Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended March 31, 1996
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
[X].
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of June 19, 1996, was $10,930,645 (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 $.10 per share, as of June 19, 1996, was 3,450,374.
Documents Incorporated by Reference: None.
Exhibit Index is located at page 29
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 35 major computer vendors including Compaq, Hewlett
Packard, AST, IBM, Dell, Lotus, NEC, Conner Peripherals, Apple, Cisco, Canon,
Novell, Microsoft, Bay Networks, Toshiba, 3COM, Cubix, Fore Systems, Madge and
numerous others.
Since 1991, MTM has provided its customers, some Fortune 500
corporations and others mostly considered to be in the Fortune 2000 category
(hereinafter referred to as "Fortune 2000 corporations") in the tri-state New
York Metropolitan area, with a wide range of related outsourced customer support
services, including network analysis and design, systems configuration, physical
installation, software loading, application training, continuing education,
maintenance and repair services. A network is the integration of two or more
computers and their components into a system that allows multiple users to share
the same information, communicate with the mainframe (a computer with large
capacity used primarily for massive data storage and processing) or central
networking system and all other computers and peripheral equipment.
The outsourcing of computer services is a rapidly growing trend whereby
a client company obtains all or a portion of its data processing requirements
from a systems integrator, such as MTM, that specializes in the computer
service, product or application required by the client. Outsourcing is a fast
growing component of the data processing industry. The focus of the Company's
growth revolves around the Company's outsourced support services, which include
contract programming, network consulting and staff leasing in addition to
systems integration. Since 1991, the Company has been providing customer support
services and is focusing its current marketing efforts in such areas. Such
services account for about 10% of the Company's current revenues, including a
small amount of revenues derived from maintenance and repair services.
On May 6, 1996, the Company acquired the business of Data.Com RESULTS,
Inc. ("Data.Com"), a data communication and networking consultant and advanced
technology solutions provider primarily serving clients located in Connecticut.
This acquisition complements the Company's existing business by expanding its
client base throughout Connecticut and New England. The Company expects to
continue to expand its operations either internally or through strategic
acquisitions, with emphasis on its support services.
The Company's software support services include network and mainframe
connectivity (communication between computers and networks) consulting, hardware
and software maintenance agreements, network management, network planners, 1-800
Network Consultant (a toll-free network consultation), MTM Network Connectivity
and Communications Lab (a multi-vendor laboratory environment to test and
implement connectivity networks), Network Diagnostics (dial-in access for
trouble-shooting network problems), MTM technical database and a 1-800-4-MTM-SVC
Service Hotline (a toll-free support line). 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. Most of the
Company's support engineers have been trained by the major computer vendors.
They receive additional training from courses given by computer vendors, as well
as by the Company's head technicians on an as-needed basis and with a view to
maintaining their certifications with such vendors. The Company's clients also
-2-
have access to MTM's consulting services for LAN and WAN planning, detailed
systems design, gateway (a device which allows computer users to access data
from networks to the mainframes or by telephone), bridge (a device which allows
computer users to communicate between networks and provides an expansion route
for the existing network) and security/disaster recovery, among other services.
The Company's products and services are sold by a direct sales force of
31 technical salespersons who maintain and service a base of active business
customers and regularly call on sales executives primarily of Fortune 2000
corporations with solutions for their computer problems. While the Company's
activities are focused on Fortune 2000 corporations located in the tri-state
Metropolitan New York area and throughout Connecticut and New England, it sells
its products and services to branch offices of its customers located throughout
the United States. The Company also relies on customer referrals from its major
suppliers and manufacturers who request systems integrators to design and
install their systems.
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 rate ranging from 10% to 17% since 1988. The Company believes that
the industry will continue to grow at this modest rate in the future, although
there can be no assurance that it will.
Corporations purchase their computer hardware from a number of sources,
including manufacturer authorized dealers and value-added resellers, such as
MTM, retail stores and, with increasing importance, directly from manufacturers
through direct telemarketing and mail order organizations. Direct sales have
benefited from microcomputer users becoming more computer literate, the
emergence of industry standards and increased inter-changeability of
peripherals. As a result of the foregoing, the microcomputer dealer distribution
channel is currently undergoing additional market segmentation into dealers such
as the Company, which are systems integrators which offer a one-stop total
solution for outsourcing.
PRODUCTS
The Company markets microcomputers, printers, displays, 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., AST Research, Inc., Conner
Peripherals, Inc., Cisco 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., Bay Networks,
3COM Corporation, Cubix Corporation, Madge Development Corp. and others, and
software products from major suppliers, including Lotus Development Corp.,
Microsoft Corporation, IBM and others.
MTM purchases certain products from MicroAge Computer Centers, Inc.
("MicroAge") and Intelligent Electronics, Inc. ("IE"), as described below, which
are distributors selling to other dealers, at prices generally lower than the
Company could obtain directly from suppliers. The Company also obtains products
from a number of suppliers, including independent distributors, on an individual
purchase order basis rather than through dealership agreements. MTM will also
order specific products from other manufacturers to satisfy a particular
customer
-3-
requirement. The Company regularly evaluates new products, both internally and
through evaluations with its customers.
The microcomputer industry is characterized by numerous hardware
systems that utilize different and often incompatible standards for hardware and
software. The Company has the capability to design systems and support services
which include products or components manufactured by numerous manufacturers that
address most applicable industry standards.
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, and
security/disaster recovery.
The outsourcing of computer services is a rapidly growing trend in
which a client company obtains all or a portion of its data processing
requirements from a systems integrator, such as the Company, that specializes in
the computer service, product or application required by the client.
The Company believes that it is generally more cost-effective and more
efficient for its clients to purchase outsourcing services from the Company than
for them to provide equivalent services by hiring their own service and support
personnel.
The following services provide the Company's clients with the ability
to outsource virtually all of their support issues with one company for a wide
variety of microcomputer hardware and software products. These services
generally provide the Company's clients with access via an 800 telephone call to
person-to-person support services administered by a staff of highly trained
support engineers in the Company's Advanced Technology Group. The Advanced
Technology Group and Technical Support consists of 44 technical support persons
under the supervision of a Data Communications Manager. This group is
responsible for systems design and the implementation of technology and the
management of advanced technology projects including LANs, WANs 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, consulting,
user training
-4-
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.
-5-
DIAGNOSTICS
The Company will ship one of its trouble-shooting tools (e.g., HP
Advisor, Novell(R) LANalyzer or Network Analyzer) to a client to allow dial-in
access for trouble-shooting network hardware and software related problems. By
displaying and capturing network traffic, the Company's experienced systems
engineers can analyze and determine the network problem. In addition, through a
remote dial-in system, the Company's systems engineers can access a client's
network problems.
DATABASE
MTM has access to state-of-the-art technical databases which provide it
with information concerning technological advances from major vendors. This
assists the Company in trouble-shooting as it receives up-to-date product
information from a wide variety of vendors. The Company has either been
licensed, contracted or authorized to use the following databases: Novell's
technical database which Novell engineers use for research and network
diagnosis, as well as technical information from IBM, Compaq, Cisco, Microsoft,
NEC, 3COM, and Fore Systems, Inc. These databases provide the Company with
technological advances from major vendors as soon as the information is
published. These, in turn, allow the Company its flexibility to shift rapidly to
vendors whose products are expected to increase in demand as a result of
technological advances.
ACCESSORY PRODUCTS
The Company has formed new purchasing relationships with several
computer supply vendors, through which it resells diskettes, data tape, compact
disks, toner, ribbons and other related computer supplies. The Company does not
believe that it is dependent on any one vendor of computer supplies, and the
loss of any such vendor would not have a material adverse impact on the Company.
MARKETING AND SALES
The Company's marketing efforts are focused on Fortune 500 corporations
and, to a greater degree, what may be categorized as Fortune 2000 corporations,
professional firms and governmental and educational institutions. Except for
major corporate accounts, these customers generally do not have internal
computer support personnel. Management believes that the increasing complexity
of microcomputer systems, increased usage of microcomputers in the workplace and
the trend toward network interconnecting will cause business and institutional
customers to require significant levels of outsourced customer support services,
such as those provided by the Company. The Company believes that these customers
are increasingly relying on their dealers and suppliers to provide, in addition
to competitive pricing, a one-stop solution-based approach to their data
processing requirements. The Company uses such an approach which addresses
purchasing, compatibility, maintenance, support, training and obsolescence.
The Company has approximately 500 active clients. The Company's
customers are well diversified in such industries as securities, financial
institutions, pharmaceuticals, manufacturing, distribution, law and accounting
firms. For the fiscal years ended March 31, 1996, 1995 and 1994 ("Fiscal 1996",
"Fiscal 1995" and "Fiscal 1994"), approximately 16%, 11%, and 21%, respectively,
of the Company's total revenues were derived from sales to PaineWebber,
Incorporated ("PaineWebber"). During Fiscal 1996 and Fiscal 1995, A.I. Credit
Corp. ("AI") accounted for approximately 18% and 29%, respectively, of the
Company's revenues. During Fiscal 1994, American Cyanamid Company/Lederle
Laboratories accounted for approximately 12% of the Company's revenues. Although
the Company's customer base has increased, the loss of PaineWebber or AI as well
as, to a lesser extent, the loss of any other principal customer, would be
expected to have a material adverse effect on the Company's operations during
the short term until the Company is able to generate replacement business,
although there can be no assurance of obtaining such business.
