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: December 31, 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)
(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 6,471,889
shares of the issuer's common stock, par value $.001 per share, outstanding as
of February 4, 2005.
MTM TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2004
(Unaudited) and March 31, 2004........................................... 1
Condensed Consolidated Statements of Operations for the Nine
Months Ended December 31, 2004 and 2003 (Unaudited)...................... 2
Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 2004 and 2003 (Unaudited)................ 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 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.......................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 24
Item 4. Controls and Procedures............................................ 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 25
Item 3. Defaults Upon Senior Securities.................................... 25
Item 4. Submission of Matters to a Vote of Security Holders................ 26
Item 5. Other Information.................................................. 26
Item 6. Exhibits........................................................... 26
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 MARCH 31, 2004
----------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 8,124,818 $ 370,361
Restricted cash....................................................... 1,000,000
Accounts receivable - trade, net of allowance of $390,000 and $233,000,
respectively........................................................ 28,881,164 11,278,932
Inventories........................................................... 1,957,914 858,544
Prepaid expenses and other current assets............................. 1,457,743 525,970
------------------ ------------------
TOTAL CURRENT ASSETS................................................ 41,421,639 13,033,807
------------------ -----------------
Property and equipment................................................... 12,406,364 9,746,254
Less accumulated depreciation and amortization........................ 8,153,316 7,038,281
------------------ ------------------
4,253,048 2,707,973
------------------ ------------------
Goodwill ................................................................ 30,863,965 3,228,729
Other assets............................................................. 364,010 504,945
------------------ ------------------
TOTAL ASSETS...................................................... $ 76,902,662 $ 19,475,454
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Secured notes payable................................................. $ 11,291,018 $ 5,918,784
Inventory financing agreements........................................ 2,605,035 3,455,635
Current portion of promissory notes................................... 166,587
Accounts payable and accrued expenses................................. 17,053,308 3,252,736
Convertible subordinated promissory notes............................. 5,549,874
Warrants and future rights liability.................................. 5,531,000
Deferred revenue...................................................... 4,310,886 1,583,938
Current portion of capital lease obligations.......................... 137,257 100,070
------------------ ------------------
TOTAL CURRENT LIABILITIES........................................... 46,644,965 14,311,163
------------------ ------------------
Non-current portion of promissory notes.................................. 708,253
Non-current portion of lease obligation.................................. 206,410
------------------ ------------------
Total liabilities................................................... 47,559,628 14,311,163
------------------ ------------------
Shareholders' equity:
Series A preferred stock, par value $.001 per share;
14,000,000 shares authorized; 9,101,968 shares issued and
outstanding at December 31, 2004...................................... 16,997,230
Common stock - $.001 par value; authorized 80,000,000 and
10,000,000 shares respectively, issued and outstanding
6,465,985 and 4,723,052 shares, respectively.......................... 6,467 4,724
Additional paid-in capital............................................ 26,658,853 15,364,227
Accumulated deficit................................................... (14,319,516) (10,204,660)
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY.......................................... 29,343,034 5,164,291
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $ 76,902,662 $ 19,475,454
================== ==================
See Notes to Condensed Consolidated Financial Statements
1
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended December 31,
----------------------------------
2004 2003
-------------- ------------------
(Unaudited)
Net revenues:
Products.............................................................. $ 46,943,080 $ 30,572,749
Services.............................................................. 16,703,202 13,335,272
------------------ ------------------
63,646,282 43,908,021
------------------ ------------------
Costs and expenses:
Cost of products sold................................................. 42,518,098 29,065,168
Cost of services provided............................................. 10,961,942 8,961,483
Selling, general and administrative expenses.......................... 12,822,494 7,633,823
------------------ ------------------
66,302,534 45,660,474
------------------ ------------------
Operating (loss) income.................................................. (2,656,252) (1,752,453)
Other income............................................................. 5,606
Interest expense......................................................... 1,458,604 330,431
------------------ ------------------
Net income (loss)........................................................ $ (4,114,856) $ ($2,077,278)
================== ==================
Net income (loss) per common share:
Basic and diluted..................................................... $ (0.76) $ (0.44)
================== ==================
Weighted average number of common shares outstanding:
Basic and diluted..................................................... 5,399,890 4,723,052
================== ==================
See Notes to Condensed Consolidated Financial Statements
2
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31,
--------------------------------------
2004 2003
------------------ ------------------
(Unaudited)
Net revenues:
Products......................... $ 21,137,917 $ 10,621,503
Services......................... 8,553,707 4,122,188
------------------ ------------------
29,691,624 14,743,691
------------------ ------------------
Costs and expenses:
Cost of products sold............ 18,696,309 10,004,682
Cost of services provided........ 4,972,435 3,460,203
Selling, general and
administrative expenses......... 5,555,767 2,598,877
------------------ ------------------
29,224,511 16,063,762
------------------ ------------------
Operating income (loss) 467,113 (1,320,071)
Other income........................ 2,454
Interest expense.................... 1,241,718 128,826
------------------ ------------------
Net income (loss)................... $ (774,605) $ ($1,446,443)
================== ==================
Net income (loss) per common
share:
Basic and diluted ............... $ (0.13) $ (0.31)
================== ==================
Weighted average number of
common shares outstanding:
Basic and diluted ............. 6,091,346 4,723,052
================== ==================
See Notes to Condensed Consolidated Financial Statements
3
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended December 31,
----------------------------------
2004 2003
-------------- ------------------
(Unaudited)
Cash flows from operating activities:
Net loss ............................................................. $ (4,114,856) $ (2,077,278)
Adjustments to reconcile net loss to net cash used in
operating activities:
Changes in operating assets and liabilities net of effects of
acquisitions:
Depreciation and amortization..................................... 1,122,744 1,242,886
Amortization of debt discount..................................... 1,046,405
(Increase) in accounts receivable................................. (2,754,108) (2,880,086)
(Increase) decrease in inventory.................................. (120,624) (230,770)
(Increase) in prepaid expenses and other current assets........... (354,722) 155,100
Decrease in other assets.......................................... 328,928 (40,391)
(Decrease) in accounts payable and accrued expenses............... (1,931,167) 1,315,840
(Decrease) in deferred revenue.................................... (992,850) --
------------------ ------------------
Net cash used in operating activities........................... (7,770,250) (2,514,699)
------------------ ------------------
Cash flows used in investing activities:
Acquisition of property and equipment................................. (1,176,521) (543,171)
Acquisition of businesses, net of cash acquired....................... (20,501,376) --
Increase in restricted cash........................................... (1,000,000) --
------------------ ------------------
Net cash used in investing activities........................... (22,677,897) (543,171)
------------------ ------------------
Cash flows from financing activities:
Borrowing of secured notes payable.................................... 5,372,234 2,102,648
(Repayment) borrowing on inventory financing.......................... (850,600) 1,168,363
Proceeds from issuance of preferred stock, net........................ 23,751,733 --
Proceeds from issuance of subordinated promissory notes............... 10,000,000
Options exercised..................................................... 16,825
Payments on promissory note........................................... (30,946) --
Payments on capital lease obligations................................. (56,642) (281,819)
------------------ ------------------
Net cash provided by financing activities......................... 38,202,604 2,989,192
------------------ ------------------
Net increase in cash and cash equivalents................................ 7,754,457 (68,678)
Cash and cash equivalents at beginning of period......................... 370,361 118,452
------------------ ------------------
Cash and cash equivalents at end of period............................... $ 8,124,818 $ 49,774
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the quarter for -
Interest............................................................ $ 427,481 $ 401,420
================== ==================
Income Taxes........................................................ $ 0 $ 163,896
================== ==================
Supplemental schedule of non cash investing and financing activity:
Property and equipment acquired under capital lease obligations....... $ 251,787 $ 0
================== ==================
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"), MTM Technologies (California), Inc., MTM Technologies (Texas),
Inc., and MTM Technologies (North Carolina), 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, computer and networking and data center services,
including secure access, voice over internet protocol (VOIP), connectivity,
storage, security, collaboration, and messaging solutions. The Company serves as
a single source provider of advanced technology solutions to divisions of large
corporations, mid-sized companies, municipalities and educational institutions.
