighted-
average contractual life is 7.95 years.
The weighted-average fair value of options granted during
the years ended March 31, 1999 and 1998 is $2.31 and $2.77,
respectively.
There were 155,000 and 213,333 options exercisable at March
31, 1999 and 1998, respectively, under the 1993 Plan and
108,700 and 25,000 options exercisable at March 31, 1999 and
1998, respectively, under the 1996 Plan.
The Company has elected to follow APB Opinion No. 25 and
related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair
value accounting provided for under Financial Accounting
Standards Board ("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 Opinion No. 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 FASB No. 123, and has been determined
as if the Company had accounted for its employee stock
options under the fair value method of the statement. The
fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for the years ended
March 31, 1999 and 1998 and 1997: risk-free interest rate
5.1%, 6.0% and 6.0%, respectively; no dividend yield; a
volatility factor of the expected market price of the
Company's common stock of 1.88, .57 and .78, respectively,
and an expected life of 9.2, 8.5 and 8.0 years,
respectively.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of
highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in management's opinion the existing models
do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the
options' vesting period. The Company's pro forma
information is as follows:
Year ended March 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Pro forma net income $444,307 $301,225 $883,825
=============================================================================
Pro forma income per share -
basic and diluted $ .10 $ .07 $ .20
=============================================================================
F-13
In accordance with the provisions of FASB No. 123, the pro
forma disclosures include only the effect of stock options
granted in years beginning after December 15, 1994. The
application of the pro forma disclosures presented above are
not representative of the effects that FASB No. 123 may have
on net earnings and EPS 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 per share:
Year ended March 31, 1999 1998 1997
- ----------------------------------------------------------------------------
Numerator:
Net income $ 909,977 $ 341,831 $ 909,988
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 4,414,564 4,450,374 4,425,073
Dilutive effect of employee stock
options and warrants 22,449 33,507 66,246
- -----------------------------------------------------------------------------
Denominator for diluted earnings
per share 4,437,013 4,483,881 4,491,319
=============================================================================
Net income per share - basic $ .21 $ .08 $ .21
=============================================================================
Net income per share - diluted $ .21 $ 08 $ .20
=============================================================================
Options to purchase 154,700, 145,000 and 155,000 shares of
common stock, outstanding as of March 31, 1999, 1998 and
1997, respectively, were not included in the computation of
diluted earnings per share because their inclusion would be
antidilutive.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
March 31, 1999 1998
Trade accounts payable $3,200,703 $2,998,222
Accrued payroll and other taxes payable 497,247 512,689
Accrued commissions 256,618 198,705
Accrued other 443,156 332,525
- ---------------------------------------------------------------------
$4,397,724 $4,042,141
=====================================================================
F-14
5. INCOME TAXES:
The asset and liability method is used in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to
reverse.
The provision for income taxes consists of the following:
Year ended March 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Federal:
Current $184,500 $ 513,100 $463,450
Deferred 299,000 (289,000) 5,000
- -----------------------------------------------------------------------------
483,500 224,100 468,450
State:
Current 49,500 124,300 152,000
Deferred 72,800 (61,400) -
- -----------------------------------------------------------------------------
$605,800 $ 287,000 $620,450
=============================================================================
The reconciliations of income tax computed at the federal
statutory tax rates to actual income tax expense are as
follows:
Year ended March 31, 1999 1998 1997
Tax expense at statutory rates
applied to pretax earnings $515,000 $213,800 $520,000
State income taxes, net of federal
benefit 76,500 41,500 100,000
Other 14,300 31,700 450
- -----------------------------------------------------------------------------
$605,800 $287,000 $620,450
=============================================================================
F-15
Significant components of the Company's deferred tax assets
and liabilities are as follows:
March 31, 1999 1998
Deferred tax assets:
Reserve for bad debts $54,600 $ 54,000
Inventory reserve 15,600 24,000
Deferred revenue - 313,000
Other, net 13,900 11,400
- ---------------------------------------------------------------------------
84,100 402,400
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software, net 44,900 -
Depreciation 45,600 37,000
- --------------------------------------------------------------------------
90,500 37,000
- --------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ (6,400)$365,400
==========================================================================
For the year ended March 31, 1999, the Company recognized
for income tax purposes a tax benefit of $76,646 for
compensation expense related to its incentive stock option
plan for which no corresponding charge to operations has
been recorded. Such amount has been added to additional
paid-in capital for the year ended March 31, 1999.
6. COMMITMENTS AND CONTINGENCIES:
Leases:
The Company leases three locations for its administrative
and operational functions under operating leases expiring
at various dates through July 2004. Certain leases are
subject to escalation based on the Company's share of
increases in operating expenses. 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 noncancelable
operating leases are as follows:
Year ending March 31,
2000 $ 438,569
2001 379,463
2002 359,635
2003 345,167
2004 206,021
Thereafter 22,292
-----------------------------------
$1,751,147
===================================
F-16
Rental expense for operating leases approximated $572,000,
$356,000 and $460,000 for the years ended March 31, 1999,
1998 and 1997, respectively.
Employment Agreements:
The Company has entered into employment agreements which
require the payment of approximately $460,000 annually and
which expire at various dates through September 2001.
7. EMPLOYEE SAVINGS PLAN:
The Company has an employee savings plan which qualifies
under Section 401(k) of the Internal Revenue Code. Under
the plan, all employees who are at least 21 years of age
and have completed one year of service are eligible to
defer up to 15% of their pre-tax compensation, but not more
than the limit prescribed by the Internal Revenue Service.
The Company matches 10% of employee contributions to a
maximum of 6% of the employee's salary. The Company
contributed approximately $25,000, $18,000 and $12,000 to
the plan in the years ended March 31, 1999, 1998 and 1997,
respectively.
