Item 1. Business
Overview
We are a leading national provider of innovative information technology (“IT”) solutions including Access, Unified Communications, Virtualization, and Managed Services. We enable our clients to achieve improved operational efficiency and to focus on growth, while mitigating the risk of implementing complex IT systems. We achieve these results by providing systems, networking, IP telephony, storage, security and data center infrastructure services that address the full life cycle of a client’s IT requirements from needs analysis, through planning, development, deployment, and testing, to on-going maintenance and support. We combine these services with technology from leading software and hardware manufacturers delivering strategic IT solutions that solve many of today’s business challenges.
Our clients consist of middle market corporations (generally those with $50 million to $1 billion in revenues), divisions of Global 2000 corporations, municipal, state and federal government agencies, and educational, financial and health-care institutions. We serve clients in most major US metropolitan markets.
History
The certificate of incorporation of MTM was filed by the New York Department of State on May 12, 1986 under the original name of Micros To Mainframes Inc. On May 21, 2004 we changed the name of our Company to MTM Technologies, Inc.
Since July 2004, we have acquired the following six companies, either through the purchase of operating assets or the acquisition of capital stock:
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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.
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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.
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Vector ESP, Inc. and Vector ESP Management, Inc., providers 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.
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Info Systems, Inc., a provider of VOIP, security and storage solutions, as well as telecommunications and structured cabling services, outsourced IT, staff augmentation and remote network monitoring, management and support services through its network operations center.
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Nexl, Inc., a provider of enterprise storage, network infrastructure, security, IP telephony, and managed services to clients primarily located in the Northeast.
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Axcent Solutions, Inc., a provider of access, infrastructure and availability solutions based on technologies from Citrix, Microsoft, Network Appliance, VMware and Cisco.
Business Strategy
Our strategy is to be the national leader in providing IT solutions to the middle market. The most recent of our acquisitions was completed in April 2006. Since that time we have focused on integrating the operations of the acquired companies in order to improve our earnings and cash flow. Although we currently are not actively seeking acquisition candidates, we believe that growth through acquisition may be an important component of our long-term strategy. The following are key components of our strategy to improve our earnings and cash flow.
Focus on strategic service offerings and increase our overall percentage of services revenue
Our goal is to increase our service revenue, which generates superior gross margin contributions, as a percentage of overall revenue. This will include focusing on those product sales that are typically coupled with the highest percentages of service revenue, a concept we refer to as “pull-through”. We believe that our offerings in Access and Unified Communications provide the greatest opportunity in these areas. Additionally, we strive to attach Managed Services to each sales opportunity, further increasing margins. Our national footprint enables us to more effectively execute this strategy.
Focus in key industry verticals
We intend to increase our focus on selling our solutions to selected industry segments or industry “verticals” that we believe have the greatest potential for revenue growth and gross margin improvement. This effort will include greater alignment of our sales and services resources in those selected verticals.
Rationalize product sales
We believe that we can improve the overall profitability of our product resale business by focusing on selling the products of certain vendors, typically those for whom we sell the largest volume of products, and eliminating or deemphasizing smaller and less profitable vendors. We believe that by properly rationalizing our product sales we will reduce the extra cost burden associated with supporting a large number of smaller vendors.
Leverage our current customer base
We have an existing customer base of over 5,000 clients. Many of our clients are currently utilizing only a small portion of our overall solutions. Our sales professionals are actively revisiting our existing client base and introducing them to our complete set of offerings with the goal of having those clients purchase additional offerings thereby gaining an increased percentage of such client’s total IT spending.
Leverage our centralized infrastructure and processes to support our national IT solutions platform
We have made a significant investment in building an infrastructure that supports our current business operations and enhances our ability to support substantial future growth. Centralized technology infrastructure, back-office, purchasing and human resources functions have all contributed to our ability to deliver our services on a national basis and improve the operating margins of our acquired businesses.
Implementing and maintaining aggressive cost control initiatives to right size the business
We have made a commitment over the past few quarters to continue to monitor and implement cost control initiatives including reducing the number of associates from 636 in fiscal 2007 to 554 at March 31, 2008. We continue to seek opportunities to improve operating results and generate cash flow.
We believe our strategy is aimed at focusing on profitable revenue growth, expanding our market share, reducing our structural costs and generating positive cash flow. We will continue to work to grow our net revenue and profitability.
Business Services
Our approach to the market aligns our solutions and professional services with strategic manufacturer and supply chain relationships to deliver an end-to-end solution for our clients.
Solutions
We have developed our IT solutions to deliver immediate business value and return on investment for our clients. Our solutions consist of the following:
Access. Our Access solutions offer our clients secure, on-demand access to all of their corporate applications and information from remote locations using both wired and wireless technologies. These solutions combine system, network, and security technologies to create a cohesive infrastructure that improves the efficiency, mobility and agility of clients’ businesses.
Convergence. Our Convergence solutions provide our clients the ability to combine voice, data and video content on a common network, offering a feature-rich, cost-effective and flexible platform for business communications. By using a single converged network rather than multiple networks, clients are able to lower their total cost of ownership and simplify network management and deployment.
Consolidation. Our Consolidation solutions provide our clients the ability to streamline their IT infrastructure by consolidating operating systems, applications, and storage into high-performance, scalable systems thereby improving efficiency, control and manageability. These solutions combine server and storage consolidation, application centralization, data management and migration and disaster recovery services.
Virtualization. Our Virtualization solutions provide our clients the ability to separate applications, operating systems, and storage from physical hardware enabling a more flexible, scalable, fault-tolerant and cost-effective IT infrastructure. Virtualization allows clients to lower their total cost of ownership, maximize the utilization of their infrastructure resources and achieve operational efficiencies.
Professional Services
Our staff of experienced and certified technology professionals provide our clients with a full suite of IT professional services. The services range from advanced configurations and complex project management to project logistics and planning. We provide design, consulting, implementation and support services in our six areas of core competence. These are systems, networks, IP telephony, storage, security, and facilities and cabling.
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Our systems practice includes Windows servers, open system servers, directories, messaging, fax and server-based computing.
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Our networks practice includes wide-area networks, local-area networks, wireless, intelligent switching and routing.
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Our IP telephony practice includes voice, video and data integration on IP network.
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Our storage practice includes enterprise storage and data management.
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Our security practice includes essential systems and tools to secure, monitor and defend data and networks from unauthorized access.
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Our facilities and cabling practice includes design and installation of data centers and physical infrastructure.
Our capability to address all phases of technology projects, from needs analysis and definition through implementation and support, allows us to offer our customers a single point of accountability for a broad range of technology projects. As technology infrastructure becomes progressively more sophisticated and complex, our clients demand total project accountability from a single vendor. With our national presence, engineering expertise, and high-level relationships with top-tier vendors, we are able to undertake most technology infrastructure projects for our clients and provide them that critical single point of accountability.
Many of our clients require a guaranteed response to their system outages. Through our national staff of certified technicians and related field resources, we provide service level guarantees to our customers in response to problems with their infrastructure technology outages that are communicated to us, or that are detected through our automated remote monitoring systems as part of a managed services solution. We offer our clients various degrees of guaranteed response depending on the severity of the outage or the client’s specific response requirements.
Technology Partners
We maintain strategic relationships with many of today’s leading hardware and software technology manufacturers enabling us to deliver to our clients advanced and comprehensive solutions at competitive prices. For example, we are a Cisco Gold partner, a Citrix Platinum Solutions Advisor, a Hewlett Packard Gold partner, a Microsoft Gold partner, an EMC Velocity Premier partner, a Sun Advantage partner, an Avaya Platinum partner, and a Captaris Platinum partner. For those manufacturers that we believe are critical to our client’s technology infrastructure we generally hold the highest levels of certification granted by such manufacturers. We work with our strategic partners to develop national training programs to ensure consistent service delivery methodologies across our entire national footprint. With over 200 technical professionals nationwide, we train and certify our service professionals to maintain the highest levels of manufacturer certifications and authorizations. We often times work in conjunction with our partners to utilize our own accredited professional training service centers to train and deliver technical content to our service professionals.
We provide all aspects of infrastructure technology product delivery to our clients. Through our relationships as a certified partner with most of the key top tier infrastructure technology product manufacturers and with key infrastructure technology distributors, we are able to provide our clients with cost-effective product sourcing solutions to meet their requirements for managed, timely and competitive product procurement.
We offer an on-line, Web-based, secure product purchasing option for those clients who prefer a self-service alternative. Our e-commerce portal allows our clients to obtain product pricing, place unit or volume orders, and track the delivery process of their orders on line.
For clients who require their purchased products to be staged, pre-configured, field tested, assembled or integrated, we provide these services in one of two staging facilities (located in California and Delaware). Staging can be provided with or without the client’s participation, as directed by the client.
Managed Services
Our automated remote management system and proactive support services monitor, manage, and protect our clients’ business-critical infrastructure and applications from down time and failure.
Remote Monitoring & Management. Our automated remote management system provides our clients with real-time monitoring of their computing and storage systems, IP telephony systems and network infrastructure to immediately detect component failures, critical security events (such as hacking attempts), and deteriorating performance, with reporting on key operating metrics of these systems. The system is a combination of our proprietary network management and monitoring software and third party licensed software. Monitoring of our clients’ networks is performed by our certified engineering staff operating on a 24x7x365 basis from our network operations centers (“NOC”). Our NOCs are located on the east and west coasts.
Hosting. In addition to monitoring, our managed services include managed hosting. We offer our customers a choice of two collocation facilities to host their computing systems. Our field engineering resources are available in each of our regions to provide field support and technical resources in connection with our managed services.
Remote Support. Our remote phone support service is a virtual extension of our clients’ IT staff. We provide support for a wide range of technologies including Microsoft, Citrix, Sun, Cisco and Captaris.
Remote Helpdesk. Our helpdesk services provide end-user support customized to meet our clients’ specific application requirements. All helpdesk analysts are HDI (Help Desk International) certified and available 24x7.
IT Outsourcing. Many of our potential clients have adopted an approach to technology of focusing on their core business competencies, while outsourcing non-core technology systems. These clients, however, often find it more cost-effective to outsource than to fund the cost of a full-time internal IT staff to operate the sophisticated technology systems necessary to support their core business. Additionally, some clients are faced with extensive legal and regulatory compliance mandates that require sophisticated technology solutions. Again, for some of these clients, maintaining a full-time internal staff to operate those systems is not feasible. Our IT outsourcing solutions provide a cost effective solution to such clients by providing targeted support to fill gaps in their technology staffing on a project basis.
Industry
The IT solution and service provider industry is a multi-billion dollar industry that is focused on providing services to clients in building and maintaining IT infrastructures, safeguarding data and systems, optimizing applications and ensuring regulatory compliance. Industry participants face intense competition, the challenge of constant technological advancement and the ongoing need for business process optimization. The outsourcing of computer solutions is a rapidly growing trend in which a client company obtains all or a portion of its data processing requirements from an IT solutions provider, such as us, that specializes in the computer service, product or application required by the client.
We believe the strongest demand for our IT solutions is amongst companies which typically lack the time and technical resources to satisfy all of their IT needs internally. These companies typically require sophisticated, experienced IT assistance to achieve their business objectives and often rely on IT service providers to help implement and manage their systems. However, many of these companies rely on multiple providers for their IT needs. Generally, we believe that this reliance on multiple providers results from the fact that larger IT service providers do not target these companies, while smaller IT service providers lack sufficient breadth of services or industry knowledge to satisfy all of these companies’ needs.
Companies have recognized the importance of IT systems in supporting their business processes and are turning to IT solutions to compete more effectively. At the same time the process of designing, developing and implementing IT solutions has become increasingly complex. The accelerated rate of development of new technologies is placing increasing demand on our clients to understand the opportunity and impact that these technologies can have on their business. IT services organizations like ours are faced with an increasing demand to keep up with these developments so as to effectively serve as consultants and advisors to our clients.
Consolidation of clients’ voice and data communications to IP-based networks and advances of virtualization at the device and application level are indicative of a trend toward a more centralized computing model. This cycle, which started with mainframes, then workgroup mini-computers, then highly distributed applications running on micro-computers and PCs, may now be returning to a model where an increasing portion of business applications are implemented in a centralized computing model, using increasingly sophisticated terminal services to access these applications. This shift may be one of the most significant developments driving the re-definition by IT providers of product and service solutions for the foreseeable future.
Sales and Marketing
Our primary target market for acquiring new clients consists of middle market corporations (generally those worth $50 million to $1 billion in revenues), divisions of Global 2000 corporations, municipal, state and federal government agencies, and educational, financial and health-care institutions. We further define our target market as organizations with 100 to 3,000 technology seats in a single or in multiple US locations.
Sales. We have a direct sales force in the United States consisting of account executives, sales assistants, and subject matter expert sales personnel located in four areas (Northeast, Mid-Atlantic, Central, and West), each of whom report to an area vice president of sales. Account executives have the direct responsibility for selling and account management and the adoption of our technology at customer sites. A subject matter expert sales specialist is a quota-carrying, outbound sales professional with generally ten-plus years of relevant experience and with advanced knowledge of a specific technology that drives specific vendor and solution sales.
Indirect Sales. Through our partnership organization, we seek to build a set of relationships with strategic partners and value added resellers, in order to establish, and then expand an indirect channel of sales for our products.
Marketing. Our marketing strategy is to position ourselves as the premier IT solutions to the middle market. We do this primarily through demand generation activities, and by identifying new business opportunities. Demand generation activities are targeted to both vertical markets (e.g. industry-specific markets such as financial services, healthcare, government, and retail) and horizontal markets, consisting primarily of national and regional events, trade shows, and advertising. Event and trade show attendance is driven by targeted mass email campaigns and telemarketing. Most marketing initiatives involve participation by one or more of our technology partners, which both enhances our visibility and resources, and significantly defrays our out-of- pocket marketing costs. We also identify business opportunities through new and existing contacts generated by our sales force.
Suppliers
We purchase software, computers and related products directly from numerous suppliers as either an authorized dealer or a value added reseller. We have entered into authorization agreements with our major suppliers including Cisco Systems, Inc., Citrix Systems, Inc., Hewlett-Packard Company, Microsoft Corporation, EMC Corporation, Sun Microsystems, Inc., Avaya Inc., and Captaris, Inc. Typically, these agreements provide that we have been appointed, on a non-exclusive basis, as an authorized dealer and systems integrator of specified products of the supplier at specified locations. Most of the authorization agreements provide that the supplier may terminate the agreement with or without cause upon 30 to 90 days notice or immediately upon the occurrence of certain events. If these agreements are terminated, we may have difficulty in obtaining inventory at a sufficiently low cost to allow for resale at a competitive price. The sales of products from the Company’s two largest suppliers accounted for 29% and 19% of all product sales for the year ended March 31, 2008.
We receive certain discretionary cost subsidies, typical for the industry, from certain major suppliers to promote sales and support activities relating to their products. We have used these funds to subsidize marketing, advertising and our connectivity and communication laboratory.
Our suppliers generally permit us to pass through to clients all warranties and return policies applicable to the suppliers’ products. To date, we have experienced few returns of product and have generally been reimbursed by the suppliers for most warranty work done for clients. All service work after the expiration of the warranty period is at the client’s expense. We offer service contracts of varying lengths under which we agree to be responsible for all service costs for a fixed term in exchange for a set fee paid by the client.
Software and other related products are purchased from numerous industry suppliers. As is customary, we do not have any long-term agreements or commitments with these suppliers, because competitive sources of supply are generally available for such products.
Competition
The markets in which we operate are highly competitive with respect to performance, quality and price. In our professional services business our competition ranges from small, specialty integrators, to other service providers of comparable size and profile to us, as well as large national and global professional services firms and integrators. Our smaller competitors generally are highly focused on their immediate market segment and can respond more quickly to changes in customer needs. Our larger competitors generally have greater financial resources and may be able to compete more effectively than we can on prices and payment terms offered to potential clients. In our product provisioning business we directly compete with local, regional and national distributors and mail order providers of computer and IT products and services, including network integrators and corporate divisions of retail superstores. On the national level our product competitors include Verizon, AT&T and Dimension Data. On the regional level our competitors include CDW, Right Systems, Entysis, Gotham, IPM and Dell.
In addition, the computer and IT products and services industries have each experienced a significant amount of consolidation through mergers and acquisitions. In the future, we may face further competition from new market entrants and possible alliances between existing competitors. Some of our competitors have, or may have, greater financial, marketing and other resources than us. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, benefit from greater purchasing economies, offer more aggressive hardware and service pricing to customers, or devote greater resources to the promotion of their products and services. We also compete with manufacturers, including those serving as our vendors, which market through direct sales forces and distributors. More aggressive competition by principal manufacturers of computer and IT products, such as offering a full range of services in addition to products, could have a material adverse effect on our operations and financial results. We believe that our backlog of unfilled customer orders is not material.
Proprietary Information
We do not hold any patents, but have several trademarks and service marks. We also may affix copyright notices on our support service, training and service manuals. While such protection may become important to use, it is not considered essential to the success of our business. We rely on the know-how, experience and capabilities of our management, sales and service personnel. We require our employees to sign confidentiality or non-solicitation agreements.
Employees
As of March 31, 2008 we employed approximately 554 associates (as measured on a full-time equivalent basis) in the United States. Of these associates, 31 were in management, 133 were in sales and marketing, 296 were in technical support, and 94 were in operations, finance and administration. At fiscal year end none of our personnel was represented by a union.
Item 1A.
Item 1A. Risk Factors
The statements in this Section describe the major risks to our business and should be considered carefully. We provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
Risks Relating to our Business
We have incurred losses in our last three fiscal years and our losses may continue.
We incurred a net loss of approximately $14.4 million for our fiscal year ended March 31, 2008, $32.0 million for our fiscal year ended March 31, 2007 and $8.5 million for our fiscal year ended March 31, 2006. Our net losses may continue and our ability to achieve and sustain profitability will be impacted by the following:
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Our access to sufficient working capital and vendor credit to fund our sales and other operating activities.
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Our revenue may not increase or even remain at its current level.
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Our operating expenses may increase as we continue to develop our business. If our expenses increase more rapidly than our revenue, or if revenue and expense levels remain the same, we may never become profitable.
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If we fail to reach profitability or sustain or grow our profits within the time frame expected by investors, the market price of our common stock may be adversely impacted.
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Our ability to increase our Access, IP Telephony, Networking solution revenue and our Managed Services revenue to improve overall service margins, as well as our ability to leverage our current customer base and sell to selected industry segments or industry “verticals.”
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Our ability to keep pace with rapidly changing technology and frequent introductions of new IT products, services, and product and service enhancements, and our ability to fulfill increasingly sophisticated client requirements.
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Our ability to attract, train, retain and motivate qualified IT, sales and senior management personnel in a market place where competition for qualified personnel is significant. There is a shortage of qualified personnel in these fields and we compete with other companies for this limited pool of IT professionals and sales and senior management personnel.
We require access to significant working capital and vendor credit to fund our day-to-day operations. Our failure to comply with the financial and other covenants under our working capital facility and other credit arrangements could lead to a termination of those agreements and an acceleration of our outstanding debt.
We require access to significant working capital and vendor credit to fund our day-to-day operations, particularly at the end of our fiscal quarters when demand for our products and services increases substantially. Our credit facilities agreement (described in Part II, Item 7) with GE Commercial Distribution Finance Corporation, as Administrative Agent, and our credit agreement (described in Part II, Item 7) with Columbia Partners, L.L.C. Investment Management, as Investment Manager, and National Electric Benefit Fund, as Lender, contain a number of financial and other covenants, including minimum consolidated earnings before interest, taxes, depreciation and amortization, minimum consolidated liquidity multiples and maximum consolidated leverage ratios. A breach of these financial or other covenants, unless waived, would be a default under each facility. Upon an event of default, each of these lenders may terminate their respective facilities and/or declare all amounts outstanding under such facilities immediately due and payable and exercise other remedies including foreclosure of the security for the obligations under such facilities. The acceleration of our debt would have a material adverse effect on our financial condition and liquidity. Additionally, the amount of working capital available to us under the credit facilities agreement is dependent upon the amount and quality of our accounts receivable. Significant defaults, or payment delays, of our accounts receivable could materially adversely affect our borrowing base and our access to sufficient working capital.
Our vendor agreements and lines of credit are generally terminable by the vendor at any time. Any significant termination of these arrangements would adversely impact our ability to deliver our IT solutions and reduce our working capital availability.
We may need additional funds to support our current and future operations which, if available, could result in an increase in our interest expense and/ or dilution of your shareholdings. If these funds are not available, our business could be adversely affected.
We may raise funds through public or private debt or equity financing. If funds are raised through the issuance of equity securities, the percentage ownership of our then current shareholders may be reduced and such securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through the issuance of debt securities, such securities could have rights, preferences and privileges senior to those of the holders of our common stock and the terms of such debt could impose restrictions on our operations. If additional funds become necessary, additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may not be able to continue to fund our current operations or expand our business.
A prolonged downturn in economic conditions may impact our revenues and negatively affect our business in the future.
The recent economic slowdown in particular within the lending industry may negatively affect our business. Customers may cancel or delay orders for our products or services, and we could fall short of our revenue projections for 2009 and beyond. Slower growth and budget tightening among our customers and other general economic factors all have had, and could in the future have a materially adverse effect on our revenue, capital resources, financial condition and results of operations.
The failure to maintain our status as an authorized reseller/service provider of IT products or a significant change in the terms of our supplier agreements could have a material adverse effect on our business and operations.
We are materially dependent on our continued status as an approved reseller of IT products and our continued authorization as an IT service provider. We would be unable to provide the range of products and services we currently offer, including warranty services, without such authorization. Our resale agreements with manufacturers generally are terminable by manufacturers on short notice. The sales of products from our two largest suppliers accounted for 29% and 19% of all product sales for the year ended March 31, 2008. The loss of one or more of such authorizations could have a material adverse effect on our business and results of operations.
In addition, our professional services revenues depend in large part on our accreditations with other vendors such as Citrix, Cisco, and Microsoft. Most of our major vendors require that we maintain specifically trained and accredited staff at each of our offices in order to resell and provide services associated with such products. Furthermore, certain such vendors require that we make annual purchases of their products for use in our labs and for marketing purposes. Each vendor independently determines these requirements for those organizations which it authorizes to provide services in connection with their products. If these requirements should become substantially more burdensome, they could affect our business in either of two ways: (1) we would elect not to continue our accreditation with such vendor and forgo the revenues associated with the resale of such vendor’s products and associated services, or (2) we would incur the additional expense associated with additional staff training or equipment purchase requirements. In either case, this could have a negative impact on our operating results.
We are subject to substantial competition which could adversely affect our operating results.
The markets in which we operate are highly competitive with respect to performance, quality and price. In our professional services business our competition ranges from small, specialty integrators, to other service providers of comparable size and profile to us, as well as large national and global professional services firms and integrators. Our smaller competitors generally are highly focused on their immediate market segment and can respond more quickly to changes in client needs. Our larger competitors generally have greater financial resources and may be able to compete more effectively than we can on prices and payment terms offered to potential clients. This competition impacts our ability to acquire and retain clients and reduces the prices we can charge for our offering.
In addition, the computer and IT products and services industries have each experienced a significant amount of consolidation through mergers and acquisitions. We also compete with manufacturers, including those serving as our vendors, which market through direct sales forces and distributors. More aggressive competition by principal manufacturers of computer and IT products, such as offering a full range of services in addition to products, could have a material adverse effect on our operations and financial results.
The loss of key personnel or difficulties recruiting and retaining qualified personnel could jeopardize the Company’s ability to meet its growth targets.
The success of the Company’s efforts to grow its business depends on the contributions and abilities of key executive and operating officers and other personnel. We must continue to recruit, retain and motivate management and operating personnel sufficient to maintain its current business and support its projected growth. A shortage or loss of these key employees might jeopardize the Company’s ability to meet its growth targets.
If we are unable to protect our trade secrets, our financial condition could be materially adversely affected.
