UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ________
COMMISSION FILE NUMBER: 0-22122
MTM TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3354896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
850 CANAL STREET
STAMFORD, CT 06902
(Address of principal executive offices) (Zip Code)
(203) 975-3700
(Registrant's telephone number, including area code)
614 CORPORATE WAY
VALLEY COTTAGE, NY 10989
(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. There were a total of 6,029,645
shares of the issuer's common stock, par value $.001 per share, outstanding as
of November 10, 2004.
MTM TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2004
(Unaudited) and March 31, 2004........................................... 1
Condensed Consolidated Statements of Operations for the Six
Months Ended September 30, 2004 and 2003 (Unaudited)..................... 2
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2004 and
2003 (Unaudited)......................................................... 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2004 and 2003 (Unaudited)................. 4
Notes to Unaudited Condensed Consolidated Financial Statements........... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 21
Item 4. Controls and Procedures............................................ 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 21
Item 3. Defaults Upon Senior Securities.................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................ 24
Item 5. Other Information.................................................. 24
Item 6. Exhibits........................................................... 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 March 31, 2004
------------------ --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 2,966,107 $ 370,361
Restricted cash....................................................... 1,000,000
Accounts receivable - trade, net of allowance of $290,000 and $233,000,
respectively........................................................ 20,270,199 11,278,932
Inventories........................................................... 1,825,469 858,544
Prepaid expenses and other current assets............................. 810,675 525,970
------------------ ------------------
Total current assets................................................ 26,872,450 13,033,807
------------------ -----------------
Property and equipment................................................... 10,621,723 9,746,254
Less accumulated deprecation and amortization......................... 7,811,872 7,038,281
------------------ ------------------
2,809,851 2,707,973
------------------ ------------------
Goodwill ................................................................ 10,596,798 3,228,729
Other assets............................................................. 326,405 504,945
------------------ ------------------
Total assets...................................................... $ 40,605,504 $ 19,475,454
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Secured notes payable................................................. $ 7,514,970 $ 5,918,784
Inventory financing agreements........................................ 3,069,004 3,455,635
Current portion of promissory notes................................... 135,153
Accounts payable and accrued expenses................................. 12,782,356 3,252,736
Deferred revenue...................................................... 1,393,277 1,583,938
Current portion of capital lease obligations.......................... 13,474 100,070
------------------ ------------------
Total current liabilities........................................... 24,908,234 14,311,163
Non-current portion of promissory notes.................................. 83,172
Non-current portion of lease obligation.................................. 34,978
Shareholders' equity:
Series A Convertible Preferred Stock, par value $.001 per share; 14,000,000
shares authorized; 5,255,814 shares issued and
outstanding at September 30, 2004................................... 8,028,000
Common stock - $.001 par value; 80,000,000 and 10,000,000 shares
authorized at September 30, 2004 and March 31, 2004, respectively;
6,003,427 and 4,723,052 shares issued and outstanding at September 30,
2004 and March 31, 2004, respectively............................... 6,004 4,724
Additional paid-in capital............................................ 21,090,027 15,364,227
Accumulated deficit................................................... (13,544,911) (10,204,660)
------------------ ------------------
Total shareholders' equity.......................................... 15,579,120 5,164,291
------------------ ------------------
Total liabilities and shareholders' equity........................ $ 40,605,504 $ 19,475,454
================== ==================
See Notes to Condensed Consolidated Financial Statements
1
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended September 30,
--------------------------------------
2004 2003
------------------ ------------------
(Unaudited)
Net revenues:
Products.............................................................. $ 25,805,164 $ 19,951,246
Services.............................................................. 8,149,495 9,213,084
------------------ ------------------
33,954,659 29,164,330
------------------ ------------------
Costs and expenses:
Cost of products sold................................................. 23,821,789 19,060,486
Cost of services provided............................................. 5,989,506 5,501,280
Selling, general and administrative expenses.......................... 7,266,728 5,034,946
------------------ ------------------
37,078,023 29,596,712
------------------ ------------------
Other income............................................................. 3,152
Interest expense......................................................... 216,887 201,605
------------------ ------------------
Net (loss) income........................................................ $ (3,340,251) $ (630,835)
================== ==================
Net (loss) income per common shares:
Basic and diluted..................................................... $ (0.66) $ (0.13)
================== =================
Weighted average number of common shares outstanding:
Basic and diluted................................................... 5,052,273 4,723,152
================== ==================
See Notes to Condensed Consolidated Financial Statements
2
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
--------------------------------------
2004 2003
------------------ ------------------
(Unaudited)
Net revenues:
Products.............................................................. $ 13,568,775 $ 11,583,870
Services.............................................................. 5,152,536 3,941,708
------------------ ------------------
18,721,311 15,525,578
------------------ ------------------
Costs and expenses:
Cost of products sold................................................. 12,405,190 11,021,376
Cost of services provided............................................. 3,634,099 2,449,848
Selling, general and administrative expenses.......................... 3,425,262 2,626,624
------------------ ------------------
19,464,551 16,097,848
------------------ ------------------
Other income............................................................. 1,255
Interest expense......................................................... 92,359 96,959
------------------ ------------------
Net (loss) income........................................................ $ (835,599) $ (667,974)
================== ==================
Net (loss) income per common shares:
Basic and diluted..................................................... $ (0.16) $ (0.14)
================== =================
Weighted average number of common shares outstanding:
Basic and diluted................................................... 5,369,587 4,723,152
================== ==================
See Notes to Condensed Consolidated Financial Statements
3
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended September 30,
--------------------------------------
2004 2003
------------------ ------------------
(Unaudited)
Cash flows from operating activities:
Net (loss) income..................................................... $ (3,340,251) $ (630,835)
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Changes in operating assets and liabilities net of effects of acquisitions:
Depreciation and amortization................................... 773,591 810,002
(Increase) in accounts receivable................................. (1,280,544) (4,727,735)
(Increase) decrease in inventory.................................. (143,008) 49,025
(Increase) decrease in prepaid expenses and other current assets.. (131,841) 194,705
Decrease in other assets.......................................... 296,840 4,415
Increase in accounts payable and accrued expenses................. 246,597 1,153,516
(Decrease) in deferred revenue.................................... (908,508)
----------------- -----------------
Net cash used in operating activities........................... (4,487,124) (3,146,907)
----------------- -----------------
Cash flows used in investing activities:
Acquisition of property and equipment................................. (434,933) (398,698)
Acquisition of businesses, net of cash acquired....................... (4,065,573)
Increase in restricted cash........................................... (1,000,000)
------------------ ------------------
Net cash used in investing activities........................... (5,500,506) (398,698)
------------------ ------------------
Cash flows from financing activities:
Borrowing of secured notes payable.................................... 1,596,186 1,786,470
(Repayment) borrowing on inventory financing.......................... (386,631) 1,930,842
Proceeds from issuance of preferred stock, net........................ 11,505,081
Payments on promissory note........................................... (31,190)
Payments on capital lease obligations................................. (100,070) (175,257)
------------------ ------------------
Net cash provided by financing activities......................... 12,583,376 3,542,055
------------------ ------------------
Net increase/(decrease) in cash and cash equivalents..................... 2,595,746 (3,550)
Cash and cash equivalents at beginning of period......................... 370,361 118,452
------------------ ------------------
Cash and cash equivalents at end of period............................... $ 2,966,107 $ 114,902
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the six months for -
Interest............................................................ $ 244,986 $ 256,195
================== ==================
Income Taxes........................................................ $ -- $ 9,765
================== ==================
See Notes to Condensed Consolidated Financial Statements
4
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The accompanying unaudited condensed consolidated financial statements include
the accounts of MTM Technologies, Inc. (formerly Micro-to-Mainframes, Inc.) and
its wholly owned subsidiaries, Data.Com RESULTS, Inc. ("Data.Com"), MTM Advanced
Technology, Inc. ("MTM"), PTI Corporation (formerly known as Pivot Technologies,
Inc.) ("Pivot"), and MTM Technologies (California), Inc., hereinafter
collectively referred to as the "Company." All significant intercompany accounts
and transactions have been eliminated.