-6-
As of June 30, 1996, the Company employed 31 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 24%,
31% and 20%, respectively, of the Company's revenues during Fiscal 1996, Fiscal
1995 and Fiscal 1994. Sales of IBM products accounted for approximately 13% of
the Company's revenues during Fiscal 1994. No other supplier's products
accounted for 10% or more of the Company's revenues during Fiscal 1996, Fiscal
1995 or Fiscal 1994. The Company's sales of products purchased through MicroAge
accounted for approximately 20%, 33% and 30% of the Company's total revenues in
Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively, and sales of products
purchased through IE accounted for approximately 10% of total revenues in Fiscal
1996. The material provisions of the MicroAge contract are described below under
"MicroAge and IE". Except for Dell and IBM, management does not believe that a
termination of any one supplier's agreement would have a material adverse effect
on the Company.
The Company's future results of operations are dependent upon continued
demand for microcomputer products. Distributors in the microcomputer industry
currently face a number of adverse business conditions, including price and
gross profit margin pressures and market consolidation. During the past four
years, all major hardware vendors have instituted extremely aggressive price
reductions
-7-
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 two years, it has resulted in lower gross margins for the Company.
Moreover, additional discounting by manufacturers will in all probability
adversely affect the Company's profitability in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MICROAGE and IE
The Company operates as a reseller for MicroAge and IE. MicroAge and IE
are master resellers and distributors which market and distribute information,
technology, products and services through a network of franchisees and
affiliated resellers, such as MTM. Such products include microcomputer systems,
workstations, networking and telecommunications equipment, software and related
-8-
products. As a reseller, the Company has purchased products and services through
MicroAge since March 1993 and through IE since 1995.
The Company purchases products from MicroAge and IE on a cost-plus
basis (consisting of MicroAge's or IE's cost of the products from a supplier
plus a mark-up) generally at lower prices than could be obtained independently
from suppliers. In certain instances, the Company has access to suppliers
through MicroAge and IE for which it is not otherwise an authorized dealer. The
Company is obligated to purchase a minimum of $100,000 of products from MicroAge
in each calendar quarter. The Company's agreement with MicroAge may be
terminated by either party on 60 days' notice, and its agreement with IE may be
terminated upon 30 days' notice by the Company and upon 3 days' notice by IE.
The Company does not believe that it is dependent on either supplier, and that
if it were to suffer the loss of either supplier, adequate alternatives would
exist.
DATA.COM RESULTS, INC.
On May 6, 1996, a newly formed subsidiary of MTM acquired substantially
all of the assets of Data.Com. RESULTS, Inc. ("Seller"). After the closing of
the acquisition, the Company's subsidiary changed its name to Data.Com RESULTS,
Inc. The acquired business is a data communications, WAN and LAN consultant and
advanced technology solutions provider primarily serving clients located in the
State of Connecticut. The acquisition was effective as of May 1, 1996.
The net purchase price for the assets and business was approximately
$1,820,000 in assumed liabilities, of which $1,343,000 was paid at the closing
of the acquisition, and 87,000 shares of the Company's common stock, $.001 par
value ("Common Stock"). Additional consideration is payable in Common Stock,
contingent upon Data.Com's achieving certain levels of earnings before taxes,
depreciation and amortization through Fiscal 1999. The maximum number of shares
to be issued are 25,000, 25,000 and 35,000 in Fiscal 1997, 1998 and 1999,
respectively. On the first anniversary of the closing of the transaction, there
may also be some additional consideration given by the Company based on accounts
receivable claims and sales of written down inventory.
Simultaneous with the closing of the acquisition, the Company and Mr.
Fries entered into a three year employment agreement. See "Item 11. Executive
Compensation--Employment Agreements."
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.
-9-
Management believes that the Company will continue to be able to
compete effectively against the various aforementioned distribution methods on
the basis of its being able to combine competitive 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 Technology Group, in which it believes
that it has certain common-law rights. The Company may also affix copyright
notice 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 30, 1996, the Company employed 96 persons, all but three of
whom are full-time personnel. Of these employees, five are responsible for
management, 31 are responsible for marketing and sales, 42 for technical
support, three for distribution, six for finance and nine for purchasing and
administration. None of the Company's personnel is represented by a union, and
the Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse are located in
approximately 11,000 square feet of space at a two-story facility leased at 614
Corporate Way, Valley Cottage, New York. Approximately 35% of such space is
devoted to marketing and telephone sales, 15% to service and customer support,
10% to administration, 10% to the Connectivity and Communication Lab and 30% to
warehouse space. The Company does not maintain a retail showroom. The monthly
payment is currently $6,400 under a lease, expiring on August 31, 1997, as
amended.
The Company also leases 4,000 square feet of office space in the
Chrysler Building in New York City, which space is devoted to high technology
sales. The monthly payment is currently $5,100 under a lease expiring on
February 28, 1997. In addition, the Company also leases a 2,560 square foot
office space in Bridgewater, New Jersey, which space is devoted to sales in the
New Jersey area. The monthly rental payment of $3,413 under the lease expires on
February 13, 1997. The Company also leases approximately 8,100 square feet of
office and warehouse space (only about 10% of this property is devoted to
warehouse space) in Rocky Hill, Connecticut. The monthly payment on this lease
is currently $4,442.71, which will increase to $4,853.81 on August 1, 1996. The
lease is terminable on six months' notice after July 31, 1997.
The Company is also responsible for real estate taxes, insurance,
utilities, and maintenance expenses concerning these premises.
-10-
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, other
than customer claims arising, from time to time, in the ordinary course of the
Company's business, except as described below.
In July 1995, the Company was served with a subpoena to produce
documents to a grand jury convened in the United States District Court for the
Southern District of New York. The subpoena sought documents relating to
insurance claims filed by the Company and claims made by the Company to
manufacturers of computer equipment based upon the manufacturers' warranties.
The Company complied with the subpoena by delivering the documents to the office
of the U.S. Attorney in August 1995. The Company believes that the inquiry will
not have a material adverse effect on its financial condition. No further
inquiry has been made by the U.S. Attorney's office since the Company's response
to the subpoena.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the fiscal year ended March 31, 1996.
-11-
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", and warrants of the Company were listed on NASDAQ/NMS until
December 22, 1995 under the symbol "MTMCW," when the warrants were removed from
trading.
The following table sets forth the high and low closing bid prices of
Common Stock and warrants for the last two 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 FISCAL YEAR ENDED MARCH 31, 1995
STOCK --------------------------------
April 1 - June 30, 1994 $2.75 $1.75
July 1 - September 30, 1994 $2.375 $1.375
October 1 - December 31, 1994 $2.0625 $1.25
January 1 - March 31, 1995 $4.375 $1.00
FISCAL YEAR ENDED MARCH 31, 1996
--------------------------------
April 1 - June 30, 1995 $5.75 $3.125
July 1 - September 30, 1995 $8.625 $4.875
October 1 - December 31, 1995 $7.00 $4.50
January 1 - March 31, 1996 $6.75 $4.50
WARRANTS FISCAL YEAR ENDED MARCH 31, 1995
--------------------------------
April 1 - June 30, 1994 $0.6875 $0.375
July 1 - September 30, 1994 $0.5625 $0.3125
October 1 - December 31, 1994 $0.50 $0.1875
January 1 - March 31, 1995 $1.125 $0.25
FISCAL YEAR ENDED MARCH 31, 1996
--------------------------------
April 1 - June 30, 1995 $4.75 $0.625
July 1 - September 30, 1995 $4.75 $1.25
October 1 - December 22, 1995 $3.00 $0.25
On June 18, 1996, the closing bid and asked prices of a share of Common
Stock were $4 7/8 and $5, respectively, and the Company had in excess of 500
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 year ended June
30, 1992, the Nine Months Ended March 31, 1993, and the three fiscal years ended
March 31, 1994,1995 and 1996, are derived from the financial statements of the
Company. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
-12-
Income Statement Data: Nine
Months Year
Ended Ended
Year Ended March 31 March 31 June 30
--------------------------------- -------- -------
1996 1995 1994 1993 1992
(In thousands; except earnings per share)
Net sales................................ $47,326 $43,043 $29,028 $15,322 $18,560
Cost of products sold 40,452 37,530 24,862 12,742 15,283
Technical personnel
salaries............................. 1,109 778 562 242 177
Selling, general and
administrative
expenses........................... 4,070 3,276 2,690 1,590 2,406
Compensatory stock
arrangement.......................... 4,655 -- -- -- --
Interest expenses ..................... 13 40 94 86 159
Income (loss) from
operations and before
provisions for income
taxes.................................. (2,907) 1,514 820 662 535
Net income (loss) ....................... (3,614) 878 478 387 295
Net income (loss) per
share:
Primary (1) ......................... $(1.10) $.40 $.30 $.33 $.25
Fully diluted (2) -- ($.22) ($.57) -- --
Weighted average number
of common and common
equivalent shares used
in calculation:
Primary (1).......................... 3,251 2,194 1,605 1,175 1,175
Fully diluted (2) ................... -- 3,183 2,104 -- --
Balance Sheet Data: At March 31 June 30
------------------------------------ -------
1996 1995 1994 1993 1992
(In thousands; except earnings per share)
Working Capital.......................... $10,684 $4,648 $3,771 $ 773 $ 775
Total Assets............................. 16,209 9,420 8,486 5,247 4,066
Total Liabilities........................ 5,208 4,554 4,501 4,307 3,513
Retained Earnings (Deficit) ............. (1,379) 2,235 1,357 879 492
Shareholders' Equity .................... 11,000 4,866 3,985 940 553
- ----------
(1) Share and per share data do not include 1,400,000 shares of the Company's
Preferred Stock issued in September 1993 (the "Preferred Stock") or the
1,400,000 shares of Common Stock issuable upon conversion of the Preferred
Stock. The Shares of Preferred Stock are considered common stock
equivalents; however, conversion is contingent on the achievement of
specified performance criteria. These shares were excluded from primary
earnings per share calculations prior to January 1, 1996, as such
performance levels had not been achieved in the applicable periods.