We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with our employees and limit distribution of proprietary information. However, we cannot assure that the steps taken in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We also are subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses to the intellectual property that is the subject of the alleged infringement. Our inability or failure to establish rights or to protect our rights may have a material adverse effect on our business, results of operations, and financial condition.
Our dependence on third party licenses could have adverse affects.
We rely on certain software, technology and content that we license or have licensed from third parties, including software, technology and content that is integrated with internally developed software and used in our products to perform key functions. These third-party licenses may not continue to be available to us on commercially reasonable terms. Also, the licensed software, technology and content may not be appropriately supported, maintained or enhanced by the licensors such that the license would not continue to provide the necessary commercial benefits to us. In addition, we may not be able to license additional software, technology and content on terms advantageous to us. The loss of or inability to obtain or replace licenses to, or inability to support, maintain and enhance, any of such licensed software, could result in increased costs, including the expense of internally developing the required software, technology and/or content, as well as delays or reductions in product shipments.
In certain parts of our managed services business we utilize software obtained as open-source. Such software is supported through various informal developer communities and may be more susceptible to internal vulnerabilities than commercial grade products. In the event that any of these software products would need to be replaced by an equivalent commercial product (because of discovered flaws or difficulty in obtaining support), we could incur significant costs associated with licensing equivalent commercial products, possibly rendering the services provided to clients based on these products unprofitable.
We have and may continue to have fluctuations in our quarterly operating results.
Our quarterly operating results have and, in the future, may fluctuate significantly, depending on a variety of factors, many of which are outside of our control. Factors that may affect our quarterly results include:
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changes in the level of our operating expenses;
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the demand for our products and services;
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timing and amount of vendor and manufacturer incentive programs;
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the size, timing and timely fulfillment of orders for our products and services;
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the financial impact of and possible business interruptions caused by restructuring efforts;
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the level of product, price and service competition;
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changes in our sales incentive strategy, as well as sales personnel changes;
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the timing and impact of acquisitions; and
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general economic conditions and economic conditions specific to the IT market.
Our operating expenses and capital expenditures are expected to be based in large part on our expectations of future revenues. Therefore, if revenue levels are below expectations, operating results are likely to be adversely affected. Operating results may be disproportionately affected negatively by an unanticipated decline in revenue for a particular quarter because a relatively small amount of our expenses will vary with our revenue in the short term. As a result, we believe that period-to-period comparisons of our results of operations are not and will not necessarily be meaningful and should not be relied upon as any indication of future performance.
MTM may be delisted by NASDAQ which could affect the ability to trade MTM stock, and which may be deemed an event of default pursuant to our credit arrangements.
Our common stock (“Common Stock”) currently trades on The NASDAQ Capital Market (“NASDAQ”). In order for our Common Stock to continue to be quoted on NASDAQ, it must satisfy certain listing maintenance standards of the NASDAQ. On November 12, 2007, we received a notice from the Listing Qualifications Staff of The NASDAQ Stock Market stating that for the last 30 consecutive business days, the bid price of our Common Stock had closed below the minimum $1.00 per share requirement for continued inclusion under NASDAQ Marketplace Rule 4310(c)(4). Pursuant to NASDAQ Marketplace Rule 4310(c)(8)(D), we were provided 180 calendar days or until May 12, 2008 to regain compliance.
On May 14, 2008, we received notice from The NASDAQ Stock Market stating that our Common Stock will be delisted from NASDAQ due to our failure to evidence a closing bid price of $1.00 per share, prior to the expiration of the 180 day grace period. The notice from NASDAQ provided that our Common Stock will be delisted from NASDAQ at the opening of business on May 23, 2008, unless we request a hearing before the NASDAQ Listing Qualifications Panel. We have requested such a hearing to seek continued listing of our Common Stock on NASDAQ. Our hearing request stays the delisting of our Common Stock until the Listing Qualifications Panel renders a determination after the hearing. The hearing is scheduled for July 10, 2008.
In April 2008, the Independent Committee of the Board of Directors and the Board of Directors authorized a reverse stock split of our Common Stock at a reverse stock split ratio of 1-for-15 (the “Reverse Stock Split”), At the hearing, we will request an opportunity to implement the Reverse Stock Split and allow the post-split shares to trade for a sufficient time to meet the $1.00 minimum bid price listing standard. In order to demonstrate compliance with the NASDAQ bid price requirement, we will be required to evidence a closing bid price of at least $1.00 per share for a minimum of ten consecutive business days (NASDAQ in its discretion may monitor the bid price for as long as twenty business days). There can be no assurance that the Listing Qualification Panel will grant our request for continued listing on NASDAQ.
In the event the NASDAQ panel determines not to grant our request or in the event the reverse stock split fails to bring us back into compliance with the $1.00 per share bid price requirement, our Common Stock would be delisted from NASDAQ and our Common Stock would trade on the OTC Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. Such alternative markets are generally considered to be less efficient than, and not as liquid as NASDAQ. Consequently, broker-dealers may be less willing or able to sell and/or make a market in MTM common stock. Additionally, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, MTM common stock. As a result of a delisting, it may become more difficult for MTM to raise funds through the sale of its securities.
A delisting of our common stock may be deemed an event of default or breach of a covenant by our lenders pursuant to our facilities and credit agreements which could lead to the termination of these agreements and an acceleration of our outstanding debt. The acceleration of our debt would have a material adverse effect on our financial condition and liquidity. Delisting could also adversely affect MTM’s ability to obtain financing for the continuation of its operations or to use its common stock in acquisitions. Delisting could result in the loss of confidence by suppliers, customers and employees.
Risks Relating to our Reverse Stock Split
If the Reverse Stock Split is implemented, the resulting per share price may not attract institutional investors; and any decline in share price would be a greater percentage decline than prior to the Reverse Stock Split.
While our Board of Directors believes that a higher stock price may help generate investor interest in our Common Stock, the Reverse Stock Split may not result in a stock price that will attract institutional investors or investment funds or satisfy the investing guidelines of institutional investors or investment funds. If the Reverse Split is implemented and the market price of our Common Stock declines, the percentage decline may be greater than would occur in the absence of the split. The market price of our Common Stock is also based on the Company’s performance and other factors, which are unrelated to the number of shares of Common Stock issued.
Our total market capitalization immediately after the proposed Reverse Stock Split may be lower than immediately before the proposed Reverse Stock Split.
There are numerous factors and contingencies that could affect our stock price following the proposed Reverse Stock Split, including the status of the market for our stock at the time, our reported results of operations in future periods, and general economic, market and industry conditions. Accordingly, the market price of our Common Stock may not be sustainable at the bid price following the Reverse Stock Split. If the market price of our Common Stock declines after the Reverse Stock Split, our total market capitalization (the aggregate value of all of our Common Stock at the then existing market price) after the Reverse Stock Split will be lower than before the Reverse Stock Split.
The Reverse Stock Split may result in some stockholders owning “odd lots” that may be more difficult to sell.
The Reverse Stock Split may result in some stockholders owning “odd lots” of less than 100 shares of our Common Stock on a post-split basis. Odd lots may be more difficult to sell, or require greater transaction costs per share to sell, than shares in “board lots” of even multiples of 100 shares.
Risks Relating to Ownership of our Common Stock
Pequot can be deemed our controlling shareholder and Pequot’s interests may not be the same as our other shareholders.
Pequot currently holds approximately 57% of the voting power of our outstanding securities and has the right to acquire up to 60% of our voting securities. Pequot also has the power to nominate two directors to our Board of Directors. Pequot will receive additional voting power when we pay dividends on outstanding Series A Preferred Stock in the form of additional shares of Series A Preferred Stock. As a result, Pequot may be deemed in control because Pequot is in a position to approve, and the approval of Pequot is effectively required to approve, any transaction requiring approval of shareholders. These transactions could include mergers, consolidations, dissolutions or sales of assets. These transactions could benefit Pequot at the expense of our other shareholders or benefit Pequot disproportionately when compared to our other shareholders.
There is significant potential volatility in our stock price.
The market for our common stock is highly volatile and we have a limited average daily trading volume when compared to the total number of shares of our common stock outstanding. Consequently, even moderate selling pressure on our common stock could have a depressive effect on its market price.
We may issue substantial amounts of additional shares of our common and preferred stock without shareholder approval, which could dilute the equity interests of our shareholders.
As of May 31, 2008, we had outstanding an aggregate of 13,462,514 shares of our common stock and an aggregate of 30,843,626 shares of Series A Preferred Stock which are subsequently convertible into a total of 45,012,649 shares of our common stock. As of May 31, 2008, the Investors hold warrants to purchase 6,566,093 shares of our common stock and 392,157 shares of preferred stock. We also have an additional 9,436,374 shares of Series A Preferred Stock authorized but unissued, all of which shares are not reserved for specific purposes, other than pursuant to the anti-dilution provisions of the Series A Preferred Stock or for issuance in lieu of cash dividends on the Series A Preferred Stock, an additional 7,720,000 shares of serial preferred that are not designated as Series A Preferred Stock and an additional (a) 5,747,457 shares of our common stock issuable upon the exercise of stock options or restricted stock units granted or available for grant under our various stock plans and (b) aggregate of approximately 1,400,000 shares of our common stock issuable upon exercise of other warrants previously granted and outstanding, all as of May 31, 2008. All of such shares may be issued without any action or approval by our shareholders, except as may be limited under NASDAQ Marketplace Rules. Any shares issued by us in the future would further dilute the percentage ownership held by our shareholders.
Item 2.
Item 2. Properties
Our principal executive offices are located at 1200 High Ridge Road, Stamford, Connecticut. We lease approximately 20,000 square feet at this location. The Company additionally leases approximately 184,000 square feet of space in another 24 locations throughout the United States for regional and administrative offices. The Company currently occupies 20 of these offices, and subleases the balance of the office space consisting of approximately 25,000 square feet.
Item 3.
Item 3. Legal Proceedings
On December 4, 2007 a lawsuit styled Amanda Mhanna v. MTM Technologies, Inc, et al., was filed in the Superior Court of the State of California. The plaintiff, a former Company employee, alleges discrimination, harassment, retaliation and other causes of action against the defendants. The plaintiff seeks an unstated amount of compensatory and punitive damages, attorney’s fee’s, and costs. On January 28, 2008, the Company served an answer to the complaint denying the allegations and asserting affirmative defenses. This matter is now in the discovery stage. The trial has been scheduled for May 2009.
On March 14, 2008 a lawsuit styled Sonal Patel v. MTM Technologies, Inc, et al., was filed in the Superior Court of the State of California. The plaintiff, a former Company employee, alleges hostile work environment, harassment, and intentional infliction of emotional distress against the defendants. The plaintiff seeks an unstated amount of compensatory and punitive damages, attorney’s fees, and costs. On May 2, 2008, the Company served an answer to the complaint denying the allegations and asserting affirmative defenses.
While management believes that the Company has meritorious defenses in the foregoing pending matters and the Company intends to pursue its positions vigorously, litigation is inherently subject to many uncertainties. Thus, the outcome of these matters is uncertain and could be adverse to the Company. Depending on the amount and timing of an unfavorable resolution of the contingencies, it is possible that the Company’s financial position, future results of operations or cash flows could be materially affected in a particular reporting period(s).
As permitted under New York law, the Company has agreements under which it indemnifies its officers, directors and certain employees for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has a director and officer insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. Given the insurance coverage in effect, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of March 31, 2008.
We are involved in other various claims and legal actions arising in the ordinary course of business. We believe that the ultimate outcome of these matters would not have a material adverse impact on the Company's financial condition or the results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Our Common Stock
Our common stock is traded on The NASDAQ Capital Market under the symbol “MTMC.” Set forth in the following table is the high and low sales prices for our common stock for each of the quarters during our last two fiscal years, based upon data provided by The NASDAQ Stock Market, Inc.:
We have never declared or paid any dividends to the holders of our common stock and we do not expect to pay cash dividends in the foreseeable future. Our Board of Directors will have the sole discretion in determining whether to declare and pay dividends in the future. The declaration of dividends will depend on our profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by our Board of Directors. In addition, provisions contained in our certificate of incorporation governing the terms of our Series A Preferred Stock, provisions contained in our credit facilities agreement (described in Part II, Item 7) with GE Commercial Distribution Finance Corporation and in our credit agreement (described in Part II, Item 7) with Columbia Partners, L.L.C. Investment Management and National Electric Benefit Fund, as Lender, place restrictions on our ability to declare or make any cash dividends on our common stock. In addition, our ability to pay cash dividends on our common stock in the future could be further limited or prohibited by the terms of future financing agreements that we may enter into or by the terms of any preferred stock that we may authorize and issue.
Equity Compensation Plan Information
The following table sets forth, as of March 31, 2008:
•
the number of shares of our common stock issuable upon exercise of outstanding options, warrants and rights, separately identified by those granted under equity compensation plans approved by our shareholders and those granted under plans, including individual compensation contracts, not approved by our shareholders (column A),
•
the weighted average exercise price of such options, warrants and rights, also as separately identified (column B), and
•
the number of shares remaining available for future issuance under such plans, other than those shares issuable upon exercise of outstanding options, warrants and rights (column C).
Equity Compensation Plan Information excludes, for the purposes of Columns A and B, 225,107 Restricted Stock Units with a weighted-average fair value of $1.81.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Overview
We are a leading national provider of innovative IT solutions, including Access, Unified Communications, Virtualization, and Managed Services. We enable our clients to achieve improved operational efficiency and to focus on growth, while mitigating the risk of implementing complex IT systems. We achieve these results by providing systems, networking, IP telephony, storage, security and data center infrastructure services that address the full life cycle of a client’s IT requirements from needs analysis, through planning, development, deployment, and testing, to on-going maintenance and support. We combine these services with technology from leading software and hardware manufacturers delivering strategic IT solutions that solve many of today’s business challenges.
Our clients consist of middle market corporations (generally those with $50 million to $1 billion in revenues), divisions of Global 2000 corporations, municipal, state and federal government agencies, and educational, financial and health-care institutions. We serve clients in most major US metropolitan markets.
As of March 31, 2008 the Pequot and Constellation investment has totaled approximately $73 million. The Company has used these funds to execute a growth strategy, as well as for working capital needs. The Company has executed its growth strategy since July 2004 by completing six strategic acquisitions of providers of advanced technology solutions and products. The most recent of these acquisitions was completed in April 2006. Currently we are not actively seeking acquisition candidates, but we believe that growth through acquisition may be an important component of our long-term strategy.
During fiscal 2007 the Company focused on integrating the operations of the acquired companies, centralizing operations and restructuring its organization in an effort to provide our customers with a national strategy and to improve our earnings and cash flow. During fiscal 2008 we have remained steadfast in our commitment to cut costs and to focus on profitable revenue growth and continued improvements in margin, while building on efficiencies within our existing resources. Results for the year ended March 31, 2008 included a return to positive EBITDA for not only year end but for each of the respective quarters. In August 2007, the Company successfully refinanced its working capital lines of credit with a $34 million credit facilities agreement with GE Commercial Distribution Finance Corporation (“CDF”) as Administrative Agent, which provided the Company with additional capital and increased purchasing flexibility. Our business requires significant levels of working capital to fund future revenue growth and current operations. We have historically relied on and continue to rely heavily on, trade credit from vendors and our credit facilities for our working capital needs. We are focused on looking at avenues to secure additional open lines of credit with vendors and have recently negotiated additional flexibility in borrowing restrictions and reserves under our credit facilities. We continue to drive collection of accounts receivable and are actively managing our expenses to achieve greater economies of scale. All of which we believe will serve to improve our working capital position and purchasing ability.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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. 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. Actual results may differ from these estimates under different assumptions or conditions. The Securities and Exchange Commission has defined critical accounting policies as policies that involve critical accounting estimates that require (a) management to make assumptions that are highly uncertain at the time the estimate is made and (b) different estimates that could have been reasonably used for the current period, or changes in the estimates that are reasonably likely to occur from period to period, which would have a material impact on the presentation of our financial condition, changes in financial condition or in results of operations. Based on this definition, our most critical policies include: revenue recognition, allowance for doubtful accounts, stock-based compensation, the assessment of recoverability of long-lived assets, and the assessment of recoverability of goodwill and intangible assets.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104. We recognize revenue from the sales of hardware when the rights and risks of ownership have passed to the client, upon shipment or receipt by the client, depending on the terms of the sales contract with the client. Revenue from the 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 of the terms and conditions of the client contract. Service contracts generally do not extend over one year, and are billed when 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 client acceptance criteria. For arrangements with multiple deliverables, delivered items are accounted for separately, provided that the delivered item has value to the client 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.
Allowance for Doubtful Accounts
We estimate the allowance for doubtful accounts based on historical experience, customer credit risk and application of the specific identification method. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible. If actual customer performance were to deteriorate to an extent not expected by us, additional allowances may be required which could have an adverse effect on our consolidated financial results. Conversely, if actual customer performance were to improve to an extent not expected by us, a reduction in allowances may be required which could have a favorable effect on our consolidated financial results.
Stock-based Compensation
We account for stock-based compensation in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). The Company uses the Black-Scholes option pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements. Changes in the subjective assumptions can materially affect the estimate of fair value stock-based compensation and consequently, the related amount recognized on the consolidated statement of operations. RSUs issued by the Company are equivalent to nonvested shares, as defined by SFAS No. 123(R). No stock-based compensation expense was recognized in the consolidated financial statements related to the Associate Stock Purchase Plan, since the related purchase discounts did not exceed the amount allowed under SFAS No. 123(R) for non-compensatory treatment.
Impairment of Long-lived Assets
When facts and circumstances indicate that the carrying values of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying values of the assets to projected future cash flows, in addition to other quantitative and qualitative analyses. For goodwill and other intangible assets, we test for impairment on a consolidated basis at least annually or more frequently if we believe indicators of impairment exist. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Property and equipment assets are grouped at the lowest level for which there are identifiable cash flows when assessing impairment. Factors that may cause a goodwill, intangible asset or other long-lived asset impairment include negative industry or economic trends and significant underperformance relative to historical or projected future operating results. Our valuation methodologies include, but are not limited to, estimating the net present value of the projected cash flows of our Company. If actual results are substantially lower than our projections underlying these assumptions, or if market discount rates substantially increase, our future valuations could be adversely affected, potentially resulting in future impairment charges.
Consolidated Results of Operations
The following table sets forth for the periods presented information derived from our audited consolidated statement of operations expressed as a percentage of net revenues, unless otherwise noted:
Fiscal 2008 Compared to Fiscal 2007
Net Revenue
Net revenues for the year ended March 31, 2008 decreased $32.3 million, or 11.7% from the comparable prior year, to $242.7 million. The decrease in net revenues for the year ended March 31, 2008 was primarily due to a decrease in product revenue of $35.0 million. During the second half of fiscal 2008 the Company experienced a slow down in product sales to customers, the result of external economic factors. Overall the decrease in product revenue for the year ended March 31, 2008 has been impacted by the general economic slowdown and the Company’s shift in business practice to focus on more profitable arrangements, with an emphasis on business solutions such as Access, Virtualization and Unified Communications. The decrease is also attributable to a change in the mix and volume of the type of deals the Company is currently closing versus that in the prior year. The decrease in product revenue has directly impacted the volume of services revenue by limiting the Company in offering add-on professional services solutions. Despite the decrease in product revenue, service revenue for the year ended March 31, 2008 remained solid, increasing $2.7 million over the prior year. The improvement in service revenue is a direct result of the Company’s efforts to deploy billable resources more effectively across markets and customers.
Gross Profit
Gross profit for the year ended March 31, 2008 increased $0.4 million, or 0.7% from the comparable prior year period, to $55.6 million. Product gross margin was 15.8% for the year ended March 31, 2008 and 14.8% for the year ended March 31, 2007. Service gross margin was 40.2% for the year ended March 31, 2008 and 36.1% for the year ended March 31, 2007. As noted above, while product revenue decreased $35.0 million in the year over the prior year period, the resulting decrease in product gross margins for the period was only $3.5 million. The Company’s shift in business practice to focus on more profitable arrangements pushed average product profit margins 1% higher compared with the prior year. The increase in service gross margin contribution was the result of our national services infrastructure investment in the prior fiscal year which has enabled us to better manage our people and our resources.
Selling, General and Administrative
Selling, general and administrative expenses (“S,G&A”) for the year ended March 31, 2008 decreased by $12.8 million, or 17.1% from the comparable prior year, to $62.3 million. S,G&A net of non-cash charges for depreciation, amortization and stock-based compensation expense expressed as a percentage of revenue decreased to 21.3% for the year ended March 31, 2008 compared with 23.1% for the year ended March 31, 2007. The decrease in net S,G&A of $11.8 million or 18.5% for the year ended March 31, 2008 includes a non-recurring charge of $1.3 million in the prior year related to integration and personnel costs. The balance of the decrease was due primarily to a reduction in personnel costs over the prior year, the result of the Company’s 2007 Restructuring Plan, a reduction in operating expenses over the corresponding prior year as a result of cost saving programs and initiatives, a decrease in business related expenses, and lower selling expenses as a result of the decrease in revenue in the year ended March 31, 2008 as compared to the prior year. Depreciation for the year ended March 31, 2008 increased $0.7 million related to the Company’s investments in capital assets. This increase was offset by a $1.7 million decrease in stock-based compensation costs and intangible amortization, the result of an increase in the rate of actual forfeitures of unvested options from employee terminations and the impact of fully amortized intangible assets on current year results.
Restructuring
Results for the year ended March 31, 2007 include restructuring charges of $6.0 million primarily related to a reduction in workforce of $4.5 million in accordance with the Company’s 2007 Restructuring Plan, a charge for unused or underutilized facility costs of $0.8 million, and other related restructuring charges of $0.7 million. There were no comparable charges for the year ended March 31, 2008. See Note 5 to the Consolidated Financial Statements for a discussion of these cost savings initiatives.
EBITDA
Earnings before interest, income taxes, depreciation, amortization, stock-based compensation cost and other (income) expense (“EBITDA”) amounted to $3.8 million for the year ended March 31, 2008, as compared to negative $14.5 million for the year ended March 31, 2007. EBITDA results for fiscal 2007 include $7.5 million of restructuring costs and non-recurring S,G&A expenses which are not expenses in the current period. Overall the improvement in EBITDA for year ended March 31, 2008 was primarily the result of i} an improvement in gross margin of $0.4 million, ii} a reduction in personnel costs and operating expenses in S,G&A in excess of $5.0 million as a result of cost saving programs and restructuring activities initiated in the prior fiscal year and, iii} lower selling expenses as a result of the decrease in revenue in the current year.
The following table sets forth a reconciliation of EBITDA to net loss for the periods presented.
We believe that EBITDA, which is not a recognized measure for financial presentation under GAAP, provides investors and management with a useful supplemental measure of our operating performance because it more closely approximates the cash generating ability of the Company as compared to operating income (loss). Operating income (loss) includes charges for depreciation and amortization of intangible assets as well as stock-based compensation cost. These non-GAAP results should be evaluated in light of our 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 our operating performance. Readers are encouraged to consider this non-GAAP measure in conjunction with our GAAP results.
Interest Expense, net
Interest expense, net was $6.7 million for the year ended March 31, 2008 compared to $5.1 million for the year ended March 31, 2007, an increase of $1.6 million or 32.3% . The increase in interest expense for the year ended March 31, 2008 is primarily due to higher interest rates imposed on the secured promissory note as a result of the amendments entered into during the second quarter of fiscal 2008. The current internal rate of return is 15% compared with 11% for the comparable prior year period. Included in fiscal 2008 results was also a non-cash charge of approximately $0.3 million incurred in the second quarter of fiscal 2008 related to the write off of the remaining debt issuance costs in connection with our secured financing agreement facility with The CIT Group/Business Credit, Inc. (“CIT”), as agent, as a result of the refinancing of our working capital lines of credit with CDF.