8. 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 Data.Com payables (primarily trade). Data.Com is a
data communication, wide area network and local area
network 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.
The following summarized pro forma results of operations for
the year ended March 31, 1997 have been prepared assuming
the acquisition occurred at the beginning of the period.
Net sales $58,907,524
Net income 957,704
Earnings per share:
Basic $ .22
Diluted $ .21
- ------------------------------------------------------
9. TERMINATION OF THE MERGER AGREEMENT:
On August 29, 1997, the Company entered into an Agreement
and Plan of Merger (the "Agreement") with BTG, Inc.
("BTG"), a Virginia corporation, 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 $25,000,000.
F-17
On February 13, 1998, BTG 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 nonrefundable payment of $900,000 from BTG for
consulting services to be provided during the 10-month
period ended December 31, 1998. The Company recognized
$810,000 and $90,000 of income related to this payment
during the years ended March 31, 1999 and 1998,
respectively. The Company is not required to provide
services exceeding $900,000.
10. IVESTMENT IN PIVOT TECHNOLOGIES, INC:
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, the Company paid Pivot (exclusive of the merger
consideration payable upon any exercise of the Option)
$475,000 and made further payments, as defined in the
Purchase and Option Agreement, of $346,000 over a five-
month period commencing one month after closing. Pursuant
to the Option, the shareholders of Pivot (exclusive of the
Company) would receive 377,130 shares of the Company's
common stock, five-year warrants to acquire 100,000 shares
of the Company's common stock at $2.916767 per share, with
one-third such warrants becoming exercisable at the end of
each of the first three years after the exercise of the
Option and $337,600 in cash. The Option had an initial
term of six months and was extended for three additional
one-month terms for additional cash consideration of
$240,000. Such further payments gave the Company the right
to increase its ownership to 33.4% for no further
consideration. The Company also incurred acquisition costs
of approximately $20,000. On February 22, 1999, the
Company increased its ownership to 33.4%.
The investment in Pivot is accounted for under the equity
method of accounting whereby earnings or losses from the
investment are reflected in the Company's earnings based on
the Company's pro rata ownership interest. The net loss
from this investment for the year ended March 31, 1999
aggregated approximately $13,000. The excess of the
Company's carrying value over the proportionate share of
the underlying net assets of Pivot aggregated $985,000 and
is being amortized over a period of 15 years.
In addition, the Company lent Pivot $124,000 which is
included in prepaid expenses and other current assets at
March 31, 1999. The loan is payable, without interest, 12
months after its issuance.
On June 2, 1999, the Company acquired the remaining 66.6%
ownership of Pivot. In consideration, Pivot shareholders
received 377,129 shares of the Company's common stock;
five-year warrants to acquire 100,000 shares of the
Company's common stock at $2.916767 per share, exercisable
immediately; and $262,603 in cash. The Company also paid
$100,000 to the Pivot shareholders in consideration for the
F-18
shareholders' covenant not to compete. Additionally, the
Company entered into employment agreements which require
the payment of approximately $335,000 annually through
March 2002. The approximate value of the consideration
paid totaled $2,170,000. As of March 31, 1999 (unaudited),
the total assets, liabilities, and shareholders' equity of
Pivot approximated $388,000, $123,000 and $265,000,
respectively.
11. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Information relating to the allowance for doubtful accounts
is as follows:
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses of Year
- ----------------------------------------------------------------------
(in thousands)
Year ended March 31,
1997 $ 41 - $ 41
1998 41 $99 140
1999 140 - 140
- ----------------------------------------------------------------------
12. QUARTERLY RESULTS OF OPERATIONS (unaudited):
The following is a summary of the quarterly results of
operations for the years ended March 31, 1999, 1998 and
1997:
June 30 September 30 December 31 March 31
------------------------------------------------
(in thousands, except per share data)
1999:
Net revenue $17,073 $15,066 $17,313 $19,579
Cost of products sold 11,840 9,675 11,716 12,518
Cost of services provided 2,905 3,003 3,119 5,076
Net income 207 (1) 215 (1) 135 (1) 353
Net income per common share:
Basic $ .05 (1) $ .05 (1) $ .03 (1) $ .08
Diluted $ .05 (1) $ .05 (1) $ .03 (1) $ .08
1998:
Net revenue $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 (2)
Net income per common share:
Basic $ .03 $ .03 $ .02 $ .00 (2)
Diluted $ .03 $ .03 $ .02 $ .00 (2)
(continued)
F-19
June 30 September 30 December 31 March 31
------------------------------------------------
(in thousands, except per share data)
1997:
Net revenue $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 256 79 171 404
Net income 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 $270,000 (approximately $159,000 after tax)
contractual payment from BTG.
(2) 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-20
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 28, 1999
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 28, 1999
Howard Pavony
/s/ Steven H. Rothman President, June 28, 1999
Steven H. Rothman Principal Executive
Officer and Director
/s/ Frank Wong Vice President-Finance June 28, 1999
Frank Wong (Principal Financial and
Accounting Officer)
/s/ Anthony Travaglini Chief Technology Officer June 28,1999
Anthony Travaglini
/s/ William Lerner Director June 28,1999
William Lerner
/s/ Arnold J. Wasserman Director June 28,1999
Arnold J. Wasserman
/s/ Alvin E. Nashman Director June 28, 1999
Alvin E. Nashman
EXHIBIT INDEX
Exhibit No. Description
10.25 Master Services Agreement dated April 15, 1999,
between Micros-to-Mainframes, Inc. and Dell Marketing L.P.
23.2 Consent from Independent accountants on 1996 and 1998 Stock
Options Plans (1) Letter from Goldstein Golub Kessler LLP,
(2) Letter from Ernst & Young LLP
27.1 Financial Data Schedule.