(2) Assumes (i) that the Preferred Stock was converted to Common Stock for all
periods, (ii) that earnings were adjusted to reflect the necessary earnings
requirements for convertibility of the Preferred Stock and (iii) that the
charge to income for the compensatory element of the Preferred Stock was
recognized for each period in the three year period ended March 31, 1996
based on the current market price at the end of each period.
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing elsewhere
in this Report.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
in the Company's Consolidated Statements of Operations expressed as a percentage
of sales for that period:
Years Ended March 31,
1994 1995 1996
(Percentage of Sales)
------------------------------------------------
Net sales............................ 100.00% 100.00% $100.00%
Cost of products sold................ 85.65 87.19 85.48
Technical personnel salaries....... 1.94 1.81 2.34
Selling, general and
administrative expenses.......... 9.27 7.61 8.60
Compensatory stock arrangement -- -- 9.84(1)
Interest expenses.................. .32 .09 .03
Income (loss) from operations
and before provision for
income taxes....................... 2.83 3.52 (6.14)
Net income (loss).................... 1.65 2.04 (7.64)
- ----------
(1) Reflects the non-cash non-recurring charge of $4,655,000 described below.
The Year Ended March 31, 1996 as compared to the Year Ended March 31, 1995.
The Company had net sales of approximately $47,326,000 for the Year
Ended March 31, 1996 ("Fiscal 1996"), as compared with approximately $43,043,000
for the Year Ended March 31, 1995 ("Fiscal 1995"). This increase in sales of
approximately 10% was attributable to increased sales of equipment to both new
and existing customers in Fiscal 1996, as well as to increased revenues from
support services, which the Company began to offer in 1991.
As a percentage of net sales, the cost of products sold for Fiscal 1996
decreased by 1.71% as compared to Fiscal 1995, due to increased service
revenues, which have higher margins than equipment sales, offset by competitive
market pressures on product sales.
Service revenue in Fiscal 1996 increased 98% to $4,537,000 from
$2,290,000 in Fiscal 1995. Because of the increase in the Company's service
business, the Company hired additional technical personnel. Technical personnel
salaries as a percentage of net sales increased by 0.53% in fiscal 1996 as
compared to Fiscal 1995. On an aggregate basis, technical personnel salaries in
Fiscal 1996 increased 43% to $1,109,000 from $778,000 in Fiscal 1995. Technical
personnel salaries as a percentage of service revenues were 24% in Fiscal 1996
and 34% in Fiscal 1995. This decrease was due to greater utilization of
technical personnel on customer service contracts. The Company is expected to
continue to hire additional professional technicians and engineers for the
Advanced Technology Group in order to meet the expected demand in the
outsourcing business for the coming year.
Selling, general and administrative ("SG&A") expenses were
approximately $4,070,000 for Fiscal 1996, as compared to approximately
$3,276,000 in Fiscal 1995. SG&A expenses as a percentage of net sales increased
to 8.60% in Fiscal 1996 from 7.61% in Fiscal 1995. This increase was primarily
attributable to the Company's overall increase in overhead expenses. As a whole,
SG&A expenses increased by approximately $794,000 in Fiscal 1996. This increase
resulted primarily from expenses related to increased sales volume, including
increases
-14-
in sales commissions and salaries of $416,000, and other employee payroll,
benefits and payroll taxes of $71,000. The increase was also due to increases in
accounting and administrative salaries of $49,000, legal, accounting and other
professional fees of $104,000, and insurance of $102,000.
The Company recognized a one-time charge against earnings in Fiscal
1996 in the amount of $4,655,000 relating to the compensatory nature of the
Preferred Stock. The charge was required to be recognized at such time as the
convertibility of the Preferred Stock is deemed probable, as previously
disclosed by the Company in its prospectus dated October 26, 1993. The Preferred
Stock is convertible into Common Stock, on a one for one basis, solely if the
Company met certain revenue and earnings thresholds. Such thresholds for
convertibility were considered probable in the fourth quarter of Fiscal 1996. In
conjunction with this determination, the Company and the holders of the
Preferred Stock committed to accelerate the convertibility and fix the amount of
compensation expense to be charged to earnings. The Board of Directors and the
holders of the Preferred Stock agreed, subject to receipt of the necessary
consent of the Company's shareholders and an independent appraisal as to the
equivalent value of the Preferred Stock and the Common Stock, to the conversion
of the Preferred Stock into Common Stock. The appraisal concluded that the
1,400,000 shares of Preferred Stock were equivalent to 980,000 shares of Common
Stock. Based on the market value of the Company's Common Stock at March 31,
1996, the Company recognized the non-recurring, non-cash charge of $4,655,000
shown on the income statement as "Compensatory stock arrangement".
Interest expense decreased to approximately $13,000 in Fiscal 1996 from
approximately $40,000 in Fiscal 1995. This represents a decrease of 68% from
Fiscal 1996 primarily due to faster turn-around in inventory, resulting in fewer
borrowings, as well as avoiding higher interest rates charged by the floor
planners described below in "Liquidity and Capital Resources."
Excluding the charge for the compensatory stock arrangement, for which
there is no tax benefit, the effective income tax rates for Fiscal 1996 and
Fiscal 1995 were approximately 42%. See Note 4 of the Consolidated Financial
Statements for a discussion of income taxes.
Accordingly, net income (loss) decreased to approximately ($3,614,000)
in Fiscal 1996 from $878,000 in Fiscal 1995.
The Year Ended March 31, 1995 as compared to the Year Ended March 31, 1994.
The Company had net sales of approximately $43,043,000 for Fiscal 1995
as compared with approximately $29,028,000 for the fiscal year ended March 31,
1994 ("Fiscal 1994"). This increase in sales of approximately 48% was
attributable to the increased sales to both new and existing customers in Fiscal
1995 and includes increased volumes of equipment sales, as well as increased
support service revenues, which the Company began to offer in 1991.
Net sales of computer supplies decreased approximately $670,000 or 30%
to $1,565,000 in Fiscal 1995 from approximately $2,235,000 for Fiscal 1994. This
decrease was due to the reduction in sales to two significant computer supply
customers believed by the Company to be caused by their budget constraints. In
January 1995, one customer discontinued purchasing computer supplies from the
Company, resulting in a loss of this major customer in 1995. In March 1995, the
Company sold the franchise rights of Richard Young Products North, Inc. back to
its franchisor for $108,000, resulting in a gain, net of expenses, of $94,275,
or $.025 per common share, after taxes. The Company formed new purchasing
relationships with other computer supply vendors designed to allow the Company
to purchase computer supplies on more favorable terms and prices and to enable
the Company to better compete within the computer supply market by allowing the
Company to be more competitive in its pricing.
As a percentage of net sales, the cost of products sold for Fiscal 1995
increased by 1.54% as compared to Fiscal 1994. These changes were due to
competitive market pressures which resulted in lower realizations on product
sales that were not in proportion to changes in product costs.
-15-
Technical personnel salaries as a percentage of net sales decreased by
0.13% as compared to Fiscal 1994. However, on an aggregate basis, technical
personnel salaries in Fiscal 1995 increased 38% to $778,000 from $562,000 in
Fiscal 1994. Service revenue in Fiscal 1995 increased 107% to $2,290,000 from
$1,106,000 in Fiscal 1994. Technical personnel salaries as a percentage of
service revenues were 33.9% in Fiscal 1995 and 50.8% in Fiscal 1994. The
decrease was due to the increase in service revenues due to higher utilization
of technical personnel on customer service contracts.
Selling, general and administrative ("SG&A") expenses were
approximately $3,276,000 for Fiscal 1995, as compared to approximately
$2,690,000 in Fiscal 1994. SG&A expenses as a percentage of net sales decreased
to 7.61% in Fiscal 1995 from 9.27% in Fiscal 1994. This decrease was primarily
attributable to the Company's increased sales levels. As a whole, SG&A expenses
increased by approximately $586,000 in Fiscal 1995. The increase is partly due
to increases in Messrs. Pavony and Rothman's compensation, each of whom received
$123,750 in Fiscal 1994 and $185,000 in Fiscal 1995. Furthermore, legal,
accounting and other professional related fees increased by $136,000 in Fiscal
1995. In addition, the increase in SG&A expenses resulted from expenses related
to increased sales volume including increases in sales commissions and salaries
of $152,000, and other employee payroll, benefits and payroll taxes of $83,000.