We require access to significant working capital and vendor credit to fund our day-to-day operations, particularly at the end of our fiscal quarters when demand for our products and services increases substantially. Our primary source of day-to-day working capital is from our secured credit facilities agreement with CDF (described below in this Item) and vendor lines of credit.
For the year ended March 31, 2008 cash decreased $1.2 million to $3.2 million compared with $4.4 million at March 31, 2007. Working capital at March 31, 2008 was a deficit of $3.3 million as compared to a working capital deficit of $12.4 million at March 31, 2007. Included in current liabilities at March 31, 2008 are obligations of $23.9 million relating to the Company’s secured financing facilities, described below. The use of cash during fiscal 2008 related primarily to the payment of trade accounts payable and accrued restructuring costs. We have taken a number of significant steps to reduce our use of cash and improve our working capital position, including, during fiscal 2008 and 2007, we implemented cost reduction plans designed to improve operating income through reductions of S,G&A and enhancements in gross margin; and we have significantly reduced our capital expenditures in the current year related to software development and infrastructure investment as well as general capital spending.
As of March 31, 2008 the Pequot and Constellation investment has totaled approximately $73 million. The Company has used these funds to execute a growth strategy, as well as for working capital needs. The Company has executed its growth strategy since July 2004 by completing six strategic acquisitions of providers of advanced technology solutions and products. The most recent of these acquisitions was completed in April 2006. During fiscal 2007 the Company focused on integrating the operations of the acquired companies, centralizing operations and restructuring its organization in an effort to provide our customers with a national strategy and to improve our earnings and cash flow. During fiscal 2008 we have remained steadfast in our commitment to cut costs and to focus on profitable revenue growth and continued improvements in margin, while building on efficiencies within our existing resources. Results for the year ended March 31, 2008 included a return to positive EBITDA for not only year end but for each of the respective quarters.
A detailed review of the financing arrangements entered into by the Company during fiscal year 2008, as well as several related arrangements which have been entered since the beginning of fiscal year 2009 follows.
Pequot Notes and Warrants
On February 28, 2008, the Company issued and sold to (1) Pequot Fund a promissory note in the principal amount of $2,191,123 (the “PPEF Note”), (2) Pequot Partners a promissory note in the principal amount of $308,877 (the “POPEP Note” and collectively with the PPEF Note, the “February Pequot Notes”), (3) Pequot Fund warrants entitling Pequot Fund to purchase 343,705 shares of the Company’s next designated series of preferred stock at an exercise price of $.6375, (the “PPEF Warrants”) and (4) Pequot Partners warrants entitling Pequot Partners to purchase 48,452 shares of the Company’s Series A-9 Preferred Stock at an exercise price of $.6375, (the “POPEP Warrants”, and collectively with the PPEF Warrants, the “February Pequot Warrants”). The Company’s Series A-9 Preferred Stock have been authorized by the Board of Directors and will become effective upon filing of an Amendment to the Company’s Restated Certificate of Incorporation setting forth the provisions for the Series A-9 Preferred Stock.
The February Pequot Notes were due and payable in full on the later of (a) March 29, 2008, or (b) the date that the Company has obtained all necessary consents from its lenders. On March 28, 2008 the Company and Pequot amended the February Pequot Notes (the “Amended Pequot Notes”) to change the Maturity Date as follows: thirty percent (30%) of the principal amount of the Amended Pequot Notes ($750,000) is due and payable on December 28, 2008, and the remaining principal balance and all interest accrued from February 28, 2008 to the date of payment of the principal amount is due on March 28, 2009. The Amended Pequot Notes bear interest at a rate per annum equal to 8.5% . Interest on the Amended Pequot Notes shall be due and payable in cash or, at the option of the Company, in shares of the Company’s next designated series of preferred stock at a price per share of $.561.
The right of repayment of principal and interest on the Amended Pequot Notes is subordinated to the rights and security interest of (i) CDF in connection with the August 21, 2007, secured Credit Facilities Agreement (described below in this Item), and (ii) Columbia Partners, L.L.C. Investment Management, as Investment Manager (“CP Investment Manager”) and National Electric Benefit Fund (“NEBF”) in connection with the CP/NEBF Credit Agreement (CDF and NEBF collectively, the “Senior Lenders” and the Credit Facilities Agreement and the CP/NEBF Credit Agreement collectively the “Senior Debt”). While any default or event of default has occurred and is continuing with respect to any Senior Debt, the Company is prohibited from making any payments or distribution in respect of the Amended Pequot Notes.
Upon an event of default, as set forth in the Amended Pequot Notes, the holders of the Amended Pequot Notes may declare all amounts outstanding under the Amended Pequot Notes immediately due and payable and exercise other remedies permitted by the Amended Pequot Notes or at law or in equity, subject to the above mentioned subordination.
The February Pequot Warrants expire on March 29, 2012. The holders of the February Pequot Warrants may exercise the purchase rights represented by the February Pequot Warrants at any time after the Company’s designation of the series of preferred stock for which they are exercisable. Cashless exercise is permitted. The purchase price per share at which the holders of the February Pequot Warrants can purchase the Company’s shares of its next designated series of preferred stock is $.6375 per share. The Company allocated and charged approximately $0.1 million to debt discount, which will be amortized over the life of the Amended Pequot Notes to interest expense, and assigned and credited to additional paid in capital approximately $0.1 million for the fair value of the February Pequot Warrants. The values attributed to the February Pequot Warrants were determined utilizing the Black-Scholes model. The foregoing description of the February Pequot Warrants does not purport to be complete, and is qualified in its entirety by reference to the full text of such document.
As of March 31, 2008, the Company was in compliance with all covenants prescribed under the Amended Pequot Notes and the Pequot Warrants.
Since the commencement of the Company’s fiscal year 2009, the Company entered in the following further agreements with Pequot.
On June 11, 2008 the Company and Pequot further amended the Amended Pequot Notes to change the maturity and payment terms such that all principal and all interest accrued on such notes from the date of original issuance of February 28, 2008 through the date of payment of the principal amount shall be due on December 15, 2009.
On June 11, 2008, the Company also issued and sold to Pequot the following Promissory Notes (the “June 11 Pequot Notes”) (1) Pequot Fund a promissory note in the principal amount of $2,410,235, and (2) Pequot Partners a promissory note in the principal amount of $339,765.
On June 11, 2008, the Company also issued and sold to Pequot the following Warrants (the “June 11 Pequot Warrants”): (1) Pequot Fund warrants entitling Pequot Fund to purchase 642,729 shares of the Company’s next designated series of preferred stock at an exercise price of $0.375 and (2) Pequot Partners warrants entitling Pequot Partners to purchase 90,604 shares of the Company’s next designated series of preferred stock at an exercise price of $0.375.
On June 16, 2008, the Company issued and sold to Pequot the following Promissory Notes (the “June 16 Pequot Notes”): (1) Pequot Fund a promissory note in the principal amount of $219,112, and (2) Pequot Partners a promissory note in the principal amount of $30,888. The June 11 Pequot Notes together with the June 16 Pequot Notes are sometimes referred herein as the “June Pequot Notes”, and collectively with the Amended Pequot Notes as the “Pequot Notes.”
On June 16, 2008, the Company also issued and sold to Pequot the following Warrants (the “June 16 Pequot Warrants”): (1) Pequot Fund warrants entitling Pequot Fund to purchase 56,545 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0.3875, and (2) Pequot Partners warrants entitling Pequot Partners to purchase 7,971 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0.3875. The June 11 Pequot Warrants together with the June 16 Pequot Warrants are sometimes referred herein as the “June Pequot Warrants”, and collectively with the February Pequot Warrants as the “Pequot Warrants.”
The June Pequot Notes are due and payable in full on December 15, 2009 and bear interest at a rate per annum equal to 8.5% . Interest on the June 11 Pequot Notes is due and payable in cash or, at the option of the Company, in shares of the Company’s next designated series of preferred stock at a price per share of $0.33. Interest on the June 16 Pequot Notes is due and payable in cash or, at the option of the Company, in shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at a price per share of $0.341.
The right of repayment of principal and interest on the Pequot Notes is subordinated to the rights and security interest of the Senior Debt. While any default or event of default has occurred and is continuing with respect to any of the Senior Debt the Company is prohibited from making any payments or distribution in respect of the above mentioned notes.
The June 11 Pequot Warrants expire on June 11, 2012. The June 16 Pequot Warrants expire on June 16, 2012. The holders of such warrants may exercise the purchase rights represented by such warrants at any time after the Company’s designation of the series of preferred stock for which they are exercisable. Cashless exercise is permitted. The purchase price per share at which the holders of the June 11 Pequot Warrants can purchase the Company’s shares of its next designated series of preferred stock is $.375 per share. The purchase price per share at which the holders of the June 16 Pequot Warrants can purchase the Company’s designated series of preferred stock designated after the next series of preferred stock is $0.3875 per share.
Constellation Notes and Warrants
On June 16, 2008, the Company issued and sold to (1) Constellation Venture a promissory note in the principal amount of $249,617.80, (2) Constellation Offshore a promissory note in the principal amount of $132,834.65, (3) BSC a promissory note in the principal amount of $111,313.95, (4) CVC a promissory note in the principal amount of $6,233.60, (5) Constellation Venture warrants entitling Constellation Venture to purchase 64,417 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0.3875, (6) Constellation Offshore warrants entitling Constellation Offshore to purchase 34,280 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0.3875, (7) BSC warrants entitling BSC to purchase 28,726 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0. 3875, (8) CVC warrants entitling CVC to purchase 1,609 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0. 3875. The aforementioned promissory notes together, and the warrants together, respectively, are sometimes referred to herein as the “Constellation Notes,” and the “Constellation Warrants.”
The Constellation Notes have the identical terms as the June 16 Pequot Notes. The Constellation Warrants have the identical terms as the June 16 Pequot Warrants.
Credit Facilities Agreement
On August 21, 2007, the Company entered into a secured Credit Facilities Agreement (the "Credit Facilities Agreement") with CDF as Administrative Agent, GECC Capital Markets Group, Inc. as Sole Lead Arranger and Sole Bookrunner, and CDF and the other Lenders listed in the Credit Facilities Agreement as (the “ Lenders”), providing a combined maximum availability of up to $34 million.
The Credit Facilities Agreement refinances the Company’s prior senior lender facilities and is secured by a first priority lien on and security interest in substantially all of the present and future assets of the Company, including the issued and outstanding stock of the Company (other than MTM Technologies, Inc.), except for permitted encumbrances. Credit and advances to the Company pursuant to the Credit Facilities Agreement are used to fund working capital and floor-planning needs, and for general corporate purposes. The initial advances were used to prepay all outstanding obligations of the Company under the Company’s secured financing agreement facility with CIT, as agent, and secured floor planning facility with Textron Financial Corporation (“Textron”), which facilities were terminated upon such prepayments in accordance with separate termination agreements with CIT and Textron, each of which dated August 21, 2007. Terms not otherwise defined in this discussion have the meaning ascribed to them in the Credit Facilities Agreement.
A Revolving Credit Facility under the Credit Facilities Agreement encompasses a two year revolving credit facility, unless earlier terminated by the Company or the Lenders, for up to $20 million, subject to a borrowing base based on eligible accounts receivable, minus the sum of any outstanding Swingline Loan, Floorplan Shortfall, Letter of Credit Exposure, and Bid Bonds, and certain other limitations. All amounts under the Credit Facilities Agreement are due upon the termination thereof, subject to optional prepayment in accordance with the terms of the Credit Facilities Agreement, and mandatory repayment of any Swingline Loan in the event that any of the Lenders fails to pay its allocated portion thereof. Amounts borrowed under the Revolving Credit Facility bear interest at LIBOR plus 3%.
A Floorplan Loan Facility under the Credit Facilities Agreement is not a commitment to lend or advance funds but is a discretionary facility, for up to $14 million, unless terminated by the Company or the Lenders, which allows the Company to finance inventory purchases from vendors as may be approved by the Administrative Agent, on an up to 45-day interest-free basis in many cases. Interest accrues after expiration of any applicable interest free period at a rate to be determined under each Transaction Statement, and not to exceed a maximum rate of 16% per annum in the event the Company objects to the terms under any Transaction Statement. Generally, the Company would receive at least 60 days advance notice of a termination of the Floorplan Facility, during which period the Company would continue to be able to finance inventory purchases under the facility.
A Letter of Credit Facility under the Credit Facilities Agreement allows the Company to request standby letters of credit and commercial letters of credit for the account of the Company from time to time up to the lesser of $2 million or then applicable availability limits less certain outstanding obligations of the Company under the Credit Facilities Agreement. As of March 31, 2008, the Company had no outstanding letters of credit.
The Credit Facilities Agreement also gives the Company access to further potential purchase order financing through CDF's own “Star” (Short Term Accounts Receivable) program.
The Company is required to pay (i) on a monthly basis, an Unused Revolving Fee of 15 basis points on the difference between $20 million and the outstanding daily balance of the Revolving Loans (unless the Aggregate Revolving Loan, Swingline Loan and Letter of Credit Exposure is greater than 67% of $20 million), (ii) on an annual basis, an Annual Facility Fee of 20 basis points of the then-Aggregate Revolving Loan Commitment, (iii) letter of credit fees for each letter of credit issued pursuant to the Letter of Credit Facility of 3% per annum of the undrawn amount of such letter of credit plus a fronting fee of 0.125% of the face amount of each letter of credit, (iv) a closing fee to the Administrative Agent on the Credit Facilities Agreement, and (v) an annual management fee to the Administrative Agent.
The Company also entered into a First Amendment to the Credit Facilities Agreement with CDF, effective August 21, 2007, which provided that as to inventory acquired by the Company other than pursuant to the Floorplan Loan Facility, there will be a maximum invoice amount of $1.5 million at any time against which the Company may seek financing under the Credit Facilities Agreement and for certain modifications to the definitions regarding certain covenant calculations and floor plan inventory value to reflect the intent of the parties when they entered in the Credit Facilities Agreement.
Effective as of February 4, 2008, the Company entered into a Second Amendment to the Credit Facilities Agreement with CDF, which has given the Company additional flexibility whereby the Company is allowed to borrow against certain other receivables. The initial impact increased the Company’s availability by $0.5 million. On February 28, 2008, the Company entered into a Third Amendment to the Credit Facilities Agreement in order to (a) accommodate the February Pequot Notes and the February Pequot Warrants, since the terms and conditions of the Credit Facilities Agreement gives CDF the right to consent to and approve of various indebtedness incurred by the Company, (b) modify certain financial covenants contained in the Credit Facilities Agreement by reducing required minimum EBITDA amounts for the fiscal quarters ending on March 31, 2008 and on June 30, 2008, and (c) update the disclosures with respect to the representations and warranties in the Credit Facilities Agreement.
The Credit Facilities Agreement, as amended through March 31, 2008 requires, among other things, that the Company maintain certain financial covenants including Maximum Total Funded Indebtedness to EBITDA of not greater than 4.00 to 1.00 for the preceding four fiscal quarters then ended, beginning with the period ended March 31, 2008; Minimum EBITDA for the fiscal quarter ending on March 31, 2008 of $440,000, on June 30, 2008 of $1,365,000 and for each quarter thereafter to June 30, 2009, $2,000,000; Minimum Excess Cash/Marketable Securities plus Availability of $1,500,000 on the last day of each calendar month; and Minimum Liquidation Multiple of 1.20 to 1.00 as of the last day of each fiscal month; restriction on the Company’s ability to incur certain additional indebtedness, and various customary provisions, including affirmative and negative covenants, representations and warranties and events of default. Upon a breach or an event of default by the Company with respect to the Amended Pequot Notes, the Pequot Warrants, the CP/NEBF Credit Facility (described below in this Item), the Constellation Notes, the Constellation Warrants or otherwise under the Credit Facilities Agreement that is not cured by the Company within any applicable grace period, any of the Lenders may terminate the Credit Facilities Agreement and/or declare all amounts outstanding under the Credit Facilities Agreement immediately due and payable and exercise other remedies including foreclosure of the security for the obligations under the Credit Facilities Agreement.
As of March 31, 2008, the Company was in compliance with all covenants prescribed under the Credit Facilities Agreement.
Available funds under the Credit Facilities Agreement as of March 31, 2008, net of the minimum excess cash/marketable securities plus availability covenant of $1.5 million, amounted to approximately $4.3 million.
Since the commencement of the Company’s fiscal year 2009, the Company entered in the following amendments of the Credit Facilities Agreement.
As of May 16, 2008, the Company entered into a Fourth Amendment to the Credit Facilities Agreement which amended the definition of “Eligible Account” in order to give the Company added flexibility to borrow against certain Accounts which are customarily paid within 120 days, rather than 90 days.
As of June 11, 2008, the Company entered into a Fifth Amendment to the Credit Facilities Agreement in order to obtain various consents and to modify certain financial covenants contained in the Credit Facilities Agreement by (i) reducing minimum EBITDA to $0 for the fiscal quarter ending on June 30, 2008, and (ii) reducing the excess cash/marketable securities plus availability covenant for each of the fiscal months ending on June 30, 2008, July 31, 2008 and August 30, 2008, to $750,000 from $1,500,000.
CP/NEBF Credit Agreement
As of July 31, 2007, the Company entered into Amendment No. 1 to its secured Credit Agreement (the “CP/NEBF Credit Agreement”), dated as of November 23, 2005 and accompanying promissory note in the principal amount of $25 million (the “Note”), with CP Investment Management NEBF, and the Company issued and sold to the Lender a warrant entitling the Lender to purchase 700,000 shares of the Company’s Common Stock at an exercise price of $4.06 per share (the “Lender Warrant”).
As an inducement to CP Investment Management and NEBF (collectively, the “Junior Creditor”) to enter into a Subordination Agreement dated as of August 21, 2007 (the "Subordination Agreement") with CDF, for itself and agent to the Lenders under the Credit Facilities Agreement, the Company entered into Amendment No. 2 to the CP/NEBF Credit Agreement. Pursuant to Amendment No. 2, the CP/NEBF Credit Agreement was extended until November 23, 2010. Mandatory principal prepayments are also due upon the occurrence of a Liquidity Event or Partial Liquidity Event, generally involving a Change of Control or the issuance by the Company of securities, the proceeds of which exceed $25,000,000. The amount outstanding on the Note bears interest equal to 4.52%; of which the Applicable Current Cash Rate of interest was reduced from 2% to 1% per annum through the first anniversary of the Second Amendment Date, and then will increase back to 2% per annum through November 22, 2009, and then will increase to 8% per annum thereafter. The Applicable Current Cash Rate is payable quarterly in cash and all remaining interest will accrue and only become due at maturity. Upon maturity or in the event of acceleration or upon the occurrence of certain liquidity events, the Company will pay a payment premium in respect of the Note equal to an amount which, when combined with previous payments made, will yield an internal rate of return to the Lender of 11% per annum from the Closing Date through and including July 31, 2007, the First Amendment Date. For the period from August 1, 2007 through and including August 21, 2007, the Second Amendment Date, the amount required will provide the Lender with an internal rate of return during such time period of 13.5% per annum. At all times thereafter, until the date on which all Obligations have been paid in full, the amount required will provide the Lender with an internal rate of return during such time period of 15% per annum, except during any period in which an Event of Default shall have occurred and be continuing, in which case the internal rate of return for such period shall be adjusted to 17% per annum. At March 31, 2008, $6.6 million in interest has been accrued on the Note, $0.1 million is accrued and payable within the next quarter, and $6.5 million is accrued and is payable at maturity. As discussed below in this Item, the payment premium to the Lender has been further amended under Amendment No. 5 to the CP/NEBF Credit Agreement entered into by the Company as of June 16, 2006.
Pursuant to the Subordination Agreement, the Junior Creditor is entitled to receive (a) fee payments due at closing of Amendment No. 2, (b) regularly scheduled cash interest payments as and when due, and (c) mandatory principal prepayments due upon the occurrence of a Liquidity Event or Partial Liquidity Event, subject to prior notice thereof to the senior lenders and the failure by the senior lenders to issue a blockage notice. Notwithstanding the foregoing, payments described in (b) and (c) above may not be received by the Junior Creditor during any payment blockage period following a payment default or a non-payment default under the Senior Loan Documents. Blockage periods for non-payment defaults may not exceed 180 days in any year. Under the Subordination Agreement, the Junior Creditor also agrees not to exercise remedies under the CP/NEFB Credit Agreement until the earliest of the date that is 10 days following the date on which the senior lenders accelerate the senior debt, the date of commencement of a bankruptcy case against any Company or, in the case of acceleration payments under the CP/NEFB Credit Agreement, 120 days and in the case of other remedies, 180 days after notice of default from the Lenders to the senior lenders. Terms not otherwise defined in this discussion have the meaning ascribed to them in the Subordination Agreement. The Company paid a one-time modification fee of $250,000, which was advanced under the Credit Facilities Agreement, and issued a second Warrant to the NEBF for the right to purchase up to the maximum number of 700,000 shares of the Common Stock of MTM Technologies at a price per share of $1.17 per share.
As of February 28, 2008, the Company entered into Amendment No. 3 to the CP/NEBF Credit Agreement in order to (i) accommodate the February Pequot Notes and the February Pequot Warrants since the terms and conditions of the CP/NEBF Credit Agreement gives the Lender the right to consent to and approve of various indebtedness incurred by the Company, (ii) modify certain financial covenants contained in the CP/NEBF Credit Agreement by (a) reducing minimum EBITDA amounts as follows: (1) $396,000 for the fiscal quarter ended on March 31, 2008, and (2) $1,228,500 for the fiscal quarter ending on June 30, 2008, and (iii) update the disclosures with respect to the representations and warranties in the CP/NEBF Credit Agreement.
Required financial covenants were also modified to coincide substantially with those under the Credit Facilities Agreement. Amendments No. 2 and No. 3 to the CP/NEBF Credit Agreement requires, among other things, that the Company maintain certain financial covenants including Maximum Total Funded Indebtedness to EBITDA of not greater than 4.40 to 1.00 for the preceding four fiscal quarters then ended, beginning with the period ended March 31, 2008; Minimum EBITDA for the fiscal quarter ending on March 31, 2008 of $396,000, on June 30, 2008 of $1,228,500 and for each quarter thereafter to June 30, 2009, $1,800,000; Minimum Excess Cash/Marketable Securities plus Availability of $1,350,000 on the last day of each calendar month; and Minimum Liquidation Multiple of 1.08 to 1.00 as of the last day of each fiscal month. Subject to the terms of the Subordination Agreement, upon an event of default, the lenders under the CP/NEFB Credit Agreement may terminate such Credit Agreement and/or declare all amounts outstanding immediately due and payable and exercise other remedies including foreclosure of the security for the obligations under the CP/NEFB Credit Agreement, as amended. Terms not otherwise defined in this discussion have the meaning ascribed to them in the CP/NEFB Credit Agreement, as amended or in the Subordination Agreement. As of March 31, 2008, the Company was in compliance with all covenants prescribed under the CP/NEFB Credit Agreement.
Since the commencement of the Company’s fiscal year 2009, the Company entered in the following amendments of the CP/NEBF Credit Agreement.
On June 11, 2008 and June 17, 2008, the Company entered into Amendments No. 4 and 5 to the CP/NEBF Credit Agreement to obtain various consents and to modify certain financial covenants contained in the CP/NEBF Credit Agreement by (i) reducing required minimum EBITDA amounts for the fiscal quarter ending on June 30, 2008, and (ii) lowering the cash requirement for the June 30, 2008, July 31, 2008 and August 31, 2008 calculation dates to $675,000 from $1,350,000 in consideration for an increase of the payment premium that is due upon the earlier of the maturity date or the other specific occurrences as described in Amendment No. 5 and the CP/NEBF Credit Agreement equal to an amount which, when combined with previous payments made, will yield an internal rate of return of 15% per annum from the Closing Date. (ii) increase the borrowings under such CP/NEBF Credit Agreement by $3,000,000; in particular, the Companies issued and sold to NEBF an amended and restated secured promissory note in the principal amount of $28,000,000, which replaces the secured promissory note issued and sold to NEBF in the principal amount of $25,000,000 dated November 23, 2005.