The Company provides its clients with a suite of outsourced IT professional
services, including network connectivity consulting, remote network monitoring
and management, network and system diagnostics, technology systems
implementation and project management, facilities and data center design and
implementation management, product maintenance and support, training, and
product procurement solutions. The Company also provides total solutions to its
clients by delivering complete technology life-cycle services which include
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. The Company provides its remote
network solutions utilizing its proprietary solution marketed as "Pivot
Technology."
The Company purchases software, 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 short notice, or
immediately upon the occurrence of certain events. The sales of products from
the Company's three largest manufacturers accounted for 29%, 14% and 11% of all
product sales for the three months ended December 31, 2004. The sales of
products from the Company's three largest manufacturers were 56%, 22% and 11% of
all product sales for the three months ended December 31, 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 to 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 nine months ended December 31, 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.
5
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
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 2004, the FASB issued SFAS No. 123R "Share-Based Payment" ("SFAS
123R"), which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS 123R supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS 123
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions and requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. This
statement is effective for our interim periods beginning after June 15, 2005. We
are currently evaluating the provisions of SFAS 123R to determine its impact on
our future financial statements.
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 income (loss) and net (loss) income per common share for
the nine months and three months ended December 31, 2004 and 2003 would
approximate the pro forma amounts indicated in the tables below.
6
Nine Months Ended December 31,
----------------------------------
2004 2003
-------------- ------------------
(dollars in thousands)
Net (loss) income - as reported.......................................... $ (4,115) $ (2,077)
Stock-based compensation using the fair-value method..................... (1,152) (61)
Net (loss) income - pro forma............................................ (5,267) (2,138)
Basic and diluted net (loss) income per common share - as reported....... (.76) (.44)
Basic and diluted net (loss) income per common share - pro forma......... (.98) (.45)
Three Months Ended December 31,
----------------------------------
2004 2003
-------------- ------------------
(dollars in thousands)
Net (loss) income - as reported.......................................... $ (775) $ (1,446)
Stock-based compensation using the fair-value method..................... (788) (35)
Net (loss) income - pro forma............................................ (1,563) (1,481)
Basic and diluted net (loss) income per common share - as reported....... (.13) (.31)
Basic and diluted net (loss) income per common share - pro forma......... (.26) (.31)
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. 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
nine months ended December 31, 2004 and 2003: risk-free interest rate of 4.2%
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 one to 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. Effective as of
December 27, 2004, the Schedule to the Amended Financing Facility was amended to
change certain of the financial covenants contained therein.
On February 1, 2005, the Company received a temporary increase from the Lender
in the maximum amount of the credit facility to $20,000,000. This temporary
increase terminates on March 31, 2005. The Company anticipates either extending
the Amended Financing Facility or replacing it prior to its expiration.
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
7
negative covenants, including those relating to the Company's tangible capital
funds and other financial conditions. The Company is required to pay additional
fees if it exceeds the maximum permitted aggregate loan amount then in effect or
if the Company is found to be in default under the Amended Financing Facility.
The Company's total outstanding debt under the revolving receivable financing
facility was $11,291,018 as at December 31, 2004 and $5,918,784 as at March 31,
2004. The amount outstanding under inventory financing was $2,605,035 as at
December 31, 2004 and $3,455,635 as at March 31, 2004.
NOTE 3. COMMITMENTS AND CONTINGENCIES:
LITIGATION
On April 1, 2003, the Trustee of a Chapter 7 bankruptcy case filed a complaint
(the "Complaint") against the Company in the United States Bankruptcy Court,
Northern District of Illinois, Eastern Division alleging that a payment of
$212,000 in the 90-day period preceding the bankruptcy filiing constituted a
preference within the meaning of Section 547(b) of the Bankruptcy Code, and
seeks return of such amount, together with interest and costs. The Company
denied liability and asserted affirmative defenses. The Company believes that an
adverse outcome is not probable and has not accrued any amount with respect to
the Complaint.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements, which require the following
payments:
Year Ending March 31,
---------------------
2005 ...................................... $ 779,000
2006 ...................................... 2,870,000
2007 ...................................... 1,941,000
2008 ...................................... 122,000
---------------
$ 5,712,000
===============
In addition, certain of the agreements provide for bonus compensation based on
certain performance goals.
NOTE 4. AUTHORIZATION OF SERIES A CONVERTIBLE PREFERRED STOCK; SALE OF
SERIES A-1, A-2, AND A-3, CONVERTIBLE PREFERRED STOCK AND
WARRANTS; AND SERIES A-4 NOTES AND WARRANTS:
On January 29, 2004, the Company entered into an agreement (the "Pequot Purchase
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.
On December 7, 2004 Pequot assigned to Constellation Venture Capital II, L.P.,
Constellation Venture Capital Offshore II, L.P., The BSC Employee Fund VI, L.P.,
and CVC Partners II, LLC (collectively, "Constellation") all of its rights and
obligations under the Pequot Purchase Agreement to purchase from the Company
$6,250,000 of the Series A-3 Convertible Preferred Stock and related common
stock warrants, together with any and all rights and obligations of a
"Purchaser" under the Pequot Purchase Agreement with respect to such Series A-3
Convertible Preferred Stock and common stock warrants. Immediately thereafter,
Pequot purchased from the Company $6,250,000 of the Series A-3 Convertible
Preferred Stock and 384,616 common stock warrants and Constellation purchased
$6,250,000 of the Series A-3 Convertible Preferred Stock and 384,616 common
stock warrants. The A-3 Convertible Preferred Stock is convertible into
8
3,846,154 shares of common stock at a conversion price of $3.25 per share and
the associated common stock warrants are exercisable for 769,232 shares of
common stock at an exercise price of $4.06 per share.
Costs incurred in connection with the negotiation of the Pequot Purchase
Agreement and the consummation of the Pequot's purchase of Series A-1
Convertible Preferred Stock amounted to approximately $1 million. As part of
that transaction, 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 Series A-2
Convertible Preferred Stock and the Series A-3 Convertible Preferred Stock
transactions amounted to approximately $250,000. The net proceeds of the Pequot
investments and Constellation investments have been 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 Convertible Preferred Stock and 500,000
warrants. The Company allocated and recorded $2.9 million to the Series A-1
Convertible 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, the company paid a finder's fee 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. In connection with the Pequot and
Constellation purchase of the Series A-3 Convertible Preferred Stock and related
warrants the Company allocated and recorded $9.0 million to Series A-3
Convertible Preferred Stock and assigned and credited to additional paid in
capital $3.5 million for the fair value of the warrants.