The Company is a leading computer and communications technology management
company providing IT networking and data center services, including storage,
security, messaging, and internet protocol or "IP" telephony solutions. The
Company serves as a single source provider of advanced technology solutions to
large corporations, mid-sized companies, municipalities and educational
institutions. The Company provides its clients with a suite of outsourced
support services, network and mainframe connectivity consulting, remote network
monitoring and management, network and system diagnostics, product maintenance
and support, training, and product procurement solutions. The Company also
provides total solutions to its clients by delivering systems design,
installation, consulting, maintenance and integration of network computer
products, including the design and implementation of WANS, LANS, wireless
network solutions and computer hardware and software products. The Company
provides its remote network solutions utilizing its proprietary solution
marketed as "Pivot Technology."
The Company purchases computers and related products directly from suppliers as
either an authorized dealer or a value-added reseller. The Company has entered
into authorization agreements with major suppliers, which can be terminated by
the supplier, with or without cause, upon 30 to 90 days' notice, or immediately
upon the occurrence of certain events. The sales of products from the Company's
three largest manufacturers accounted for 33%, 20% and 10% of all product sales
for the three months ended September 30, 2004. The sales of products from the
Company's three largest manufacturers were 33%, 20% and 19% of all product sales
for the three months ended September 30, 2003. The Company believes that it has
excellent relationships with its major suppliers; however, there can be no
assurance that the aforementioned agreements will be renewed. If these
agreements are not renewed, the Company may have difficulty in obtaining
inventory at a sufficiently low cost, which would allow for resale at a
competitive market price.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting principles generally
accepted in the United States of America 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 six months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the Company's
fiscal year ending March 31, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K (Commission file number: 0-22122) for the
fiscal year ended March 31, 2004.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amount of assets and liabilities and
5
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RESTRICTED CASH
The Company has restricted $1,000,000 of cash in a blocked account for the
benefit of a lender under the amended financing facility discussed in Note 2.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at their outstanding unpaid principal balances
reduced by an allowance for doubtful accounts, based on certain percentages of
aged receivables. The Company estimates doubtful accounts based on historical
bad debts, factors related to specific customers' ability to pay and current
economic trends. The Company writes off accounts receivable against the
allowance when a balance is determined to be uncollectible.
INVENTORIES
Inventories, comprised principally of computer hardware and software, are stated
at the lower of cost or market using the first-in, first-out method.
PER SHARE DATA
Basic net income (loss) per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted net income per
share is calculated using the weighted-average number of common shares plus
dilutive potential common shares outstanding during the period. Dilutive
securities have not been included in the weighted-average shares used for the
calculation of earnings per share in periods of net loss because the effect of
such securities would be anti-dilutive.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, to require prominent disclosures in
annual and interim financial statements concerning the method of accounting for
stock-based employee compensation and the effect in measuring compensation
expense. The disclosure requirements of SFAS No. 148 are effective for periods
beginning after December 15, 2002.
The Company has elected, in accordance with the provisions of SFAS No. 123, as
amended by SFAS No. 148, to apply the current accounting rules under APB Opinion
No. 25 and related interpretations in accounting for employee stock options and,
accordingly, has presented the disclosure-only information as required by SFAS
No. 123. If the Company had elected to recognize compensation cost based on the
fair value of the options granted at the grant date, as prescribed by SFAS No.
123, the Company's net (loss) income and net (loss) income per common share for
the six months and three months ended September 30, 2004 and 2003 would
approximate the pro forma amounts indicated in the tables below.
6
Six Months Ended September 30,
------------------------------
2004 2003
-------------- -----------
(dollars in thousands)
Net (loss) income - as reported.......................................... $ (3,340) $ (631)
Stock-based compensation using the fair-value method..................... (363) (26)
Net (loss) income - pro forma............................................ (3,703) (657)
Basic and diluted net (loss) income per common share - as reported....... (.66) (.13)
Basic and diluted net (loss) income per common share - pro forma......... (.73) (.14)
Three Months Ended September 30,
--------------------------------
2004 2003
-------------- -------------
(dollars in thousands)
Net (loss) income - as reported.......................................... $ (835) $ (668)
Stock-based compensation using the fair-value method..................... (218) (5)
Net (loss) income - pro forma............................................ (1,053) (673)
Basic and diluted net (loss) income per common share - as reported....... (.16) (.14)
Basic and diluted net (loss) income per common share - pro forma......... (.20) (.14)
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of the
statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for the six months ended September 30, 2004 and 2003: risk-free
interest rate of 4.1% and 3.0%, respectively; no dividend yield; a volatility
factor of the expected market price of the Company's common stock of 1.00 and
1.31, respectively; and an expected life of five and four years, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of publicly traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of publicly traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the Black-Scholes option valuation model does not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
NOTE 2. CREDIT FACILITIES:
On May 21, 2004, the Company and its subsidiaries entered into an Amended and
Restated Financing Facility (the "Amended Financing Facility") with a financial
institution (the "Lender"). The Amended Financing Facility provides for a credit
facility of up to $10,000,000, secured by all of the Company's assets, except
for permitted encumbrances, and expires on May 21, 2005. Two forms of loans can
be made under the Amended Financing Facility: floor plan financings and
revolving receivable financings. The floor plan financings generally allow the
Company to finance inventory purchases from approved vendors on a 30-day
interest-free basis. Interest accrues on floor plan financings after such 30-day
period at the rate equal to six basis points over a specified prime rate. The
revolving receivable financings allow the Company to borrow against current
account receivables that meet certain specified standards. Interest accrues on
revolving receivable financings immediately upon funding a specified prime rate.
The Amended Financing Facility contains other affirmative and negative
covenants, including those relating to the Company's tangible net worth and
other financial conditions. The Company is required to pay additional fees if it
exceeds the maximum permitted aggregate loan amount of $10,000,000 or if the
Company is found to be in default under the Amended Financing Facility. The
Lender also is entitled to make periodic reviews and audits of the Company's
records, files, books of account and other documents. The Company will incur an
annual facility fee computed at 0.2% of the amount of the total facility.
7
As of September 30, 2004, the Company was not in compliance with the covenant
set forth in the Amended Financing Facility requiring the Company to maintain a
minimum tangible net worth, however, the Company has received a letter from the
Lender under the Amended Financing Facility which provides that as an
accommodation to the Company, the Lender presently intends to make loans
to the Company notwithstanding the default. The letter can be withdrawn at any
time.
The Company's total outstanding debt under the revolving receivable financing
facility was $7,514,970 as at September 30, 2004 and $5,918,784 as at March 31,
2004. The amount outstanding under inventory financing was $3,069,004 as at
September 30, 2004 and $3,455,635 as at March 31, 2004.
NOTE 3. COMMITMENTS AND CONTINGENCIES:
On April 1, 2003, Andrew J. Maxwell, trustee (the "Trustee") of the Chapter 7
bankruptcy case of Marchfirst, Inc. and its subsidiaries and affiliates
(collectively, the "Debtors"), filed a complaint (the "Complaint") against the
Company in the United States Bankruptcy Court, Northern District of Illinois,
Eastern Division. The Debtors had filed petitions for relief under Chapter 11 of
Title 11 of the United States Code (the "Bankruptcy Code") on April 12, 2001
(the "Petition Date"). The Debtors' bankruptcy case was thereafter converted to
a Chapter 7 bankruptcy case on or about April 26, 2001. During the 90 days
preceding the Petition Date, the Debtors transferred to the Company an aggregate
of approximately $212,000 (the "Transfer") on account of debts owed by the
Debtors to the Company. The Complaint alleges that the Transfer constituted a
preference within the meaning of Section 547(b) of the Bankruptcy Code, and
seeks return of the amount of the Transfer, together with interest and costs
incurred by the Trustee in bringing suit, including attorney's fees, to the
extent permitted under the Bankruptcy Code. The Company answered the Complaint
denying liability and asserting affirmative defenses under Sections 547(c) (2)
and (4) of the Bankruptcy Code, commonly known as the "ordinary course of
business" and "new value" defenses, respectively. The Company believes that an
adverse outcome is not probable and has not accrued any amount with respect to
the Complaint and Transfer.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements, which require the following
payments:
Year Ending March 31,
---------------------
2005 ................................ $ 1,288,000
2006 ................................ 2,033,000
2007 ................................ 1,285,000
2008 ................................ 112,000
---------------
$ 4,718,000
===============
In addition, certain of the agreements provide for bonus compensation based on
certain performance goals, as defined.