Subject to the terms of the Subordination Agreement between the Junior Creditor and CDF, upon an event of default, the Lender under the CP/NEBF Credit Agreement may terminate the CP/NEBF Credit Agreement and/or declare all amounts outstanding immediately due and payable and exercise other remedies including foreclosure of the security for the obligations under the CP/NEBF Credit Agreement, as amended.
For the year ended March 31, 2008, the Company used cash of $11.9 million in operating activities. The cash used is derived from a net loss of $14.4 million plus a decrease in net operating liabilities of $13.5 million offset by non-cash charges of $16.0 million. The decrease in net operating liabilities relates primarily to a decrease in accounts receivable and in payables. Accounts receivable at March 31, 2008 includes a $3.6 million receivable of which $3.5 million was subsequently collected in June 2008. Accounts receivable net of the above decreased over $8.5 million from March 31, 2007 as a result of a strong collection effort especially with regard to past due accounts coupled with the impact of a new compensation plan whereby the commission structure was modified to include payments based on collected receivables and a lower overall receivable base. Additionally, accounts payable decreased as proceeds from the equity funding and from the working capital line with CDF were used to pay vendors. Accrued expenses decreased primarily due to the payout of accrued restructuring costs and payments related to acquired businesses coupled with lower operating costs as a result of cost cutting initiatives.
Cash used in investing activities was $2.4 million for the year ended March 31, 2008 related to additions to capital expenditures compared with $6.6 million for the comparable prior year which consisted of capitalized costs related to the internal development of purchased and developed software and infrastructure investment of $3.2 million. The Company has no plans for any material purchases of property and equipment including capital software projects for fiscal 2009.
Cash provided by financing activities was $13.1 million for the year ended March 31, 2008, which was primarily the result of net cash proceeds received from the issuance of shares of Series A-6, A-7 and A-8 Preferred Stock of $9.2 million and cash proceeds of $2.5 million from our issuance of the February Pequot Notes, for the purpose of funding working capital needs, and increased borrowings on our working capital lines under our Credit Facilities Agreement with CDF. The Company had net borrowings under its Credit Facilities Agreement of $1.8 million during fiscal 2008, which consisted of additional gross borrowings of $317.0 million offset by gross repayments of $315.2 million.
Contractual Obligations
The following table sets forth, as of March 31, 2008, the Company’s known contractual obligations and borrowings, and the timing and effect that such commitments are expected to have on the Company’s liquidity and capital requirements in future periods (in thousands).
(1) Amounts include the principal maturities and expected interest payments.
The Company sustained net losses during the years ended March 31, 2008 and 2007. Working capital at March 31, 2008 was a deficit of $3.3 million as compared to a working capital deficit of $12.4 million at March 31, 2007. The Company has made a concerted effort in the past two years to improve its working capital position, including issuing additional shares of preferred stock raising over $9.0 million in the current fiscal year alone, a $6.0 million restructuring in fiscal 2007, and instituting other cost control initiatives and programs. Capital expenditures for the year ended March 31, 2008 were $2.4 million compared with $6.6 million for the comparable prior year period. The Company currently has no commitments for material capital expenditures. In August 2007, the Company successfully refinanced its working capital lines of credit with a $34 million credit facilities agreement with CDF which provided the Company with additional capital and increased purchasing flexibility. Our business requires significant levels of working capital to fund future revenue growth and current operations. We have historically relied on and continue to rely heavily on, trade credit from vendors and our credit facilities for our working capital needs. We are focused on looking at avenues to secure additional open lines of credit with vendors and have recently negotiated additional flexibility in borrowing restrictions and reserves under our credit facilities. We continue to drive collection of accounts receivable and are actively managing our expenses to achieve greater economies of scale.
As of June 17, 2008 we have successfully completed several financing arrangements which generated net proceeds of $9.0 million, including $2.5 million in February 2008 from the Pequot Notes, another $3.5 million from the Pequot June 11 Notes, the Pequot June 16 Notes, and the Constellation Notes, and $3.0 million in additional financing under the CP/NEBF Credit Agreement. The proceeds of which will be used to fund working capital needs. Additionally, the Company has negotiated additional flexibility in availability under the Credit Facilities Agreement with CDF and has received relaxed covenant restrictions for the first quarter of fiscal 2009 from both CDF and CP Investment Management and NEBF.
Our future liquidity and capital requirements will depend on numerous factors, including, general economic conditions and conditions in the technology industry in particular; the cost effectiveness of our product and service development activities; our dependence on third party licenses and our ability to maintain our status as an authorized reseller/service provider of IT products, and our ability to leverage our centralized infrastructure, all of which may impact our ability to achieve and maintain profitability. The Company anticipates that its available cash including the proceeds received from the financing arrangements described above in the first quarter of fiscal 2009 together with its available credit facilities should be adequate to fund our operations in the foreseeable future. The Company currently has no commitments for material capital expenditures. To the extent that our existing capital resources are insufficient to meet our working capital requirements we may seek to raise additional funds from the Investors or seek additional financing arrangements. However, no assurance can be given that such financing may be obtained on terms attractive to us, or at all. Furthermore, any additional debt or equity financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed could have a material adverse effect on our business, operating results and financial condition.
Recently Issued Accounting Pronouncements
Effective April 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. Upon the adoption of FIN 48, the Company had no unrecognized tax benefits. The application of FIN 48 did not have any impact on the Company’s consolidated balance sheets, statements of operations, or statements of cash flows during the year ended March 31, 2008.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB deferred the effective date for one year for certain nonfinancial assets and nonfinancial liabilities and removed certain leasing transactions from its scope. The Company must adopt these new requirements no later than its first fiscal quarter of 2009 and is currently evaluating whether the adoption of SFAS No. 157 will have an impact on our consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, or the Company’s first quarter of fiscal 2009. The Company does not expect that the adoption of this standard will have a material impact on its future consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations” (“SFAS No. 141(R)), which replaces SFAS No. 141, “Business Combinations”, and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at fair values as of that date, with limited exceptions. SFAS No. 141(R) requires the acquirer to record contingent consideration at the estimated fair value at the time of purchase and establishes principles for treating subsequent changes in such estimates which could affect earnings in those periods. SFAS 141(R) also requires additional disclosures designed to enable users of the financial statements to evaluate the nature and financial effects of the business combination and disallows the capitalization of acquisition costs. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will implement the provisions of SFAS No. 141(R) for any acquisitions made by the Company on or subsequent to April 1, 2009.
Subsequent Events
Subsequent events which relate to the financial arrangements entered into by the Company during the Company’s fiscal year 2008 have been included within the discussion hereinabove set forth in this Item 7.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8.
Item 8. Financial Statements and Supplementary Data
Set forth below is a list of our audited consolidated financial statements included in this Annual Report on Form 10-K and their location.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On November 15, 2007, we were notified that certain of the partners of Goldstein Golub Kessler LLP (“GGK”) became partners of McGladrey & Pullen, LLP (“M&P”) in a limited asset purchase agreement effective October 3, 2007. As a result, GGK resigned as our independent registered public accounting firm effective as of November 15, 2007 and M&P was appointed by our audit committee as our new independent registered public accounting firm for the Company’s annual financial statements for the year ended March 31, 2008.
The audit reports of GGK on the consolidated financial statements of MTM Technologies, Inc. and Subsidiaries, as of and for the year ended March 31, 2007 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the two most recent fiscal years, the Company did not consult with either GGK or M&P regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was either the subject of a disagreement or reportable event identified in paragraph (a)(1)(iv) of Item 304 of Regulation S-K. Prior to the Company’s appointment of both M&P and GGK as its independent auditor, the Company had not consulted GGK or M&P regarding any accounting or auditing matters.
Item 9A.
Item 9A. Controls and Procedures.
Not applicable.
Item 9A(T). Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this Annual Report on Form 10-K, we conducted under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, an evaluation of the effectiveness of our "disclosure controls and procedures" (as that term is defined under the Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded as of the period covered by this report that our disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified in the Securities and Exchange Commissions rules and forms.
(b) Management's report on internal control over financial reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (ii) provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management assessed the effectiveness of the Company's internal control over financial reporting as of March 31, 2008 based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that, as of March 31, 2008, the Company's internal control over financial reporting was effective based on the criteria established in Internal Control-Integrated Framework.
This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting since temporary rules of the SEC permit the Company to provide only management's report on this Annual Report on Form 10-K.
(c) Changes in internal control over financial reporting.
As of the end of the period covered by this report, there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2008 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives and our principal executive officer and principal financial officer have concluded that the controls and procedures evaluated are effective at the “reasonable assurance” level.
PART III
Item 10.
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance Matters
Directors and Executive Officers
Set forth below is a brief description of the background of each of our directors and executive officers as of May 31, 2008, based on information provided to us by them. Each director currently serving has been elected to a term that expires at the next Annual Meeting of shareholders.
Gerald A. Poch has served as Managing Director of Pequot Capital Management, Inc., the investment manager/advisor for Pequot Private Equity Fund III, L.P. and Pequot Offshore Private Equity Partners III L.P., since 1999. Mr. Poch also served as a Managing General Partner of both Pequot Fund and Pequot Partners. From August 1998 through January 2000, he was a principal of Pequot Capital Management, Inc. and co-leader of Pequot Fund’s and Pequot Partners’ venture capital team. From August 1996 to June 1998 he was the Chairman, President and Chief Executive Officer of GE Capital Information Technology Solutions, Inc., a technology solutions provider. Prior to that, he was a founder, and served as Co-Chairman and Co-President, of AmeriData Technologies, Inc., a value-added reseller and systems integrator of hardware and software systems. Mr. Poch is a director of a number of private companies.
Keith B. Hall has served as a director since February 2008. Mr. Hall was Senior Vice President and Chief Financial Officer of LendingTree, Inc., a division of InterActive Corp. (IACI), from 1999 to 2007. Prior to LendingTree, Mr. Hall served as Vice President and Chief Financial Officer for three other publicly traded companies that were subsequently acquired (Broadway & Seymour, Inc., from 1997 to 1999; Loctite Corporation from 1996 to 1997; and, Legent in 1995). Mr. Hall also served in the financial organization of United Technologies (UTX) from 1983-1995. Mr. Hall serves as a member of the board of directors of the following companies: Tectura, one of the world’s leading providers, implementers and integrators of Microsoft business management solutions (since 2008; and Chairman of its Corporate Governance Committee); NewRiver, Inc., a private Internet company serving the mutual fund industry (since 2004), and Blue Holdings, Inc. a NASDAQ listed designer, manufacturer and distributor of high-end fashion jeans (since 2008). Until its acquisition earlier this year, Mr. Hall served since 2007 as a member of the board of directors and Chairman of the Audit Committee for Electronic Clearing House, Inc., a provider of electronic payment and transaction processing services. Mr. Hall is also on the Board of Trustees of Coe College in Cedar Rapids, Iowa.
William Lerner has served as chairman of our Corporate Governance and Nominating Committee since November 2003. Mr. Lerner has been engaged in the private practice of corporate and securities law in New York since 1961 and in Pennsylvania since 1990. Mr. Lerner is a director/trustee of the Reich & Tang Family of Money Market Mutual Funds including The Daily Income Fund, and several state tax free money market funds including California, Connecticut, New Jersey and New York. Until December 2007 he was a director of Coach Industries, Group, Inc. a public company engaged in providing specialized business services to companies in the Courier, Limousine and Transportation industries that utilize independent contractors in the performance of their services.
Alvin E. Nashman has been an independent consultant in the field of computer service for the past ten years. Dr. Nashman is a director of Freedom Bank of Virginia.
Sterling Phillips is a Venture Partner with Pequot Ventures, the venture capital arm of Pequot Capital Management, Inc. Pequot Capital Management, Inc. is the Investment Manager for Pequot Private Equity Fund III, L.P. and Pequot Offshore Private Equity Partners III, L.P. Mr. Phillips joined Pequot Ventures in 2007. Prior to joining Pequot Ventures, Mr. Phillips served for six years as Chairman and Chief Executive Officer of Analex Corporation, a publicly traded federal professional services firm that was acquired in March 2007 by QinetiQ North America. Prior to joining Analex Corporation, Mr. Phillips was Senior Vice President of Federal Data Corporation (now part of Northrop Grumman).
Arnold J. Wasserman has served as chairman of our Audit Committee since March 1999 and Standing Committee of Independent Directors since September 2004. Mr. Wasserman has been a principal of Panda Financial Associates, Inc., a leasing/consulting firm, for the past 35 years. He is a director of Stratasys, Inc., a NASDAQ National Market listed company which manufactures rapid prototyping systems and materials, and serves as chairman of its audit committee.
Thomas Wasserman has served as Managing Director at Constellation Ventures which he joined in June 2001 as an associate before becoming a Vice President. From March 2000 to June 2001, he served as a senior manager of corporate development for 360Networks, a global telecommunications service provider. Prior to 360Networks Mr. Wasserman worked at Charterhouse Group International, a private equity firm, and at the investment banking firm of Donaldson, Lufkin and Jenrette. Mr. Wasserman is a director of a number of private companies including Bridgevine, Inc., One Phone AB and Crispy Gamer, Inc.
Steven Stringer has served as our President since June 2005 and as our Chief Operating Officer since October 1, 2004. From June through September 2004 he was employed by Pequot as a consultant and was made available by Pequot to us to assist with the selection, evaluation and integration of acquisitions. From January 2002 through May 2004, Mr. Stringer pursued private investment opportunities. Prior to that time he served in a number of senior executive roles with Rhythms NetConnections Inc. (“Rhythms”), including as Chief Executive Officer and President from July through December 2001, Chief Executive Officer, President and Chief Operating Officer from April through July 2001, and President and Chief Operating Officer from April 1999 through March 2001. Rhythms was a national provider of digital subscriber line services and operated one of the largest DSL networks in the United States, serving 60 major markets with 67,000 digital subscriber lines in service.
J.W. (Jay) Braukman III has served as a Senior Vice President, as well as our Chief Financial Officer, since September 2006. Mr. Braukman’s experience includes 23 years with The General Electric Company (“GE”), where he held numerous executive positions, including Chief Financial Officer of several divisions. In addition to his experience at GE, Mr. Braukman served during 2006 as Chief Financial Officer of Cleartel Communications, Inc., a CLEC. His prior experience also includes serving from 2004 until 2005 as Chief Financial Officer of Chiquita Brands International, Inc., a publicly traded company in the New York Stock Exchange, as Chief Operating Officer from 2002 until 2004 of ITC ^Deltacom, Inc., a publicly held company, and as Chief Financial Officer from 2000 until 2001 of Rhythms, a publicly traded company in the NASDAQ stock market.
Frank Carlucci has served as our Senior Vice President of Sales since January 2008. Prior to joining MTM, Mr. Carlucci served as Senior Vice President, Worldwide Sales for Extreme Networks, Inc. a publicly traded provider of data networking solutions from July 2004 to July 2007. From August 1998 to July 2004, Mr. Carlucci was Vice President for Avaya Inc. Mr. Carlucci resigned from the Company on June 6, 2008.
Stephen Hicks has served as our Senior Vice President, as well as General Counsel and Corporate Secretary, since January 2008. From November 2006 to December 2007 Mr. Hicks served as Vice President, General Counsel & Corporate Secretary at OutlookSoft Corp. in Stamford, an international provider of performance management and business intelligence software acquired by SAP in 2007. From August 2000 to November 2006, Mr. Hicks was Vice President, General Counsel & Corporate Secretary at AMICAS, Inc. (formerly VitalWorks Inc.) in Boston, a healthcare information technology company. Mr. Hicks was also a member of the executive staff of the New York State Attorney General’s office from 1995 to 1998.
Under the terms of the Restated Shareholders Agreement, each of Mr. Poch and Mr. Phillips are directors designated by Pequot Capital Management, Inc. and Mr. T. Wasserman is a director designated by Constellation. See Item 12, “Security Ownership of Certain Beneficial Owners and Management-Restated Shareholders’ Agreement.”
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3, 4 and 5 and amendments to these forms furnished to us, except as provided below, all parties subject to the reporting requirements of Section 16(a) of the Exchange Act filed on a timely basis all such required reports during and with respect to our 2008 fiscal year.
Frank Carlucci was hired by the Company as an executive officer on January 7, 2008 and Keith B Hall was appointed to the Board of Directors on February 8, 2008. In both cases the required Form 3’s were filed late during our fiscal year ended March 31, 2008. A Form 4 with regard to the March 28, 2008 Amended Pequot Notes was filed late in April 2008.
Code of Ethics
Our Board of Directors has established a code of business conduct and ethics (“Code”) that applies to all employees and our principal executive, financial and accounting officer(s). On April 2, 2008, the Board of Directors modified the Code. A copy of our Code is filed as Exhibit 14.1 to this Annual Report on Form 10-K. The Code is posted on the Company’s website at http://www.mtm.com/investorrelations/codeofbusinessconductethics.asp.
Committees of our Board of Directors
Our Board of Directors currently has four standing committees, consisting of an Audit Committee, a Compensation Committee, a Corporate Governance and Nominating Committee and an Independent Directors Committee.
Audit Committee
Our Audit Committee currently is composed of Keith B. Hall, William Lerner, Alvin E. Nashman and Arnold J. Wasserman, with Mr. Wasserman serving as its chairman. We believe that each of these committee members is “independent,” within the meaning of such term under applicable law and the Marketplace Rules of The NASDAQ Stock Market, Inc. Our Board of Directors has determined that Mr. Hall and Mr. Wasserman are each an “audit committee financial expert,” as such term is defined by the SEC. The Audit Committee is primarily concerned with the accuracy and effectiveness of the audits of our financial statements by our independent auditors. Its duties include:
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selecting and retaining the independent auditors, as well as ascertaining the auditors’ independence;
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reviewing the scope of the audits to be conducted, as well as the results of their audits;
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approving non-audit services provided to our Company by the independent auditors;
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reviewing the organization and scope of our internal system of audit, financial and disclosure controls;
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appraising our financial reporting activities, including our Annual Report on Form 10-K, and the accounting standards and principles followed; and
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conducting other reviews relating to compliance by employees with our internal policies and applicable laws.
Our Board of Directors adopted a charter for its Audit Committee in 2001. We amended the Audit Committee Charter in June 2003 in order to comply with rules mandated by the SEC. The Audit Committee charter is posted on the Company’s website at http://www.mtm.com/InvestorRelations/AuditCommitteeCharter.asp.
Compensation Committee
Our Compensation Committee currently is composed of William Lerner, Alvin E. Nashman and Sterling Phillips, each of whom is an “independent” director, within the meaning of the current NASDAQ rules, with Mr. Phillips serving as its chairman. The duties of our Compensation Committee include recommending to the full Board of Directors remuneration to be paid our executive officers, determining the number of and conditions related to the exercise of options and other equity incentives granted pursuant to our various stock plans and recommending the establishment and monitoring of a compensation and incentive program for all of our executive officers.
The Compensation Committee charter is posted on the Company’s website at http://www.mtm.com/InvestorRelations/CompensationCommitteeCharter.asp.
Corporate Governance and Nominating Committee
Our Corporate Governance and Nominating Committee currently is composed of William Lerner, Sterling Phillips, Arnold J. Wasserman and Thomas Wasserman, with Mr. Lerner serving as its chairman. The duties of our Corporate Governance and Nominating Committee include overseeing our board’s policies, reviewing director compensation, as well as ensuring that we are in compliance with all applicable federal and state securities laws and the NASDAQ rules, and determining our Board of Directors’ slate of director-nominees for each shareholder election of directors.
The Corporate Governance and Nominating Committee charter is attached as Appendix A to the Proxy Statement contained as a part of our definitive Schedule 14A filed with the Securities Exchange Commission on October 20, 2004, and can be found on our website at http://www.mtm.com/InvestorRelations/CorporateGovernanceCommitteeCharter.asp.
In identifying and evaluating nominees for director, including nominees recommended by shareholders, the Corporate Governance and Nominating Committee shall take into consideration any criteria approved by the board, which may include:
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judgment, skill, diversity, experience with business and other organizations in related industries and of comparable size;
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the interplay of the candidate’s experience with the experience of the other board members; and
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the extent to which the candidate would be a desirable addition to the board and any committees of the board
Other than the foregoing, and the independence requirements discussed above, there are no stated minimum criteria for director nominees.
Nominating Process
The Corporate Governance and Nominating Committee will consider all candidates recommended by shareholders in accordance with the procedures set forth below. Shareholders who wish to recommend a nominee for election as director at an annual shareholders meeting must submit their recommendations at least 120 calendar days before the date that our Proxy Statement is released to shareholders in connection with the previous year’s annual meeting of shareholders. Shareholders may recommend candidates for consideration by the Board by writing to Investor Relations, at our corporate offices, 1200 High Ridge Road, Stamford, Connecticut 06905, giving the candidate’s name, business and residence contact information, biographical data, including the principal occupation or employment of the candidate, qualifications, the class and number of our shares, if any, beneficially owned by such candidate, a description of all arrangements or understandings between the shareholder and the candidate and any other person or persons (naming them) pursuant to which the nominations are to be made by the shareholder and any other information relating to the candidate that is required to be disclosed in solicitations of proxies for election of directors, or as otherwise required, pursuant to Regulation 14A under the Exchange Act of 1934. A written statement from the candidate consenting to be named as a candidate and, if nominated and elected, to serve as a director must accompany any shareholder recommendation. Any shareholder who wishes to recommend a nominee for election as director also must provide his, her or its name and address, as they appear in our books, the number and class of shares beneficially owned by such shareholder and any other information that is required to be provided by the shareholder pursuant to Regulation 14A under the Exchange Act of 1934.
Independent Directors Committee
Our Independent Directors Committee was formed by our Board of Directors in September 2004. It consists only of directors who are neither members of management nor associated with Pequot or Constellation and is to consider, review and provide guidance and oversight regarding transactions or other situations in which other board members, who are either members of management or employees of Pequot or Constellation, have interests that may be in addition to, or different from, the interests of the shareholders in general. This committee currently is composed of Keith B. Hall, William Lerner, Alvin E. Nashman and Arnold J. Wasserman, with Mr. Wasserman serving as its chairman.
Meetings of Our Board of Directors and its Committees
Our Board of Directors held seven formal meetings during our fiscal year ended March 31, 2008 and acted five times by unanimous written consent. During our 2008 fiscal year: (i) Our Audit Committee held six formal meetings, (ii) our Compensation Committee held one formal meeting and acted one time by unanimous written consent, (iii) our Corporate Governance and Nominating Committee did not hold a formal meeting, and (iv) our Independent Directors Committee held one formal meeting and acted one time by unanimous written consent. Each member of our Board of Directors attended, in person or telephonically, at least 75% of the total number of meetings of our board and each committee of the board on which the director serves.
Item 11.
Item 11. Executive Compensation
The compensation of the Company’s executive officers is determined by the Compensation Committee of the Board. The Committee has three members, each of whom is independent of management. None of the members of the Committee has any insider or interlocking relationship with the Company, and each of them is a non-employee director, as these terms are defined in applicable rules and regulations of the Securities and Exchange Commission (“SEC”).
The Company’s executive compensation philosophy is to align the interests of executive management with shareholder interests and with the Company’s business strategy and success, through an integrated executive compensation program that considers performance against specific business objectives and growth in total shareholder value. The key elements of executive compensation are competitive base salary, quarterly and annual incentives, and equity participation. The aggregate compensation package is designed to attract and retain individuals critical to the long-term success of the Company, to motivate these persons to perform at their highest levels, and to reward exceptional performance.
The Company has entered into agreements with its current named executive officers and certain other key employees. The purpose of these agreements is to ensure predictability in determining the executives’ terms and conditions of employment, to provide the executives with some security so that they are able to devote their full attention to providing superior performance, and to provide a reasonable level of protection, based on their relative position in the organization, in the event they are terminated without cause. Each named executive officer’s employment or severance agreement provides for certain severance payments and benefits in the event that his employment is terminated by the Company without “cause”, or by the executive with “good reason”, or upon the executive’s death or total disability. These payments and benefits are more fully described below.