Interest expense decreased to approximately $40,000 in Fiscal 1995 from
approximately $94,000 in Fiscal 1994. This represents a decrease of 58% from
Fiscal 1994 primarily due to the Company utilizing the proceeds from the
Company's initial public offering to temporarily reduce the balance of the
Company's revolving line of credit, faster turn-around in inventory and faster
collection of accounts receivable (resulting in additional debt paydowns), as
well as avoiding higher interest rates charged by the floor planners.
The effective income tax rates for Fiscal 1995 and Fiscal 1994 were
approximately 42%. See Note 4 of the Consolidated Financial Statements for a
discussion of income taxes.
Accordingly, net income increased to approximately $878,000 in Fiscal
1995 from $478,000 in Fiscal 1994.
INFLATION
Management does not believe that inflation has had a significant effect
on the Company's operations to date. The cost of computer products is largely
affected by new product introductions and decreasing prices of older products,
which are not affected by inflation. Those costs which are normally affected by
inflation, such as wages and transportation, are a relatively small part of the
Company's total operations, and the Company has been able to offset these
increases, in part, by increases in its sales volume and service business.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways, including the
following:
March 31,
1996 1995 1994
(Dollars in thousands, except current ratio data)
-------------------------------------------------
Cash and cash equivalents........ 5,285 1,167 2,091
Working capital.................. 10,685 4,648 3,771
Current ratio.................... 3.05:1 2.02:1 1.84:1
Secured notes payable............ 5 5 1,506
Working capital line available... 8,759 7,373 0
The Company had working capital of $10,684,000, $4,648,000 and
$3,771,000 for Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. The
increase of approximately $6,036,000 or 130% in 1996 was primarily due to the
proceeds
-16-
received for the issuance of common stock upon exercise of options and warrants
amounting to $5,093,000.
During Fiscal 1996, the Company used approximately $827,000 in cash
from operating activities. The cash used in operating activities resulted from a
net loss of $3,614,000, offset by the non-cash charge for the compensatory stock
arrangement of $4,655,000, an increase in accounts payable of $802,000, offset
by an increase in accounts receivable of $2,122,000, an increase in inventory of
$279,000, an increase in prepaid expenses and other current assets of $159,000
and a decrease of income taxes payable of $147,000. The Company used
approximately $149,000 in investing activities for the purchase of property and
equipment primarily for the Advanced Technology Group. The Company had net cash
provided by financing activities of $5,093,000 from the exercise of warrants. As
a result of the foregoing, the Company increased its cash by $4,118,000 during
Fiscal 1996.
During Fiscal 1995, the Company had net cash provided from operating
activities of $567,000, derived primarily from $878,000 of net income, a
decrease in inventory of $71,000, an increase in accounts payable and accrued
expenses of $1,443,000 and income taxes payable of $111,000, offset, in part, by
an increase in accounts receivable of $1,865,000, and an increase in prepaid
expenses and other assets of $68,000. The Company had net cash provided from
investing activities of $10,000 relating to the sale of franchise rights, net of
expenses, of $103,000, offset by purchases of equipment of $93,000 primarily for
its Advanced Technology Group. The Company used cash for financing activities in
the amount of approximately $1,501,000 for the repayment in part of the bank's
secured loan resulting in a net decrease in cash of $924,000 during Fiscal 1995.
The Company makes capital expenditures from time to time as required to
enhance its operational efficiency.
The Company finances much of its business through "floor-plan"
financings, which are alternate credit lines provided by manufacturers or
through lines of credit provided by vendors. The financing arrangements have
aggregate credit limits of approximately $6,300,000 and allow the Company to
borrow for between 30 and 60 days, interest-free. Interest is charged to the
Company only after the due date. These arrangements generally provide for
security interests in the related inventory and/or accounts receivable and liens
against all assets of the Company. The Company also has a $5,000,000 revolving
credit facility from a bank, expiring on July 31, 1996, which the Company
intends to renew. See "Item 13. Certain Relationships and Related Transactions."
All of the floor-plan borrowings are subordinated to the Company's bank revolver
except as to inventory and equipment, as to which the floor-planners hold a
first lien pursuant to intercreditor agreements. At March 31, 1996 and 1995, the
Company's total outstanding debt under the floor-plan arrangements was
approximately $2,536,000 and $1,922,000, respectively, and the revolver balance
was $5,000 at the end of each year.
The Company's current ratio increased to 3.05:1 at March 31, 1996 from
2.02:1 at March 31, 1995.
The Company believes that expected cash flow from its operations
combined with available financing arrangements and funds from the warrant
conversions will be sufficient to satisfy its expected cash requirements for the
next 12 months.
ACQUISITION OF DATA.COM
On May 6, 1996, a newly formed subsidiary of MTM acquired substantially
all of the assets of Data.Com. RESULTS, Inc. The net purchase price for the
assets was approximately $1,820,000 in assumed liabilities, of which $1,343,000
was paid at the closing of the acquisition, and 87,000 shares of Common Stock.
Additional consideration is payable in Common Stock, contingent upon Data.Com's
achieving certain levels of earnings before taxes, depreciation and amortization
through Fiscal 1999. The maximum number of shares to be issued are 25,000,
25,000 and 35,000 in Fiscal 1997, 1998 and 1999, respectively. On the first
anniversary of the closing of the transaction, there may also be some additional
consideration
-17-
given by the Company based on accounts receivable claims and sales of written
down inventory.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", which provides an
alternative to APB Opinion No. 25, "Accounting for Stock Issued to Employees",
in accounting for stock-based compensation issued to employees. The Statement
allows for a fair value based method of accounting for employee stock options
and similar equity instruments. However, for companies that continue to account
for stock-based compensation arrangements under Opinion No. 25, Statement No.
123 requires disclosure of the pro forma effect on net income and earnings per
share of its fair value based accounting for those arrangements. These
disclosure requirements are effective for fiscal years beginning after December
15, 1995, or upon initial adoption of the statement, if earlier. The Company
does not intend to adopt the recognition and measurement provisions of that
Statement, which the Company expects would result in increased compensation
expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in Part IV, immediately following Item 14 of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-18-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Howard Pavony 45 President and a Director
Steven H. Rothman 47 Vice President and a Director
Frank T. Wong 49 Vice President-Finance, Secretary
and a Director
Robert A. Fries 44 Vice President and a Director
Ramon Mota 34 Vice President-Technology
and a Director
Joseph J. Farley* 72 Director
William Lerner* 62 Director
- ----------
* Member of the Audit Committee and Compensation Committee.
Howard Pavony has served as the Company's President and a Director
since the Company's inception in May 1986. 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. Mr. Pavony holds a B.A. degree in pre-law
from the City University of New York.
Steven H. Rothman has served as the Company's Vice President, and a
Director since the Company's inception in May 1986. 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. Mr. Rothman holds a B.A. in psychology and a
B.S. degree in pre-medicine from Long Island University and a Masters degree in
Guidance and Counseling from Long Island University.
Frank Wong has served as the Company's Vice President-Finance since
February 1992, as a Director since June 1993 and as the Secretary since
September 1995. Prior thereto, from 1975 to September 1991, he served as Chief
Accountant of the Carvel Corporation, a franchise ice cream distributor.
Robert A. Fries has served as a Vice President and a Director of the
Company since May 6, 1996, when he joined the Company as a result of the
acquisition of Data.Com. He has been President of Data.Com RESULTS, Inc. since
June 1986 and now serves as Co-President of Data.Com. See "Item 1. Business--
Data.Com RESULTS, Inc."
Ramon Mota has served as a Director of the Company since May 6, 1996.
He joined the Company in October 1991, acting as a technical salesperson for the
Company and was promoted to Director of Technology in June 1992. He became Vice
President-Technology of the Company in April 1993. He also has been Co-President
of Data.Com since May 1996. Prior thereto, from 1989 until September 1991, Mr.
Mota served as an engineer with Multitech System, Inc. a modem manufacturing and
data communications company.
Joseph J. Farley has served as a Director of the Company since
September 1995. From January 1982 to November 1990, Mr. Farley served as a Vice
President
-19-
and Director of Marketing for Helm Resources, Inc. ("Helm"), an American Stock
Exchange listed company engaged in providing financial services and management
assistance to small and mid-market companies. Mr. Farley continues to serve as
a director of Helm. Prior thereto, Mr. Farley was employed with International
Business Machines, Inc. ("IBM") for thirty-two years. Mr. Farley held various
positions with IBM in engineering, marketing and field engineering.
William Lerner has served as a Director of the Company since September
1995. Mr. Lerner has been engaged in the private practice of corporate and
securities law in New York and Pennsylvania since 1991. From 1990 to 1991, Mr.
Lerner was Vice President and general counsel to Hon Development Company, a
California real estate development company. From 1986 to 1990, Mr. Lerner was a
Vice President and general counsel of The Geneva Companies, a California based
business valuation and mergers and acquisitions firm specializing in privately
owned middle-market companies. Mr. Lerner previously served as the Director of
Compliance with the American Stock Exchange and as a Branch Chief, Enforcement
Attorney for the Securities and Exchange Commission. Mr. Lerner serves as a
director of Helm; of Seitel, Inc., a New York Stock Exchange listed company
engaged in several facets of the oil and gas business; of Rent-Way, Inc., a
Nasdaq listed company engaged in the rent-to-own business; and of Co-Counsel,
Inc., a Nasdaq listed company that provides part-time or contract lawyers to
businesses and corporations on a nationwide basis.