NOTE 4. AUTHORIZATION OF SERIES A PREFERRED STOCK; SALE OF SERIES A-1 PREFERRED
STOCK AND WARRANTS:
On January 29, 2004, the Company entered into an agreement to sell to Pequot
Private Equity Fund III, LLP and Pequot Offshore Private Equity Partners III,
L.P. (collectively, "Pequot") an aggregate of up to $25 million of Series A
Convertible Preferred Stock, together with warrants to purchase additional
shares of common stock. On May 21, 2004, Pequot purchased $7 million of Series
A-1 Convertible Preferred Stock which is convertible into 3,255,814 shares of
the Company's common stock at the conversion price of $2.15 per share, and
500,000 common stock warrants which are exercisable at a price of $2.46 per
share. On September 16, 2004, Pequot purchased $5.5 million of Series A-2
Convertible Preferred Stock which is convertible into 2,000,000 shares of the
Company's common stock at the conversion price of $2.75 per share, and 400,000
common stock warrants which are exercisable at a price of $3.44 per share.
Pequot also received rights to purchase, solely at its option, Series A-3
Convertible Preferred Stock aggregating up to $12.5 million, plus warrants to
8
purchase additional shares of common stock. Costs incurred in connection with
the consummation of the initial Pequot transaction amounted to approximately $1
million. Payments aggregating $1.1 million were made to two officers of the
Company and an additional $400,000 funded a rabbi trust from which payments
aggregating $200,000 will be paid to these officers on each of May 21, 2005 and
2006. Costs incurred in connection with the consummation of the second Pequot
transaction amounted to approximately $25,000. The net proceeds of the Pequot
investments have been used to fund acquisition transactions and working capital,
and any future sale of Series A Preferred Stock are also expected to be used to
fund acquisition transactions and working capital.
In connection with the initial Pequot investment, the Company allocated the net
proceeds from the sale of the (a) Series A-1 Convertible Preferred Stock, (b)
warrants to purchase 500,000 shares of the Company's common stock and (c) rights
to purchase the Series A-2 Convertible Preferred Stock, Series A-3 Convertible
Preferred Stock and related warrants based on their relative fair values as at
the date of the sale of the Series A-1 Preferred Stock and 500,000 warrants. The
Company allocated and recorded $2.9 million to the Series A-1 Preferred Stock
and assigned and credited to additional paid-in capital (x) $600,000 for the
500,000 warrants sold with the Series A-1 Preferred Stock and (y) $3.2 million
for the rights to purchase the Series A-2 Convertible Preferred Stock, Series
A-3 Convertible Preferred Stock and related warrants. Additionally, a finder's
fee was paid, consisting of $70,000 in cash and 27,363 shares of the Company's
common stock, valued at $45,150, which was charged against additional paid-in
capital. In connection with the Pequot purchase of the Series A-2 Convertible
Preferred Stock and related warrants the Company allocated and recorded $5.1
million to the Series A-2 Convertible Preferred Stock and assigned and credited
to additional paid in capital $0.4 million for the fair value of the warrants.
NOTE 5. SEGMENT INFORMATION:
The Company is a leading computer and communications technology management
company providing IT networking and data center services, including storage,
security, messaging and IP telephony solutions. The Company serves as a single
source provider of advanced technology solutions to large corporations,
mid-sized companies, municipalities and educational institutions. The Company
provides its clients with a suite of outsourced support services, network and
mainframe connectivity consulting, remote network monitoring and management,
network and system diagnostics, product maintenance and support training, and
product procurement solutions. The Company also provides total solutions to its
clients by delivering systems design, installation, consulting, maintenance and
integration of network computer products, including the design and
implementation of WANS, LANS, wireless network solutions and computer hardware
and software products. The Company provides its remote network solutions
utilizing its proprietary solution marketed as "Pivot Technology." The Company
has aggregated its business units into three reportable segments: Pivot
Technologies, Data.Com and Micros-to-Mainframes. The accounting policies of the
segments are the same as those described in the summary of accounting policies.
There are no material inter-segment sales. Each unit shares facilities, and
sales and administrative support services. Management evaluates performance on
gross profits and operating results of the three business segments. Summarized
financial information concerning the Company's reportable segments for the six
months and three months ended September 30, 2004 and 2003 are set forth on the
following tables.
9
For the Six Months Ended September 30, 2004 For the Six Months Ended September 30, 2003
------------------------------------------------------------------------------------------
Pivot Data.Com MTM Total Pivot Data.Com MTM Total
-------- ----------- ----- ------- --------- -------- ------- -------
(In thousands)
Net revenues:
Products.............. $ -- $ 5,968 $ 19,837 $ 25,805 $ -- $ 1,903 $ 18,048 $ 19,951
Services.............. 676 2,472 5,002 8,150 878 3,638 4,697 9,213
Cost of products sold.... -- 5,546 18,276 23,822 -- 1,773 17,287 19,060
Cost of services
provided.............. 414 1,923 3,652 5,989 299 2,402 2,799 5,500
Gross profit............. 262 971 2,911 4,144 579 1,366 2,659 4,604
Operating expenses....... 204 975 6,088 7,267 386 1,066 3,583 5,035
Other income............. -- -- -- -- -- -- 3 3
Interest expense......... 4 -- 213 217 21 -- 181 202
Income (loss) from
operations............ 54 (4) (3,390) (3,340) 172 300 (1,102) (630)
Segment assets........... 4,079 3,322 33,204 40,606 5,950 4,006 17,063 27,019
Capital expenditures..... 45 10 380 435 245 -- 154 399
Depreciation and
amortization expense.. 451 20 303 774 535 21 254 810
For the Three Months Ended September 30, 2004 For the Three Months Ended September 30, 2003
----------------------------------------------------------------------------------------------
Pivot Data.Com MTM Total Pivot Data.Com MTM Total
-------- ----------- ----- ------- --------- -------- ------- --------
(In thousands)
Net revenues:
Products.............. $ -- $ 3,970 $ 9,599 $ 13,569 $ -- $ 722 $ 10,862 $ 11,584
Services.............. 309 1,368 3,476 5,153 487 1,548 1,907 3,942
Cost of products sold.... -- 3,707 8,698 12,405 -- 693 10,328 11,021
Cost of services
provided.............. 246 1,017 2,371 3,634 119 1,025 1,305 2,449
Gross profit............. 63 614 2,006 2,683 368 552 1,136 2,056
Operating expenses....... 43 617 2,765 3,425 274 410 1,943 2,627
Other income............. -- -- -- -- -- -- 1 1
Interest expense......... (2) -- 94 92 8 -- 89 97
Income (loss) from
operations............ 22 (3) (853) (834) 86 142 (895) (667)
Segment assets........... 4,079 3,322 33,204 40,606 5.950 4,006 17,063 27,019
Capital expenditures..... -- -- 317 435 160 -- 104 264
Depreciation and
amortization expense.. 194 10 168 774 271 11 129 411
NOTE 6. 2004 EQUITY INCENTIVE PLAN:
On May 20, 2004, the Company's shareholders approved the Company's 2004 Equity
Incentive Plan. On the following day, executive officers were granted options to
purchase an aggregate of 625,000 shares of the Company's common stock at a price
of $2.15 per share. Other options, to purchase an additional 372,500 shares,
were granted to a newly employed executive officer and certain managers of the
Company at prices ranging from $1.37 per share to $2.15 per share.
10
NOTE 7. ACQUISITIONS
On July 2, 2004, the Company acquired DataVox Technologies, Inc. ("DataVox). The
results of operations of DataVox are included with the results of operations of
the Company from the date of acquisition. DataVox, located in New York City,
offers advanced technology solutions including, security, storage networking,
wireless technologies, as well as solutions for networking, facilities
engineering and data center technologies. DataVox's founders have also joined
the Company.
The purchase price of the DataVox acquisition was approximately $2,150,000 and
was allocated to the specific assets acquired and liabilities assumed. The
purchase price was paid in the form of cash, promissory notes and 753,012 shares
of the Company's common stock. The Company issued a promissory note, in the
principal amount of $124,757, to each of the DataVox Shareholders (the "DataVox
Notes"). Each DataVox Note is payable in five equal quarterly installments of
$20,792 and one final quarterly installment of $20,792, (each, an "Installment")
such Installments being due on October 1, 2004, January 1, 2005, April 1 2005,
July 1, 2005, October 1, 2005 and January 1, 2006 (each, an "Installment Due
Date"), without interest. Payments of principal and interest, if any, on the
DataVox Notes is payable at the Company's option in any combination of cash and
common stock, provided that all payments must be made with a minimum of 25% cash
and cannot be made with more than a maximum of 75% cash. In determining the
value of a share of common stock, such shares shall be valued at the "market
price" at the date such payment first became due and payable. Market price means
an amount equal to the average, for each of the 15 consecutive trading days
immediately prior to such date, of the closing prices for a share of common
stock on such trading days. On October 1, 2004, the Company issued 6,218 shares
of common stock in partial payment of the first installments due under the
DataVox Notes. Based upon the stock price of the Company's common stock on
November 8, 2004 of $2.80 per share, the maximum number of shares the Company is
obligated to issue for the remaining five installments of the DataVox Notes
would be approximately 56,000.