On December 7, 2004 the Company also entered into a purchase agreement (the
"Pequot/Constellation Purchase Agreement") with Pequot and Constellation
(collectively referred to as the "Purchasers") for up to $40 million (or in
certain limited circumstances, up to $47.5 million) of additional financing in
the form of 7% convertible secured notes in three tranches. On December 10,
2004, the Company sold to the Purchasers, pursuant to the Pequot/Constellation
Purchase Agreement, $10,000,000 aggregate principal amount of notes (the "Series
A-4 First Tranche Notes") and issued to the Purchasers warrants to purchase
615,385 shares of the Company's common stock at an exercise price of $4.06 per
share (the "Series A-4 First TrancheWarrants") The Series A-4 First Tranche
Notes bear interest at an annual rate of 7%, payable quarterly. The interest
accrued on each such payment date will be added to the principal of the Series
A-4 First Tranche Note. The Series A-4 First Tranche Notes are convertible into
3,076,923 shares of Series A-4 Convertible Preferred Stock which is in turn
convertible into 3,076,923 shares of the Company's common stock at a conversion
price of $3.25. The conversion and voting rights of the Series A-4 First Tranche
Notes and the right to exercise the A-4 First Tranche Warrants is subject to
shareholder approval. The outstanding principal and accrued interest on the
Series A-4 First Tranche Notes will be automatically converted into Series A-4
Convertible Preferred Stock on the date of shareholders' approval. If the Series
A-4 First Tranche Notes have not already been converted into Series A-4
Convertible Preferred Stock, they will be due and payable on demand, which may
be given by 66-2/3% of the holders of the notes at any time following the later
of the date that is (x) 150 days following the date of issuance or (y) if the
Securities and Exchange Commission (the "SEC") reviews the Company's filings
seeking shareholder approval, 180 days following the date of issuance. The
company assigned a value of $5,531,000 to the beneficial conversion feature of
the debt, the warrants, and the options and recorded this value as a discount to
the notes. This discount is being accreted to interest expense over the expected
term of the note. During the period ended December 31, 2004 the discount
accreted to interest expense amounted to approximately $1.0 million.
9
The Purchasers (or in certain circumstances, a third party) also have the right
to purchase up to an additional $15,000,000 in aggregate principal amount of
notes, which amounts may be adjusted in accordance with the terms of the
Pequot/Constellation Purchase Agreement (the "A-4 Second Tranche Notes"), which
upon shareholder approval will be converted into 4,615,385 shares of Series A-4
Convertible Preferred Stock, which is in turn convertible into 4,615,385 shares
of the Company's common stock at a conversion price of $3.25 and warrants to
purchase up to 923,077 shares of Common Stock (the "Additional A-4 Warrants").
This additional right is exercisable until September 10, 2005. The Purchasers
also have the right to purchase up to $15,000,000 (or in certain limited
circumstances, up to $22,500,000) in aggregate principal amount of notes (the
"A-5 Notes"), which following shareholder approval will be converted into
4,615,385 shares (or in certain limited circumstances, 6,923,077 shares) of
Series A-5 Convertible Preferred Stock, which is in turn convertible into
4,615,385 shares (or in certain limited circumstances, 6,923,077 shares) of the
Company's common stock at a conversion price of $3.25. This additional right is
exercisable until December 10, 2005.
The Pequot/Constellation Purchase Agreement provides that if the shareholders of
the Company approve the authorization and issuance of, and the conversion of the
notes into, the New Series A Convertible Preferred Stock and the exercise of the
Series A-4 Warrants prior to the date of issuance of any Series A-4 Second
Tranche Notes and/or Series A-5 Notes, such Series A-4 Second Tranche Notes
and/or Series A-5 Notes will not be issued and the Company will issue and sell
to Purchasers (i) instead of the Series A-4 Second Tranche Notes, up to a
maximum of 4,615,385 shares of the Series A-4 Convertible Preferred Stock and
(ii) instead of the Series A-5 Notes, up to a maximum of 4,615,385 shares (or in
certain limited circumstances, 6,923,077 shares) of the Series A-5 Convertible
Preferred Stock.
A portion of the net proceeds of the sale of the Series A-4 First Tranche Notes
has been used to fund acquisition transactions and working capital, and any
remaining proceeds plus any future proceeds from the notes or preferred stock
under the Pequot/Constellation Purchase Agreement are also expected to be used
to fund acquisition transactions and working capital.
In connection with the Purchaser's investment in the Series A-4 First Tranche
Notes, the Company allocated the net proceeds from the sale of the (a) Series
A-4 First Tranche Notes, (b) A-4 First Tranche Warrants to purchase up to
615,386 shares of the Company's common stock and (c) rights to purchase the
Series A-4 Second Tranche Notes, the Additional A-4 Warrants and the Series A-5
Notes based on their relative fair value at the date of the sale of the Series
A-4 Convertible Preferred Stock and A-4 First Tranche Warrants. The Company
allocated and recorded $5.5 million to the Series A-4 First Tranche Notes and
assigned and credited to debt discount (x) $2.5 million for the 615,386 A-4
First Tranche Warrants and (y) $3.0 million for the rights to purchase Series
A-4 Second Tranche Notes, the Additional A-4 Warrants and the Series A-5 Notes.
The stated value of the Series A-4 First Tranche Notes includes $1.0 million in
amortization of debt discount. The fair value was determined using the Black
Scholes model.
In accordance with Emerging Issues Task Force Issue 00-19 ("EITF 00-19),
"Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled in, a Company's Own Stock," the Company has initially accounted for the
fair value of $ 5.5 million for the warrants and the option as a liability since
the Company is required to register the underlying securities. The fair value of
the warrants was calculated utilizing the Black Scholes model. From the date of
issuance through the end of the quarter, there were no significant changes in
the market value of the Company's common stock, and therefore, no significant
change in the carrying value of the liability. Any change in the market value of
the underlying securities may cause the value of the liability to change. Any
change in the carrying value of the liability will be made through the Company's
current statement of operations.
NOTE 5. SEGMENT INFORMATION:
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
10
segments. Summarized financial information concerning the Company's reportable
segments for the nine months ended December 31, 2004 and 2003 are set forth on
the following table.
For the Nine Months Ended December 31, 2004 For the Nine Months Ended December 31, 2003
------------------------------------------- -------------------------------------------
Pivot Data.Com MTM Total Pivot Data.Com MTM Total
----- -------- --- ----- ----- -------- --- -----
(In thousands)
Net revenues:
Products.............. $ -- $ 8,865 $ 38,077 $ 46,943 $ -- $ 2,577 $ 27,996 $ 30,573
Services.............. 1,011 3,981 11,712 16,703 1,236 4,766 7,333 13,335
Cost of products sold.... -- 8,239 34,280 42,518 -- 2,525 26,540 29,065
Cost of services
provided.............. 662 2,877 7,422 10,962 388 3,189 5,385 8,962
Gross profit............. 349 1,730 8,087 10,166 848 1,629 3,404 5,881
Selling, general &
administrative expenses 285 1,671 10,866 12,822 594 1,278 5,762 7,634
Other income............. -- -- -- -- -- -- 6 6
Interest expense......... 4 -- 1,455 1,459 27 -- 303 330
Income (loss) from
operations............ 60 59 (4,234) (4,115) 227 351 (2,654) (2,077)
Segment assets........... 4,119 2,740 70,044 76,903 3,807 5,858 15,517 25,182
Capital expenditures..... 182 10 985 1,177 349 4 211 544
Depreciation and
amortization expense.. 598 26 499 1,123 835 33 387 1,243
For the Three Months Ended December 31, 2004 For the Three Months Ended December 31, 2003
-------------------------------------------- --------------------------------------------
Pivot Data.Com MTM Total Pivot Data.Com MTM Total
----- -------- --- ----- ----- -------- --- -----
(In thousands)
Net revenues:
Products.............. $ -- $ 2,897 $ 18,241 $ 21,138 $ -- $ 674 $ 9,948 $ 10,622
Services.............. 335 1,509 6,710 8,554 358 1,128 2,636 4,122
Cost of products sold.... -- 2,693 16,003 18,696 -- 752 9,253 10,005
Cost of services
provided.............. 248 954 3,770 4,972 89 787 2,585 3,461
Gross profit............. 87 759 5,178 6,024 269 263 746 1,278
Selling, general &
administrative expenses 81 697 4,778 5,556 208 212 2,179 2,599
Other income............. -- -- -- -- -- -- 3 3
Interest expense......... -- -- 1,242 1,242 6 -- 122 128
Income (loss) from
operations............ 6 62 (843) (775) 55 51 (1,552) (1,446)
Segment assets........... 4,119 2,740 70,044 76,903 -- -- -- --
Capital expenditures..... 137 -- 605 742 84 4 57 145
Depreciation and
amortization expense.. 147 6 196 349 288 12 133 433
NOTE 6. 2004 EQUITY INCENTIVE PLAN:
On May 20, 2004, the Company's shareholders approved the Company's 2004 Equity
Incentive Plan and on November 19, 2004 the shareholders approved an increase in
the number of shares available for issuance under the Company's 2004 Equity
Incentive Plan from 2,000,000 to 3,000,000. Since April 1, 2004 a total of
1,848,500 options to purchase shares of the Company's common stock, at exercise
prices ranging from $1.37 to $5.22, plus 40,000 restricted stock units have been
issued to directors, executive officers, managers and employees of the Company.
