<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-22122
MICROS-TO-MAINFRAMES, INC.
(Exact name of registrant as specified in its charter)
New York 13-3354896
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) No.)
614 Corporate Way, Valley Cottage, NY 10989
(Address of principal executive offices)
(914) 268-5000
(Registrant's telephone number )
Not applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Security
Exchange Act of 1994 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Common Stock, $.001 par value - 4,450,374 shares as of July 21, 1998
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<TABLE>
PART I: FINANCIAL INFORMATION:
ITEM 1: Financial Statements
Micros-to-Mainframes, Inc
Condensed Consolidated Balance Sheets
June 30, March 31
1998 1998
(unaudited)
Assets
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,680,806 $ 3,991,593
Accounts receivable, net 12,998,923 14,000,562
1,147,726 1,332,322
Prepaid expenses and other current asset 452,201 396,618
Deferred income tax 309,000 402,400
---------- ----------
Total current assets 17,588,656 20,123,495
Property, plant and equipment 1,988,305 1,952,556
Less accumulated deprecation and amortization 951,682 877,683
----------- ----------
1,036,623 1,074,873
Goodwill, net of accumulated amortization 762,330 777,181
Investment and advances in Pivot, at cost 594,739 -
Other Assets 143,919 100,951
---------- ----------
Total assets $ 20,126,267 $ 22,076,500
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Secured notes payable $ 5,000 $ 5,000
Accounts payable and accrued expenses 6,469,722 8,166,141
Income taxes 181,988 373,284
Deferred revenue 540,000 810,000
--------- ---------
Total current liabilities 7,196,710 9,354,425
Deferred Income taxes 37,000 37,000
---------- ---------
7,233,710 9,391,425
Shareholders' Equity
Common stock 4,450 4,450
Additional paid-in capital 12,807,900 12,807,900
Retained earnings (deficit) 80,207 (127,275)
---------- ----------
Total shareholders' equity 12,892,557 12,685,075
---------- ----------
Total liabilities and shareholders' equity 20,126,267 22,076,500
========== ==========
<FN>
See accompanying footnotes
</TABLE>
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Micros-to-Mainframes, Inc.
Condensed Consoliadated Stataments of Income
Unaudited Three Months
Ended June 30
1998 1997
--------------------------
Revenue
Products $ 12,042,541 $ 14,651,144
Service related sales 5,030,018 2,924,731
----------- -----------
17,072,559 17,575,875
----------- -----------
Costs and expenses:
Cost of products sold 11,840,135 13,656,247
Cost related to service sales 2,905,478 1,886,615
Selling, general and
administrative expenses 2,282,956 1,831,363
---------- ----------
17,028,569 17,374,225
---------- ----------
Other Income 310,455 19,229
Interest expenses 2,963 485
--------- ----------
351,482 220,394
Provision for income taxes 144,000 90,000
---------- ----------
$ 207,482 $ 130,394
Net income per common share:
Basic $ 0.05 $ 0.03
=========== ===========
Diluted $ 0.05 $ 0.03
=========== ===========
Weighted average number of common and common
equivqlent shares used in calculation
Basic 4,450,374 4,450,374
========= =========
Diluted 4,456,468 4,467,281
========= =========
See accompanying footnotes
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<TABLE>
Micros-to-Mainframes, Inc
Condensed Consolidated Statement of Cash Flows
Unaudited
Three Months Ended June 30
1998 1997
<S> <C> <C>
Operating activities
Net income $ 207,482 $ 130,394
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 88,849 82,698
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,001,639 343,136
Decrease (Increase) in inventory 184,596 (22,377)
Increase in prepaid expenses and
other current assets (55,583) (134,279)
Increase in other assets (42,968)
Decrease in deferred taxes 93,400
Decrease in accounts payable
and accrued expenses (1,696,418) (1,072,734)
Deferred revenue (270,000)
Increase (Decrease) in income taxes payable (191,296) (174,553)
------------ -----------
Netcash provided by (used in) operating (680,299) (847,715)
Investing activities
Investmnet in Pivot (594,139)
Purchase of property and equipment (35,749) (146,007)
------------ ------------
Net cash used in investing activities (629,888) (146,007)
Financing activities
Net cash (used in) provided by financing activities
Increase (decrease) in cash (1,310,187) (993,782)
Cash at the beginning of period 3,991,593 2,879,578
----------- -----------
Cash at the end of period 2,681,406 1,885,796
=========== ===========
Supplement disclosures of cash flow information
Cash paid during the quarter for:
Income taxes $ 260,950 $ 287,285
<FN>
See accompanying footnotes
</TABLE>
<PAGE>
MICROS-TO-MAINFRAMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Micros-to-Mainframes, Inc. and its wholly-owned subsidiaries
Data.Com Results Inc. and MTM Advanced Technology, Inc. hereafter referred to
as the "Company" have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended June 30,
1998 are not necessarily indicative of the results that may be
expected for the year ending March 31, 1999. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report Form
10-K (Commission file number 0-22122) for the fiscal year ended
March 31, 1998.