On September 17, 2004, the Company acquired Network Catalyst, Inc. The results
of operations of Network Catalyst are included with the results of operations of
the Company from September 17, 2004. Network Catalyst provides advanced
technology solutions in the VOIP (Voice Over Internet Protocol), infrastructure
and security fields to clients located throughout the Southern California
region. The Network Catalyst senior management team has joined the Company.
The purchase price of the Network Catalyst acquisition was $5,000,000 and was
allocated to the specific assets acquired and liabilities assumed. The purchase
price was paid in the form of cash, promissory notes and 500,000 shares of the
Company's common stock. In addition, as part of the Network Catalyst purchase
price, the Company agreed to pay to Network Catalyst additional cash amounts as
well as transfer to Network Catalyst additional shares of common stock on the
achievement of certain financial targets. More particularly, in the event that
as of the end of any fiscal quarter, the earnings before interest, taxes,
depreciation and amortization attributable to the acquired business during the
period beginning October 1, 2004 and ending on September 30, 2005 (the "Earnout
Period") equals or exceeds $2,000,000, then the Company is required to (x) pay
to Network Catalyst $960,000 in cash, and (y) issue to Network Catalyst that
number of shares of common stock determined by dividing $240,000 by the greater
of (A) the average trading price of the common stock for the 20 business days
ending immediately preceding the end of the Earnout Period and (B) $2.15.
11
UNAUDITED PRO FORMA SUMMARY
The following pro forma consolidated amounts give effect to the Company's
Network Catalyst acquisition accounted for by the purchase method of accounting
as if they had occurred at the beginning of the period by consolidating the
results of operations of the acquired net asset for the three and six months
ended September 30, 2004 and 2003.
The pro forma consolidated statements of operations are not necessarily
indicative of the operating results that would have been achieved had the
transaction been in effect as of the beginning of the periods presented and
should not be construed as being representative of future operating results.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended September 30,
--------------------------------------
2004 2003
------------------ ------------------
(Unaudited)
Net revenues:
Products.............................................................. $ 36,749,138 $ 31,944,099
Services.............................................................. 12,725,881 12,860,906
------------------ ------------------
49,475,019 44,805,005
------------------ ------------------
Costs and expenses:
Cost of products sold................................................. 33,684,924 29,490,832
Cost of services provided............................................. 9,425,583 8,323,872
Selling, general and administrative expenses.......................... 9,290,263 7,211,551
------------------ ------------------
52,400,770 45,026,255
------------------ ------------------
Other income............................................................. -- (3,152)
Interest expense......................................................... 346,482 366,014
------------------ ------------------
Net (loss) income........................................................ $ (3,272,234) $ (584,112)
================== ==================
Net (loss) income per common shares:
Basic and diluted (1)................................................. $ (0.59) $ (0.11)
================== ==================
Weighted average number of common shares outstanding:
Basic and diluted (1)............................................... 5,533,147 5,223,152
================== ==================
(1) The weighted average shares used to compute pro forma basic and diluted
net (loss) per share for the six month periods ended September 30, 2004
and 2003 includes 500,000 shares of common stock issued as if the
shares were issued on April 1, 2004 and 2003, respectively.
12
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
----------------------------------
2004 2003
----------------------------------
(Unaudited)
Net revenues:
Products.............................................................. $ 18,170,802 $ 17,882,781
Services.............................................................. 7,868,230 5,858,780
------------------ ------------------
26,039,032 23,741,561
------------------ ------------------
Costs and expenses:
Cost of products sold................................................. 16,872,072 16,558,136
Cost of services provided............................................. 5,448,572 4,020,172
Selling, general and administrative expenses.......................... 4,567,281 3,628,335
------------------ ------------------
26,887,925 24,206,643
------------------ ------------------
Other income............................................................. -- 1,255
Interest expense......................................................... 152,176 183,634
------------------ ------------------
Net (loss) income........................................................ $ (1,001,069) $ (647,461)
================== ==================
Net (loss) income per common shares:
Basic and diluted (1)................................................. $ (0.17) $ (0.12)
================== =================
Weighted average number of common shares outstanding:
Basic and diluted (1)............................................... 5,831,544 5,223,152
================== ==================
(1) The weighted average shares used to compute pro forma basic and diluted
net (loss) per share for the three month periods ended September 30,
2004 and 2003 includes 500,000 shares of common stock issued as if the
shares were issued on July 1, 2004 and 2003, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of our results of operations and financial
position should be read in conjunction with our audited consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the
year ended March 31, 2004 and the unaudited consolidated financial statements
and related notes included in this Quarterly Report on Form 10-Q.
INTRODUCTORY COMMENT - TERMINOLOGY
Throughout this Quarterly Report on Form 10-Q, the terms the "we," "us," "our"
and "our company" refers to MTM Technologies, Inc. (formerly,
Micros-to-Mainframes, Inc.) ("MTM") and, unless the context indicates otherwise,
includes, on a consolidated basis, MTM's wholly-owned subsidiaries, PTI
Corporation (formerly known as Pivot Technologies, Inc., ("PTI"), MTM Advanced
Technology, Inc. ("MTM Advanced"), Data.Com Results, Inc. ("DCR") and MTM
Technologies (California), Inc. ("MTM California"); "Pequot Fund" refers to
Pequot Private Equity Fund III, LLP; "Pequot Partners" refers to Pequot Offshore
Private Equity Partners III, L.P.; and "Pequot" refers to the Pequot Fund and
Pequot Partners, collectively.
13
INTRODUCTORY COMMENT - FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q include
"forward-looking statements" within the meaning of such term in Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements involve known and unknown risks, uncertainties
and other factors which could cause actual financial or operating results,
performances or achievements expressed or implied by such forward-looking
statements not to occur or be realized. Forward-looking statements made in this
Form 10-Q generally are based on our best estimates of future results,
performances or achievements, predicated upon current conditions and the most
recent results of the companies involved and their respective industries.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may," "will," "could," "should," "project," "expect,"
"believe," "estimate," "anticipate," "intend," "continue," "potential,"
"opportunity" or similar terms, variations of those terms or the negative of
those terms or other variations of those terms or comparable words or
expressions. Potential risks and uncertainties include, among other things, such
factors as:
o the market acceptance, revenues and profitability of our current and future
products and services;
o our ability to acquire additional companies and ability to successfully
integrate such acquisitions, if any, into our operations;
o general economic conditions in the United States and elsewhere, as well as
the economic conditions affecting the industries in which we operate;
o the competitive environments within the industries in which we operate;
o our ability to raise additional capital, if and as needed;
o the cost-effectiveness of our product and service development activities;
o the extent that our sales network and marketing programs achieve
satisfactory response rates;
o political and regulatory matters affecting the industries in which we
operate; and
o the other risks detailed in this Form 10-Q and, from time to time, in our
other filings with the Securities and Exchange Commission.
Readers are urged to carefully review and consider the various disclosures made
by us in this Quarterly Report on Form 10-Q and our other filings with the SEC.
These reports attempt to advise interested parties of the risks and factors that
may affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this Form 10-Q speak only as
of the date hereof and we disclaim any obligation to provide updates, revisions
or amendments to any forward-looking statements to reflect changes in our
expectations or future events.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Accounting estimates in these financial
statements include reserves for trade accounts receivable and vendor accounts
receivable. Actual results could differ from those estimates.
OVERVIEW
We are a leading computer and communications technology management company
providing information technology, or "IT," networking and data center services,
including storage, security, messaging and internet protocol, or "IP," telephony
solutions. We serve as a single source provider of advanced technology solutions
to divisions of large corporations, mid-size companies, municipalities and
educational institutions. We provide our clients with a suite of outsourced
support services; network and mainframe connectivity consulting; remote network
monitoring and management; network and system diagnostics, product maintenance
and support, training, and product procurement solutions. We also provide total
solutions to our clients by delivering systems design, installation, consulting,
maintenance and integration of network computer products, including the design
and implementation of wide area networks, or "WANS," local area networks, or
"LANS," wireless network solutions and computer hardware and software products.