11
NOTE 7. ACQUISITIONS
On July 2, 2004, the Company acquired the assets and business operations of
DataVox Technologies, Inc. ("DataVox). The results of operations of DataVox are
included with the results of operations of the Company from July 2, 2004.
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 and on January 1, 2005 the Company issued 5,904 shares of common
stock in partial payment of the second Installments due under the Data Vox
Notes. Based upon the stock price of the Company's common stock on February 1,
2005 of $4.89 per share, the maximum number of shares the Company is obligated
to issue for the remaining four installments of the DataVox Notes would be
approximately 25,000.
On September 17, 2004, the Company acquired the assets and business operations
of Network Catalyst, Inc. ("Network Catalyst"). 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 ("EBITDA") attributable to the acquired business during the period
beginning October 1, 2004 and ending on September 30, 2005 (the "Network
Catalyst 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 Network
Catalyst Earnout Period and (B) $2.15.
On December 10, 2004, the Company acquired the assets and business operations of
Vector ESP, Inc. and Vector ESP Management, Inc. (collectively, "Vector"). The
results of Vector are included with the results of operations of the Company
from December 1, 2004. Vector provides advanced technology solutions in
application delivery and deployment, network infrastructure, messaging and
collaboration, remote office connectivity and workforce mobility. The Vector
senior management team has joined the Company.
12
The purchase price of the Vector acquisition was recorded as $19,800,000 and was
allocated to the specific assets acquired and liabilities assumed. The purchase
price was paid in the form of cash, promissory notes and 433,840 shares of the
Company's common stock.
In addition, as part of the Vector purchase price, the Company agreed to issue
to Vector Global Services, Inc. (the "Vector Shareholder") additional shares of
common stock on the achievement of certain financial targets. More particularly,
if the EBITDA attributable to the acquired business during the period beginning
on January 1, 2005 and ending on the date one year thereafter (the "Vector
Earnout Period") equals or exceeds $2,975,000, then, as additional consideration
the Company shall issue to the Vector Shareholder the number of shares of common
stock determined by (x) dividing $3,000,000 by the greater of (A) the weighted
average trading price of the Company's common stock for the 10 business days
immediately preceding the end of the Vector Earnout Period and (B) $2.75 and (y)
multiplying such amount by a fraction, the numerator of which shall equal the
EBITDA of the acquired business for the year ending on the last day of the
Vector Earnout Period and the denominator of which shall equal $3,500,000 (the
"Vector Earnout Consideration"); provided, however, that in no event shall the
value of the Vector Earnout Consideration exceed $3,000,000.
13
UNAUDITED PRO FORMA SUMMARY
The following pro forma consolidated amounts give effect to the Company's
Network Catalyst and Vector 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 nine months ended December 31, 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
Nine Months Ended December 31,
--------------------------------------
2004 2003
------------------ ------------------
(Unaudited)
Net revenues:
Products....................... $ 73,610,703 $ 74,010,934
Services....................... 27,737,152 29,895,037
------------------ ------------------
101,347,855 103,905,971
Costs and expenses:
Cost of products sold.......... 65,279,832 66,751,460
Cost of services provided...... 17,897,816 19,198,872
Selling, general and
administrative expenses....... 20,563,987 20,979,696
------------------ ------------------
103,741,635 106,930,027
Other income...................... (1,000) (5,707)
Interest expense (1).............. 6,233,663 6,340,828
------------------ ------------------
Net (loss) income................. $ (8,626,443) $ (9,359,177)
================== ==================
Net (loss) income per common
shares:
Basic and diluted (2).......... $ (1.36) $ (1.65)
================== ==================
Weighted average number of
common shares outstanding:
Basic and diluted (2)........ 6,333,730 5,656,892
================== ==================
- --------------------
(1) Interest expense includes $4,663,003 and $5,743,877 of non-cash debt
discount amortization and interest on convertible subordinated
promissory notes, for the nine months ended December 31, 2004 and 2003,
respectively.
(2) The weighted average shares used to compute pro forma basic and diluted
net (loss) per share for the nine month periods ended December 31, 2004
and 2003 includes 933,840 shares of common stock issued as if the shares
were issued on April 1, 2004 and 2003, respectively.
14
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31,
--------------------------------------
2004 2003
------------------ ------------------
(Unaudited)
Net revenues:
Products......................... $ 28,333,059 $ 27,038,657
Services......................... 10,712,896 9,877,723
------------------ ------------------
39,045,955 36,916,380
------------------ ------------------
Costs and expenses:
Cost of products sold............ 24,333,762 24,528,953
Cost of services provided........ 6,266,205 6,958,249
Selling, general and
administrative expenses......... 8,017,661 6,939,135
------------------ ------------------
38,617,628 38,426,337
------------------ ------------------
Other income........................ (1,000) (2,454)
Interest expense (1)................ 4,911,372 5,004,505
------------------ ------------------
Net (loss) income................... $ (4,482,045) $ (6,512,008)
================== ==================
Net (loss) income per common
shares:
Basic and diluted (2)............ $ (0.64) $ (1.15)
================== =================
Weighted average number of common
shares outstanding:
Basic and diluted (2).......... 7,025,186 5,656,842
================== ==================
- --------------------
(1) Interest expense includes $3,679,817 and $4,760,691 of non-cash debt
discount amortization and interest on convertible subordinated
promissory notes, for the three months ended December 31, 2004 and
2003, respectively.
(2) The weighted average shares used to compute pro forma basic and diluted
net (loss) income per share for the three month periods ended December
31, 2004 and 2003 includes 933,840 shares of common stock issued as if
the shares were issued on October 1, 2004 and 2003, respectively
NOTE 8. SUBSEQUENT EVENTS
On January 27, 2005 the Company entered into a Stock Purchase Agreement with
Info Systems, Inc. ("Info Systems") and its shareholders (collectively, the
"Info Systems Shareholders") to acquire all of the outstanding capital stock of
Info Systems. Info Systems conducts an information technology business and
certain management and consulting businesses consisting of providing
connectivity (network infrastructure), server architecture (applications,
directory and computing infrastructure), convergence (legacy and Voice Over
Internet Protocol ("VOIP")), security (assessment, policy design) and storage
(SAN, data migration) solutions, as well as telecommunications and structured
cabling services, outsourced information technology (IT), staff augmentation and
remote network monitoring, management and support services through its Network
Operations Center.