INVENTORIES
Inventories which are comprised principally of computer hardware
and software, are stated at the lower-of-cost or market using the
first-in, first-out (FIFO).
RECLASSIFICATION
Certain amount have been reclassified to conform to the current year
presentation.
MARKETING AND SERVICE AGREEMENT
The Company entered into a cooperative marketing and service
agreement with BTG in February 1998, under which the Company
received a non-refundable payment of $900,000 from BTG for
consulting services to be provided during the 10 month period
ending December 31, 1998. The Company is recognizing this revenue
ratably over the term of the contract. The Company recognized
$270,000 of income during the three months ended June 30, 1998.
The Company is not required to provide services exceeding $900,000.
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INVESTMENT IN PIVOT
On May 18, 1998, the Company acquired 19.9% of Pivot Technologies,
Inc. ("Pivot"), a remote network servicer, and an option (the
"Option") to cause the merger of Pivot into a to be created wholly-
owned subsidiary of the Company. In consideration for the Option and
the Pivot Shares, Micros-to-Mainframes paid Pivot (exclusive of the
merger consideration payable upon any exercise of the Option)
$475,000 and agreed to make further payments if Pivot is in material
compliance with its Business Plan, as defined in the Purchase and
Option Agreement, up to an aggregate of $346,000 over a five month
period commencing one month after Closing. The Company further
agreed to lend Pivot up to an additional $125,000 in six (6) equal
monthly installments. Such loan is payable, without interest, twelve
months after its issuance, or upon redemption of MTM's interest in
the event the Option is exercised. No assurance can be given that
the Company will exercise the Option. Pursuant to the Option, the
shareholders of Pivot (exclusive of MTM) would receive 377,130
shares of MTM's Common Stock, five (5) year warrants to acquire
100,000 shares of MTM's Common Stock at $2.916767 per share, with
such warrants becoming first exercisable one-third at the end of
each of the first three years after the exercise of the Option, and
$337,600 in cash. The Option has a term of six (6) months, and may
be extended for up to three additional one month terms upon the
payment of an additional $80,000 prior to the expiration of the
Initial Option Period and the commencement of each additional
extension period, respectively. The Company will have certain other
rights if the Option is not exercised or if Pivot receives
additional funding
During the three months period ended June 30, 1998, the
Company paid Pivot $475,000 for the option, contributed an
additional $60,000 to Pivot as required by the contract
and made the first two installments under the loan
provisions of $20,667, each.
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2 EMPLOYEE STOCK OPTION PLAN
The 1993 Employee Stock Option Plan (the 1993 Plan) was adopted by
the Company in May 1993 and the 1996 Stock Option Plan (the 1996 Plan) was
approved by the shareholders of the Company on August 20, 1996.