14
We provide our remote network solutions by utilizing our proprietary solution
which we market as "Pivot Technology."
There is a rapidly growing trend of companies outsourcing their computer
services requirements. This entails a client company obtaining all or a portion
of its data processing requirements from solution providers, such as us, that
specialize in the computer service, product or application required by these
client companies. Our strategy is to offer these companies a selective
outsourced infrastructure solution at competitive prices. We are focusing on
developing our higher margin recurring service offerings, while maintaining
control over our expenses and improving our balance sheet. These services
include our outsourced support services; contract programming, internet
protocol, or "IP," telephony solutions, network consulting, network management
and monitoring, security solutions, collaboration solutions focused primarily on
Microsoft Exchange, data storage (including disaster recovery and data back-up)
and IT staff leasing.
Since 1991, we have evolved to become a provider of IT professional services and
IT managed solutions. We are focusing our current marketing efforts in
accelerating growth in such areas. Services accounted for approximately 28% of
our revenues for the three months ended September 30, 2004, as compared to 25%
in the comparable 2003 period, with a small portion of these revenues derived
from maintenance and repair services.
On May 20, 2004, our shareholders approved an investment of up to $25 million by
Pequot under the terms of our January 29, 2004 Purchase Agreement with Pequot.
The investment is to be made through Pequot's purchase from us of shares of our
Series A Convertible Preferred Stock and warrants to purchase shares of our
common stock. On May 21, 2004, we completed an initial $7 million investment
from Pequot and on September 16, 2004 we completed a second $5.5 million
investment from Pequot. We refer to these investments as the "Pequot
investment."
We have used these funds to execute a growth through acquisition strategy, as
well as for working capital needs. We believe that there is an opportunity to
consolidate similar businesses throughout the United States. We expect to focus
our acquisition strategy on businesses providing networking, messaging, storage
and security solutions. The acquisition targets are expected to include
companies providing IT services and products, as well as certain managed
solutions. We intend to seek acquisitions to enhance our current service
offerings and extend our geographic presence. We seek to identify businesses
which will add technical expertise and service offerings, customers, sales
capabilities and/or geographic coverage while generating a positive rate of
return on investment. Furthermore, we intend to capitalize on the business
practices of acquired companies that we believe will best maintain our
competitive advantage and ensure ongoing delivery of high quality IT solutions
to our customers. The acquisition candidates we review can be large, and their
acquisition by us could have a significant and lasting impact on our business.
We commenced the execution of our growth-through-acquisition strategy on July 2,
2004 when we acquired the business and operating assets of DataVox Technologies,
Inc. ("DataVox"). DataVox, based in New York City, is a Cisco AVVID
(Architecture for Voice, Video and Integrated Data) authorized partner, offering
advanced technology solutions, including IP telephony, security, storage,
networking and wireless technologies solutions, as well as network facilities
engineering and data center technology consulting and services. The
consideration we paid to acquire the business and operating assets of DataVox
included cash, promissory notes and the issuance of 753,012 shares of our common
stock.
We continued executing on our growth-through-acquisition strategy on September
17, 2004 when we acquired substantially all of the business and operating assets
of Network Catalyst, Inc. ("Network Catalyst"). Network Catalyst provides
advanced technology solutions in the VOIP (Voice Over Internet Protocol),
infrastructure and security fields to clients located throughout the Southern
California region. The consideration we paid to acquire the business and
operating assets of Network Catalyst included cash payments totaling
approximately $4.0 million and the issuance of 500,000 shares of our common
stock. A portion of such cash payments and shares have been placed into escrow.
We also agreed to pay the seller an additional $960,000 and issue up to a
maximum of 111,627 shares of our common stock if the acquired business generates
at least $2 million in income, before interest, taxes, depreciation and
amortization, during the twelve month period commencing on October 1, 2004.
15
We presently realize revenue from client engagements that range from the
placement of contract and temporary technical consulting to project assignments
that entail the delivery of end-to-end solutions. These services are primarily
provided to the client at hourly rates that are established for each of our
employees based upon their skill level, experience and the type of work
performed. We also provide project management and consulting work which are
billed either by an agreed upon fixed fee or hourly rates, or a combination of
both. The billing rates and profit margins for project management and solutions
services are higher than those for professional consulting services. We
generally endeavor to expand our sales of higher margin solution and project
management services. The majority of our services are provided under purchase
orders. Contracts are utilized on more of the complex assignments where the
engagements are for longer terms or where precise documentation on the nature
and scope of the assignment is necessary. Contracts, although they normally
relate to longer-term and more complex engagements, generally do not obligate
the customer to purchase a minimum level of services and are generally
terminable by the customer on 60 to 90 days' notice.
Costs of services and related products consist primarily of salaries, cost of
outsourced labor and products to complete the projects. Selling, general and
administrative expenses consist primarily of salaries and benefits of personnel
responsible for administrative, finance, operative, sales and marketing
activities and all other corporate overhead expenses. Corporate overhead
expenses include rent, telephone charges, insurance premiums, accounting and
legal fees, depreciation and amortization expenses. Depreciation primarily
relates to the fixed assets and amortization related to a capital lease.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The methods, estimates, and
judgments we use in applying our most critical accounting policies have a
significant impact on the results we report in our financial statements. The
Securities and Exchange Commission has defined critical accounting policies as
policies that involve critical accounting estimates that require (a) management
to make assumptions that are highly uncertain at the time the estimate is made
and (b) different estimates that could have been reasonably used for the current
period, or changes in the estimates that are reasonably likely to occur from
period to period, which would have a material impact on the presentation of our
financial condition, changes in financial condition or in result of operations.
Based on this definition, our most critical policies include: revenue
recognition, allowance for doubtful accounts, inventory valuation reserve, the
assessment of recoverability of long-lived assets, the assessment of
recoverability of goodwill and intangible assets, and valuation of deferred tax
assets.
REVENUE RECOGNITION
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104.
We recognize revenue from sales of hardware when the rights and risks of
ownership have passed to the customer, which is upon shipment or receipt by the
customer, depending on the terms of the sales contract. Revenue from sales of
software not requiring significant modification or customization is recognized
upon delivery or installation. Revenue from services is recognized upon
performance and acceptance after consideration of all the terms and conditions
of the customer contract. Service contracts generally do not extend over one
year, and are billed periodically as services are performed. Revenue from both
products and services is recognized provided that persuasive evidence of an
arrangement exists, the sales price is fixed and determinable, and collection of
the resulting receivable is reasonably assured. Revenue arrangements generally
do not include specific customer acceptance criteria. For arrangements with
multiple deliverables, delivered items are accounted for separately, provided
that the delivered item has value to the customer on a stand alone basis and
there is objective and reliable evidence of the fair value of the undelivered
items. Revenue billed on retainer is recognized as services are performed and
amounts not recognized are recorded as deferred revenue.
We periodically receive discretionary cost reimbursements from suppliers. These
reimbursements are accounted for as reductions to the cost of sales of products.
Shipping and handling costs are included in the cost of sales.
16
GOODWILL AND INTANGIBLES
Goodwill is not amortized, but is regularly tested for impairment, in accordance
with SFAS No. 142, "Goodwill and Intangible Assets."
We recorded goodwill as a result of our acquisition of PTI and DCR, which we
currently are operating as wholly-owned subsidiaries. We determined the fair
value of both companies' operations through a discounted cash flow method. This
analysis was based on a projection of future sales and earnings for a discrete
period of three years at March 31, 2004, plus an assumed average growth rate for
all years beyond the initial projected period. Based on this analysis, we
determined that our goodwill was not impaired. Since March 31, 2004, no events
have transpired which would change the aforementioned determination. In
connection with the acquisitions of DataVox and Network Catalyst, we recorded
goodwill in the amount of $1.9 million and $5.5 million, respectively. Goodwill
was determined by comparing the purchase price and related transaction costs
with the fair value of the net tangible assets and liabilities acquired.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at their outstanding unpaid principal balances
reduced by an allowance for doubtful accounts, based on certain percentages of
aged receivables. We estimate doubtful accounts based on historical bad debts,
factors related to specific customers' ability to pay and current economic
trends. We write off accounts receivable against the allowance when a balance is
determined to be uncollectible.