The purchase price for the Info Systems acquisition is $13,200,000 and will be
paid in the form of cash and shares of the Company's common stock. The number of
shares of common stock to be issued at the closing of the acquisition will be
determined by dividing $3,200,000 by the greater of (A) the average closing
price of the Company's common stock for the 10 business days ending immediately
prior to the closing of the acquisition and (B) $2.75.
15
In addition, as part of the Info Systems purchase price, the Company has agreed
to pay to the Info Systems Shareholders $1,000,000 in cash, all of which shall
be paid on the date that is twelve months following the closing of the
acquisition if each of certain Info Systems Shareholders is either (a) employed
by the Company throughout the period of 12 months following the closing of the
acquisition, or (b) not so employed if (i) such employment is terminated by the
Company other than for "cause" (as such term is defined in individual's
employment agreement) or (ii) by such individual for "good reason" (as such term
is defined in such individual's employment agreement). The Company has also
agreed to issue to the Info Systems Shareholders additional shares of common
stock on the achievement of certain financial targets. More particularly if the
EBITDA attributable to the acquired business during the six months following the
closing of the acquisition (the "Info Systems Earnout Period") equals or exceeds
$600,000, then the Company, at its option, shall either (i) pay $500,000 in cash
to the Info Systems Shareholders, or (ii) issue to the Info Systems
Shareholders, the number of shares of common stock determined by dividing
$500,000 by the greater of (A) the average closing price of the common stock for
the 10 business days ending immediately prior to the end of the Info Systems
Earnout Period and (B) $2.75. Additionally, for each $1.00 of the EBITDA
attributable to the acquired business during the Info Systems Earnout Period in
excess of $600,000, the Company shall, at its option, shall either (i) pay to
the Info Systems Shareholders cash in an amount equal to 30% of such excess, or,
(ii) issue to the Info Systems Shareholders the number of shares of common stock
determined by dividing 30% of such excess by the greater of (x) the average
closing price of the common stock for the 10 business days ending immediately
prior to the end of the Info Systems Earnout Period and (y) $2.75 (the
"Additional Earnout Consideration"); provided, however, that in no event shall
the value of the Additional Earnout Consideration exceed $200,000.
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 (North Carolina), Inc. ("MTM North Carolina"), MTM Technologies
(California), Inc. ("MTM California"), MTM Technologies (Texas), Inc. ("MTM
Texas)"; "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; and
"Constellation Venture" refers to Constellation Venture Capital II, L.P.,
"Constellation Offshore" refers to Constellation Venture Capital Offshore II,
L.P., "BSC" refers to The BSC Employee Fund VI, L.P., "CVC" refers to CVC
Partners II, LLC, and collectively with Constellation Venture, Constellation
Offshore and BSC, "Constellation."
16
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," computer and networking and data
center services, including secure access, voice over internet protocol (VOIP),
connectivity, storage, security, collaboration, and messaging 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 IT professional
services including network technology systems implementation and project
management, facilities and data center design and implementation management
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 complete technology life-cycle services which include systems design,
installation, consulting, maintenance and integration of network computer
products, including the design and implementation of wide area networks, or
17
"WANS," local area networks, or "LANS," wireless network solutions and computer
hardware and software products. We provide our remote network solutions by
utilizing our proprietary solution which we market as "Pivot Technology."
There is a rapidly growing trend among companies to outsource their computer
services requirements. This entails client companies obtaining all or a portion
of their data processing and related requirements from solution providers, such
as us, that specialize in the technology service, product or application
required by these client companies. Our strategy is to offer these companies
selective outsourced infrastructure solutions at competitive prices. We are
focusing our efforts 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; voice over internet protocol (VOIP) 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 29% of
our revenues for the three months ended December 31, 2004, as compared to 28% in
the comparable 2003 period, with a small portion of these revenues derived from
maintenance and repair services.
On January 29, 2004 the Company entered into the Pequot Purchase Agreement and
on December 7, 2004 the Company entered into the Pequot/Constellation Agreement,
whereby the Purchasers purchased, as well as acquired the right to purchase, the
Company's Preferred Shares as well as notes convertible into the Company's
Preferred Shares. Reference is made to Note 4 of this Form 10-Q for further
information.
We intend to use the Pequot and Constellation investment 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 will focus our acquisition strategy on
businesses providing secure access, voice over internet protocol (VOIP),
storage, networking and messaging solutions. The acquisition targets will
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 or strengthen
our competitive advantage and ensure ongoing delivery of high quality IT
solutions to our customers. The acquisition candidates we may investigate can be
large, and their acquisition by us could have a significant and lasting impact
on our business.
The execution of our growth-through-acquisition strategy has included the
acquisition of the business and operating assets of the following:
o DataVox Technologies, Inc., 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
o Network Catalyst, Inc., a provider of advanced technology solutions in
the VOIP (voice over internet protocol), infrastructure and security
fields to clients located throughout the Southern California region.
o Vector ESP, Inc. and Vector ESP Management, Inc., a provider of secure
access, consulting services, information technology products,
technology solutions, applications, messaging and collaboration
products and services, remote connectivity and workforce mobility
products and services.
On January 27, 2005 we entered into a Stock Purchase Agreement with Info
Systems, Inc. ("Info Systems") and its shareholders to acquire all of the
outstanding capital stock of Info Systems. Info Systems conducts an information
technology business and certain management and consulting businesses consisting
of providing connectivity (network infrastructure), server architecture
18
(applications, directory and computing infrastructure), convergence (legacy and
Voice Over Internet Protocol ("VoIP")), security (assessment, policy design) and
storage (SAN, data migration) solutions, as well as telecommunications and
structured cabling services, outsourced information technology (IT), staff
augmentation and remote network monitoring, management and support services
through its Network Operations Center.
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 SEC
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.
19
Shipping and handling costs are included in the cost of sales.
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, and Vector we
recorded goodwill in the amount of $1.9 million, $6.0 million, and $19.8 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 AND CONSTELLATION INVESTMENTS
In connection with the negotiation of the Pequot Purchase Agreement and the
consummation of Pequot's purchase of the Series A-1 Convertible Preferred Stock
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 Convertible Preferred Stock
and 500,000 warrants. We allocated and recorded $2.9 million to the Series A-1
Convertible 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
Convertible 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, the company paid a finder's fee 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 connection with the Pequot purchase of the Series A-3
Convertible Preferred Stock and related warrants, the Company allocated and
recorded $9.0 million to the Series A-3 Convertible Preferred Stock and assigned
and credited additional paid in capital $3.5 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.
In connection with Constellation's and Pequot's investment in the Series A-4
First Tranche Notes, the Company allocated the net proceeds from the sale of the
(a) Series A-4 First Tranche Notes, (b) A-4 First Tranche Warrants to purchase
up to 615,386 shares of the Company's common stock and (c) rights to purchase
the Series A-4 Second Tranche Notes, the Additional A-4 Warrants and the Series
A-5 Convertible Preferred Stock based on their relative fair value at the date
of the sale of the Series A-4 Convertible Preferred Stock and A-4 First Tranche
Warrants. The Company allocated and recorded $4.5 million to the Series A-4
First Tranche Notes and assigned and credited to additional debt discount (x)
$2.5 million for the 615,386 A-4 First Tranche Warrants and (y) $3.0 million for
the rights to purchase Series A-4 Second Tranche Notes, the Additional A-4
Warrants and the Series A-5 Notes.