Summary Compensation Table for Fiscal Year 2008
The following table sets forth, with respect to our fiscal year ended March 31, 2008 and 2007, all compensation earned by our Principal Executive Officer (“PEO”), and one other of our most highly compensated “named executive officers” other than our PEO who was serving as an executive officer at the end of our 2008 fiscal year and whose total compensation exceeded $100,000, and one other individual who would have been among the most highly compensated executive officers except for the fact that such person was not serving as an executive officer at the end of our 2008 fiscal year.
(1) See Footnote 7 to the Company’s Consolidated Financial Statements contained herein for a discussion of the assumptions made in the valuation of Stock Awards and Option Awards for financial reporting purposes.
(2) Mr. Alfano served as our PEO from May 21, 2004 to April 26, 2007.
(3) In connection with the termination of Mr. Alfano’s employment with the Company, the vesting of all of Mr. Alfano’s unvested stock options and restricted stock units was accelerated and the Company recorded the associated compensation expense during the 2007 fiscal year. The impact of this transaction is reported under the “Stock Award” and “Option Award” columns, since the associated expense was recorded in fiscal 2007.
(4) Mr. Stringer has served as our PEO since April 27, 2007.
(5) Mr. Braukman has served as our Senior Vice President and Chief Financial Officer since September 28, 2006.
Summary Compensation Table Narrative.
Amounts shown as “Salary” include gross salary earned for the fiscal year ended March 31.
The “Stock Awards” column reports the dollar amount recognized for financial statement reporting purposes in accordance with SFAS No. 123(R), for restricted stock units held, excluding the impact of estimated forfeitures related to service based vesting conditions. The Company adopted SFAS No. 123(R) effective April 1, 2006 using the modified prospective transition method. Amounts shown in the Stock Awards column do not reflect compensation actually received by the named executive officer.
The “Option Awards” column reports the dollar amount recognized for financial statement reporting purposes in accordance with SFAS No. 123(R), for options held, excluding the impact of estimated forfeitures related to service based vesting conditions. The Company adopted SFAS No. 123(R) effective April 1, 2006 using the modified prospective transition method. Amounts shown in the Option Awards column do not reflect compensation actually received by the named executive officer.
The amount reported for Mr. Alfano in “All Other Compensation” consists of post-termination consulting fees of $758,333, a one-time fee for entering into a severance and release agreement of $29,167, post-termination health benefits funded by the company of $14,350, and legal fee reimbursements of $5,000, in each case accrued by the Company during fiscal 2007 in connection with the termination of Mr. Alfano’s employment in April 2007. The Company reported this amount in Mr. Alfano’s 2007 total compensation in the 2007 Annual Report on Form 10-K. All amounts shown are the actual costs the Company incurred and paid during fiscal year 2008.
The amount reported for Mr. Braukman in “All Other Compensation” consists of reimbursed relocation expenses in connection with Mr. Braukman’s hiring of $47,728.
Essential to an understanding of the Summary Compensation Table is an understanding of the Employment and Severance Agreements of the named executive officers.
Summary of Employment Agreements
Named Executive Officers who Terminated Employment During 2008.
Frank Alfano. We entered into an employment agreement, dated June 28, 2006, with Francis J. Alfano (as amended, the “Alfano Employment Agreement”) to employ Mr. Alfano as our Chief Executive Officer (“CEO”). The Alfano Employment Agreement had an initial term of three (3) years (the “Initial Term”). Mr. Alfano was paid a base salary of $350,000 per annum and was eligible to receive an annual bonus based upon the achievement of performance targets established under the Company’s Management Bonus Plan of up to 75% of his base salary payable 67% in cash and 33% in common stock consisting of 35,000 shares of common stock, subject to certain limitations on the number of shares to be issued. Payment of the annual bonus is subject to the achievement of performance targets established under the Company’s management bonus plan. Mr. Alfano did not receive a bonus in fiscal year 2007 because the Compensation Committee did not approve performance targets. In March, 2007, the Company and Mr. Alfano reached an agreement in principle regarding Mr. Alfano’s departure as CEO of the Company. On April 12, 2007 the Company reported, among other things, that Mr. Alfano would be departing to pursue other opportunities and that simultaneous with his departure as CEO, Mr. Alfano would also resign from the Board of Directors. On April 26, 2007 we entered into a definitive Consulting Service Agreement (the “Alfano Consulting Service Agreement”) with Mr. Alfano and Tory Ventures LLC (the “Consultant”). Mr. Alfano is the sole member of the Consultant. The Alfano Consulting Service Agreement commenced on April 26, 2007 and terminates on June 30, 2009. For services rendered under the Alfano Consulting Service Agreement, the Company paid or will pay Consultant, among other things (i) a signing bonus of $58,333.33 on May 15, 2007 in accordance with the normal payroll practices of the Company and (ii) fees at the rate of $29,166.67 per month, payable in arrears in twice monthly payments with the initial payment on May 15, 2007 in accordance with the normal payroll practices of the Company, provided that a lump sum payment on March 31, 2008 shall be made which shall include fees from April 1, 2008 through March 31, 2009. We are providing Mr. Alfano health benefits at no cost for the term of the Alfano Service Consulting Agreement. Upon a change of control of the Company all compensation under the Alfano Consulting Service Agreement shall become immediately due and payable.
Additionally, in connection with these agreements the vesting of Mr. Alfano’s unvested stock options and restricted stock units were accelerated and became fully vested and immediately exercisable.
In connection with these arrangements, Mr. Alfano and the Company executed mutual releases and Mr. Alfano agreed that for a period ending on the earlier of (i) April 26, 2009 or (ii) the date of a valid termination of the Alfano Consulting Service Agreement by him, that he will be prohibited from engaging in any Business Activities on behalf of any person, firm or corporation, and, subject to certain limitations, he shall not acquire any financial interest in any entity which engages in Business Activities within 200 miles of any of the Company’s offices in operation on the commencement date of the Alfano Employment Agreement and within 100 miles of any office of the Company established after such commencement date. During the period that the foregoing non-competition restriction applies, Mr. Alfano shall not, without the written consent of the Company: (i) solicit any employee of the Company or any of the Company’s affiliates to terminate his employment, or (ii) solicit any customers, partners, resellers, vendors or suppliers of the Company on behalf of any individual or entity other than the Company or its affiliates. “Business Activities” means conduct of business as a computer and communications technology management and/or consulting business providing information technology networking and data center services, including secure access, VOIP storage, security, messaging solutions, network and mainframe connectivity consulting, remote network monitoring and management, network and system diagnostics, product maintenance and support, training, and product procurement solutions.
All Other Named Executive Officers.
Steve Stringer. We entered into an employment agreement dated October 1, 2004 with Mr. Stringer which agreement was superseded by an agreement dated August 10, 2006 (the “Stringer Employment Agreement”), to employ Mr. Stringer as our President and Chief Operating Officer. The Stringer Employment Agreement has an initial term ending December 31, 2009 (the “Initial Term Date”). On the Initial Term Date and each subsequent anniversary of the Initial Term Date, the term of the agreement shall automatically be extended for an additional period of twelve (12) months; provided, however, that either party may elect not to extend the agreement by giving written notice to the other party at least twelve (12) months prior to the Initial Term Date or any anniversary date thereof. Mr. Stringer is paid a base salary of $335,000 per annum and is eligible to receive an annual bonus based upon the achievement of performance targets of up to 75% of his base salary payable 67% in cash and 33% in common stock consisting of 25,000 shares of common stock, subject to certain limitations on the number of shares to be issued. Payment of the annual bonus is subject to the achievement of performance targets established under the Company’s management bonus plan. Mr. Stringer did not receive a bonus in fiscal years 2008 and 2007 because the Compensation Committee did not approve performance targets. Concurrent with the execution of the Stringer Employment Agreement, Mr. Stringer was granted 107,000 options to purchase shares of Company stock and a grant of 20,000 restricted stock units. The Stringer Employment Agreement’s termination related clauses and benefits are described below.
The tables below provide an estimate of the payments that would be made to Mr. Stringer under various termination scenarios. These include voluntary termination, termination by the Company without “cause” or by the executive with “good reason,” and “for cause” termination by the Company. The amounts shown are estimates assuming that such termination was effective as of March 31, 2008. The actual amounts to be paid can only be determined at the time of such executive’s termination of employment from the Company.
(1) Represents the dollar amount recognized for financial statement reporting purposes in accordance with SFAS No. 123(R).
In the event of a termination of Mr. Stringer’s employment during the term of the Stringer Employment Agreement by the Company without “cause” or by Mr. Stringer for “good reason” or as a result of his death or permanent and total disability, the Company agreed to provide to Mr. Stringer (or his legal representative):
A continuance of his salary at one hundred percent (100%) of his then current base salary, for a period equal to the greater of (i) one year from the date of termination of Mr. Stringer’s employment or (ii) the period ending on the Initial Term Date (the “Severance Period”).
Subject to certain limitations, during the Severance Period, Mr. Stringer will be entitled to a continuance of coverage under all health, life, disability and similar employee benefit plans and programs on the same basis as he was entitled to participate immediately prior to the commencement of the Severance Period.
Additionally, the impact of Mr. Stringer’s termination of employment on the stock options or other equity incentives held by him (including the maximum period that any such option or other equity incentive shall remain exercisable) shall be governed by the applicable equity incentive plan and agreement. All stock options and other equity incentives granted to Mr. Stringer provide that, upon termination of his employment by the Company other than for “cause” or by him for “good reason”, any unvested shares subject to such options or other equity incentives shall become fully vested and immediately exercisable in connection with such termination.
In connection with any termination by the Company other than for “cause” or by Mr. Stringer for “good reason” or as a result of his death or permanent and total disability the Company is required to execute a release and waiver of claims in favor of Mr. Stringer, as consideration for the execution and non-revocation by Mr. Stringer of a release agreement in favor of the Company and its shareholders and their respective directors, officers and employees. The foregoing payments shall be in lieu of any other severance benefits to which Mr. Stringer is entitled pursuant to any other severance plans, programs, arrangements, or policies of the Company.
In the event that Mr. Stringer’s employment with the Company is terminated during the term of the Stringer Employment Agreement by the Company for “cause”, or by Mr. Stringer other than for “good reason”, the Company will pay to him (or his legal representative) any earned but unpaid salary amounts and any unreimbursed expenses through his final date of employment with the Company, and the Company shall have no further obligations to him.
The foregoing payments are in lieu of any other severance benefits to which Mr. Stringer is entitled pursuant to any other severance plans, programs, arrangements, or policies of the Company.
During the term of the Stringer Employment Agreement and for a period of: (i) two years thereafter upon Mr. Stringer’s non-renewal of that agreement, (ii) one year thereafter upon the Company’s non-renewal of that agreement, or (iii) two years thereafter upon termination of employment by either Mr. Stringer or the Company for any reason other than non-renewal, Mr. Stringer is prohibited from engaging in any Business Activities on behalf of any person, firm or corporation, and, subject to certain limitations, he shall not acquire any financial interest in any entity which engages in Business Activities within 200 miles of any of the Company’s offices in operation on the commencement date of the Stringer Employment Agreement and within 100 miles of any office of the Company established after such commencement date. During the period that the foregoing non-competition restriction applies, Mr. Stringer shall not, without the written consent of the Company: (i)
solicit any employee of the Company or any of the Company’s affiliates to terminate his employment, or (ii) solicit any customers, partners, resellers, vendors or suppliers of the Company on behalf of any individual or entity other than the Company or its affiliates. “Business Activities” means conduct of business as a computer and communications technology management and/or consulting business providing information technology networking and data center services, including secure access, VOIP, storage, security, messaging solutions, network and mainframe connectivity consulting, remote network monitoring and management, network and system diagnostics, product maintenance and support, training, and product procurement solutions.
J.W. Braukman III. We entered into a letter agreement with Mr. Braukman dated September 12, 2006, which was amended by an agreement dated September 28, 2006 (the “Braukman Agreement”), to employ Mr. Braukman as our Senior Vice President and Chief Financial Officer at a base salary of $260,000 per annum. Mr. Braukman is eligible to receive a bonus to be determined by the Board of Directors and the Compensation Committee consistent with our management bonus plan. Mr. Braukman did not receive a bonus in fiscal years 2008 and 2007. Concurrent with the execution of the Braukmant Agreement, Mr. Braukman was granted 250,000 options to purchase shares of Company stock and a grant of 35,000 restricted stock units. The Braukman Agreement’s termination related clauses and benefits are described below.
The tables below provide an estimate of the payments that would be made to Mr. Braukman under various termination scenarios. These include voluntary termination, termination by the Company without “cause” or by the executive with “good reason,” and “for cause” termination by the Company. The amounts shown are estimates assuming that such termination was effective as of March 31, 2008. The actual amounts to be paid can only be determined at the time of such executive’s termination of employment from the Company.
(1) Represents the dollar amount recognized for financial statement reporting purposes in accordance with SFAS 123R.
In the event of a termination of Mr. Braukman’s employment on or before the fourth anniversary date of the Braukman Agreement by the Company without “cause” or by Mr. Braukman for “good reason” or as a result of his death or permanent and total disability, the Company agreed to provide to Mr. Braukman (or his legal representative):
A continuance of his salary at one hundred percent (100%) of his then current base salary, for a period equal to one year from the date of termination of Mr. Braukman’s employment (the “Severance Period”).
Subject to certain limitations, during the Severance Period, Mr. Braukman will be entitled to a continuance of coverage under all health, life, disability and similar employee benefit plans and programs on the same basis as he was entitled to participate immediately prior to the commencement of the Severance Period.
Additionally, the impact of Mr. Braukman’s termination of employment on the stock options or other equity incentives held by him (including the maximum period that any such option or other equity incentive shall remain exercisable) shall be governed by the applicable equity incentive plan and agreement. All stock options and other equity incentives granted to Mr. Braukman provide that, upon termination of his employment by the Company other than for “cause” or by him for “good reason”, any unvested shares subject to such options or other equity incentives shall become fully vested and immediately exercisable in connection with such termination.
In connection with any termination by the Company other than for “cause” or by Mr. Braukman for “good reason” or as a result of his death or permanent and total disability the Company is required to execute a release and waiver of claims in favor of Mr. Braukman, as consideration for the execution and non-revocation by Mr. Braukman of a release agreement in favor of the Company and its shareholders and their respective directors, officers and employees. The foregoing payments shall be in lieu of any other severance benefits to which Mr. Braukman is entitled pursuant to any other severance plans, programs, arrangements, or policies of the Company.
In the event that Mr. Braukman’s employment with the Company is terminated by the Company for “cause”, or by Mr. Braukman other than for “good reason”, the Company shall pay to him (or his legal representative) any earned but unpaid salary amounts and any unreimbursed expenses through his final date of employment with the Company, and the Company shall have no further obligations to him.
The foregoing payments are in lieu of any other severance benefits to which Mr. Stringer is entitled pursuant to any other severance plans, programs, arrangements, or policies of the Company.
During the term of Mr. Braukman’s employment and for a period of: (i) two years following Mr. Braukman’s termination of his employment or (ii) one year following the Company’s termination of his employment, Mr. Braukman is prohibited from engaging in any Business Activities on behalf of any person, firm or corporation, and, subject to certain limitations, he shall not acquire any financial interest in any entity which engages in Business Activities within 200 miles of any of the Company’s offices in operation on the commencement date of the Braukman Employment Agreement and within 100 miles of any office of the Company established after such commencement date. During the period that the foregoing non-competition restriction applies, Mr. Braukman shall not, without the written consent of the Company: (i) solicit any employee of the Company or any of the Company’s affiliates to terminate his employment, or (ii) solicit any customers, partners, rese
llers, vendors or suppliers of the Company on behalf of any individual or entity other than the Company or its affiliates. “Business Activities” means conduct of business as a computer and communications technology management and/or consulting business providing information technology networking and data center services, including secure access, VOIP, storage, security, messaging solutions, network and mainframe connectivity consulting, remote network monitoring and management, network and system diagnostics, product maintenance and support, training, and product procurement solutions.
Outstanding Equity Awards at Fiscal 2008 Year End
Outstanding Equity Awards at Fiscal Year End Table Narrative.
The outstanding options listed under “Option Awards” primarily relate to options granted under the 2004 Equity Incentive Plan pursuant to option agreements, the principal terms of which are disclosed in the table.
The outstanding awards listed under “Stock Awards” primarily relate to restricted stock units under the 2004 Equity Incentive Plan pursuant to restricted stock unit agreements, the principal terms of which are disclosed in the table.
Accelerated Vesting of Equity Awards.
The applicable award agreement governing the outstanding equity awards may accelerate vesting in connection with a termination of employment, change in control, or other specified events.
Options Exercised and Stock Vested Table During Fiscal year 2008
Options Exercised and Stock Vested Table Narrative.
Director Compensation for Fiscal Year 2008
The following table shows the cash paid to each non-employee director for services rendered in that capacity during the fiscal year ended March 31, 2008.
Director Compensation Table Narrative
The “Fees Earned or Cash Paid” column includes the aggregate of all fees earned or paid in cash for services as a director, including annual retainer fees, committee and/or chairman fees, and meeting fees.
Directors who are employees of the Company or who are designated as a director by Pequot or Constellation, receive no compensation for their service as directors. As a result, we did not pay any compensation to Mr. Poch, Mr. Phillips, or Mr. Thomas Wasserman for serving on our Board of Directors.
Director Fees
Each director who is not an employee of our Company or who is not appointed to the Board of Directors by either Pequot or Constellation receives an annual fee of $25,000 as compensation for serving on our Board of Directors. Each such member of the board’s Audit, Compensation and Corporate Governance and Nominating Committees receives $2,500 per year, and each chairman of the committees receives $3,500 (except the chairman of the Audit Committee who receives $5,000), as compensation for serving on such committees. Effective April 2, 2008, non-employee directors who are not appointed to the Board of Directors by either Pequot or Constellation are also granted stock awards of 25,000 shares of common stock on their initial appointment or election to the Board of Directors. Beginning in January 2009 and each year thereafter these directors will be granted a stock award of shares of common stock in an amount to be determined by the Board.
The Company does not provide non-equity plan compensation or pension benefits to directors; nor does it provide any deferred compensation programs for directors.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Our Current Beneficial Owners
Our Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series A-4 Preferred Stock, Series A-5 Preferred Stock, Series A-6 Preferred Stock, Series A-7 Preferred Stock and Series A-8 Preferred Stock (collectively referred to as the “Series A Preferred Stock”) and Common Stock are the only classes of our voting securities presently outstanding. The Series A Preferred Stock votes on an as converted basis, such that each share of Series A Preferred Stock is entitled to that number of votes as equals the number of shares of Common Stock that the holder of such share of Series A Preferred Stock would receive upon conversion of the share of Series A Preferred Stock, provided that (i) for the shares of the Series A-1, A-2, and A-3 Preferred Stock, such number of votes shall not exceed such number of shares of Common Stock which would be received based on a conversion price of $1.45 per preferred share, (ii) the shares of the Series A-4, A-5, A-6, and A-7 Preferred Stock shall not exceed one vote per share, and (iii) the shares of the Series A-8 Preferred Stock, shall be one vote per each share of Common Stock into which the shares of Series A-8 Preferred Stock held by such holder would be converted if the Series A-8 conversion price were $1.177 per share (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares).
The following table sets forth as of May 31, 2008 the beneficial ownership of the following persons:
each person known by us to beneficially own 5% or more of our Series A Preferred Stock and/or our common stock, based on filings with the SEC and certain other information;
each of our “named executive officers” and directors; and
all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power. In addition, under SEC rules, a person is deemed to be the beneficial owner of securities which may be acquired by such person upon the exercise of options and warrants or the conversion of convertible securities within 60 days from the date on which beneficial ownership is to be determined. Our “named executive officers,” in accordance with SEC rules, are those executive officers who are required to be listed in the Summary Compensation Table provided in Item 11 of this Annual Report on Form 10-K. Except as otherwise indicated in the notes to the Beneficial Ownership Table, we believe that all shares are beneficially owned, and investment and voting power is held by, the persons named as owners; and the address for each beneficial owner listed in the table, except where otherwise noted, is MTM Technologies, Inc., 1200 High Ridge Road, Stamford, Connecticut 06905.
The following table does not include the Series A-9 Preferred Stock to be designated upon filing of a Restated Certificate that will be filed in connection with the our reverse stock split, however, the following table does include the anti-dilution effects of the issuance of the Series A-9 Preferred Stock. As of May 31, 2008, Pequot holds warrants to purchase 392,157 shares of our Series A-9 Preferred Stock that will become exercisable upon filing of a Restated Certificate.
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(18)
The address for Mr. Phillips is c/o Pequot Capital Management, Inc., 500 Nyala Farm Road, Westport, Connecticut 06880.
(19)
Does not include the shares of Series A Preferred Stock beneficially owned by Pequot Capital (see note (2) to this Beneficial Ownership Table), of which Mr. Phillips is a Venture Partner. Mr. Phillips does not have voting power nor investment power with respect to the Series A Preferred Stock beneficially owned by Pequot Capital.
(20)
Does not include the shares of our common stock beneficially owned by Pequot Capital (see note (3) to this Beneficial Ownership Table), of which Mr. Phillips is a Venture Partner. Mr. Phillips does not have voting power nor investment power with respect to our common stock beneficially owned by Pequot Capital.
(21)
The address for Mr. Wasserman is c/o Bear Stearns Asset Management Inc., 383 Madison Avenue, New York, New York 10179.
(22)
Does not include the shares of our Series A Preferred Stock beneficially owned by Constellation Venture, Constellation Offshore, BSC and CVC (see note (8) to this Beneficial Ownership Table). Mr. Wasserman is a Vice President of Constellation Ventures. Mr. Wasserman does not have voting power nor investment power with respect to the Series A Preferred Stock beneficially owned by Constellation Venture, Constellation Offshore, BSC or CVC.
(23)
Does not include the shares of our common stock beneficially owned by Constellation Venture, Constellation Offshore, BSC and CVC (see note (9) to this Beneficial Ownership Table). Mr. Wasserman is a Vice President of Constellation Ventures. Mr. Wasserman does not have voting power nor investment power with respect to the common stock beneficially owned by Constellation Venture, Constellation Offshore, BSC or CVC.
(24)
Does not include 75,000 shares of our common stock issuable upon exercise of options granted to Mr. Hicks, which are not exercisable within 60 days following the date of the Beneficial Ownership Table.
(25)
Includes those Series A Preferred Stock beneficially owned by our current executives officers and directors, as set forth in notes to this Beneficial Ownership Table.
(26)
Includes those common shares beneficially owned by our current executives officers and directors, as set forth in notes to this Beneficial Ownership Table.
Restated Shareholders’ Agreement
On August 1, 2005 we entered into an Amended and Restated Shareholders’ Agreement (as amended, the “Restated Shareholders Agreement”) with Pequot, Constellation, Howard A. Pavony and Steven H. Rothman. The Restated Shareholders Agreement reflected certain amendments to the original Shareholders’ Agreement entered into by the parties on May 21, 2004, as a condition to the consummation of our sale to the Pequot Fund and Pequot Partners of our Series A-1 Preferred Stock.
The Restated Shareholders Agreement provides that parties agree to vote, or cause to be voted, all securities of the Company owned by such party or over which such party has voting control so that the number of directors will consist of: (i) the Company’s CEO; (ii) two directors designated by Pequot Capital, or its assignee; (iii) one director designated by Constellation or its assignee; (iv) Mr. Rothman; (v) three “independent” directors, within the meaning of “independent” under the current rules of NASDAQ, selected by the Company’s nominating and corporate governance committee; and (vi) two additional independent directors to be selected by the CEO and reasonably acceptable to the Company’s nominating and corporate governance committee. Under certain circumstances where Pequot holds less than 25% of the securities Pequot purchased pursuant to the Purchase Agreement, the right to designate two directors in (ii) above will be reduced to one director and the above voting provisions will be adjusted in the manner described in the Restated Shareholders’ Agreement. On July 7, 2006, in connection with the termination of his employment with the Company, Mr. Rothman waived the obligation that Pequot and Constellation vote in favor of his appointment.