All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualify. Officers are elected annually
by, and serve at the discretion of, the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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 April 1, 1995 and March 31,
1996, 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 1996, Fiscal 1995
and Fiscal 1994 by certain executive officers of the Company. No other executive
officers received compensation in excess of $100,000 during such years.
-20-
Long-Term
Annual Compensation Compensation
------------------- ------------
Shares
Name and Principal Other Annual Underlying
Position Year Salary($) Bonus($) Compensation($) Options(#)
- -------- ---- --------- -------- --------------- ----------
Howard Pavony 1996 $165,000 $20,000 (1) 10,000
President and Co-CEO 1995 $165,000 $20,000 (1) 0
1994 $123,750(2) 0 (1) 50,000
Steven H. Rothman 1996 $165,000 $20,000 (1) 10,000
Vice President 1995 $165,000 $20,000 (1) 0
and Co-CEO 1994 $123,750(2) 0 (1) 50,000
Ramon Mota 1996 $95,000 $10,500 (1) 0
Vice President-
Technology
- ----------
(1) The above compensation figures do not include the cost to the Company of the
use of automobiles leased by the Company, the cost to the Company of benefits,
including premiums for life and health insurance and any other personal benefits
provided by the Company to such persons in connection with the Company's
business. The figures also do not reflect the receipt by each of Messrs. Pavony
and Rothman of 490,000 shares of Common Stock, upon the conversion of their
Preferred Stock, which the Company values at $2,327,500, each, based on the
market price of the Common Stock on March 31, 1996.
(2) Messrs. Pavony and Rothman did not receive compensation for the three months
ended June 30, 1993. Since July 1993, these officers' salaries have been
$165,000 per annum. During Fiscal 1994, these officers each received aggregate
cash advances of approximately $34,000.
OPTION GRANTS IN LAST FISCAL YEAR
The table below includes the number of stock options granted to the
executive officers named in the Summary Compensation Table during the year ended
March 31, 1996, exercise information and potential realizable value.
Individual Grants Potential Realizable
------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to for Option Term
Options Employees in Exercise Expiration --------------------------
Name Granted(#) Fiscal Year Price($/sh) Date 5%($) 10%($)
- ---- ---------- ----------- ----------- ----------- ----- -------
Steven H. Rothman 10,000 28.6% $6.125 10/19/2005 $38,598 $97,617
Howard Pavony 10,000 28.6% $6.125 10/19/2005 $38,598 97,617
Ramon Mota 0 0 -- -- 0 0
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY END OPTION VALUES
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired at FY-End(#) at FY-End($)
on Exer- Value Exercisable/ Exercisable/
Name cise (#) Realized Unexercisable Unexercisable
---- -------- -------- ------------- -------------
Steven H. Rothman -0- -0- 60,000/0 $68,750/0
Howard Pavony -0- -0- 60,000/0 $68,750/0
Ramon Mota -0- -0- 7,500/12,500 $20,937.50/$38,437.50
-21-
DIRECTOR FEES
The Company's independent directors receive an annual fee of $9,000
payable quarterly in advance. In addition, each independent director receives
$1,500 for attendance in person at each Board meeting and $250 for participating
in each telephonic board meeting held. Each independent director also received
ten-year options to purchase 2,500 shares of Common Stock, exercisable,
beginning September 16, 1995, at $7.00 per share. See "1993 Employee Stock
Option Plan" below, for the terms of stock options granted to the Company's
directors. Members of the Audit Committee and Compensation Committee are
appointed annually and serve at the discretion of the Board of Directors. Each
member of the Audit Committee will receive $1,000 for each meeting attended in
excess of five committee meetings per year. These directors receive no
additional fees for serving on the Compensation Committee.
Management/Directors currently receive no cash compensation for serving on
the Board of Directors other than reimbursement of reasonable expenses incurred
in attending meetings. Each of the Company's directors has received stock
options from the Company. See "1993 Employee Stock Option Plan" below.
EMPLOYMENT AGREEMENTS
The Company has entered into identical three-year employment agreements
with Howard Pavony, President, and Steven Rothman, Vice President, respectively.
The agreements provide that Messrs. Pavony and Rothman shall devote all of their
business time to the Company, each in consideration of an annual salary of
$165,000 for the three-year period commencing on October 26, 1993. Messrs.
Pavony and Rothman shall each be entitled to an annual bonus not to exceed
$20,000 per person in the one-year period commencing on January 1, 1994. A bonus
at such time, as well as in future years shall be based upon the performance of
the Company and determined at the discretion of the Board of Directors (or a
Compensation Committee).
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 from and after the next annual meeting of the Company's shareholders
through the initial term of his employment with the Company.
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. The Company
further agreed to use its best efforts to designate Mr. Fries as a member of the
Board from and after the next annual meeting of the Company's shareholders
through the initial term of his employment agreement with the Company.
STOCK OPTIONS
Messrs. Pavony and Rothman have each been granted five-year incentive
stock options to purchase 50,000 of the Company's Common Shares at $3.375 per
share. Their agreements provide that during the term of employment with the
Company and for a period of two years following termination of employment,
Messrs. Pavony and Rothman will be prohibited from engaging in activities which
are competitive with those of the Company.
1993 EMPLOYEE STOCK OPTION PLAN
In May 1993, the Company adopted the 1993 Employee Stock Option Plan (the
"Option Plan"). The Option Plan provides for the grant of options to qualified
-22-
employees (including officers and directors) of the Company, and its
subsidiaries, independent contractors, consultants and other individuals to
purchase an aggregate of 250,000 Common Shares. The Option Plan may be
administered by the Board of Directors or a committee of at least two
disinterested members of the Board of Directors (the "Compensation Committee").
The Board or the Compensation Committee has complete discretion to select the
optionee and to establish the terms and conditions of each option, subject to
the provisions of the Option Plan. Options granted under the Option Plan may or
may not be "incentive stock options" as defined in Section 422 of the Code
("Incentive Options"), and non-qualified stock options may be granted in tandem
with Stock Appreciation Rights ("SARs") or Stock Depreciation Rights ("SDRs"),
depending upon the terms established by the Board or the Compensation Committee
at the time of grant, but the exercise price of options may not be less than
100% of the fair market value of the Company's Common Shares 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 Shares). Options may
not be exercised more than 10 years after the 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 Option Shares
having a fair market value equal to the exercise price of the Option Shares
issued. Options granted under the Option 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 Option Plan,
shares subject to canceled or terminated options are reserved for subsequently
granted options. 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.
As of the date of this Report, the Company has granted an aggregate of
250,000 stock options under the Option Plan. Of these, 175,000 are currently
exercisable, and 7,500 have been exercised to date. 17,500 options have been
cancelled to date and are available for regrant under the Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until September 15, 1995, the Company did not have a compensation
committee or another Board committee performing equivalent functions, and the
then entire Board of Directors, consisting of Howard Pavony, Steven Rothman and
Frank Wong participated in deliberations of the Board of Directors concerning
executive compensation. On September 15, 1995, a Compensation Committee
consisting of Mr. Lerner and Mr. Farley was appointed and took over the
responsibility of setting executive compensation. 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. The table does
not give effect to the planned conversion of the Preferred Stock.
-23-
Amount and Nature
of Beneficial Ownership Percent of Class (1)
------------------------- -------------------------------
Name and Address Preferred Common Preferred Common Combined
of Beneficial Owner Stock Shares Stock Shares Power(2)
- ------------------- ---------- ------ ----- ------ --------
Steven H. Rothman(3) 700,000(5) 648,625(4)(5) 50.0% 18.5% 27.5%
Howard Pavony(3) 700,000(6) 647,500(4)(6) 50.0% 18.4% 27.4%
Frank T. Wong(3) 0 8,555(4)(7) 0 *
Robert A. Fries
71 Peria Drive
Rocky Hill, CT 06061 0 87,000 0 2.5% 1.8%
Ramon Mota(3) 0 7,565(4) 0 * *
Joseph J. Farley
78 Sawmill Road
Stamford, CT 06903 0 0(4) 0 0 0
William Lerner
423 East Beau Street
Washington, PA 15301 0 0(4) 0 0 0
All Directors and
executive officers
as a group (7 persons) 1,400,000 1,399,245(4)(5) 100.0% 39.0% 56.1%
(6)(7)
- ----------
* Represents less than 1%.
(1) Based on 3,450,374 Common Shares and 1,400,000 shares of Preferred Stock
issued and outstanding as of the date of this Report.
(2) After conversion of the Preferred Stock to Common Stock (on a .7-for-1
basis), each of Messrs. Pavony and Rothman would beneficially hold
approximately 25% of the voting power of the Company.
(3) The address of this person is c/o the Company, 614 Corporate Way, Valley
Cottage, New York 10989.
(4) Includes options held by Steven Rothman and Howard Pavony to each purchase
60,000 Common Shares and options to purchase 7,500 shares held by each of
Frank Wong and Ramon Mota which are currently exercisable, but does not
include options held by Mr. Wong to purchase 7,500 Common Shares and Mr.