20
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:
Nine Months Ended Three Months Ended
December 31, December 31,
----------------------------------------------
2004 2003 2004 2003
--------- --------- ---------- --------
Net revenues:
Products 73.8% 69.6% 71.2% 72.0%
Services 26.2% 30.4% 28.8% 28.0%
--------- --------- ---------- --------
Total net revenues 100.0% 100.0% 100.0% 100.0%
--------- --------- ---------- --------
Cost of products 66.6% 66.2% 63.0% 67.9%
Cost of services 17.2% 20.4% 16.7% 23.5%
Gross profit - products 7.0% 3.4% 8.2% 4.2%
Gross profit - services 9.0% 10.0% 12.1% 4.5%
Gross profit - total 16.0% 13.4% 20.3% 8.7%
Selling, general and admin (a) 20.1% 17.4% 18.7% 17.6%
Operating (loss) income 4.2% 4.0% 1.6% 8.9%
Interest expense (b) 2.3% 0.8% 4.2% 0.9%
Net (loss) income 6.5% -4.7% 2.6% -9.8%
- --------------------
(a) Includes $1.1 million 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.
(b) Includes $1.0 million of non cash amortization of debt discount.
THREE AND NINE MONTHS ENDED DECEMBER 31, 2004, AS COMPARED TO THREE AND NINE
MONTHS ENDED DECEMBER 31, 2003
Net Revenue
Net revenue for the three months ended December 31, 2004 was $29.7 million, as
compared with net revenue of $14.7 million for the comparable 2003 period. For
the nine months ended December 31, 2004, net revenue amounted to $63.6 million,
as compared with net revenue of $43.9 million for the comparable 2003 period.
The Company has achieved growth of 99% for products and 108% in services for the
three months ended December 31, 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 December 31, 2004 was $6.0 million, as
compared with gross profit of $1.3 million for the comparable 2003 period. For
the nine months ended December 31, 2004, gross profit amounted to $10.2 million,
as compared with gross profit of $5.9 million for the comparable 2003 period.
The Company achieved gross margins of 20.3% for the three months ended December
31, 2004, as compared to gross margins of 8.7% for the three months ended
December 31, 2003. Improved gross margins resulted primarily from the impact of
our acquisitions. Although we have significantly improved our gross margins, we
expect to continue to face competitive market pressures which impact the gross
profit on our product revenue and service related revenue.
Selling, General and Administrative
Selling, general and administrative expenses increased to $5.6 million in the
three months ended December 31, 2004 from $2.6 million in the comparable 2003
period. Expressed as a percentage of net revenues, selling, general and
administrative expense was 18.7% as compared to 17.6% in the comparable 2003
period. Increased expenses are predominately related to the additional costs
21
incurred from the integration of our acquisitions. For the nine months ended
December 31, 2004, selling, general and administrative expenses increased to
$12.8 million from $7.6 million during the nine months ended December 31, 2003.
The 2004 expenses included $1.1 million for special compensation arrangements
incurred in connection with the initial Pequot investment.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA") was a
positive $0.8 million in the three months ended December 31, 2004 as compared to
a negative EBITDA of $0.9 million in the comparable 2003 period. The negative
EBITDA was $1.5 million in the nine months ended December 31, 2004 as compared
to a negative $0.6 million in the comparable 2003 period. The EBITDA
improvements resulted from both increased net revenue and improved gross margins
discussed above, potentially offset by increased selling, general and
administrative expenses. The following table sets forth a reconciliation of
EBITDA to net loss for the periods presented.
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- --------
Net (loss) income ($0.8) ($1.4) ($4.1) ($2.1)
Depreciation and
amortization $0.4 $0.4 $1.1 $1.2
Interest expense (a) $1.2 $0.1 $1.5 $0.3
--------- --------- --------- --------
EBITDA $0.8 ($0.9) ($1.5) ($0.6)
--------------------
(a) Includes $1.0 million non cash amortization of debt discount.
The Company believes that its non-GAAP measure of EBITDA provides investors with
a useful supplemental measure of its operating performance by excluding the
impact of interest, taxes, depreciation, and amortization. Management uses
EBITDA to assist in evaluating operating performance. These non-GAAP results
should be evaluated in light of the Company's financial results prepared in
accordance with GAAP. EBITDA is not a recognized measure for financial statement
presentation under GAAP. Non-GAAP earnings measures do not have any standardized
definition and are therefore unlikely to be comparable to similar measures
presented by other reporting companies. This non-GAAP measure is provided to
assist readers in evaluating the Company's operating performance. Readers are
encouraged to consider this non-GAAP measure in conjunction with the Company's
GAAP results.
Interest Expense
Interest expense was $1.2 million in the three months ended December 31, 2004
and $0.1 million for the comparable period in 2003. In addition, interest
expense was $1.5 million in the nine months ended December 31, 2004 and $0.3
million for the nine months ended December 31, 2003. The primary increase is due
to non-cash interest expense of $1.0 million related to the convertible
subordinated noted issued in December 2004.
Net Income (Loss)
The Company had a net loss of $0.8 million in the three months ended December
31, 2004 as compared to a net loss of $1.4 million in the comparable 2003
period. The net loss was $4.1 million in the nine months ended December 31, 2004
as compared to a net loss of $2.1 million in the comparable 2003 period. The
increase in the net loss was primarily the result of the non-cash interest
charge and for the factors described above.
22
LIQUIDITY AND CAPITAL RESOURCES
We measure our liquidity in a number of ways, including the following:
(Dollars in thousands)
As at As at
December 31, 2004 March 31, 2004
----------------- --------------
Cash and cash equivalents.............. $ 8,125 $ 370
Working capital........................ $ (5,223) $ (1,277)
Current ratio.......................... 0.89:1 0.91:1
Secured notes payable.................. $ 11,291 $ 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 nine months ended December 31, 2004, we used cash of approximately
$7.8 million in operating activities. This primarily resulted from the decreases
in accounts receivable from customers of $2.8 million, a decrease in deferred
revenue of $1.0 million, a decrease in accounts payable of $2.0 million, a
decrease in other assets of $0.1 million, depreciation and amortization charges
of $1.1 million, amortization of debt discount of $1.0 million, and the net loss
of $4.1 million.
Net cash used in investing activities amounted to approximately $22.9 million.
The significant uses were for the acquisition of businesses of $20.5 million, an
increase in restricted cash of $1.0 million and for the acquisition of property
and equipment in the amount of $1.4 million. In addition, net cash provided by
financing activities was $38.5 million primarily related to the net proceeds
from the issuance of shares of Series A Preferred Stock in the amount of $23.8
million, precedes from the issuance of subordinated promissory notes $10.0
million and net borrowings under our secured notes payable and inventory
financing $4.5 million.
We had working capital of approximately $1.4 million as of December 31, 2004 an
increase of $2.7 million from March 31, 2004.
As a result of the foregoing, our cash increased approximately $7.8 million.
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. Effective as of
December 27, 2004, the Schedule to the Amended Financing Facility was amended to
change certain of the financial covenants contained therein.
On February 1, 2005, the Company received a temporary increase from the Lender
in the amount of the credit facility to $20,000,000. This temporary increase
terminates on March 31, 2005. The Company anticipates either extending the
Amended Financing Facility or replacing it prior to its expiration.