PEQUOT INVESTMENT
In connection with the Pequot investment, we allocated the net proceeds from the
sale of the (a) Series A-1 Convertible Preferred Stock, (b) warrants to purchase
500,000 shares of our common stock and (c) rights to purchase the Series A-2
Convertible Preferred Stock, Series A-3 Convertible Preferred Stock and related
warrants based on their relative fair values as at the date of the sale of the
Series A-1 Preferred Stock and 500,000 warrants. We allocated and recorded $2.9
million to the Series A-1 Preferred Stock and assigned and credited to
additional paid-in capital (x) $600,000 for the 500,000 warrants sold with the
Series A-1 Preferred Stock and (y) $3.2 million for the rights to purchase the
Series A-2 Convertible Preferred Stock, Series A-3 Convertible Preferred Stock
and related warrants. Additionally, a finder's fee was paid, consisting of
$70,000 in cash and 27,363 shares of our common stock, valued at $45,150, which
was charged against additional paid-in capital. In connection with the Pequot
purchase of the Series A-2 Convertible Preferred Stock and related warrants the
Company allocated and recorded $5.1 million to the Series A-2 Convertible
Preferred Stock and assigned and credited to additional paid in capital $0.4
million.
In addition, up-front payments of $1.1 million, which are included as operating
expenses in our condensed consolidated statement of operations, were made to two
of our officers under their new employment agreements and a shareholders
agreement to which we are a party.
17
RESULTS OF OPERATIONS
The following table sets forth for the periods presented information derived
from our unaudited condensed consolidated statement of operations expressed as a
percentage of net revenue:
Six Months Ended September 30, Three Months Ended September 30,
-------------------------------------- --------------------------------
2004(a) 2003 2004(a) 2003
------------------ ------------------ --------------- -----------
Net revenues:
Products..................... 76.0% 68.4% 72.5% 74.6%
Services..................... 24.0% 31.6% 27.5% 25.4%
------------------ ------------------ --------------- -----------
Total net revenues 100.0% 100.0% 100.0% 100.0%
------------------ ------------------ --------------- -----------
Cost of products................ 70.2% 65.4% 66.3% 71.0%
Cost of services................ 17.6% 18.9% 19.4% 15.8%
Gross profit - products......... 5.8% 3.1% 6.2% 3.6%
Gross profit - services......... 6.4% 12.7% 8.1% 9.6%
Gross profit - total............ 12.2% 15.8% 14.3% 13.2%
Selling, general and
administrative expenses....... 21.4% 17.3% 18.3% 16.9%
Interest expense................ 0.6% 0.7% 0.5% 0.6%
Net (loss) income............... -9.8% -2.2% -4.5% -4.3%
(a) 2004 selling, general and administrative expense includes $1,100,000 of
expenses in the six months ended September 30, 2004, for payments made to
two officers of the company in connection with the Pequot investment.
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004, AS COMPARED TO THREE AND SIX
MONTHS ENDED SEPTEMBER 30, 2003
Net Revenue
Net revenue for the three months ended September 30, 2004 was $18.7 million, as
compared with net revenue of $15.5 million for the comparable 2003 period. For
the six months ended September 30, 2004, net revenue amounted to $34.0 million,
as compared with net revenue of $29.2 million for the comparable 2003 period.
The Company has achieved growth of 17% for products and 31% in services for the
three months ended September 30, 2004, as compared with the same three month
period in 2003. The increase in revenue primarily was due to the inclusion of
the results of our acquisitions during the past three months as well as an
increase in customer demand for our products and services.
Gross Profit
Gross profit for the three months ended September 30, 2004 was $2.7 million, as
compared with gross profit of $2.1 million for the comparable 2003 period. For
the six months ended September 30, 2004, gross profit amounted to $4.1 million,
as compared with gross profit of $4.6 million for the comparable 2003 period.
The Company achieved gross margins of 14.3% for the three months ended September
30, 2004, as compared to gross margins of 13.2% for the three months ended
September 30, 2003.
We continue to face competitive market pressures which impact the gross profit
on our product revenue and service related revenue. We currently face a number
of adverse business conditions, including price and gross profit margin
pressures and market consolidation. In recent years, all major hardware vendors
have instituted extremely aggressive price reductions in response to lower
component costs and discount pricing by certain computer manufacturers. The
increased price competition among major hardware vendors has resulted in
declining gross profit margins for many computer distributors, including us, and
may result in a reduction or elimination of existing vendor subsidies in the
future. We believe that these current conditions, which are forcing certain of
our direct competitors out of business, may present us with opportunities to
expand our business. There can be no assurance, however, that we will be able to
continue to compete effectively, given the intense price reductions and
competition currently existing in the computer industry.
18
Selling, General and Administrative
Selling, general and administrative expenses increased to $3.4 million in the
three months ended September 30, 2004 from $2.6 million in the comparable 2003
period. Expressed as a percentage of net revenues, selling, general and
administrative expense was 18.3% as compared to 16.9% in the comparable 2003
period. For the six months ended September 30, 2004, selling, general and
administrative expenses increased to $7.3 million from $5.0 million during the
six months ended September 30, 2003. The 2004 expenses included $1.1 million for
special compensation arrangements incurred in connection with the Pequot
investment.
Interest Expense
Interest expense was $0.1 million in the three months ended September 30, 2004
and 2003. In addition, interest expense was $0.2 million in the six months ended
September 30, 2004 and 2003. As a percentage of net revenues interest expense
went down by 0.1% for the three months ended September 30, 2004 compared to the
same period in 2003 and for the six months ended September 30, 2004 compared to
the same period in 2003.
Net Loss
The net loss was $0.8 million in the three months ended September 30, 2004 as
compared to a net loss of $0.7 million in the comparable 2003 period. The net
loss was $3.3 million in the six months ended September 30, 2004 as compared to
a net loss of $0.6 million in the comparable 2003 period. The increase in the
net loss was result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
We measure our liquidity in a number of ways, including the following:
(Dollars in thousands)
As at As at
September 30, 2004 March 31, 2004
------------------ --------------
Cash and cash equivalents.............. $ 2,966 $ 370
Working capital........................ $ 1,964 $ (1,277)
Current ratio.......................... 1.08:1 0.91:1
Secured notes payable.................. $ 7,515 $ 5,919
Cash and cash equivalents generally consist of cash and money market funds. We
consider all highly liquid investments purchased with maturities 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.
During the six months ended September 30, 2004, we used cash of approximately
$4.5 million in operating activities. This primarily resulted from the increases
in accounts receivable from customers of $1.3 million, a decrease in deferred
revenue of $0.9 million, an increase in accounts payable of $0.2 million, a
decrease in other assets of $0.3 million and depreciation and amortization
charges of $0.8 million and the net loss of $3.3 million.
Net cash used in investing activities amounted to approximately $5.5 million.
The significant uses were for the acquisition of businesses of $4.1 million, an
increase in restricted cash of $1.0 million and for the acquisition of property
and equipment in the amount of $0.4 million. In addition, net cash provided by
financing activities was $12.6 million primarily related to the net proceeds
from the issuance of 5,255,814 shares of Series A Preferred Stock ($11.5
million) and net borrowings under our secured notes payable and inventory
financing ($1.6 million).
19
We had working capital of approximately $2.0 million as of September 30, 2004 an
increase of $0.7 million from March 31, 2004.
As a result of the foregoing, our cash increased approximately $2.6 million.
We entered into an Amended and Restated Financing Facility with Textron
Financial Corporation (the "Lender") on May 21, 2004, which amended and
superseded our prior financing arrangement with the lender. The amended facility
has a term of one year. The amended financing facility provides for borrowings
of up to $10 million, secured by all of our assets, except for permitted
encumbrances. Two forms of borrowings can be made under the amended financing
facility: floor plan financings and revolving receivable financings. The floor
plan financings generally allow us to finance inventory purchases from approved
vendors on a 30-day interest-free basis. Interest accrues on floor plan
financings after such 30-day period at the rate equal to six basis points over a
specified prime rate. The revolving receivable financing allows us to borrow
against current account receivables that meet certain specified standards.
Interest accrues on revolving receivable financings immediately upon funding at
prime rate. The amended financing facility contains other affirmative and
negative covenants, including those relating to our tangible net worth and other
financial conditions. We are required to pay additional fees if our borrowings
exceed the maximum permitted aggregate loan amount of $10 million or if we are
found to be in breach under the amended financing facility. The Lender also is
entitled to make periodic reviews and audits of our records, files, books of
account and other documents. We incur an annual facility fee of 0.2% of the
amount of the total facility.