The Plans provide for granting of options, including incentive
stock options, non-qualified stock options and stock appreciation
rights to qualified employees (including officers and directors) of the
Company, independent contractors, consultants and other individuals,
to purchase up to an aggregate of 250,000 and 350,000 shares of common
stock in the 1993 Plan and 1996 Plan, respectively. The exercise price of
options generally, may not be less than 100% of the fair market
value of the Company's common stock at the date of grant. Options
may not be exercised more than ten years after the date of grant.
Options granted under the Plans become exercisable in
accordance with different vesting schedules depending on the duration
of the options.
Information regarding the Company's stock option plans is summarized
below:
1993 Plan 1996 Plan
-----------------------------------------------
Number Option Number Option
of Exercise of Exercise
Options Price Per Options Price Per
Share Share
Outstanding at March 31, 1998 220,000 $1.25-$7.00 180,700 $2.50-4.43
Options issued during
The First Quarter 1999 20,000 $2.75
Options expired during
The First Quarter 1999 150,000 $3.375
------- -------
70,000 $1.25-$7.00 200,700 $2.25-4.43
======= =======
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following table sets forth for the periods indicated certain
items in the Company's Consolidated Statements of Income
expressed as a percentage of that period's net sales.
Percentage of Sales
Three Months Ended June 30
1998 1997
Product sales .......................... 70.54% 83.36%
Services related sales ................. 29.46 16.64
Net Sales ...............................100.00 100.00
Cost of Product Sales( as a % of
Products sale)..................... 98.32 93.21
Costs related to services (as a
% of services related sales)...... 57.76 64.51
Total Direct Cost(as a % of total sales) 86.37 88.43
Selling, general and
administrative expenses............. 13.37 10.42
Income before income taxes .............. 2.06 1.25
Net Income............................... 1.22 0.74
The Three Months Ended June 30, 1998, as compared to the Three
Months Ended June 30, 1997
The Company had net sales of approximately $17,072,000 for the
three months ended June 30, 1998 ("First Quarter 1999"), as
compared to approximately $17,576,000 for the three months ended June 30,
1997 ("First Quarter 1998"). The decrease in sales of approximately 3% or
approximately $500,000 in the First Quarter 1999 was attributable to the
decrease in hardware sales of approximately $2,600,000 or approximately 18%
offset by an increase in technology consulting services of approximately
$2,100,000 or approximately 72% to both new and existing customers.
As a percentage of net sales, the cost of products sold
increased 5.11% in the First Quarter 1999 due to continued market pressures
from increased competition. The costs as a percentage of the service revenue
decreased 6.75% due to more efficient use of company's technical personnel
during the Quarter. The Company trend is to continue to increase its
technical personnel as the customer demand for the Company's technical
and consulting services increases, which is indicated by the continued
growth of the Company's Advanced Technology Group. The revenue related to
the service and consulting business was approximately $5,030,000 for the
First Quarter 1999 compared to $2,925,000 for the First Quarter 1998.
This is an increase of approximately $2,100,000 or 72%.
Selling, general and administrative expenses ("SG&A") were
approximately $2,283,000 in the First Quarter 1999 as compared to
$1,831,000 in the First Quarter 1998, an increase of $451,000 or 25%.
The SG&A expenses as a percentage of net sales were 13.4% and 10.4% in the
First Quarter 1999 and the First Quarter 1998, respectively. The increase is
attributable to the increase in personnel to 156 in First Quarter 1999 as
compared to 138 in First Quarter 1998. Furthermore, due to the increase in
service related sales volume, there was an increase in sales commissions,
and other expense increases including employee payroll, benefits and payroll
taxes, and other professional fees.
Other income increased to approximately $310,000 in the 1999 Quarter
from approximately $19,000 for the 1998 Quarter. The increase was
due to the Company recognizing a $270,000 contractual payment from
BTG, Inc. The Company will continue to recognize the contractual
<PAGE>
payments from BTG, Inc in the next two quarters for a total
of $$540,000.