The obligation of the parties under the Restated Shareholders’ Agreement will expire upon the earliest to occur of (i) the completion of any voluntary or involuntary liquidation or dissolution of the Company, (ii) the sale of all or substantially all of the Company’s assets or of a majority of the outstanding equity of the Company to any person that is not a party to the Restated Shareholders’ Agreement, or (iii) December 10, 2009. Messrs. Rothman and Pavony’s obligation to vote for (i) two directors designated by Pequot Capital, and (ii) one director designated by Constellation or its assignee, shall terminate if (a) Pequot or their assignees own less than 10% of the outstanding Series A Preferred Stock (or shares of our common stock issuable upon conversion thereof) issued to Pequot, (b) Constellation or its assignees own less than 10% of the Series A-3 Preferred Stock (or shares of our common stock issuable upon conversion thereof) issued to Constellation, or (c) any other shareholders that are introduced to the company by Pequot own less than 10% of the shares acquired by such shareholders from the company in a transaction not including a public offering or (ii) if Messrs. Pavony and Rothman individually own less than 10% of the number of shares of common stock owned by such person on December 10, 2004.
The Restated Shareholders Agreement also contains provisions (i) restricting the transfer of any securities by shareholders party to the Restated Shareholders Agreement in certain circumstances and (ii) granting the Investors certain rights of first refusal and tag-along rights with respect to any dispositions by Messrs. Pavony and Rothman of their shares of common stock.
Item 13.
Item 13. Certain Relationships and Related Party Transactions and Director Independence
During fiscal 2008 and 2007 the Company paid approximately $152,000 and $123,000, respectively in fees to Tectura Corporation (“Tectura”) for certain consulting services related to the customization and management of the Company’s accounting systems. Funds controlled by Pequot Capital hold more than 10% of the equity securities of Tectura and Gerald A. Poch, Non-executive Chairman of the Board of the Company, is a director of Tectura.
During fiscal 2008 and 2007 the Company paid approximately $1,200,000 and $970,000, respectively in fees to Savvis, Inc. (“Savvis”) for certain technology and data center services. Members of the Constellation Group or funds affiliated with them held, during fiscal 2008 and 2007, more than 10% of the preferred equity securities of Savvis and Clifford Friedman, who is a member of Constellation Ventures Management II, LLC and a senior managing director of Bear Stearns Asset Management Inc., was a director of Savvis.
We are a party to a lease agreement, dated December 31, 2004, for our facility located in Peabody, MA. We became a party to this lease as part of the December 2005 acquisition of Nexl. The landlord for this facility is C&S Realty Peabody Trust, a nominee trust controlled by Clifford Rucker and his affiliates. Mr. Rucker owns approximately 25% of our outstanding common stock and was formerly the president of our Northeast region. The lease covers approximately 31,000 square feet, has a monthly rent of approximately $35,000 and terminates in February 2010.
On July 7, 2006, we entered into a consulting agreement with Steven Rothman in connection with the termination of his employment with the Company. This agreement provides that Mr. Rothman will perform certain consulting services for us until March 31, 2008. We will pay Mr. Rothman an annual consulting fee of $265,000, plus health benefits through December 31, 2007. Thereafter, we will pay Mr. Rothman certain transaction fees in the event we complete an acquisition introduced to the Company by Mr. Rothman. Mr. Rothman beneficially owns approximately 6% of our outstanding common stock.
On April 26, 2007, in connection with the termination of his employment with the Company, we entered into a consulting agreement with Francis J. Alfano and Consultant. Mr. Alfano is the sole member of the Consultant. This agreement provides that Consultant will perform certain consulting services for us until June 30, 2009. For services rendered under the Alfano Consulting Service Agreement, the Company paid or will pay Consultant (i) a signing bonus of $58,333.33 on May 15, 2007 in accordance with the normal payroll practices of the Company and (ii) fees at the rate of $29,166.67 per month, payable in arrears in twice monthly payments with the initial payment on May 15, 2007 in accordance with the normal payroll practices of the Company, provided that a lump sum payment on March 31, 2008 shall be made which shall include fees from April 1, 2008 through March 31, 2009. At the time of this transaction Mr. Alfano was Chief Executive Officer and a Director of the Company. As a condition to entering into this Agreement, Mr. Alfano resigned from the Board of Directors.
Director Independence
We undertook a review of the independence of our directors and, using the definitions and independence standards for directors provided in the rules of The NASDAQ Stock Market, we determined that all of our directors are "independent directors" as defined under the rules of The NASDAQ Stock Market.
In determining director independence for 2008, the board of directors considered the following transactions or relationships:
• Any indirect payments Mr. Poch and Mr. Phillips have received from us from their affiliation with Pequot arose solely from Pequot’s investments in our securities. Further, while Pequot has to date loaned us $5.5 million, this amount does not exceed 5% of our gross revenues for such fiscal year. Pequot has not loaned us any other amounts in the past three fiscal years.
• Any indirect payments Mr. Thomas Wasserman has received from us from his affiliation with Constellation arose solely from Constellation’s investments in our securities. Further, while Constellation has to date loaned us $500,000, this amount does not exceed 5% of our gross revenues for such fiscal year. Constellation has not loaned us any other amounts in the past three fiscal years.
Item 14.
Item 14. Principal Accountant Fees and Services
Principal Accounting Fees and Services
On November 15, 2007, we were notified that certain of the partners of GGK became partners of M&P in a limited asset purchase agreement. As a result, GGK resigned as our independent registered public accounting firm effective as of November 15, 2007 and M&P was appointed by our audit committee as our new independent registered public accounting firm for the Company’s annual financial statements for the year ended March 31, 2008.
Through November 15, 2007, GGK had a continuing relationship with RSM McGladrey, Inc. (“RSM”) from which it leased auditing staff who were full time, permanent employees of RSM and through which its partners provided non-audit services. Subsequent to November 15, 2007, this relationship ceased and M&P established, and maintains, a similar relationship with RSM. M&P has no full time employees and, therefore, none of the audit services performed were provided permanent full-time employees of M&P. M&P manages and supervises the audit and audit staff and is exclusively responsible for the opinion rendered in connection with its examination.
The following table sets forth the fees billed by our independent accountants for each of our last two fiscal years for the categories of services indicated.
(1) Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
(2) Consists of assurance and related services that are reasonably related to the performance of the audit and reviews of our financial statements and are not included in “audit fees” in this table. The services provided by our accountants within this category consisted of advice relating to SEC matters and employee benefit matters.
(3) Consists of professional services rendered by a company aligned with our principal accountant for tax compliance, tax advice and tax planning.
(4) The services provided by our accountants within this category consisted of advice and other services relating to our transaction with the Pequot entities and other matters.
Such fees have been pre-approved by our audit committee.
Audit Committee Pre-Approval Policy
We understand the need for M&P to maintain objectivity and independence in its audit of our financial statements. To minimize relationships that could appear to impair the objectivity of M&P, our Audit Committee has restricted the non-audit services that M&P may provide to us primarily to merger and acquisition due diligence and audit services, and valuation services and has determined that we would obtain even these non-audit services from M&P only when the services offered by M&P are more effective or economical than services available from other service providers.
The Audit Committee also has adopted policies and procedures for pre-approving all non-audit work performed by M&P and any other accounting firms we may retain. Specifically, the Audit Committee has pre-approved the use of M&P for detailed, specific types of services within the following categories of non-audit services: merger and acquisition due diligence and audit services; valuation services; internal control reviews; and reviews and procedures that we request M&P to undertake to provide assurances of accuracy on matters not required by laws or regulations. In each case, the Audit Committee has also set a specific annual limit on the amount of such services which we would obtain from M&P, and has required management to report the specific engagements to the committee on a quarterly basis and to obtain specific pre-approval from the Audit Committee for all engagements.
PART IV
Item 15.
Item 15. Exhibits, Financial Statements Schedules.
(a) Exhibits
Set forth below is a list of the exhibits to this Annual Report on Form 10-K.
Exhibit
Number
Description
2.1
Asset Purchase Agreement, dated September 17, 2004, among Network Catalyst, Inc., William Corbin, Rocci J. Della Maggiore and MTM Technologies, Inc. *
2.2
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. *
2.3
Stock Purchase Agreement, dated January 27, 2005, among Info Systems, Inc., Mark Stellini, Emidio F. Stellini, Jr., Jay Foggy, Richard Roux, Jennifer McKenzie and MTM Technologies, Inc. *
2.4
Merger Agreement, dated August 16, 2005, among NEXL, Inc., MTM Technologies (Massachusetts), LLC, MTM Technologies, Inc. and Clifford L. Rucker *
3.1
Restated Certificate of Incorporation dated December 21, 2007 *
3.2
Certificate of Amendment to Restated Certificate of Incorporation dated July 25, 2007 *
3.3
Amended and Restated By-Laws *
4.1
Purchase Agreement, dated January 29, 2004, among Micros-to-Mainframes, Inc., Pequot Private Equity Fund III, L.P. and Pequot Offshore Private Equity Partners III, L.P. *
4.2
Purchase Agreement, dated December 7, 2004, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
4.3
Amendment No. 1 to the Purchase Agreement, dated December 7, 2004, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
4.4
Amendment No. 2 to the Purchase Agreement, dated December 7, 2004, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
4.5
Waiver Letter dated December 9, 2005, by 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. and CVC II Partners, LLC *
4.6
Purchase Agreement, dated March 29, 2007, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
4.7
Purchase Agreement, dated May 24, 2007, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
4.8
Purchase Agreement, dated July 25, 2007, among MTM Technologies, Inc., Pequot Private Equity Fund III, L.P., and Pequot Offshore Private Equity Partners III, L.P. *
4.9
Amended and Restated Shareholders’ Agreement, dated August 1, 2005, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
4.10
Amended and Restated Registration Rights Agreement, dated August 1, 2005, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
4.11
Amendment No. 1 to the Amended and Restated Registration Rights Agreement, dated November 23, 2005, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
4.12
Amendment No. 2 to the Amended and Restated Registration Rights Agreement, dated March 29, 2007, among MTM Technologies, Inc., 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. and CVC II Partners, LLC *
* Incorporated by Reference. See Exhibit Index.
Financial Statements and Schedules
We have provided in Item 8 to this Annual Report on Form 10-K a complete list of the financial statements being filed with this Form 10-K. There are no financial statement schedules applicable to this Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
MTM TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheet of MTM Technologies, Inc. and Subsidiaries as of March 31, 2008 and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTM Technologies, Inc. and Subsidiaries as of March 31, 2008 and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assertion about the effectiveness of MTM Technologies, Inc.’s internal control over financial reporting as of March 31, 2008 included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.
MCGLADREY & PULLEN, LLP
New York, New York
June 23, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
MTM TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheet of MTM Technologies, Inc. and Subsidiaries as of March 31, 2007, and the related consolidated statements of operation, shareholders’ equity and cash flow for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTM Technologies, Inc. and Subsidiaries as of March 31, 2007 and the results of their operations and their cash flows for the year ended, in conformity with U. S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective April 1, 2006, the Company changed its method of accounting for share-based payments to adopt Statement of Financial Accounting Standards No. 123(R), Share-Based Payments.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
June 27, 2007
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See Notes to Consolidated Financial Statements.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See Notes to Consolidated Financial Statements.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
See Notes to Consolidated Financial Statements.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See Notes to Consolidated Financial Statements.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
The accompanying consolidated financial statements include the accounts of MTM Technologies, Inc. and its wholly owned subsidiaries, MTM Technologies (US), Inc., Info Systems, Inc. and MTM Technologies (Massachusetts) LLC, collectively referred to as (the “Company”). All significant intercompany accounts and transactions have been eliminated. The Company operates on a fiscal year that ends on March 31.
The Company is a leading national provider of sophisticated information technology solutions services including information technology networking, communications, software applications and data center services, including secure access, voice over internet protocol, storage, security and messaging solutions. The Company serves as a single source provider of advanced technology solutions to support its clients’ mission-critical business processes. The Company’s clients consist of divisions of Global 2000 corporations, middle market corporations (generally those with $50 million to $1 billion in revenues), municipal, state and federal government agencies, and educational, financial and health-care institutions. The Company serves clients in most major metropolitan markets in the United States.
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 suppliers, with or without cause, upon short notice, or immediately upon the occurrence of certain events. The sales of products from the Company’s two largest suppliers accounted for 29% and 19% of all product sales for the year ended March 31, 2008. 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 an amount to allow for profitable resale at a competitive market price.
Liquidity
The Company sustained net losses during the years ended March 31, 2008 and 2007. Working capital at March 31, 2008 was a deficit of $3.3 million as compared to a working capital deficit of $12.4 million at March 31, 2007. The Company has made a concerted effort in the past two years to improve its working capital position, including issuing additional shares of preferred stock raising over $9.0 million in the current fiscal year alone, a $6.0 million restructuring in fiscal 2007, and instituting other cost control initiatives and programs. Capital expenditures for the year ended March 31, 2008 were $2.4 million compared with $6.6 million for the comparable prior year period. The Company currently has no commitments for material capital expenditures. In August 2007, the Company successfully refinanced its working capital lines of credit with a $34 million credit facilities agreement with GE Commercial Distribution Finance Corporation (“CDF”) as Administratvie Agent, which provided the Company with additional capital and increased purchasing flexibility, see Note 2 Credit Facilities. Our business requires significant levels of working capital to fund future revenue growth and current operations. MTM has historically relied on and continues to rely heavily on, trade credit from vendors and the credit facilities for working capital needs. The Company is focused on looking at avenues to secure additional open lines of credit with vendors and has recently negotiated additional flexibility in borrowing restrictions and reserves under our credit facilities. We continue to drive collection of accounts receivable and are actively managing our expenses to achieve greater economies of scale.
As of June 17, 2008 the Company has successfully completed several financing arrangements which generated net proceeds of $9.0 million, including $2.5 million in February 2008 from the Pequot Notes, see Note 3 Related Party Note Payable, another $3.5 million from the Pequot June 11 Notes, the Pequot June 16 Notes, and the Constellation Notes, and $3.0 million in additional financing under the CP/NEBF Credit Agreement, see Note 14 Subsequent Events. The proceeds of which will be used to fund working capital needs. Additionally, the Company has negotiated additional flexibility in availability under the Credit Facilities Agreement with CDF and has received relaxed covenant restrictions for the first quarter of fiscal 2009 from both CDF and CP Investment Management and NEBF, see Note 14 Subsequent Events.
Our future liquidity and capital requirements will depend on numerous factors, including, general economic conditions and conditions in the technology industry in particular; the cost effectiveness of our product and service development activities; our dependence on third party licenses and our ability to maintain our status as an authorized reseller/service provider of IT products, and our ability to leverage our centralized infrastructure, all of which may impact our ability to achieve and maintain profitability. The Company anticipates that its available cash including the proceeds received from the financing arrangements described above in the first quarter of fiscal 2009 together with its available credit facilities should be adequate to fund our operations in the foreseeable future. The Company currently has no commitments for material capital expenditures. To the extent that our existing capital resources are insufficient to meet our working capital requirements we may seek to raise additional funds from the Investors or seek additional financing arrangements. However, no assurance can be given that such financing may be obtained on terms attractive to us, or at all. Furthermore, any additional debt or equity financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed could have a material adverse effect on our business, operating results and financial condition.
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 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 periods. Actual results could differ from these estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limits. Credit risk is limited due to the large number of customers and their dispersion across geographic areas. The Company did not have any customer at March 31, 2008 or 2007 which accounted for more than 10% of its total accounts receivable. At March 31, 2008 the combined top two customer balances accounted for approximately 13% of the Company’s total accounts receivable. Credit is extended to customers based on an evaluation of their financial condition in an effort to reduce the risk of loss. Collateral is generally not required.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based on historical experience, customer credit risk and application of the specific identification method. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible.
Information relating to the allowance for doubtful accounts is as follows (in thousands):
(a) Includes bad debt provisions.
(b) Includes write-offs for uncollectible accounts receivables and net changes to allowance estimates.
Inventories
Inventories, comprised principally of computer hardware and software, are stated at the lower of cost or market using the first-in, first-out method.
Fair Value of Financial Instruments
The estimated fair value of amounts reported in the consolidated financial statements has been determined by using available market information and appropriate valuation methodologies. All current assets are carried at their cost and current liabilities are recorded at their contract amount, which approximates fair value because of their short term nature. The carrying value of short-term financing arrangements and long-term debt obligations approximates fair value because interest rates over the relative term of these instruments approximate current market interest rates.
Property and Equipment
Property and equipment, which includes assets under capital leases, are stated at cost and are depreciated using the straight-line method over estimated useful lives, generally ranging from three to seven years. Leasehold improvements are amortized over the shorter of the lease term or economic life of the related improvement. Expenditures which extend the useful lives of the existing assets are capitalized. The cost of maintenance and repairs are charged to operations as incurred.
The Company incurred approximately $7.3 million and $6.6 million of depreciation and amortization expense for the years ended March 31, 2008 and 2007, respectively.
The following is a summary of property and equipment held by the Company at:
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Software Development Costs
The cost of software developed for internal use incurred during the preliminary project stage is expensed as incurred. Direct costs incurred during the application development stage are capitalized. Costs incurred during the post implementation/operation stage are expensed as incurred. Capitalized software development costs are amortized on a straight-line basis over their estimated useful lives, generally three years.
Goodwill
Goodwill is tested for impairment on an annual basis and more frequently if facts and circumstances indicate goodwill carrying values exceed estimated fair values. Because the Company has fully integrated its acquisitions, it has determined that it has only one reporting unit for purposes of testing for goodwill impairment. Based on the impairment tests performed, there was no impairment of goodwill in fiscal 2008 and 2007.
The change in goodwill during the years ended March 31, 2007 and 2008, respectively, was as follows (in thousands):
Intangible Assets
Definite-lived intangibles, which mainly consist of client relationships, are amortized over their estimated useful lives, three to five years.
Intangible assets consist of the following at:
Amortization expense amounted to approximately $2.0 million and $2.8 million for the years ended March 31, 2008 and 2007, respectively. Estimated amortization expense for each of the next few fiscal years is as follows (in thousands):
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered to be impaired when its carrying amount exceeds the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition. Long-lived assets include property and equipment. The amount of impairment loss, if any, is charged by the Company to current operations. For each of the fiscal years ended March 31, 2008 and 2007, no such impairment existed.
Revenue Recognition
The Company recognizes revenue from the sales of hardware when the rights and risks of ownership have passed to the client, upon shipment or receipt by the client, depending on the terms of the sales contract with the client. Revenue from the 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 of the terms and conditions of the client contract. Service contracts generally do not extend over one year, and are recognized when persuasive evidence of an arrangement exists, the sales price is fixed and determinable, and collection of the resulting receivables is reasonably assured. Revenue is recognized as services are performed or over the contracted period, as specified in the agreement. For arrangements with multiple deliverables, delivered items are accounted for separately, provided that the delivered item has value to the client 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.
Shipping and handling costs are included in the cost of sales.
Vendor Programs
Funds received from vendors for product rebates, commissions and marketing programs are recorded as adjustments to product costs, revenue, or selling, general and administrative expenses according to the nature of the program. Some of these programs may extend over one or more quarterly reporting periods. The Company accrues rebates or other vendor incentives as earned based on sales of qualifying products or as services are provided in accordance with the terms of the related program.
Operating Leases
The Company leases office space and distribution facilities under operating leases. Most lease agreements contain rent escalation clauses and/or contingent rent provisions. For purposes of recognizing minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial possession to begin amortization, which is generally when the Company enters the space.
Accounting for Stock-Based Compensation
The Company maintains several stock equity incentive plans under which incentive stock options, non-qualified stock options, and restricted stock units (“RSUs”) may be granted to employees (including officers), consultants, independent contractors, and non-employee directors. The Company also has an Associate Stock Purchase Plan (“ASPP”). Effective April 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment” (“SFAS No. 123(R)”), which replaced SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and superseded Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Stock-based compensation expense represents the cost related to stock-based awards granted by the Company. RSUs issued by the Company are equivalent to nonvested shares, as defined by SFAS No. 123(R). No stock-based compensation expense was recognized in the consolidated financial statements related to the ASPP, since the related purchase discounts did not exceed the amount allowed under SFAS No. 123(R) for non-compensatory treatment. See Note 7 Stock and Benefit Plans for additional details.
Per Share Data
Basic net 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, which are convertible into 37.6 million and 24.1 million common shares as of March 31, 2008 and 2007, respectively, have not been included in the weighted-average shares used for the calculation of earnings per share for the years then ended since the effect of such securities would be anti-dilutive.
Income Taxes
Deferred income taxes are provided, using the asset and liability method, for temporary differences between financial and tax reporting purposes which arise principally from the deductions related to the allowances for doubtful accounts, certain capitalized software costs, the basis of inventory and differences arising from book versus tax depreciation methods. A valuation allowance for deferred tax assets will be established if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. We have recorded a 100% valuation allowance against the deferred tax assets as of March 31, 2008 and 2007.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB deferred the effective date for one year for certain nonfinancial assets and nonfinancial liabilities and removed certain leasing transactions from its scope. The Company must adopt these new requirements no later than its first fiscal quarter of 2009 and is currently evaluating whether the adoption of SFAS No. 157 will have an impact on our consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, or the Company’s first quarter of fiscal 2009. The Company does not expect that the adoption of this standard will have a material impact on its future consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations” (“SFAS No. 141(R)), which replaces SFAS No. 141, “Business Combinations”, and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at fair values as of that date, with limited exceptions. SFAS No. 141(R) requires the acquirer to record contingent consideration at the estimated fair value at the time of purchase and establishes principles for treating subsequent changes in such estimates which could affect earnings in those periods. SFAS 141(R) also requires additional disclosures designed to enable users of the financial statements to evaluate the nature and financial effects of the business combination and disallows the capitalization of acquisition costs. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will implement the provisions of SFAS No. 141(R) for any acquisitions made by the Company on or subsequent to April 1, 2009.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Credit Facilities
On August 21, 2007, the Company entered into a secured Credit Facilities Agreement (the "Credit Facilities Agreement") with CDF as Administrative Agent, GECC Capital Markets Group, Inc. as Sole Lead Arranger and Sole Bookrunner, and CDF and the other lenders listed in the Credit Facilities Agreement and the signature pages thereto as (the “Lenders”), providing a combined maximum availability of up to $34 million.
The Credit Facilities Agreement refinances the Company’s prior senior lender facilities and is secured by a first priority lien on and security interest in substantially all of the present and future assets of the Company, including the issued and outstanding stock of the Company (other than MTM Technologies, Inc.), except for permitted encumbrances. Credit and advances to the Company pursuant to the Credit Facilities Agreement will be used to fund working capital and floor-planning needs, and for general corporate purposes. The initial advances were used to prepay all outstanding obligations of the Company under the Company’s existing revolving credit facility with CIT Group/Business Credit, Inc., as agent (“CIT”) and floor planning facility with Textron Financial Corporation (“Textron”), which facilities were terminated upon such prepayments in accordance with separate termination agreements, each dated August 21, 2007, which the Company entered into with CIT with respect to the CIT facility and Textron with respect to the Textron facility. Terms not otherwise defined in this discussion have the meaning ascribed to them in the Credit Facilities Agreement.
The Revolving Credit Facility under the Credit Facilities Agreement encompasses a two year revolving credit facility, unless earlier terminated by the Company or the Lenders, for up to $20 million, subject to a borrowing base based on eligible accounts receivable, minus the sum of any outstanding Swingline Loan, Floorplan Shortfall, Letter of Credit Exposure, and Bid Bonds, and certain other limitations. All amounts under the Credit Facilities Agreement are due upon the termination thereof, subject to optional prepayment in accordance with the terms of the Credit Facilities Agreement, and mandatory repayment of any Swingline Loan in the event that any Lender fails to pay its allocated portion thereof. Amounts borrowed under the Revolving Credit Facility bear interest at LIBOR plus 3%.