Our total outstanding debt under the revolving receivable financing facility was
$7.5 million at September 30, 2004 and $5.9 million at March 31, 2004. The
amount outstanding under the inventory financing agreement was $3.1 million at
September 30, 2004 and $3.5 million at March 31, 2004. As of September 30, 2004,
the Company was not in compliance with the covenant set forth in the Amended
Financing Facility requiring the Company to maintain a minimum tangible net
worth, however, the Company has received a letter from the Lender under the
Amended Financing Facility which provides that as an accommodation to the
Company, the Lender presently intends to make loans to the Company
notwithstanding the default. The letter can be withdrawn at any time.
Our other financing arrangement is a $0.3 million floor plan financing agreement
we entered into on May 25, 1989. Financing under this agreement is secured by
our assets, other than inventories and accounts receivable directly financed and
secured by other floor plan lenders. The total amount due to this lender was
under $0.1 million as of September 30, 2004.
Financial instruments that potentially subject us to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade
accounts receivable. We place our cash with high credit quality institutions. At
times, such amounts may be in excess of the FDIC insurance limits.
Our customers are primarily mid- to large-sized corporations in diversified
industries located in the New York tri-state metropolitan area and Southern
California.
Two of our customers accounted for 25% of our total accounts receivable. One of
our largest customers is a telecommunications company which represented $3.8
million, or 18%, of our accounts receivable as at September 30, 2004. Revenues
generated from this customer represented 14% of our total revenues for the three
months ended September 30, 2004.
Accounts receivable from another of our customers, a financial institution,
accounted for approximately 7% of our total accounts receivable at September 30,
2004. Revenues generated from this customer represented 6% of our total revenues
for the three months ended September 30, 2004.
The loss of any of these customers, or any of our other major customers, could
be expected to have a material adverse effect on our financial condition during
the short term and until we are able to generate replacement business, although
there can be no assurance of obtaining such business.
Credit is extended to customers based on an evaluation of their financial
condition, and collateral is generally not required. The evaluation of financial
condition is performed to reduce the risk of loss.
20
IMPACT OF INFLATION
The effects of inflation on our operations were not significant during the
periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
We do not believe that any recently issued, but not yet effective, accounting
standards will have a material effect on our financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our risk investments only consisted of cash deposited in various money market
funds. We do not use interest rate derivative instruments to manage our exposure
to interest rate changes. Due to the limited investment risks involving money
market funds, we do not anticipate any material loss in connection with such
investments. Interest on our financing arrangements are based on the prime rate,
consequently, any changes in that rate will impact our interest expense. Based
on borrowings of approximately $5.0 million, a 0.25% increase in the prime rate
would translate to a $12,500 increase in our annual interest expense.
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was performed, as of September 30, 2004, under the supervision and
with the participation of our management, including our chief executive officer
and chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on such evaluation, our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures were effective as of September 30, 2004. As of September
30, 2004 there have been no significant changes in our internal controls or
financial reporting that materially effected, or are reasonably likely to
materially effect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
References is made to the disclosures contained in Item 3 of our Annual Report
on Form 10-K for the fiscal year ended March 31, 2004, for information
concerning material legal proceedings involving our company There were no
material developments concerning such material legal proceedings during our
fiscal quarter ended September 30, 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
ACQUISITION OF DATAVOX TECHNOLOGIES, INC.
On July 2, 2004, pursuant to an Asset Purchase Agreement, dated July 2, 2004
("DataVox Asset Purchase Agreement"), by and among DataVox Technologies, Inc., a
New York corporation ("DataVox"), Norbert Sluzewski, a natural person
("Sluzewski ") and Michael Ritchken, a natural person ("Ritchken" and, together
with Sluzewski, the "DataVox Shareholders") and us, we acquired from DataVox
substantially all of its assets used in the conduct of its business of data,
voice and infrastructure technology services. We also assumed certain
liabilities of DataVox relating to the assets acquired. The DataVox Shareholders
were the record and beneficial owners of all of the issued and outstanding
capital stock of DataVox.
In addition to assuming certain liabilities, making cash payments and issuing
promissory notes, we issued 753,012 shares of our common stock, $.001 par value
21
("Common Stock") as consideration for the assets acquired from DataVox. The
shares were issued as follows: (i) a certificate representing 355,422 shares was
issued and delivered to Sluzewski on July 21, 2004, (ii) a certificate
representing 355,422 shares was issued and delivered to Ritchken on July 21,
2004, and (iii) a certificate representing 42,168 shares was issued and
delivered to Amtech Associates on July 21, 2004 in partial consideration for
services it rendered in connection with the DataVox transaction.
In addition, as part of the consideration paid for the assets of DataVox, we
issued a promissory note, in the principal amount of $124,757, to each of the
DataVox Shareholders (the "DataVox Notes"). Each DataVox Note is payable in five
equal quarterly installments of $20,792 and one final quarterly installment of
$20,792, (each, an "Installment") such Installments being due on October 1,
2004, January 1, 2005, April 1 2005, July 1, 2005, October 1, 2005 and January
1, 2006 (each, an "Installment Due Date"), without interest. Payments of
principal and interest, if any, on the DataVox Notes is payable at our option in
any combination of cash and Common Stock, provided that all payments must be
made with a minimum of 25% cash and cannot be made with more than a maximum of
75% cash. In determining the value of a share of Common Stock, such shares shall
be valued at the "market price" at the date such payment first became due and
payable. Market price means an amount equal to the average, for each of the 15
consecutive trading days immediately prior to such date, of the closing prices
for a share of Common Stock on such trading days.
We did not, and DataVox has represented to us that it did not, directly or
indirectly pay any commission or remuneration to any person in connection with
the issuance and sale of the shares of Common Stock issued in the acquisition of
its assets and operations, except as set for above. The Company issued and sold
such Common Stock in reliance upon the exemption afforded by the provisions of
Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"),
and/or Regulation D thereunder. Certificates representing such securities
contain restrictive legends preventing sale, transfer or other disposition,
unless registered under the Securities Act. DataVox and the DataVox Shareholders
received, or had access to, material information concerning our company,
including but not limited to, our reports on Form 10-K, Form 10-Q and Form 8-K,
as filed with the Securities and Exchange Commission.
ACQUISITION OF NETWORK CATALYST, INC.
On September 17, 2004, pursuant to an Asset Purchase Agreement, dated September
17, 2004 ("Network Catalyst Asset Purchase Agreement"), by and among Network
Catalyst, Inc., a California corporation (the "Network Catalyst"), William
Corbin, a natural person ("Corbin") and Rocci J. Della Maggiore, a natural
person (together with Corbin, the "Network Catalyst Shareholders") and us, we
acquired from Network Catalyst substantially all of its assets used in the
conduct of its business of providing information technology security,
convergence and infrastructure. We also assumed certain liabilities of Network
Catalyst relating to the assets acquired. The Network Catalyst Shareholders were
the record and beneficial owners of substantially all of the issued and
outstanding capital stock of Network Catalyst.
In addition to assuming certain liabilities and making certain cash payments we
issued 500,000 shares of our Common Stock to Network Catalyst on September 23,
2004, of which a certificate representing 400,000 shares was issued and
delivered to Network Catalyst and a certificate representing 100,000 shares was
delivered to the Escrow Agent to be held and distributed pursuant to the terms
of the Escrow Agreement.
In addition, as part of the Network Catalyst purchase price, we agreed to pay to
Network Catalyst additional cash amounts as well as transfer to Network Catalyst
additional shares of our Common Stock on the achievement of certain financial
targets. More particularly, in the event that as of the end of any fiscal
quarter, the income before interest, taxes, depreciation and amortization
attributable to the acquired business during the period beginning October 1,
2004 and ending on September 30, 2005 (the "Earnout Period") equals or exceeds
$2,000,000, then we are required to (x) pay to Network Catalyst $960,000 in
cash, and (y) issue to Network Catalyst that number of shares of our Common
Stock determined by dividing $240,000 by the greater of (A) the average trading
price of our Common Stock for the 20 business days ending immediately preceding
the end of the Earnout Period and (B) $2.15.
We did not, and Network Catalyst has represented to us that it did not, directly
or indirectly pay any commission or renumeration to any person in connection
22
with the issuance and sale of the shares of Common Stock issued in the
acquisition of its assets and operations. The Company issued and sold such
Common Stock in reliance upon the exemption afforded by the provisions of
Section 4(2) of the Securities Act , and/or Regulation D thereunder.