Mota to purchase 12,500 Common Shares which are not currently exercisable.
Also does not include options held by Joseph J. Farley and William Lerner
to each purchase 2,500 Common Shares which are not currently exercisable.
(5) Includes 1,125 Common Shares held by the wife of Mr. Rothman. Also includes
an aggregate of 92,222 Common Shares and 109,882 shares of Preferred Stock
held in trust for Mr. Rothman's three children. Mr. Rothman disclaims
beneficial ownership of all of such shares held in trust.
(6) Includes an aggregate of 89,444 Common Shares and 106,572 shares of
Preferred Stock held in trust for Mr. Pavony's two children. Mr. Pavony
disclaims beneficial ownership of all of such shares.
(7) Includes 1,000 Common Shares held by the wife of Mr. Wong.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1992, the Company entered into a Revolving Credit Line Agreement
with The Bank of New York (the "Bank"), which was replaced in August 1994 and
amended in March 1995 (the "Revolver"). The Revolver provides for the Company to
borrow up to $5,000,000 with interest payable at (i) the higher of (a) the
-24-
prime commercial lending rate, as announced by the Bank from time to time, or
(b) the Federal Funds Rate plus 1/2%, or, at the Company's option after meeting
certain restrictions, (ii) at the then current Eurodollar Rate plus 2%. The
Revolver is secured by a first lien on substantially all of the Company's assets
and the guarantee of a Company subsidiary. Currently the rate is 8.5%. Only
$5,000 is currently outstanding under the Revolver, which expires on July 31,
1996. The Company intends to renew this credit line.
The Company has entered into several financing agreements for the
purchase of inventory, termed floor plan financings. These agreements provide
for security interests in the related inventory and/or accounts receivable, and
liens against all assets of the Company. All such borrowings are subordinated to
the Revolver described above, except with respect to inventory and equipment.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
The Company believes that the terms for each of the foregoing
transactions are on terms no less favorable than could be obtained from
unrelated third parties.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Independent Auditors' Report F-1
Consolidated Balance Sheets at March 31, 1996 and 1995 F-2
Consolidated Statements of Income for
the years ended March 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Changes in Shareholders'
Equity for the years ended March 31, 1996, 1995
and 1994 F-4
Consolidated Statements of Cash Flows for the
the years ended March 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because of the
absence of the conditions under which they are required or because the
required information, where material, is shown in the Consolidated
Financial Statements or the notes thereto.
(3) Exhibits
2.1 Asset Purchase Agreement, dated as of May 1, 1996, by and
among Data.Com, Mr. Fries, the Company and the Company's
wholly-owned subsidiary.(5)
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 By-Laws of the Company.(1)
10.1 Revised 1993 Employee Stock Option Plan.(1)
10.2 Form of Employment Agreement between the Company and Steven H.
Rothman.(1)
-25-
10.3 Form of Employment Agreement between the Company and Howard
Pavony.(1)
10.4 Lease Agreement between the Company and Associates of Rockland
County dated July 30, 1989.(1)
10.5 Independent Computer Dealer Agreement between the Company and
MicroAge Computer Centers, Inc. dated February 23, 1993.(1)
10.6 Revolving Credit Line Agreement between The Bank of New York
and the Company.(1)
10.7 Modification and Extension Agreement dated November 12, 1992
between the Bank of New York and the Company.(1)
10.8 Remarketer/Integrator Agreement between Dell Marketing L.P.
and Company, as amended.(1)
10.9 Amendment to Lease between the Company and Associates of
Rockland County dated as of July 23, 1992.(1)
10.10 Dealer Addendum, as amended, to IBM Agreement for Authorized
Dealers and Industry Remarketers.(1)
10.11 Master Purchase Agreement between Paine Webber Incorporated
and the Company.(1)
10.12 Agreement for Wholesale Financing between Deutsche Financial
Service (f/k/a/ ITT Commercial Finance Corp.) and the
Company.(1)
10.13 September 13, 1993 amendment to Paine Webber Incorporated
agreement.(1)
10.14 Extension Agreement between the Bank of New York and the
Company dated March 3, 1994.(2)
10.15 Agreement of Cancellation and Termination of Franchise
Agreement and General Release, dated March 28, 1995.(3)
10.16 Amendment to Revolving Loan Agreement between the Company and
the Bank of New York, dated March 28, 1995.(3)
10.17 Lease Agreement with Cooke Properties Inc. dated February 13,
1995.(4)
10.18 Pledge and Escrow Agreement dated as of May 6, 1996 by and
among the Company, Data.Com and Mr. Fries.(5)
10.19 Employment Agreement dated as of May 6, 1996 by and between
the Company and Mr. Fries.(5)
10.20 Lease Extension between the Company and Associates of Rockland
County dated as of February 29, 1996.
11.1 Statement Re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
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).
-26-
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 Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1995.
5. Incorporated by reference from the Company's Current Report on Form 8-K
dated May 6, 1996.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the last
quarter of Fiscal 1996.
-27-
Report of Independent Auditors
Board of Directors and Shareholders
Micros-To-Mainframes, Inc.
We have audited the accompanying consolidated balance sheets of Micros-To-
Mainframes, Inc. as of March 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended March 31, 1996. 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, 1996 and 1995 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1996 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
June 7, 1996
F-1
Micros-To-Mainframes, Inc.
Consolidated Balance Sheets
March 31,
1996 1995
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 5,284,587 $ 1,167,008
Accounts receivable - trade, less
allowance of $41,000 8,844,204 6,722,459
Inventory 1,331,000 1,052,049
Prepaid expenses and other current assets 412,460 253,781
Deferred income taxes 20,000 6,000
------------ ------------
Total current assets 15,892,251 9,201,297
Property and equipment:
Leasehold improvements 24,363 15,412
Furniture, fixtures and other equipment 641,385 501,032
Transportation equipment 39,275 39,275
------------ ------------
705,023 555,719
Less accumulated depreciation and amortization 457,884 367,613
------------ ------------
247,139 188,106
Other assets 69,162 30,279
------------ ------------
Total assets $ 16,208,552 $ 9,419,682
============ ============
Liabilities and shareholders' equity Current liabilities:
Secured notes payable (Note 2) $ 5,000 $ 5,000
Accounts payable and accrued expenses 5,083,969 4,282,192
Income taxes payable 119,140 266,454
------------ ------------
Total current liabilities 5,208,109 4,553,646
Shareholders' equity:
Preferred stock, $.001 par value; authorized and
issued 1,400,000 shares; liquidation
preference, $140,000 (Note 3) 1,400 1,400
Common stock, $.001 par value; 10,000,000 shares
authorized; issued and outstanding 3,363,374
shares at March 31, 1996 and 2,177,410 shares
at March 31, 1995 (Note 3) 3,363 2,178
Additional paid-in capital (Note 3) 12,374,774 2,627,485
Retained earnings (deficit) (1,379,094) 2,234,973
------------ ------------
Total shareholders' equity 11,000,443 4,866,036
------------ ------------
Total liabilities and shareholders' equity $ 16,208,552 $ 9,419,682
============ ============
See accompanying notes.
F-2
Micros-To-Mainframes, Inc.
Consolidated Statements of Income
Year ended March 31
1996 1995 1994
--------------------------------------------
Net revenues:
Products $ 42,789,681 $ 40,752,849 $ 27,921,848
Services 4,536,656 2,290,422 1,106,501
--------------------------------------------
47,326,337 43,043,271 29,028,349
Costs and expenses:
Cost of products sold 40,452,206 37,530,399 24,862,090
Technical personnel salaries 1,108,941 777,619 562,043
Selling, general and administrative
expenses (Note 6) 4,070,111 3,276,358 2,690,272
Compensatory stock arrangement (Note 3) 4,655,000
Interest expense 13,325 39,570 93,784
--------------------------------------------
50,299,583 41,623,946 28,208,189
--------------------------------------------
Other income 66,179 94,275
--------------------------------------------
Income (loss) from operations before
income taxes (2,907,067) 1,513,600 820,160
Provision for income taxes (Note 4) 707,000 635,200 342,500
--------------------------------------------
Net income (loss) $ (3,614,067) $ 878,400 $ 477,660
============================================
Net income (loss) per common share:
Primary $ (1.10) $ .40 $ .30
============================================
Fully-diluted $ (.22) $ (.57)
============================================
Weighted average number of common and common
equivalent shares used in calculation:
Primary 3,251,042 2,193,991 1,605,383
============================================
Fully-diluted 3,182,508 2,104,247
============================================
See accompanying notes.
F-3
Micros-To-Mainframes, Inc.