The Floorplan Loan Facility under the Credit Facilities Agreement is not a commitment to lend or advance funds but is a discretionary facility, for up to $14 million, unless terminated by the Company or the Lenders, which allows the Company to finance inventory purchases from vendors as may be approved by the Administrative Agent, on an up to 45-day interest-free basis in many cases. Interest accrues after expiration of any applicable interest free period at a rate to be determined under each Transaction Statement, and not to exceed a maximum rate of 16% per annum in the event the Company objects to the terms under any Transaction Statement. Generally, the Company would receive at least 60 days advance notice of a termination of the Floorplan Facility, during which period the Company would continue to be able to finance inventory purchases under the facility.
The Letter of Credit Facility under the Credit Facilities Agreement will allow the Company to request standby letters of credit and commercial letters of credit for the account of the Company from time to time up to the lesser of $2 million or then applicable availability limits less certain outstanding obligations of the Company under the Credit Facilities Agreement. As of March 31, 2008, the Company has no outstanding letters of credit.
The Credit Facilities Agreement will also give the Company access to further potential purchase order financing through CDF's own “Star” (Short Term Accounts Receivable) program.
The Company will pay (i) on a monthly basis, an Unused Revolving Fee of 15 basis points on the difference between $20 million and the outstanding daily balance of the Revolving Loans (unless the Aggregate Revolving Loan, Swingline Loan and Letter of Credit Exposure is greater than 67% of $20 million), (ii) on an annual basis, an Annual Facility Fee of 20 basis points of the then-Aggregate Revolving Loan Commitment, (iii) letter of credit fees for each letter of credit issued pursuant to the Letter of Credit Facility of 3% per annum of the undrawn amount of such letter of credit plus a fronting fee of 0.125% of the face amount of each letter of credit, (iv) a closing fee to the Administrative Agent on the Credit Facilities Agreement, and (v) an annual management fee to the Administrative Agent.
The Company entered into a First Amendment to the Credit Facilities Agreement with CDF, effective August 21, 2007, which provided that as to inventory acquired by the Company other than pursuant to the Floorplan Loan Facility, there will be a maximum invoice amount of $1.5 million at any time against which the Company may seek financing under the Credit Facilities Agreement and for certain modifications to the definitions regarding certain covenant calculations and floor plan inventory value to reflect the intent of the parties when they entered in the Credit Facilities Agreement.
Effective as of February 4, 2008, the Company entered into a Second Amendment to the Credit Facilities Agreement with CDF, which has given the Company additional flexibility whereby the Company is allowed to borrow against certain other receivables. On February 28, 2008, the Company entered into a Third Amendment to the Credit Facilities Agreement in order to (a) accommodate the Amended Pequot Notes and the Pequot Warrants, see Note 3 Related Party Note Payable, since the terms and conditions of the Credit Facilities Agreement gives CDF the right to consent to and approve of various indebtedness incurred by the Company, (b) modify certain financial covenants contained in the Credit Facilities Agreement by reducing required minimum EBITDA amounts for the fiscal quarters ending on March 31, 2008 and on June 30, 2008, and (c) update the disclosures with respect to the representations and warranties in the Credit Facilities Agreement.
The Credit Facilities Agreement, as amended through March 31, 2008 requires, among other things, that the Company maintain certain financial covenants including Maximum Total Funded Indebtedness to EBITDA of not greater than 4.00 to 1.00 for the preceding four fiscal quarters then ended, beginning with the period ended March 31, 2008; Minimum EBITDA for the fiscal quarter ending on March 31, 2008 of $440,000, on June 30, 2008 of $1,365,000 and for each quarter thereafter to June 30, 2009, $2,000,000; Minimum Excess Cash/Marketable Securities plus Availability of $1,500,000 on the last day of each calendar month; and Minimum Liquidation Multiple of 1.20 to 1.00 as of the last day of each fiscal month; restriction on the Company’s ability to incur certain additional indebtedness, and various customary provisions, including affirmative and negative covenants, representations and warranties and events of default. Upon a breach or an event of default by the Company with respect to the Amended Pequot Notes, Pequot Warrants or the Credit Facilities Agreement with CDF not cured by the Company within any applicable grace period, the Lenders may terminate the Credit Facilities Agreement and/or declare all amounts outstanding under the Credit Facilities Agreement immediately due and payable and exercise other remedies including foreclosure of the security for the obligations under the Credit Facilities Agreement.
As of March 31, 2008, the Company was in compliance with all covenants prescribed under the Credit Facilities Agreement.
Available funds under the Credit Facilities Agreement net of the $1.5 million cash reserve amounted to approximately $4.3 million at March, 31, 2008.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3. Related Party Note Payable
On February 28, 2008, the Company issued and sold to (1) Pequot Private Equity Fund III, L.P (“PPEF”) a promissory note in the principal amount of $2,191,123 (the “PPEF Note”), (2) Pequot Offshore Private Equity Partners III, L.P (“POPEP” and collectively with PPEF, “Pequot”) a promissory note in the principal amount of $308,877 (the “POPEP Note” and collectively with the PPEF Note, the “Pequot Notes”), (3) PPEF warrants entitling PPEF to purchase 343,705 shares of the Company’s next designated series of preferred stock at an exercise price of $.6375, (the “PPEF Warrants”) and (4) POPEP warrants entitling POPEP to purchase 48,452 shares of the Company’s next designated series of preferred stock at an exercise price of $.6375, (the “POPEP Warrants”, and collectively with the PPEF Warrants, the “Pequot Warrants”). At March 31, 2008, Pequot owned approximately 56% of the Company’s voting stock and had the right to acquire up to 59% of the Company’s voting stock. Both Gerald A. Poch and Sterling Phillips are members of the Company’s Board of Directors and are also affiliated with Pequot. Proceeds from the Pequot Notes will be used to fund working capital needs.
The Pequot Notes were due and payable in full on the later of (a) March 29, 2008, or (b) the date that the Company has obtained all necessary consents from its lenders. On March 28, 2008 the Company and Pequot amended the Pequot Notes (the “Amended Pequot Notes”) to change the Maturity Date as follows: thirty percent (30%) of the principal amount of the Amended Pequot Notes ($750,000) is due and payable on December 28, 2008, and the remaining principal balance and all interest accrued from February 28, 2008 to the date of payment of the principal amount is due on March 28, 2009. The Amended Pequot Notes will bear interest at a rate per annum equal to 8.5% . Interest on the Amended Pequot Notes shall be due and payable in cash or, at the option of the Company, in shares of the Company’s next designated series of preferred stock at a price per share of $.561.
The right of repayment of principal and interest on the Amended Pequot Notes is subordinated to the rights and security interest of (i) CDF in connection with the August 21, 2007 Credit Facilities Agreement with CDF, as Administrative Agent, GECC Capital Markets Group, Inc., as Sole Lead Arranger and Sole Bookrunner, and CDF and the other lenders listed in the Credit Facilities Agreement, and (ii) Columbia Partners, L.L.C. Investment Management, as Investment Manager and National Electric Benefit Fund (“NEBF”) in connection with the November 23, 2005, secured credit agreement (the “CP/NEBF Credit Agreement”) with Columbia Partners, L.L.C. Investment Management, as Investment Manager, and NEBF, as Lender (CDF and NEBF collectively, the “Senior Lenders” and the Credit Facilities Agreement and the CP/NEBF Credit Agreement collectively the “Senior Debt”). While any default or event of default has occurred and is continuing with respect
to any Senior Debt, the Company is prohibited from making any payments or distribution in respect of the Amended Pequot Notes.
Upon an event of default, as set forth in the Amended Pequot Notes, the holders of the Amended Pequot Notes may declare all amounts outstanding under the Amended Pequot Notes immediately due and payable and exercise other remedies permitted by the Amended Pequot Notes or at law or in equity, subject to the above mentioned subordination. The foregoing description of the Amended Pequot Notes does not purport to be complete, and is qualified in its entirety by reference to the full text of such document.
The Pequot Warrants expire on March 29, 2012. The holders of the Pequot Warrants may exercise the purchase rights represented by the Pequot Warrants at any time after the Company’s designation of the series of preferred stock for which they are exercisable. Cashless exercise is permitted. The purchase price per share at which the holders of the Pequot Warrants can purchase the Company’s shares of its next designated series of preferred stock is $.6375 per share. The Company allocated and charged approximately $0.1 million to debt discount, which will be amortized over the life of the Amended Pequot Notes to interest expense, and assigned and credited to additional paid in capital approximately $0.1 million for the fair value of the Pequot Warrants. The values attributed to the Pequot Warrants were determined utilizing the Black-Scholes model. The foregoing description of the Pequot Warrants does not purport to be complete, and is qualified in its entirety by reference to the full text of such document.
Note 4. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5. Restructuring and Other Charges
During fiscal 2007, the Company implemented a cost reduction plan (the “2007 Restructuring Plan”) designed to improve operating income through reductions of selling, general and administrative expenses (“S,G&A”) and enhancements in gross margin. The 2007 Restructuring Plan was approved by senior management and included significant headcount reductions associated with the final stages of integrating the acquired companies, facility consolidations, as well as other cost reductions. As part of the 2007 Restructuring Plan, the Company also restructured and consolidated other job functions within all regions. This plan resulted in restructuring charges for the year ended March 31, 2007 totaling $6.0 million; $3.1 million primarily related to a reduction in force of senior and middle management, another $1.4 million related to employee terminations, a charge of $0.8 million related to the closure and underutilization of certain facilities and the remaining $0.7 million was for the write-off of other non-cash items. The Company substantially completed the 2007 Restructuring Plan in fiscal 2007; however future cash outlays related to the payment of the facility costs will continue until June 2011.
The payment activities and adjustments in fiscal 2008 and the remaining liability at March 31, 2008 related to the 2007 Restructuring Plan are summarized in the table below.
During the fourth quarter of fiscal 2008 the Company eliminated certain positions and further streamlined operations. On February 6, 2008, the Company notified approximately 42 of its employees that their employment would be terminated immediately. The Company’s total cost incurred in connection with these terminations was approximately $0.4 million, which was charged to S,G &A for the year ended March 31, 2008. This amount included severance-related costs of approximately $0.3 million. The Company paid out a majority of the costs described above in the quarter ended March 31, 2008.
Additionally, results for the year ended March 31, 2007 include $2.0 million of non-recurring charges. During the quarter ended December 31, 2006 the Company recognized $0.6 million in integration costs for plan implementation and personnel redundancy costs. This amount is included in S,G&A. The balance of $1.4 million of other one-time charges were incurred in the quarter ended September 30, 2006 and consisted of $0.5 million of charges recorded in cost of products sold for a write-off of obsolete inventory obtained as part of prior business acquisitions and $0.9 million of charges to S,G&A.
Note 6. Long-Term Debt
Secured Promissory Note
On November 23, 2005, the Company entered into the CP/NEBF Credit Agreement with Columbia Partners, L.L.C. Investment Management, as Investment Manager (“CP Investment Management”), and NEBF, as Lender (the “Lender”), as amended by Amendment No. 1 on July 31, 2007, whereby the Company issued and sold to the Lender a promissory note in the principal amount of $25 million (the “Note”) and the Company issued and sold to the Lender a warrant entitling the Lender to purchase 700,000 shares of the Company’s Common Stock at an exercise price of $4.06 per share (the “Lender Warrant”).
As an inducement to CP Investment Management and NEBF (collectively, the “Junior Creditor”) to enter into a Subordination Agreement dated as of August 21, 2007 (the "Subordination Agreement") with CDF, for itself and agent to the Lenders under the Credit Facilities Agreement, the Company entered into Amendment No. 2 to the CP/NEBF Credit Agreement. Pursuant to Amendment No. 2, the CP/NEBF Credit Agreement was extended until November 23, 2010. Mandatory principal prepayments are also due upon the occurrence of a Liquidity Event or Partial Liquidity Event, generally involving a Change of Control or the issuance by the Company of securities, the proceeds of which exceed $25,000,000. The amount outstanding on the Note bears interest equal to 4.52%; of which the Applicable Current Cash Rate of interest was reduced from 2% to 1% per annum through the first anniversary of the Second Amendment Date, and then will increase back to 2% per annum through November 22, 2009,
and then will increase to 8% per annum thereafter. The Applicable Current Cash Rate is payable quarterly in cash and all remaining interest will accrue and only become due at maturity. Upon maturity or in the event of acceleration or upon the occurrence of certain liquidity events, the Company will pay a payment premium in respect of the Note equal to an amount which, when combined with previous payments made, will yield an internal rate of return to the Lender of 11% per annum from the Closing Date through and including July 31, 2007, the First Amendment Date. For the period from August 1, 2007 through and including August 21, 2007, the Second Amendment Date, the amount required will provide the Lender with an internal rate of return during such time period of 13.5% per annum. At all times thereafter, until the date on which all Obligations have been paid in full, the amount required will provide the Lender with an internal rate of return during such time period of 15% per annum, except during any period i
n which an Event of Default shall have occurred and be continuing, in which case the internal rate of return for such period shall be adjusted to 17% per annum. At March 31, 2008, $6.6 million in interest has been accrued on the Note, $0.1 million is accrued and payable within the next quarter, and $6.5 million is accrued and is payable at maturity.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On February 28, 2008, the Company entered into Amendment No. 3 to the CP/NEBF Credit Agreement in order to (a) accommodate the Amended Pequot Notes and the Pequot Warrants since the terms and conditions of the CP/NEBF Credit Agreement gives the Lender the right to consent to and approve of various indebtedness incurred by the Company, (b) modify certain financial covenants contained in the CP/NEBF Credit Agreement by reducing required minimum EBITDA amounts for the fiscal quarters ending on March 31, 2008 and on June 30, 2008, and (c) update the disclosures with respect to the representations and warranties in the CP/NEBF Credit Agreement.
Required financial covenants were also modified to coincide substantially with those under the Credit Facilities Agreement. Amendments No. 2 and No. 3 to the CP/NEBF Credit Agreement requires, among other things, that the Company maintain certain financial covenants including Maximum Total Funded Indebtedness to EBITDA of not greater than 4.40 to 1.00 for the preceding four fiscal quarters then ended, beginning with the period ended March 31, 2008; Minimum EBITDA for the fiscal quarter ending on March 31, 2008 of $396,000, on June 30, 2008 of $1,228,500 and for each quarter thereafter to June 30, 2009, $1,800,000; Minimum Excess Cash/Marketable Securities plus Availability of $1,350,000 on the last day of each calendar month; and Minimum Liquidation Multiple of 1.08 to 1.00 as of the last day of each fiscal month. Subject to the terms of the Subordination Agreement, upon an event of default, the lenders under the CP/NEFB Credit Agreement may terminate such Credit Agreement and/or declare all amounts outstanding immediately due and payable and exercise other remedies including foreclosure of the security for the obligations under the CP/NEFB Credit Agreement, as amended. Terms not otherwise defined in this discussion have the meaning ascribed to them in the CP/NEFB Credit Agreement, as amended or in the Subordination Agreement. As of March 31, 2008, the Company was in compliance with all covenants prescribed under the CP/NEFB Credit Agreement.
Pursuant to the Subordination Agreement, the Junior Creditor is entitled to receive (a) fee payments due at closing of Amendment No. 2, (b) regularly scheduled cash interest payments as and when due, and (c) mandatory principal prepayments due upon the occurrence of a Liquidity Event or Partial Liquidity Event, subject to prior notice thereof to the senior lenders and the failure by the senior lenders to issue a blockage notice. Notwithstanding the foregoing, payments described in (b) and (c) above may not be received by the Junior Creditor during any payment blockage period following a payment default or a non-payment default under the Senior Loan Documents. Blockage periods for non-payment defaults may not exceed 180 days in any year. Under the Subordination Agreement, the Junior Creditor also agrees not to exercise remedies under the CP/NEFB Credit Agreement until the earliest of the date that is 10 days following the date on which the senior lenders accelerate the se
nior debt, the date of commencement of a bankruptcy case against any Company or, in the case of acceleration payments under the CP/NEFB Credit Agreement, 120 days and in the case of other remedies, 180 days after notice of default from the Lenders to the senior lenders. Terms not otherwise defined in this discussion have the meaning ascribed to them in the Subordination Agreement. The Company paid a one-time modification fee of $250,000, which was advanced under the Credit Facilities Agreement, and issued a second Warrant to the NEBF for the right to purchase up to the maximum number of 700,000 shares of the Common Stock of MTM Technologies at a price per share of $1.17 per share.
On November 23, 2005, in connection with the issuance of the Note and the related Lender Warrant, the Company allocated and charged $2.2 million to debt discount, which will be amortized over the life of the Note to interest expense, and assigned and credited to additional paid in capital $2.2 million for the fair value of the Lender Warrant. The Company is permitted to settle the warrants with unregistered shares. On August 21, 2007, in connection with the Subordination Agreement, the Company issued a second Warrant (collectively with the Lender Warrant, the “Lender Warrants”) and allocated and charged $0.5 million to debt discount, which will be amortized over the remaining life of the Note to interest expense, and assigned and credited to additional paid in capital $0.5 million for the fair value of the second Warrant. The values attributed to the Lender Warrants were determined utilizing the Black-Scholes model.
Capital Leases
The Company maintains capital leases for computer equipment and vehicles, with effective interest rates ranging from 6.3% to 8.7% . The majority of the lease payments expire by May 2009.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7. Stock and Benefit Plans
The Company maintains several stock equity incentive plans under which incentive stock options, non-qualified stock options, RSUs may be granted to employees (including officers), consultants, independent contractors, and non-employee directors.
Stock Option Plans
We have adopted the following stock plans:
a 1993 Employee Stock Option Plan, which provides for the grant of options to purchase an aggregate of 250,000 shares of our common stock, of which, as of March 31, 2008, 26,666 shares have been issued upon exercise of options and 50,000 shares are subject to outstanding options;
a 1996 Stock Option Plan, which provides for the grant of options to purchase an aggregate of 350,000 shares of our common stock, of which, as of March 31, 2008, 79,600 shares have been issued upon exercise of options and 10,000 shares are subject to outstanding options;
a 1998 Stock Option Plan, which provides for the grant of options to purchase an aggregate of 250,000 shares of our common stock, of which, as of March 31, 2008, 6,000 shares have been issued upon exercise of options and 86,900 shares are subject to outstanding options;
a 2000 Long-Term Performance Plan, which provides for the award of an aggregate of 350,000 shares of our common stock, of which, as of March 31, 2008, 89,800 shares have been issued upon the exercise of options and 130,000 shares are subject to outstanding awards;
a 2002 Long-Term Performance Plan, which provides for the award of an aggregate of 250,000 shares of our common stock, of which, as of March 31, 2008, 15,000 shares have been issued upon the exercise of options and 60,000 shares are subject to outstanding awards; and
a 2004 Equity Incentive Plan (the “2004 Plan”), which provides for the award of an aggregate of 6,000,000 shares of our common stock, of which, as of March 31, 2008, 378,443 shares have been issued upon the exercise of options and vested RSUs and 3,287,326 shares are subject to outstanding awards.
The 1993 Stock Option Plan and the 1996 Stock Option Plan have expired. Accordingly, we can no longer grant new options under such plans. The Company has chosen, with the approval of the Board of Directors, not to grant future options from the 1998, 2000 and 2002 Plans. Under the terms of the 2004 Plan, options to purchase common stock generally are granted at not less than fair market value, become exercisable as established by the Board of Directors (generally ratably over four years) and generally expire ten years from the date of grant. At March 31, 2008, we had outstanding options and RSUs to purchase approximately 3.6 million shares of common stock and approximately 2.3 million shares of common stock are available for future awards. On June 6, 2007, the Compensation Committee of the Board of Directors approved an increase in the number of shares available for issuance under the 2004 Plan from 4,000,000 to 4,350,000 shares. On November 20, 2007 the shareholders approved an increase in the number of shares available for issuance under the 2004 Plan from 4,000,000 to 6,000,000 shares which included the 350,000 shares noted above.
The Company adopted SFAS No. 123(R) effective April 1, 2006 using the modified prospective transition method. Under this transition method, stock-based compensation cost recognized in the Company’s statement of operations includes: (a) the estimated expense for stock options and RSUs granted prior to, but not fully vested as of the adoption date, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) the estimated expense for stock options and RSUs granted subsequent to the adoption date, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized on a straight-line basis over the awards’ requisite service period, typically the vesting period. In determining whether an award is expected to vest, we generally use an estimated forfeiture rate based on historical forfeiture rates. The estimated forfeiture rate is updated for actual forfeitures quarterly. Under the modified prospective transition method, results for prior periods are not restated.
Total stock-based compensation cost recognized in the consolidated statement of operations in selling, general and administrative expenses for the years ended March 31, 2008 and 2007 was as follows:
No income tax benefit has been recognized in the condensed consolidated statement of operations related to stock-based compensation expense, due to the Company fully reserving against the related deferred tax assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company estimates the fair value of each option award on the date of grant using the Black-Scholes option pricing model (“Black-Scholes”) based upon certain assumptions. Black-Scholes was developed for use in estimating the fair value of publicly traded options which have no vesting restrictions and are fully transferable. In addition, Black-Scholes requires the input of highly subjective assumptions including the expected stock price volatility. In management’s opinion, the Company’s employee stock options have characteristics significantly different from those of publicly traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.
For SFAS No. 123(R) purposes, the fair value of each stock option grant was estimated at the date of grant using Black-Scholes with the following weighted-average assumptions:
The expected term is based on historical exercise patterns and post-vesting termination behavior, the risk-free interest rate is based on United States Treasury instruments as of the grant dates and represents the yields on securities for terms equal to the expected term of the options. Expected volatility is calculated based on historical volatility of the Company’s common stock over the expected term of the stock option. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, our expected dividend yield is zero.
A summary of stock option activity under these plans as of March 31, 2008 and 2007, and changes during the years then ended, is presented below:
The aggregate intrinsic value in the table above is before applicable income taxes and represents the amount optionees would have received if all in the money options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price.
The total intrinsic value of options exercised during the year ended March 31, 2008 was immaterial. The total intrinsic value of options exercised during the year ended March 31, 2007 was approximately $78,600. The unrecognized stock-based compensation expense associated under the fair value method for shares expected to vest (unvested shares net of expected forfeitures) as of March 31, 2008 was approximately $1.4 million and is expected to be recognized over a weighted average period of 2.3 years. Approximately 0.2 million shares outstanding as of March 31, 2008 are not expected to vest.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Additional information regarding options outstanding as of March 31, 2008 is as follows:
Restricted Stock Units
The 2004 Plan allows for the issuance of RSUs which typically vest over four years. A summary of the status of RSUs nonvested shares as of March 31, 2008 and changes during the year then ended is presented below:
As of March 31, 2008 there was $0.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2004 Plan for RSUs. That cost is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of shares vested during the years ended March 31, 2008 and 2007 were approximately $0.1 million and $0.3 million, respectively.
Associate Stock Purchase Plan
Effective April 15, 2005, the Company adopted the MTM Technologies, Inc. Associate Stock Purchase Plan. The ASPP allows eligible employees to contribute up to 15% of their base earnings to a maximum annual contribution of $25,000 toward the semi-annual purchase of the Company’s common stock. The employee’s purchase price is 95% of the fair market value of the stock on the last business day of the offering period. Employees may purchase shares up to a maximum of 3,500 shares per offering period. The total numbers of shares issuable under the ASPP is 1.0 million. From the inception of the ASPP through March 31, 2008, the Company has issued approximately 0.1 million shares of common stock to the ASPP at an average price of $1.77. Of the 554 associates eligible to participate, approximately 13 were participants in the ASPP as of March 31, 2008. No stock-based compensation expense was recognized in the consolidated financial statements related to the ASPP, since the related purchase discounts did not exceed the amount allowed under SFAS No. 123(R) for non-compensatory treatment.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Employee Savings Plan
MTM maintains a voluntary defined contribution savings plan (the “MTM 401(k) Plan”) covering eligible employees as defined in the plan documents. Participating employees may elect to defer and contribute a portion of their compensation to the plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. Beginning April 1, 2006, MTM adopted a discretionary match contribution of 25% for the first 6% of each employee’s eligible contribution, senior management was excluded from receiving this match. Eligible participants become fully vested in the match following four years of qualified service. The Company contributed approximately $336,000 and $419,000 to the MTM 401(k) Plan for the years ended March 31, 2008 and 2007, respectively.