Certificates representing such securities contain restrictive legends preventing
sale, transfer or other disposition, unless registered under the Securities Act.
Network Catalyst and the Network Catalyst Shareholders received, or had access
to, material information concerning our company, including but not limited to,
our reports on Form 10-K, Form 10-Q and Form 8-K, as filed with the Securities
and Exchange Commission.
The description of the terms and conditions of the acquisition of the assets and
operations of Network Catalyst described above are qualified in their entirety
by reference to the terms of the Asset Purchase Agreement and Escrow Agreement
previously filed as Exhibits 10.1 and 10.3, respectively, to our Current Report
on Form 8-K (Date of Report: September 16, 2004), filed with the Securities and
Exchange Commission on September 22, 2004.
SALE OF SERIES A-2 PREFERRED STOCK AND WARRANTS
On September 16, 2004, pursuant to a Purchase Agreement, dated as of January 29,
2004 ("Pequot Purchase Agreement"), by and among us, Pequot, Pequot purchased
(i) an aggregate of 2,000,000 shares of our Series A-2 Convertible Preferred
Stock, par value $0.01 per share (the "Series A-2 Preferred Stock") for a
purchase price of $2.75 per share, and (ii) warrants (the "A-2 Warrants")
exercisable to purchase 400,000 shares of our Common Stock at an exercise price
for $3.44 per share, representing an aggregate consideration of $5,500,000.
On consummation of the transaction and after giving effect to the closing of the
acquisition of Network Catalyst, Inc. described above, Pequot beneficially owned
approximately 47% of our voting securities and has the right to acquire
additional shares of our Series A Preferred Stock and related warrants. Several
members of our Board of Directors are employees or partners of Pequot.
A substantial portion of the net proceeds from Pequot's purchase of the Series
A-2 Convertible Preferred Stock and A-2 Warrants were used to fund the Network
Catalyst acquisition, described above.
We did not, and Pequot has represented to us that it did not, directly or
indirectly pay any commission or renumeration to any person in connection with
the issuance and sale of the Series A-2 Preferred Stock or A-2 Warrants. The
Company issued and sold the Series A-2 Preferred Stock and A-2 Warrants in
reliance upon the exemption afforded by the provisions of Section 4(2) of the
Securities Act, and/or Regulation D thereunder. Certificates representing such
securities contain restrictive legends preventing sale, transfer or other
disposition, unless registered under the Securities Act. Pequot received, or had
access to, material information concerning our company, including but not
limited to, our reports on Form 10-K, Form 10-Q and Form 8-K, as filed with the
Securities and Exchange Commission.
The Series A-2 Preferred Stock is convertible into Common Stock at any time at
the election of the individual holders of the Series A-2 Preferred Stock,
initially at a ratio of one share of Common Stock for every share of Series A-2
Preferred Stock and subject to adjustments for certain dilutive equity issuances
and for stock splits, stock dividends and similar events. After the date that is
18 months following the most recent date of issuance of Series A Preferred
Stock, all outstanding shares of Series A-2 Preferred Stock will automatically
convert into Common Stock at the applicable conversion rate then in effect on
the date on which the weighted average closing price of the Common Stock for the
immediately preceding 60 consecutive trading days exceeds four (4) times the
weighted average of the applicable conversion price then in effect for the
Series A-2 Preferred Stock. However, no shares of Series A-2 Preferred Stock
will be automatically converted unless at the time of the proposed conversion,
an effective registration statement is on file with the SEC with respect to the
Common Stock issuable (i) to the holders of the Series A-2 Preferred Stock upon
conversion of the Series A-2 Preferred Stock and (ii) to the holders of the A-2
Warrants upon exercise of such Warrants, and such shares of Common Stock have
been listed on the Nasdaq Stock Market or other specified national stock
exchange.
For further details of the sale of the of Series A-2 Convertible Preferred
Stock, reference is made to the Pequot Purchase Agreement previously filed as
Appendix A to the Proxy Statement contained as part of the Registrant's
definitive Schedule 14A filed with the Securities Exchange Commission on April
15, 2004.
23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
EXHIBITS
Set forth below is a list of the exhibits to this Quarterly Report on Form 10-Q.
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation.*
3.2 Amended and Restated By-Laws, as amended. *
10.1 Purchase Agreement, dated January 29, 2004, among
Micros-to-Mainframes, Inc., Pequot Private Equity Fund III, LLP and
Pequot Offshore Private Equity Partners III, L.P.*
10.2 Asset Purchase Agreement dated September 17, 2004 by and among
Network Catalyst, Inc., William Corbin,
Rocci J. Della Maggiore and MTM Technologies, Inc. *
10.3 Escrow Agreement, dated September 17, 2004, by and among
MTM Technologies, Inc., Network Catalyst, Inc., and JPMorganChase. *
10.4 Form of Employee Stock Option Agreement.
10.5 Warrant Certificate, evidencing 350,580 warrants registered in the
name of Pequot Private Equity Fund III, L.P*
10.6 Warrant Certificate, Evidencing 49,420 warrants registered in the
name of Pequot Offshore Private Equity Partners III, L.P.*
31.1 Certification pursuant to Exchange Act Rule 13a-14(a) of
Francis J. Alfano.
31.2 Certification pursuant to Exchange Act Rule 13a-14(a) of
Alan Schwartz.
32.1 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act
of 2002 of Francis J. Alfano.
32.2 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act
of 2002 of Alan Schwartz.
- ---------
* Incorporated by reference. See Exhibit Index.
24
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.
MTM Technologies, Inc.
Date: November 15, 2004 By: /s/ Francis J. Alfano
----------------------------------
Francis J. Alfano, Chief Executive
Officer
(Principal Executive Officer)
Date: November 15, 2004 By: /s/ Alan Schwartz
----------------------------------
Alan Schwartz, Chief Financial
Officer
(Principal Financial and
Accounting Officer)
MTM Technologies, Inc.
QUARTERLY REPORT ON FORM 10-Q
Fiscal Quarter Ended September 30, 2004
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation. [Incorporated by reference to
exhibit 3.1 to the registrant's Current Report on Form 8-K (Date of
Report: May 21, 2004), filed with the Securities and Exchange
Commission on June 7, 2004.]
3.2 Amended and Restated By-Laws, as amended. [Incorporated by reference
to exhibit 3.1 to the registrant's Current Report on Form 8-K (Date
of Report: August 5, 2004), filed with the Securities and Exchange
Commission on August 13, 2004.]
10.1 Purchase Agreement, dated January 29, 2004, among
Micros-to-Mainframes, Inc., Pequot Private Equity Fund III, LLP and
Pequot Offshore Private Equity Partners III, L.P. [Incorporated by
reference to Appendix A to the proxy statement contained as part of
the registrant's definitive Schedule 14A, filed with the SEC on April
15, 2004.]
10.2 Asset Purchase Agreement dated September 17, 2004 by and among
Network Catalyst, Inc., William Corbin, Rocci J. Della Maggiore and
MTM Technologies, Inc. [Incorporated by reference to exhibit 10.1 to
the registrant's Current Report on Form 8-K (Date of Report:
September 16, 2004), filed with the Securities and Exchange
Commission on September 22, 2004.]
10.3 Escrow Agreement, dated September 17, 2004, by and among MTM
Technologies, Inc., Network Catalyst, Inc., and JPMorganChase.
[Incorporated by reference to exhibit 10.3 to the registrant's
Current Report on Form 8-K (Date of Report: September 16, 2004),
filed with the Securities and Exchange Commission on September 22,
2004.]
10.4 Form of Employee Stock Option Agreement.
10.5 Warrant Certificate, evidencing 350,580 warrants registered in the
name of Pequot Private Equity Fund III, L.P. [Incorporated by
reference to exhibit 4.5 to the registrant's Registration Statement
on Form S-3 (Commission File No. 333-117549) filed with the SEC on
December 5, 2004.]
10.6 Warrant Certificate, Evidencing 49,420 warrants registered in the
name of Pequot Offshore Private Equity Partners III, L.P.
[Incorporated by reference to exhibit 4.5 to the registrant's
Registration Statement on Form S-3 (Commission File No. 333-117549)
filed with the SEC on October 5, 2004.]
31.1 Certification pursuant to Exchange Act Rule 13a-14(a) of
Francis J. Alfano.
31.2 Certification pursuant to Exchange Act Rule 13a-14(a) of
Alan Schwartz.
32.1 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of
2002 of Francis J. Alfano.
32.2 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of
2002 of Alan Schwartz.