The effective income tax rates were approximately 41% for both the
First Quarter 1999 and the First Quarter 1998.
As a result of the forgoing, the Company had net income of
approximately $207,000 in the First Quarter 1999 compared to
$130,000 in the First Quarter 1998. This represents an increase of
approximately 59%. The basic and dilutive earnings per common share
were $0.05 in the First Quarter 1999 compared to $0.03 in the First
Quarter 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company measures its liquidity in a number of ways, including
the following:
June 30, March 31,
1998 1998
(Dollars in thousands,
except current ratio data)
Cash and cash equivalents............... $ 2,681 $ 3,992
Working capital ......................... $10,354 $10,769
Current ratio .......................... 2.43:1 2.15:1
Secured notes payable .................. $ 5 $ 5
Working capital lines available.......... $ 8,179 $ 7,761
The Company had working capital of approximately $10,354,000 as
of June 30, 1998, a decrease of approximately $415,000, from March
31, 1998.
During the First Quarter 1999, the Company had net cash used in
operating activities of approximately $680,000 derived primarily from
$207,000 of net income, a decrease in accounts receivable of approximately
$1,001,000 and a decrease in inventory of approximately $185,000,
offset by an increase in prepaid and other current assets receivable
of $56,000, an increase of other assets of $43,000, a decrease in
accounts payable and accrued expenses of approximately $1,696,000, a
decrease in deferred revenue of $270,000 and a decrease in income
taxes payable of approximately $191,000.
The Company had net cash used in investing activities of
approximately $630,000 from the investment in Pivot Technologies, Inc and
purchase of office equipment.
As a result of the foregoing, the Company decreased its cash by $994,000.
The Company finances much of its business through a two-year $5,000,000
revolving credit facility from a bank, and separately arranged
floor-plan financing agreements aggregating $6,800,000, which are
alternate credit lines provided by manufacturers or vendors. The floor-plan
agreements generally allow the Company to borrow for a period of 30
to 60 days interest free. Interest is charged to the Company only
after the due date. These arrangements generally provide for
security interests in the related inventory and/or accounts
receivable, and liens against all assets of the Company. All of
such 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. On June 30, 1998, the Company's total outstanding debt
under these arrangements with floor-planners was approximately
$3,616,000 and a balance of $3,184,000 was available under such
lines of credit.
The borrowing rate on the Company's $5,000,000 credit facility is the
"Alternate Bank Rate" as defined by the Bank. At June 30, 1998 such
rate was 8.5%. The credit facility (originally expiring on June 30, 1998)
was extended to September 30, 1998. The credit facility provides, among
other matters, for: (i) a general security interest first lien on
substantially all of the Company's assets (a second lien to the extent
a first lien on inventory and equipment is held under the financing
agreements described above); (ii) unconditional guarantees of MTM Advanced
Technology, Inc., and (iii) financial covenants, including minimum amounts
of working capital, tangible net worth, restrictions on certain
transactions, including the payment of dividends, and specified
financial ratios.
The Company's current ratio increased to 2.43:1 at June 30, 1998
from 2.15:1 at March 31, 1998.
The Company believes that expected cash flow from its operations
combined with available financing arrangements will be sufficient to
satisfy its expected cash requirements for the next 12 months. There
can be no assurance, however, that changes in Company's plans or
other events affecting the Company will not result in unexpected
expenditures or cash requirements.
Acquisition of Investment in Pivot Technologies, Inc
On May 18, 1998 (the "Pivot Closing"), the Company acquired
19.9% of the shares (the "Shares") of Pivot Technologies, Inc.
("Pivot"), a remote network management service provider, and an option
(the "Option") to cause the merger ("Merger") of Pivot into a to be
created wholly-owned subsidiary of the Company. No assurance can
be given that the Company will exercise the Option. The aggregate
purchase price for the Shares and the granting of the Option was
$475,000, together with the Company`s obligation to contribute
additional sums of $60,000, $68,000, $68,000, $75,000 and $75,000
respectively on each of the first five monthly anniversaries of
the Pivot Closing, subject to Pivot's material compliance with
their business plan. The Company further agreed to lend Pivot up
to an additional $125,000 in six equal monthly installments
commencing shortly after the acquisition of the Shares and the
Option. The loan is to be repaid without interest on the first
anniversary of the Pivot Closing or the redemption of the
Company's interest in Pivot.