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 capital
funds and other financial conditions. The Company is required to pay additional
23
fees if it exceeds the maximum permitted aggregate loan amount then in effect or
if the Company is found to be in default under the Amended Financing Facility.
Our total outstanding debt under the revolving receivable financing facility was
$11.3 million at December 31, 2004 and $5.9 million at March 31, 2004. The
amount outstanding under the inventory financing agreement was $2.6 million at
December 31, 2004 and $3.5 million at March 31, 2004.
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 December 31, 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.
One of our customers accounted for 11% of our total accounts receivable. This
customer is a telecommunications company which represented $6.0 million, or 11%,
of our accounts receivable as at December 31, 2004. Revenues generated from this
customer represented 20% of our total revenues for the three months ended
December 31, 2004.
The loss of this customer, 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.
IMPACT OF INFLATION
The effects of inflation on our operations were not significant during the
periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment" ("SFAS
123R"), which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS 123R supercedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS 123
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions and requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. This
statement is effective for our interim periods beginning after June 15, 2005. We
are currently evaluating the provisions of SFAS 123R to determine its impact on
our future financial statements.
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.
24
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was performed, as of December 31, 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 December 31, 2004. As of December
31, 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.
Reference 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 December 31, 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Reference is made to the disclosures contained in Item 3.02 of our Current
Report on Form 8-K (Date of Report: December 7, 2004), filed with the Securities
and Exchange Commission on December 13, 2004 for information concerning certain
unregistered sales of equity securities and the use of proceeds thereof.
On July 2, 2004, we acquired DataVox Technologies, Inc. ("DataVox). As part of
purchase price for DataVox we issued a promissory note (the "DataVox Notes"), in
the principal amount of $124,757, to the DataVox Shareholders. 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. On October 1, 2004 we issued to each DataVox
Shareholder 3,109 shares of our common stock as part of the October 1, 2004
Installment. The issuance of common stock to each DataVox Shareholder was made
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 or pursuant to an exception thereunder. The DataVox
Shareholders received, or had access to, material information concerning us and
our operations 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 purchase price for the Info Systems acquisition is $13,200,000 and will be
paid in the form of cash and shares of the Company's common stock as set forth
in Note 8 to this Form 10Q. In addition, we have agreed to issue the Info
Systems shareholders additional shares of common stock on the achievement of
certain financial targets as set forth in Note 8 to this Form 10Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on November 19, 2004. At
the Annual Meeting the following individuals consisting of the candidates
nominated by Company's Board of Directors were elected directors by the votes
indicated and the following proposals were adopted by the vote specified below:
Proposal No. 1: To elect nine persons to the Board of Directors of the Company,
each to serve until the next annual meeting of shareholders of the Company or
until such person shall resign, be removed or otherwise leave office.
For Withheld
--------- --------
Gerald A. Poch 9,781,784 501,900
Francis J. Alfano 9,781,784 501,900
Steven H. Rothman 9,777,784 505,900
Howard A. Pavony 9,781,784 501,900
Arnold J. Wasserman 9,930,234 353,450
Richard R. Heitzmann 9,779,584 504,100
Amish Jani 9,779,584 504,100
William Lerner 9,932,234 351,650
Alvin E. Nashman 9,932,234 351,650
Proposal No. 2: To approve an increase in the number of shares available for
issuance under the Company's 2004 Equity Incentive Plan from 2,000,000 to
3,000,000.
Vote Number of Votes Cast
---- --------------------
For 8,098,889
Against 557,086
Abstain 8,980
Broker Non-Vote 1,618,729
Proposal No. 3: To ratify the appointment of Goldstein Golub Kessler LLP as
accountants for the Company.
Vote Number of Votes Cast
---- --------------------
For 10,246,054
Against 30,300
Abstain 7,330
No other matter was presented for voting at the Annual Meeting.
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.*
26
4.1 MTM Technologies, Inc. Restated Certificate of Incorporation (subject
to shareholder approval following which the Restated Certificate of
Incorporation will be filed with the Secretary of the State of New
York).*
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 Form of the A-3 Warrants*
10.3 Purchase Agreement dated December 7, 2004 by and among MTM
Technologies, Inc., Pequot Private Equity Fund III, LLP, Pequot
Offshore Private Equity Partners III, L.P., Constellation Venture
Capital II, L.P., Constellation Venture Capital Offshore II, L.P.,
The BSC Employee Fund VI, L.P. and CVC Partners II, LLC.*
10.4 Form of the A-4 Notes and A-5 Notes*
10.5 Form of the A-4 Warrants*
10.6 Amended and Restated Registration Rights Agreement dated December 10,
2004 by and among, among MTM Technologies, Inc., Steven Rothman,
Howard Pavony, Pequot Private Equity Fund III, LLP, Pequot Offshore
Private Equity Partners III, L.P., Constellation Venture Capital II,
L.P., Constellation Venture Capital Offshore II, L.P., The BSC
Employee Fund VI, L.P. and CVC Partners II, LLC.*
10.7 Amended and Restated Shareholders' Agreement dated December 10, 2004
by and among, among MTM Technologies, Inc., Steven Rothman, Howard
Pavony, Pequot Private Equity Fund III, LLP, Pequot Offshore Private
Equity Partners III, L.P., Constellation Venture Capital II, L.P.,
Constellation Venture Capital Offshore II, L.P., The BSC Employee
Fund VI, L.P. and CVC Partners II, LLC.*
10.8 Asset Purchase Agreement dated December 1, 2004 by and among Vector
ESP, Inc., Vector ESP Management, Inc. and Vector Global Services,
Inc. and MTM Technologies, Inc. *
10.9 Stock Purchase Agreement dated January 27, 2005 by and among Info
Systems, Inc., Mark Stellini, Emidio Stellini, Jr., Jay Foggy,
Richard Roux, Jennifer McKenzie and MTM Technologies, Inc.*
10.10 Employment Agreement, dated May 21, 2004, between MTM Technologies,
Inc. and Howard A. Pavony.*
10.11 Employment Agreement, dated May 21, 2004, between MTM Technologies,
Inc. and Steven H. Rothman.*
10.12 Employment Agreement, dated May 21, 2004, between MTM Technologies,
Inc. and Francis J. Alfano.*
10.13 Amendment No.1 to Employment Agreement between MTM technologies, Inc.
and Francis J. Alfano*
10.14 Severance Letter, dated May 21, 2004, between MTM Technologies, Inc.
and Alan Schwartz*
10.15 Amendment to Severance Letter between MTM Technologies, Inc. and Alan
Schwartz*
10.16 Stock Option Award Agreement, dated November 2, 2004, between MTM
Technologies, Inc. and Steven Stringer*
10.17 Restricted Stock Unit Award Agreement, dated November 2, 2004,
between MTM Technologies, Inc. and Steven Stringer*
10.18 Amendment No. 2 to Employment Agreement between MTM Technologies,
Inc. and Howard A. Pavony*
10.19 Employment Agreement, dated October 1, 2004, between MTM
Technologies, Inc. and Steven Stringer.*
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.
99.1 Voting Agreement dated December 6, 2004 by and among Steven Rothman,
Howard Pavony, Pequot Private Equity Fund III, L.P., Pequot Offshore
Private Equity Partners III, L.P., Constellation Venture Capital II,
L.P., Constellation Venture Capital Offshore II, L.P., The BSC
Employee Fund VI, L.P., CVC II Partners, LLC.*
99.2 Press Release dated February 14, 2005 (furnished, not filed, under
Item 2.02, "Results of Operations and Financial Condition.")
- --------------------
* Incorporated by reference. See Exhibit Index.