Consolidated Statements of Changes in
Shareholders' Equity
Preferred Stock Common Stock
----------------------- ---------------------
Additional Retained
Number of Number of Paid-In Earnings/
Shares Amount Shares Amount Capital (Deficit) Total
-------------------------------------------------------------------------------------------------
Balance at March 31, 1993 1,400,000 $ 1,400 1,175,000 $ 1,175 $ 58,825 $ 878,913 $ 940,313
Initial public offering,
less offering expenses of
$810,000 1,000,000 1,000 2,563,433 2,564,433
Issuances of common stock as
compensation 810 1 2,429 2,430
Net income 477,660 477,660
-------------------------------------------------------------------------------------------------
Balance at March 31, 1994 1,400,000 1,400 2,175,810 2,176 2,624,687 1,356,573 3,984,836
Issuance of common stock as
compensation 1,600 2 2,798 2,800
Net income 878,400 878,400
-------------------------------------------------------------------------------------------------
Balance at March 31, 1995 1,400,000 $ 1,400 2,177,410 2,178 2,627,485 2,234,973 4,866,036
Issuance of common stock:
Employee options exercised 7,500 7 14,680 14,687
Underwriter Representative
Warrants exercised 100,000 100 438,650 438,750
Warrants exercised and
redeemed less offering
expenses of $78,076 1,078,464 1,078 4,638,959 4,640,037
Compensatory stock
arrangement 4,655,000 4,655,000
Net loss (3,614,067) (3,614,067)
-------------------------------------------------------------------------------------------------
Balance at March 31, 1996 1,400,000 $ 1,400 3,363,374 $ 3,363 $12,374,774 $(1,379,094) $11,000,443
=================================================================================================
See accompanying notes.
F-4
Micros-To-Mainframes, Inc.
Consolidated Statements of Cash Flows
Year ended March 31
1996 1995 1994
-----------------------------------------
Operating activities
Net income (loss) $(3,614,067) $ 878,400 $ 477,660
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Gain on sale of franchise rights (94,275)
Depreciation and amortization 90,269 96,290 85,633
Compensatory stock arrangement 4,655,000
Other non-cash charges (credits) (14,000) 10,800 9,994
Changes in operating assets and
liabilities:
Accounts receivable (2,121,743) (1,864,712) (1,291,381)
Inventory (278,951) 71,164 255,913
Prepaid expenses and other
current assets (158,679) (68,339) (93,139)
Other assets (38,883) (15,829) (400)
Accounts payable and accrued expenses 801,777 1,442,544 8,961
Income taxes payable (147,314) 110,731 9,361
-----------------------------------------
Net cash provided by (used in) operating
activities (826,591) 566,774 (537,398)
Investing activities
Sale of franchise rights, net of expenses 103,059
Purchase of property and equipment (149,304) (93,465) (131,739)
-----------------------------------------
Net cash provided by (used in) investing
activities (149,304) 9,594 (131,739)
Financing activities
Net proceeds from issuance of common stock 5,093,474
Net proceeds from initial public offering 2,564,433
Proceeds from (payments on) secured notes
payable (1,500,692) 288,632
Payments on subordinated demand notes payable
to officers/shareholders (118,283)
-----------------------------------------
Net cash provided by (used in) financing
activities 5,093,474 (1,500,692) 2,734,782
-----------------------------------------
Increase (decrease) in cash 4,117,579 (924,324) 2,065,645
Cash and cash equivalents at beginning of year 1,167,008 2,091,332 25,687
-----------------------------------------
Cash and cash equivalents at end of year $ 5,284,587 $ 1,167,008 $ 2,091,332
=========================================
See accompanying notes.
F-5
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
The accompanying consolidated financial statements include the accounts of
Micros-To-Mainframes, Inc. and its wholly-owned subsidiary, MTM Advanced
Technology, Inc. (Note 6) hereafter referred to as the "Company". Significant
intercompany accounts and transactions have been eliminated. The Company is an
authorized direct dealer and value-added computer reseller providing hardware,
software, consulting and integration services to customers primarily located in
the tri-state New York metropolitan area.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of deposit and
commercial paper. 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.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the following useful lives:
Furniture and fixtures 7
Office and computer equipment 5
Warehouse and Technical department equipment 3
Computer software 2
Leasehold improvements are depreciated over the shorter of the lease term or
economic life of the related improvement. Expenditures which extend the useful
lives of existing assets are capitalized. Maintenance and repair costs are
charged to operations as incurred.
F-6
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred income taxes are provided, using the liability method, for temporary
differences between financial and tax reporting, which arise principally from
the deductions related to the allowances for doubtful accounts and the basis of
inventory.
Revenue Recognition
The Company recognizes revenue upon the shipment of ordered merchandise and as
technical services are rendered.
Fair Value of Financial Instruments
The estimated fair value of amounts reported in the consolidated financial
statements have been determined by using available market information and
appropriate valuation methodologies. All current assets and current liabilities
are carried at their cost, which approximates fair value, because of their short
term nature.
Stock Based Compensation
The Company has granted stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company has accounted for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and intends to
continue to do so.
Earnings (Loss) Per Share
Primary and fully diluted earnings (loss) per common share have been computed
based upon the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares result from the assumed exercise of
outstanding stock options, warrants, and Representative's warrants that have a
dilutive effect when applying the treasury stock method.
Primary earnings per share assumes, in addition to the above, that the Company's
1.4 million convertible preferred shares were converted to 980,000 common shares
as of the beginning of the fourth quarter of Fiscal 1996 (see Note 3).
F-7
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Fully diluted earnings per share assumes, in addition to the above, (i) that the
Company's convertible preferred shares were converted to common shares for all
periods, (ii) that earnings were adjusted to reflect the necessary earnings
requirements for convertibility of the preferred shares, and (iii) that the
charge to income for the compensatory element of the convertible preferred stock
was recognized for each period in the three year period ended March 31, 1996
based on the current market price at the end of each period.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. The Company places its cash with high credit
quality institutions. At times, such amounts may be in excess of the FDIC
insurance limits.
The Company's customers are primarily mid to large size corporations in
diversified industries located in the New York tri-state area. Receivables from
two major customers at March 31, 1996 approximated 22% and 10%, respectively, of
the Company's trade receivables. Receivables from two major customers at March
31, 1995 approximated 25% and 18%, respectively, of the Company's trade
receivables. Two customers accounted for approximately 18% and 16%,
respectively, of the Company's revenue for fiscal 1996, 29% and 11%,
respectively, of the Company's revenue for fiscal 1995 and 21% and 12%,
respectively, of the Company's revenue for fiscal 1994. The loss of either
principal customer would be expected to have a material adverse effect on the
Company's operations during the short term until the Company is able to generate
replacement business, although there can be no assurance of obtaining such
business.
Franchise Fee
The franchise fee relates to the Richard Young Products North, Inc. franchise
purchased in 1986 for $62,000. This fee was amortized using the straight-line
method over ten years, the term of the agreement, prior to the sale in March
1995 of the franchise rights (Note 7).
Reclassifications
Certain previously reported amounts have been reclassified to conform with the
current period presentation.
F-8
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
2. Credit Facilities
The Company has entered into several financing agreements for the purchase of
inventory. Lines of credit under these agreements aggregate approximately
$6,300,000 (approximately $3,764,000 unused) at March 31, 1996 and $4,300,000
(approximately $2,378,000 unused) at March 31, 1995 and generally provide for
thirty day repayment terms. These agreements are secured by the related
inventory and/or accounts receivable and liens against all assets of the
Company. In addition, one of these agreements provides for minimum amounts of
tangible net worth and specified financial ratios. All such borrowings are
subordinated to the bank financing, except as to inventory and equipment,
pursuant to an intercreditor agreement (see below).
A revolving credit facility renewed in August 1994, amended in March 1995 and
expiring July 31, 1996 allows the Company to borrow up to $5,000,000 with an
interest rate of either (1) the bank's Alternate Base Rate (ABR); or (2) the
Eurodollar rate plus 2%, depending on certain factors as stipulated in the
agreement. At March 31, 1996 and 1995, the Company had $5,000 outstanding under
this facility with interest payable at the bank's ABR of 8.25% and 9%,
respectively.
The revolving credit facility provides, among other matters for: (i) a general
security interest first lien on all of the Company's assets (a second lien to
the extent a first lien on inventory and/or accounts receivable is held under
the financing agreements described above); (ii) unconditional guarantees of MTM
Advanced Technology, Inc. and (iii) requirements, including limitations on
additional borrowings, minimum levels of shareholders' equity, restrictions on
certain transactions, including the payment of dividends, and specified
financial ratios.
Interest paid during fiscal 1996, 1995 and 1994 aggregated approximately $1,000,
$40,000 and $100,000, respectively.
3. Shareholders' Equity
In connection with the Company's initial public offering of common stock, the
Company issued 1,000,000 Warrants entitling the holders to purchase common
shares, and 100,000 Representative's Warrants entitling the holders to purchase
units (consisting of one common share and one warrant). The 1,000,000 Warrants
entitled the holders to purchase shares of common stock at an exercise price of
$4.375 per share from October 26, 1993 through October 26, 1997. The 100,000
Representative's Warrants entitled the holders to purchase units at an exercise
price of $4.3875 per unit, from October 26, 1994 through October 26, 1998.
During fiscal 1996, substantially all of the Company's Warrants and all of the
Representative's Warrants were exercised resulting in the issuance of 1,178,464
shares of common stock.
F-9
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
3. Shareholders' Equity (continued)
Conversion of Preferred Shares
The 1,400,000 convertible preferred shares are convertible into common stock (1
to 1) at the option of the holders, solely if the Company's net sales in any
four consecutive fiscal quarters aggregates $50 million or more and its net
income amounts to $1,500,000 or more, or such proportionately higher amount of
net income (3% of net sales) on net sales in excess of $50 million.