The Option expires fifteen days after the end of the six
month anniversary of the Pivot Closing ("Initial Option Period"),
subject to extension. The Initial Option Period, shall be extended
to up to three additional one month terms upon the payment of an
additional $80,000 prior to the expiration of the Initial Option
Period and the commencement of each addition extension period,
respectively. If the Option is exercised, the Company will own
all the issued and outstanding stock of Pivot upon the
effectiveness of the Merger (the "Effective Time"). At such time,
Pivot's stockholders, other than the Company and its affiliates,
will receive (i) shares of the Company's Common Stock, $.001 par
value per share having an aggregate value of $1,100,000 based on
the thirty trading day average closing price of the Company Common
Stock prior to the Pivot Closing (the average price was $2.916767
which would require distribution of approximately 377,130 shares
of the Company's Common Stock), (ii) a number of five year
warrants, to acquire 100,000 shares of the Company Common Stock at
$2.916767, with such warrants becoming first exercisable one-third
at the end of each of the first three years after the exercise of
the Option, (iii) $337,600 in cash, and (iv) if the Company elects
to exercise its Option during any of the extension periods, an
additional amount of cash equal to fifty percent of the net profit
after taxes generated by Pivot during the period commencing on the
<PAGE>
day after the end of the Initial Option Period and ending at the
date the Option is exercised.
If the Company extends the Initial Option Period for each of
the three periods referred to above, but elects prior to the 75th
day after the end of the Initial Option Period not to exercise its
Option, Pivot will transfer to the Company, for no additional
consideration, shares of Pivot Common Stock so that the Company
will own on an aggregate basis, a 33.4 % interest in Pivot on a
fully-diluted basis as determined as of the date the Company
elects not to exercise its Option.
In the event the Company does not exercise its Option, Pivot
shall have the right for one hundred eighty days after the option
lapses to redeem all of its shares owned by the Company for 115%
of the amount contributed by the Company as a capital contribution
or to extend the Option period. The Company will have a right to
put shares back to Pivot in the event the Option is not exercised
at such time as Pivot receives suitable additional funding. The
put price is the greater of (X) 125% of the amount contributed by
the Company as a capital contribution or (Y) in the event the
additional funding is equity financing or the issuance of
convertible debt, the then fair market value thereof.
PART II OTHER INFORMATION
(a) Exhibits:
27.1 Financial Data Schedule
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SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MICROS-TO-MAINFRAMES, INC.
Date : July 21 , 1998 By: /s/ Howard A. Pavony
Howard A. Pavony
Chairman of the Board of
Directors
Date : July 21, 1998 By: /s/ Steven H. Rothman
Steven H. Rothman
President CEO( Principal
Executive Officer) and
Director
Date : July 21, 1998 By: /s/ Frank T. Wong
Frank T. Wong
Vice President - Finance
(Principal Financial and
Accounting Officer) Secretary
<PAGE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 2,681
<SECURITIES> 0
<RECEIVABLES> 12,999
<ALLOWANCES> 0
<INVENTORY> 1,148
<CURRENT-ASSETS> 17,589
<PP&E> 1,988
<DEPRECIATION> 952
<TOTAL-ASSETS> 19,312
<CURRENT-LIABILITIES> 7,234
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 12,893
<TOTAL-LIABILITY-AND-EQUITY> 20,126
<SALES> 17,073
<TOTAL-REVENUES> 17,073
<CGS> 14,745
<TOTAL-COSTS> 14,745
<OTHER-EXPENSES> 2,283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 220
<INCOME-TAX> 90
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