27
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: February 14, 2005 By: /s/ Francis J. Alfano
------------------------------------------
Francis J. Alfano, Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2005 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 DECEMBER 31, 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.]
4.1 MTM Technologies, Inc. Restated Certificate of Incorporation (subject
to shareholder approval following which the Restated Certificate of
Incorporation will be filed with the Secretary of the State of New
York). [Incorporated by reference to Exhibit 4.1 to the registrant's
Current Report on Form 8-K (Date of Report: December 7, 2004) filed
with the Securities and Exchange Commission on December 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 Form of the A-3 Warrants [Incorporated by reference to exhibit 10.7
to the registrant's Current Report on Form 8-K (Date of Report:
December 7, 2004), filed with the Securities and Exchange Commission
on December 13, 2004.]
10.3 Purchase Agreement, dated December 7, 2004, by and among MTM
Technologies, Inc., Pequot Private Equity Fund III, LLP, Pequot
Offshore Private Equity Partners III, L.P., Constellation Venture
Capital II, L.P., Constellation Venture Capital Offshore II, L.P.,
The BSC Employee Fund VI, L.P. and CVC Partners II, LLC.
[Incorporated by reference to Exhibit 10.1 to the registrants Current
Report on Form 8-K (Date of Report: December 7, 2004) filed with the
Securities and Exchange Commission on December 13, 2004.]
10.4 Form of the A-4 Notes and A-5 Notes [Incorporated by reference to
exhibit 10.2 to the registrant's Current Report on Form 8-K (Date of
Report: December 7, 2004), filed with the Securities and Exchange
Commission on December 13, 2004.]
10.5 Form of the A-4 Warrants [Incorporated by reference to exhibit 10.3
to the registrant's Current Report on Form 8-K (Date of Report:
December 7, 2004), filed with the Securities and Exchange Commission
on December 13, 2004.]
10.6 Amended and Restated Registration Rights Agreement, dated December
10, 2004, by and among MTM Technologies, Inc., Steven Rothman, Howard
Pavony, Pequot Private Equity Fund III, LLP, Pequot Offshore Private
Equity Partners III, L.P., Constellation Venture Capital II, L.P.,
Constellation Venture Capital Offshore II, L.P., The BSC Employee
Fund VI, L.P. and CVC Partners II, LLC. [Incorporated by reference to
exhibit 10.4 to the registrant's Current Report on Form 8-K (Date of
Report: December 7, 2004), filed with the Securities and Exchange
Commission on December 13, 2004.]
10.7 Amended and Restated Shareholders' Agreement, dated December 10,
2004, by and among, among MTM Technologies, Inc., Steven Rothman,
Howard Pavony, Pequot Private Equity Fund III, LLP, Pequot Offshore
Private Equity Partners III, L.P., Constellation Venture Capital II,
L.P., Constellation Venture Capital Offshore II, L.P., The BSC
Employee Fund VI, L.P. and CVC Partners II, LLC. [Incorporated by
reference to exhibit 10.5 to the registrant's Current Report on Form
8-K (Date of Report: December 7, 2004), filed with the Securities and
Exchange Commission on December 13, 2004.]
10.8 Asset Purchase Agreement, dated December 1, 2004, by and among Vector
ESP, Inc., Vector ESP Management, Inc. and Vector Global Services,
Inc. and MTM Technologies, Inc. [Incorporated by reference to exhibit
2.1 to the registrant's Current Report on Form 8-K (Date of Report:
December 7, 2004), filed with the Securities and Exchange Commission
on December 13, 2004.]
10.9 Stock Purchase Agreement dated January 27, 2005 by and among Info
Systems, Inc., Mark Stellini, Emidio Stellini, Jr., Jay Foggy,
Richard Roux, Jennifer McKenzie and MTM Technologies, Inc.
[Incorporated by reference to exhibit 2.1 to the registrant's Current
Report on Form 8-K (Date of Report: January 26, 2005), filed with the
Securities and Exchange Commission on February 1, 2005.]
10.10 Employment Agreement, dated May 21, 2004, between MTM Technologies,
Inc. and Howard A. Pavony. [Incorporated by reference to exhibit 10.3
to the registrant's Current Report on Form 8-K (Date of Report:
May 21, 2004), filed with the SEC on June 7, 2004.]
10.11 Employment Agreement, dated May 21, 2004, between MTM Technologies,
Inc. and Steven H. Rothman. [Incorporated by reference to exhibit
10.4 to the registrant's Current Report on Form 8-K (Date of Report:
May 21, 2004), filed with the SEC on June 7, 2004.]
10.12 Employment Agreement, dated May 21, 2004, between MTM Technologies,
Inc. and Francis J. Alfano. [Incorporated by reference to exhibit
10.5 to the registrant's Current Report on Form 8-K (Date of Report:
May 21, 2004), filed with the SEC on June 7, 2004.]
10.13 Amendment No.1 to Employment Agreement between MTM technologies, Inc.
and Francis J. Alfano [Incorporated by reference to exhibit 10.1 to
the registrant's Current Report on Form 8-K (Date of Report: Jan 3,
2005), filed with the SEC on Jan 6, 2005]
10.14 Severance Letter, dated May 21, 2004, between MTM Technologies, Inc.
and Alan Schwartz [Incorporated by reference to exhibit 10.2 to the
registrant's Current Report on Form 8-K (Date of Report: Jan 3,
2005), filed with the SEC on Jan 6, 2005]
10.15 Amendment to Severance Letter between MTM Technologies, Inc. and Alan
Schwartz [Incorporated by reference to exhibit 10.3 to the
registrant's Current Report on Form 8-K (Date of Report: Jan 3,
2005), filed with the SEC on Jan 6, 2005]
10.16 Stock Option Award Agreement, dated November 2, 2004, between MTM
Technologies, Inc. and Steven Stringer [Incorporated by reference to
exhibit 10.4 to the registrant's Current Report on Form 8-K (Date of
Report: Jan 3, 2005), filed with the SEC on Jan 6, 2005]
10.17 Restricted Stock Unit Award Agreement, dated November 2, 2004,
between MTM Technologies, Inc. and Steven Stringer [Incorporated by
reference to exhibit 10.5 to the registrant's Current Report on Form
8-K (Date of Report: Jan 3, 2005), filed with the SEC on Jan 6, 2005]
10.18 Amendment No. 2 to Employment Agreement between MTM Technologies,
Inc. and Howard A. Pavony [Incorporated by reference to exhibit 10.2
to the registrant's Current Report on Form 8-K (Date of Report:
Dec 21, 2004), filed with the SEC on Dec 23, 2004]
10.19 Employment Agreement, dated October 1, 2004, between MTM
Technologies, Inc. and Steven Stringer. [Incorporated by reference to
Exhibit 10.2 to the registrant's Current Report on Form 8-K (Date of
Report: October 1, 2004), filed with the SEC on October 7, 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.
99.1 Voting Agreement, dated December 6, 2004, by and among Steven
Rothman, Howard Pavony, Pequot Private Equity Fund III, L.P., Pequot
Offshore Private Equity Partners III, L.P., Constellation Venture
Capital II, L.P., Constellation Venture Capital Offshore II, L.P.,
The BSC Employee Fund VI, L.P., CVC II Partners, LLC. [Incorporated
by reference to exhibit 99.1 to the registrant's Current Report on
Form 8-K (Date of Report: December 7, 2004), filed with the
Securities and Exchange Commission on December 13, 2004.]
99.2 Press Release dated February 14, 2005 (furnished, not filed, under
Item 2.02, "Results of Operations and Financial Condition.")