In the fourth quarter of fiscal 1996, the thresholds for convertibility were
considered probable. In conjunction with this determination, the Company and the
holders of the preferred shares committed to accelerate the convertibility and
fix the amount of compensation expense to be charged to earnings. The Board of
Directors and the preferred shareholders agreed subject to the receipt of
necessary stockholders' consent and an independent appraisal as to the
equivalent value of the preferred stock and the common stock, to the conversion
of the preferred shares into common shares. The appraisal concluded that the
1,400,000 preferred shares were equivalent to 980,000 common shares. The
conversion will be consummated upon stockholder approval at the next annual
meeting of Company stockholders. Based on the market value of the Company's
common stock at March 31, 1996, the Company recognized a non-recurring, non-cash
charge of $4,655,000.
Employee Stock Option Plan
In May 1993, the Company adopted the 1993 Employee Stock Option Plan (the
"Option Plan"). The Option Plan provides for the granting of options, including
incentive stock options, non-qualified stock options and stock appreciation
rights to qualified employees (including officers and directors) of the Company,
independent contractors, consultants and other individuals, to purchase up to an
aggregate of 250,000 shares of common stock. The exercise price of options
generally, may not be less than 100% of the fair market value of the Company's'
common stock as of the date of grant. Options may not be exercised more than ten
years after the date of grant. Options granted under the Option Plan become
exercisable in accordance with different vesting schedules depending on the
duration of the options.
F-10
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
3. Shareholders' Equity (continued)
Options granted under the Plan are summarized as follows:
Number of Option Exercise
Options Price Per Share
--------------------------------------
Balance at March 31, 1993 0
Options issued during the year 210,000 $1.25 - $3.375
Terminated and canceled (10,000) $3.375
------------
Outstanding at March 31, 1994 200,000 $1.25 - $3.375
Terminated and canceled (5,000) $3.375
------------
Outstanding at March 31, 1995 195,000 $1.25 - $3.375
Terminated and canceled (2,500) $3.375
Options issued during the year 40,000 $5.125 - $7.00
Options exercised during the year (7,500) $1.25 - $3.375
------------
Outstanding at March 31, 1996 225,000 $1.25 - $7.00
=============
There were 175,000 and 123,750 options exercisable at March 31, 1996 and 1995,
respectively.
4. Income Taxes
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
F-11
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
The provision for income taxes consists of the following:
Year ended March 31
1996 1995 1994
----------------------------------------------------
Federal:
Current $568,300 $476,800 $257,500
Deferred (14,000) 8,000 2,000
----------------------------------------------------
554,300 484,800 259,500
----------------------------------------------------
State:
Current 152,700 150,400 83,000
----------------------------------------------------
$707,000 $635,200 $342,500
====================================================
The reconciliations of income tax computed at the federal statutory tax rates to
actual income tax expense are as follows:
Year ended March 31
1996 1995 1994
------------------------------------
Tax expense (benefit) at statutory rates
applied to pretax earnings $(988,000) $515,000 $279,000
Compensatory stock arrangement
without tax benefit 1,583,000
State income taxes, net of federal
benefit 101,000 99,000 55,000
Other 11,000 21,200 8,500
------------------------------------
$ 707,000 $635,200 $342,500
====================================
As of March 31, 1996, gross deferred tax assets totaled $43,000 and gross
deferred tax liabilities totaled $23,000.
Income taxes paid during fiscal 1996, 1995 and 1994 aggregated approximately
$871,000, $521,000 and $338,000, respectively.
F-12
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
5. Commitments
The Company leases three locations for its administrative and operational
functions under operating leases through August 1996 and February 1997. In
addition, the Company leases five cars for the use of certain employees,
including its officers, as well as office equipment.
Future minimum annual lease payments under operating leases are as follows:
Twelve months ending:
March 31, 1997 $263,000
March 31, 1998 50,000
March 31, 1999 13,000
---------
$326,000
=========
Rental expense for operating leases approximated $210,000, $130,000 and
$101,000, respectively, for fiscal 1996, 1995 and 1994.
6. Sale of Franchise Rights
In March 1995, the Company sold the franchise rights of Richard Young Products
North, Inc. back to its franchisor for $108,000, resulting in a gain, net of
expenses, of $94,275 which is presented as other income. The after-tax effect on
net income per common share for 1995 was approximately $.025. In conjunction
with this transaction, Richard Young Products North, Inc. changed its name to
MTM Advanced Technologies, Inc.
7. Subsequent Events
On May 6, 1996, a subsidiary of the Company, acquired substantially all of the
assets of Data.Com RESULTS, Inc. ("Data.Com"), in exchange for issuance of
87,000 shares of common stock of the company (valued at approximately $407,000),
and the assumption of certain of Data.Com's payables (primarily trade). Data.Com
is a data communication, wide area network (WAN) and local area network (LAN)
consultant and advanced technology solutions provider primarily serving clients
located in Connecticut.
The acquisition has been accounted for using the purchase method of accounting,
and, accordingly, the purchase price has been allocated to the assets acquired
and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was approximately $380,000 and has been recorded as goodwill,
which is being amortized on a straight-line basis over 15 years.
F-13
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
7. Subsequent Events (continued)
In addition to the above consideration, contingent consideration is payable in
the Company's common stock based upon defined future levels of Data.Com's
earnings before taxes, depreciation, and amortization ("EBDTA") through Fiscal
1999. The maximum number of shares to be issued are 25,000, 25,000, and 35,000
in Fiscal 1997, 1998, and 1999, respectively. The contingent consideration is
not included in the calculation of the acquisition cost.
In addition to the above contingent consideration, the president of Data.Com
RESULTS will be issued 5,000, 5,000, and 10,000 stock options in Fiscal 1997,
1998, and 1999, respectively, if Data.Com's EBTDA is greater than $1.25 million,
$1.25 million, and $1.35 million for Fiscal 1997, 1998, 1999, respectively. The
option price for any option so granted shall be 110% of the fair market value of
the Company's common stock as at the first day of the taxable year in which the
respective options, if any, are granted. The options shall not vest until the
first day of the taxable year following the year of grant, at which time all
such options shall vest. Compensation expense will be recognized during the
target period based on the market value of the Company's common stock.
The following summarized pro forma results of operations for the years ended
March 31, 1996 and 1995 assume the acquisition occurred at the beginning of the
respective periods.
1996 1995
------------------------------
Net Sales $52,518,181 $50,431,919
Net Income (loss) (3,775,433) 813,355
Earnings (loss) per share-primary (1.13) .36
F-14
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
8. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended March 31, 1996, 1995 and 1994.
June 30 September 30 December 31 March 31
----------------------------------------------------
(In Thousands, except per-share data)
Fiscal 1996
Net revenues $ 10,934 $ 11,187 $ 13,414 $ 11,791
Cost of products sold 9,274 9,694 11,552 9,869
Technical personnel
salaries 239 281 281 371
Net income (loss) 247 155 337 (4,353)
Net income (loss) per
common share:
Primary .11 .06 .12 (.99)
Fully-diluted (.86) (1.39) (.90)
Fiscal 1995
Net revenues $ 8,590 $ 9,596 $ 13,630 $ 11,227
Cost of products sold 7,462 8,354 12,270 9,444
Technical personnel
salaries 170 195 207 206
Other income-sale of
franchise rights 94
Net income 109 122 177 470
Net income (loss) per
common share:
Primary .05 .06 .08 .21
Fully-diluted (.22) (.05) (.64)
Fiscal 1994
Net revenues $ 6,940 $ 7,112 $ 6,314 $ 8,662
Cost of products sold 6,049 6,095 5,392 7,326
Technical personnel
salaries 131 134 145 152
Net income 84 82 65 247
Net income (loss) per
common share:
Primary .07 .07 .03 .13
Fully-diluted (.49) (.41)
F-15
Micros-To-Mainframes, Inc.
Notes to Consolidated Financial Statements (continued)
8. Quarterly Results of Operations (Unaudited) (continued)
The results for the fourth quarter include a charge of $4,655,000 relating to
the conversion of the Company's preferred shares (see Note 3). Earnings per
common share calculations for each of the quarters were based on the weighted
average number of shares outstanding for each period, and the sum of the
quarters may not necessarily be equal to the full year earnings per common share
amount.
F-16
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 26, 1996
MICROS-TO-MAINFRAMES, INC.
By: /s/ Steven H. Rothman
-----------------------------
Steven H. Rothman
Vice 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
- --------------------- President Co-Principal June 26, 1996
Howard Pavony Executive Officer)
and Director
/s/ Steven H. Rothman Vice President, June 26, 1996
- --------------------- (Co-Principal Executive
Steven H. Rothman Officer) and Director
/s/ Frank Wong Vice President-Finance June 26, 1996
- --------------------- (Principal Financial and
Frank Wong Accounting Officer),
Secretary and Director
/s/ Robert A. Fries Vice President June 26, 1996
- --------------------- and Director
Robert A. Fries
/s/ Ramon Mota Vice President-Technology June 26, 1996
- --------------------- and Director
Ramon Mota
Director
- ---------------------
Joseph J. Farley
/s/ William Lerner Director June 26, 1996
- ---------------------
William Lerner
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.20 Lease Extension between the Company and
Associates of Rockland County dated as of
February 29, 1996.
11.1 Statement Re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.