As a result of its acquisitions, the Company had three employee savings plans which qualify under Section 401-K of the Internal Revenue Code with essentially the same terms on eligibility and deferral amounts. The acquired 401k plans were merged during fiscal 2007 into the MTM 401(k) Plan.
Note 8. Shareholders’ Equity
Common Stock
On November 20, 2007, the shareholders approved an amendment to our Certificate of Incorporation increasing the number of authorized shares of common stock from 80,000,000 shares to 150,000,000 shares.
Preferred Stock
On November 20, 2007, the shareholders approved an amendment to our Certificate of Incorporation increasing the number of authorized shares of preferred stock from 40,000,000 shares to 48,000,000 shares, par value $.001 per share and to designate such additional 8,000,000 shares of preferred stock as “blank check” preferred stock thereby increasing the number of shares of “blank check” preferred stock from 700,000 shares to 8,700,000 shares, par value $.001 per share. As of March 31, 2008, there were approximately 29,600,000 million shares of Series A Preferred Stock issued.
As of March 31, 2007, the Company had authorized 40,000,000 shares of preferred stock, 33,500,000 of which are designated Series A Preferred Stock, par value $.001 per share and 6,500,000 of which are “blank check” preferred stock, par value $.001 per share. As of March 31, 2007, there were approximately 22,600,000 shares of Series A Preferred Stock issued.
Series A Preferred Stock
“Pequot Fund” refers to Pequot Private Equity Fund III, L.P., “Pequot Partners” refers to Pequot Offshore Private Equity Partners III, L.P., and collectively with Pequot Fund, “Pequot,” “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 the CVC II Partners, LLC, and collectively with Constellation Venture, Constellation Offshore and BSC, “Constellation,” and together with Pequot, (the “Investors”).
On January 29, 2004, the Company entered into a purchase agreement (the “Pequot Agreement”) to sell to Pequot an aggregate of up to $25.0 million of Series A Convertible Preferred Stock, together with warrants to purchase additional shares of common stock and on December 7, 2004, the Company entered into an additional purchase agreement (the “Pequot/Constellation Purchase Agreement”) with the Investors to sell to the Investors up to an additional $40.0 million of Series A Convertible Preferred Stock, together with warrants to purchase additional shares of common stock. During the year ended March 31, 2005, the Investors received $41.0 million of Series A Convertible Preferred Stock and associated common stock warrants. During the year ended March 31, 2006, the Investors purchased an additional $19.0 million of Series A Convertible Preferred Stock, and associated common stock warrants.
On March 29, 2007, the Company entered into a purchase agreement (the “A-6 Purchase Agreement”) with the Investors to sell to the Investors up to an aggregate of $5.0 million of Series A-6 Convertible Preferred Stock, together with warrants to purchase additional shares of common stock. On March 29, 2007, the Company sold to the Investors 2,020,202 shares of Series A-6 Convertible Preferred Stock and Series A-6 Warrants to purchase 610,000 shares of the Company’s common stock for an aggregate purchase price of $3.0 million. This transaction resulted in an adjustment to the Series A conversion price of each of the Series A-1 to Series A-5 Preferred Stock. The Company allocated and recorded $2.6 million to Series A Preferred Stock and assigned and credited to additional paid in capital $0.4 million for the fair value of the warrants. The value attributed to the Series A-6 warrants was determined by independent valuation utilizing Black-Scholes.
On April 9, 2007, Pequot exercised its option to purchase additional shares under the A-6 Purchase Agreement and the Company issued and sold to Pequot 517,526 shares of Series A-6 Preferred Stock and Series A-6 Warrants to purchase 155,258 shares of the Company’s common stock for an aggregate purchase price of $0.8 million. This transaction resulted in a further adjustment to the Series A conversion price of each of the Series of Series A Preferred Stock. During the first quarter of fiscal 2008 the Company allocated and recorded $0.7 million to Series A Preferred Stock and assigned and credited to additional paid in capital $0.1 million for the fair value of the warrants. The value attributed to the Series A-6 warrants was determined by utilizing Black-Scholes.
On May 24, 2007, the Company entered into a purchase agreement with the Investors to sell to the Investors up to an aggregate of $5.0 million of Series A-7 Convertible Preferred Stock, together with warrants to purchase additional shares of common stock. On May 24, 2007, the Company issued and sold to Pequot 3,753,127 shares of Series A-7 Preferred Stock and Series A-7 Warrants to purchase up to 1,125,939 shares of the Company’s common stock for an aggregate purchase price of $4.5 million. At the same time, the Company also granted an option to Constellation to purchase up to 417,015 shares of Series A-7 Preferred Stock and Series A-7 Warrants to purchase up to 125,105 shares of the Company’s common stock. On May 30, 2007 Constellation exercised its rights under the foregoing options and the Company issued and sold to Constellation 417,015 shares of Series A-7 Preferred Stock and 125,105 Series A-7 Warrants for an aggregate purchase price of $0.5 million. This transaction resulted in a further adjustment to the Series A conversion price of each of the Series of Series A Preferred Stock. During the first quarter of fiscal 2008 the Company allocated and recorded $4.4 million to Series A Preferred Stock and assigned and credited to additional paid in capital $0.6 million for the fair value of the warrants. The value attributed to the Series A-7 warrants was determined by utilizing Black-Scholes.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On July 25, 2007, the Company entered into the A-8 Purchase Agreement with Pequot, whereby the Company issued and sold to Pequot 743,415 shares of Series A-8 Convertible Preferred Stock and Series A-8 Warrants to purchase up to 892,098 shares of the Company’s common stock for an aggregate purchase price of $3.5 million. This transaction resulted in a further adjustment to the Series A conversion price of each of the Series of Series A Preferred Stock. Each share of Series A-8 Convertible Preferred Stock is convertible for four shares of the Company’s common stock at a conversion price equal to $1.1770 per share (subject to adjustment). During the second quarter of fiscal 2008 the Company allocated and recorded $3.0 million to Series A Preferred Stock and assigned and credited to additional paid in capital $0.5 million for the fair value of the warrants. The value attributed to the Series A-8 warrants was determined by utilizing Black-Scholes.
In the event of any liquidation of the Company the holders of the Series A Preferred Stock shall be entitled to be paid in preference to any distribution to holders of common stock, in an amount per share equal to the sum of the applicable Series A Purchased Shares Purchase Price plus any accrued but unpaid dividends on the Series A Preferred Stock.
The following table sets forth the Series A Preferred Stock and associated warrants issued to the Investors under the Pequot Agreement and the Pequot/Constellation Purchase Agreement, including in-kind dividends paid.
The funds raised from the sales of Series A Convertible Preferred Stock were used to fund the cash portion of the purchase price for the Company’s various acquisitions, as well as for working capital and general corporate purposes.
Beginning May 21, 2006, the Series A Preferred Stock began to accrue dividends, payable semi-annually in arrears, in an amount equal to 6% of the applicable Series A purchase price. Until May 21, 2008 dividends may, at the option of the Company, be paid in cash or in shares of the applicable Series A Preferred Stock valued at the applicable Series A purchase price. During fiscal 2008 the Company paid $4.2 million in preferred dividends for the period November 21, 2006 to November 21, 2007 in the form of 1,492,410 shares of Series A Preferred Stock. The Series A purchase prices ranged from $1.199 to $4.708. For the year ended March 31, 2008, the Company has accrued and charged to equity $4.5 million in preferred dividends. At March 31, 2008 $1.7 million was accrued in preferred dividends for the period beginning November 21, 2007. The Series A-1 to A-8 purchase prices accrued range from $1.199 to $4.708. Dividends are accrued as other long-term liabilities since the current intention of the Company is to pay dividends in the form of equity.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 9. Income Taxes
Effective April 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. Upon the adoption of FIN 48, the Company had no unrecognized tax benefits. The application of FIN 48 did not have any impact on the Company’s consolidated balance sheets, statements of operations, or statements of cash flows during the year ended March 31, 2008.
The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The provision for (benefit from) income taxes consisted of the following (in thousands):
The reconciliations of income tax provision (benefit) computed at the federal statutory tax rates to actual income tax provision (benefit) are as follows (in thousands):
The tax effects of temporary differences that give rise to the net short-term deferred income tax asset are presented below (in thousands):
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax effects of temporary differences that give rise to the net long-term deferred income tax asset (liability) are presented below (in thousands):
At March 31, 2008, the Company has net operating loss carry forwards of approximately $70 million to offset taxable income through the year 2028. Realization of the benefit of the carry forward losses depends on earning sufficient taxable income before expiration of loss carry forwards. The utilization of the net operating loss carry forwards may also be limited as a result of “change of ownership” provision under section 382 of the Internal Revenue Services Code. At March 31, 2008 and 2007, the Company has established a valuation allowance that offsets the deferred tax assets.
Note 10. Related Party Transactions
During fiscal 2008 and 2007 the Company paid approximately $152,000 and $123,000, respectively in fees to Tectura Corporation (“Tectura”) for certain consulting services related to the customization and management of the Company’s accounting systems. Funds controlled by Pequot Capital hold more than 10% of the equity securities of Tectura and Gerald A. Poch, Non-executive Chairman of the Board of the Company, is a director of Tectura.
During fiscal 2008 and 2007 the Company paid approximately $1,200,000 and $970,000, respectively in fees to Savvis, Inc. (“Savvis”) for certain technology and data center services. Members of the Constellation Group or funds affiliated with them held, during fiscal 2008 and 2007, more than 10% of the preferred equity securities of Savvis and Clifford Friedman, who is a member of Constellation Ventures Management II, LLC and a senior managing director of Bear Stearns Asset Management Inc., was a director of Savvis.
We are a party to a lease agreement, dated December 31, 2004, for our facility located in Peabody, MA. We became a party to this lease as part of the December 2005 acquisition of Nexl. The landlord for this facility is C&S Realty Peabody Trust, a nominee trust controlled by Clifford Rucker and his affiliates. Mr. Rucker owns approximately 25% of our outstanding common stock and was formerly the president of our Northeast region. The lease covers approximately 31,000 square feet, has a monthly rent of approximately $35,000 and terminates in February 2010.
On July 7, 2006, we entered into a consulting agreement with Steven Rothman in connection with the termination of his employment with the Company. This agreement provides that Mr. Rothman will perform certain consulting services for us until March 31, 2008. We will pay Mr. Rothman an annual consulting fee of $265,000, plus health benefits through December 31, 2007. Thereafter, we will pay Mr. Rothman certain transaction fees in the event we complete an acquisition introduced to the Company by Mr. Rothman. Mr. Rothman beneficially owns approximately 6% of our outstanding common stock.
On April 26, 2007, in connection with the termination of his employment with the Company, we entered into a consulting agreement with Francis J. Alfano and Consultant. Mr. Alfano is the sole member of the Consultant. This agreement provides that Consultant will perform certain consulting services for us until June 30, 2009. For services rendered under the Alfano Consulting Service Agreement, the Company paid or will pay Consultant (i) a signing bonus of $58,333.33 on May 15, 2007 in accordance with the normal payroll practices of the Company and (ii) fees at the rate of $29,166.67 per month, payable in arrears in twice monthly payments with the initial payment on May 15, 2007 in accordance with the normal payroll practices of the Company, provided that a lump sum payment on March 31, 2008 shall be made which shall include fees from April 1, 2008 through March 31, 2009. At the time of this transaction Mr. Alfano was Chief Executive Officer and a Director of the Company. As a condition to entering into this Agreement, Mr. Alfano resigned from the Board of Directors.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 11. Commitments and Contingencies
Lease Commitments
The Company leases 25 locations for its administrative and operational functions under operating leases expiring at various dates through 2016. Certain leases are subject to escalation based on the Company’s share of increases in operating expenses for the locations. In addition, the Company leases equipment, software and vehicles used in operations under both operating and capital leases.
Future annual minimum lease payments including estimated escalation amounts under non-cancelable operating and capital leases as of March 31, 2008 are as follows (in thousands):
Rental expense for operating leases including amounts from non-cancelable leases approximated $3.2 million and $2.9 million for the years ended March 31, 2008 and 2007, respectively.
Legal Proceedings
From time to time, in the normal course of business, various claims are made against the Company. Except for the proceedings described below, there are no material proceedings to which the Company is a party.
On December 4, 2007 a lawsuit styled Amanda Mhanna v. MTM Technologies, Inc, et al., was filed in the Superior Court of the State of California. The plaintiff, a former Company employee, alleges discrimination, harassment, retaliation and other causes of action against the defendants. The plaintiff seeks an unstated amount of compensatory and punitive damages, attorney’s fee’s, and costs. On January 28, 2008, the Company served an answer to the complaint denying the allegations and asserting affirmative defenses. This matter is now in the discovery stage. The trial has been scheduled for May 2009.
On March 14, 2008 a lawsuit styled Sonal Patel v. MTM Technologies, Inc, et al., was filed in the Superior Court of the State of California. The plaintiff, a former Company employee, alleges hostile work environment, harassment, and intentional infliction of emotional distress against the defendants. The plaintiff seeks an unstated amount of compensatory and punitive damages, attorney’s fees, and costs. On May 2, 2008, the Company served an answer to the complaint denying the allegations and asserting affirmative defenses.
While management believes that the Company has meritorious defenses in the foregoing pending matters and the Company intends to pursue its positions vigorously, litigation is inherently subject to many uncertainties. Thus, the outcome of these matters is uncertain and could be adverse to the Company. Depending on the amount and timing of an unfavorable resolution of the contingencies, it is possible that the Company’s financial position, future results of operations or cash flows could be materially affected in a particular reporting period(s).
As permitted under New York law, the Company has agreements under which it indemnifies its officers, directors and certain employees for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has a director and officer insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. Given the insurance coverage in effect, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of March 31, 2008.
We are involved in other various claims and legal actions arising in the ordinary course of business. We believe that the ultimate outcome of these matters would not have a material adverse impact on the Company's financial condition or the results of operations.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 12. Acquisitions
On April 20, 2006, the Company purchased the operating assets of Axcent Solutions, Inc. (“Axcent”), a provider of access, infrastructure and availability solutions based in the southern California area. The aggregate purchase price for Axcent was approximately $0.7 million, consisting of $0.5 million in cash and 62,500 shares of stock (at $3.71 per share or $0.2 million). The purchase price was allocated to assets acquired of $0.4 million and liabilities assumed of $0.3 million based on estimated fair values on the transaction date, resulting in net assets acquired of $0.1 million. Goodwill related to the purchase was recorded at approximately $1.3 million, including expected costs related to employee severance and facility consolidations of $0.6 million and transactions costs of $0.1 million.
On December 1, 2005, the Company acquired all of the outstanding stock of Nexl, Inc. (“Nexl”). The Nexl purchase agreement provided for a potential additional purchase price payment (the “Earnout”). During the third quarter of fiscal 2007 the Company recognized the full Earnout consisting of $1.0 million payable in cash and 250,000 shares of MTM stock valued at $1.54 per share or $385,000, both of which were included in goodwill and in accrued expenses at the end of the period. In the fourth quarter of fiscal 2007 the Company and the shareholders of Nexl agreed to adjust the form of the cash payment of the Earnout to reflect $1.0 million payable in shares of MTM common stock with a FMV determined using the 10 day trailing closing price of the common stock immediately preceding signing of a definite agreement. The agreement was signed on May 24, 2007 and the $1.0 million in shares of MTM common stock was valued at $0.95 per share for a total of 1,052,632 shares. On May 31, 2007 the Company issued 1,276,579 shares of common stock in satisfaction of the Earnout. On November 9, 2007 the Company cancelled the unissued shares and adjusted goodwill for $27,000 upon satisfaction of the Earnout.
The final fair value assessment of the Nexl acquisition resulted in the recording of $26.5 million of goodwill and $2.6 million of amortizable intangible assets related to customer relationships and non-compete agreements.
Note 13. Segment Information
The Company currently operates only within the United States. Substantially, all of the Company’s revenue generating operations have similar economic characteristics, including the nature of the products and services sold; the type and class of clients for products and services; the methods used to deliver products and services and regulatory environments.
Note 14. Subsequent Events
Reverse Stock Split
On May 5, 2008, MTM announced that it plans to affect a reverse stock split of its Common Stock at a split ratio of 1-for-15 (“Reverse Stock Split”).
The Reverse Stock Split as well as the following matters (A) a further restatement of our restated certificate of incorporation to (i) authorize the Company to issue in lieu of cash dividends on our Series A Preferred Stock, payment of the dividend due on November 21, 2008 in shares of our Series A Preferred Stock, (ii) increase the authorized number of shares of Series A-4 Preferred Stock from 9,000,000 to 9,150,000, and (iii) designate the Series A-9 Preferred Stock, and (B) the conversion of the Series A-6 Preferred Stock, the Series A-7 Preferred Stock, and the Series A-8 Preferred Stock into shares of Common Stock at a conversion price that is lower than the fair market price of such securities on the date such securities were issued (all of the above actions collectively referred to as the “Transactions”), were approved by our Independent Committee of the Board of Directors on April 25, 2008 and by our Board of Directors on April 28, 2008.
On May 1, 2008, Pequot and Constellation the holders of a majority of the Company’s voting stock delivered to the Company an executed written stockholders' consent approving the Transactions including the Reverse Stock Split. As of May 31, 2008 Pequot and Constellation collectively owned approximately 70% of the Company’s voting securities and 100% of the Company’s Series A Preferred. As a result of Pequot and Constellation’s approval, no further stockholder approval or action was necessary.
As a result of the Reverse Stock Split, every fifteen shares of the Company’s Common Stock will be combined into one share of Common Stock. The Reverse Stock Split will affect all of the Company’s common stockholders uniformly and will not affect any common stockholder’s percentage ownership interests in the Company or proportionate voting power, other than as a result of the elimination of fractional shares. Any fractional share resulting from the Reverse Stock Split will be cancelled and exchanged for cash. On May 23, 2008 the Company filed with the SEC an information statement on Schedule 14C which includes additional information about the Reverse Stock Split. MTM’s Board of Directors set April 28, 2008 as the record date for stockholders of record entitled to receive the information statement on Schedule 14C. We expect the Reverse Stock Split to be consummated on or about June 26, 2008. MTM reserves the right, in its discretion, to abandon the Reverse Stock Split at any time prior to filing the applicable charter amendment with the New York Secretary of State.
The Reverse Stock Split is being implemented in an effort to avoid being delisted from the NASDAQ due to the failure to comply with the minimum bid price for our Common Stock. On May 14, 2008 we received a NASDAQ Staff Determination indicating our failure to comply with NASDAQ Marketplace Rule 4310(c)(4)- the minimum bid price requirement- for continued listing, and that our securities were subject to delisting from The NASDAQ Capital Market. Pursuant to the NASDAQ rules, we requested a hearing before a NASDAQ Listing Qualifications Panel (“Panel”) which has been accepted. The hearing is scheduled for July 10, 2008. The hearing request stays the suspension of trading and delisting of our Common Stock. Pending the decision by the Panel, our Common Stock will remain listed on the NASDAQ Capital Market. There can be no assurance that the Panel will grant MTM Technologies’ request for continued listing.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pequot Notes and Warrants
On June 11, 2008 the Company and Pequot further amended the Amended Pequot Notes to change the maturity and payment terms such that all principal and all interest accrued on such notes from the date of original issuance of February 28, 2008 through the date of payment of the principal amount shall be due on December 15, 2009.
On June 11, 2008, the Company also issued and sold to Pequot the following Promissory Notes (the “June 11 Pequot Notes”) (1) Pequot Fund a promissory note in the principal amount of $2,410,235, and (2) Pequot Partners a promissory note in the principal amount of $339,765 .
On June 11, 2008, the Company also issued and sold to Pequot the following Warrants (the “June 11 Pequot Warrants”): (1) Pequot Fund warrants entitling Pequot Fund to purchase 642,729 shares of the Company’s next designated series of preferred stock at an exercise price of $0.375 and (2) Pequot Partners warrants entitling Pequot Partners to purchase 90,604 shares of the Company’s next designated series of preferred stock at an exercise price of $0.375.
On June 16, 2008, the Company issued and sold to Pequot the following Promissory Notes (the “June 16 Pequot Notes”): (1) Pequot Fund a promissory note in the principal amount of $219,112, and (2) Pequot Partners a promissory note in the principal amount of $30,888. The June 11 Pequot Notes together with the June 16 Pequot Notes are sometimes referred herein as the “June Pequot Notes”, and collectively with the Amended Pequot Notes as the “Pequot Notes.”
On June 16, 2008, the Company also issued and sold to Pequot the following Warrants (the “June 16 Pequot Warrants”): (1) Pequot Fund warrants entitling Pequot Fund to purchase 56,545 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0.3875, and (2) Pequot Partners warrants entitling Pequot Partners to purchase 7,971 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0.3875. The June 11 Pequot Warrants together with the June 16 Pequot Warrants are sometimes referred herein as the “June Pequot Warrants”, and collectively with the February Pequot Warrants as the “Pequot Warrants.”
The June Pequot Notes are due and payable in full on December 15, 2009 and bear interest at a rate per annum equal to 8.5% . Interest on the June 11 Pequot Notes is due and payable in cash or, at the option of the Company, in shares of the Company’s next designated series of preferred stock at a price per share of $0.33. Interest on the June 16 Pequot Notes is due and payable in cash or, at the option of the Company, in shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at a price per share of $0.341.
The right of repayment of principal and interest on the Pequot Notes is subordinated to the rights and security interest of the Senior Debt. While any default or event of default has occurred and is continuing with respect to any of the Senior Debt the Company is prohibited from making any payments or distribution in respect of the above mentioned notes.
The June 11 Pequot Warrants expire on June 11, 2012. The June 16 Pequot Warrants expire on June 16, 2012. The holders of such warrants may exercise the purchase rights represented by such warrants at any time after the Company’s designation of the series of preferred stock for which they are exercisable. Cashless exercise is permitted. The purchase price per share at which the holders of the June 11 Pequot Warrants can purchase the Company’s shares of its next designated series of preferred stock is $.375 per share. The purchase price per share at which the holders of the June 16 Pequot Warrants can purchase the Company’s designated series of preferred stock designated after the next series of preferred stock is $0.3875 per share.
Constellation Notes and Warrants
On June 16, 2008, the Company issued and sold to (1) Constellation Venture a promissory note in the principal amount of $249,617.80, (2) Constellation Offshore a promissory note in the principal amount of $132,834.65, (3) BSC a promissory note in the principal amount of $111,313.95, (4) CVC a promissory note in the principal amount of $6,233.60, (5) Constellation Venture warrants entitling Constellation Venture to purchase 64,417 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0.3875, (6) Constellation Offshore warrants entitling Constellation Offshore to purchase 34,280 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0.3875, (7) BSC warrants entitling BSC to purchase 28,726 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0. 3875, (8) CVC warrants entitling CVC to purchase 1,609 shares of the Company’s designated series of preferred stock designated after the next series of preferred stock at an exercise price of $0. 3875. The aforementioned promissory notes together, and the warrants together, respectively, are sometimes referred to herein as the “Constellation Notes,” and the “Constellation Warrants.”
The Constellation Notes have the identical terms as the June 16 Pequot Notes. The Constellation Warrants have the identical terms as the June 16 Pequot Warrants.
Proceeds from the June Pequot Notes and the Constellation Notes will be used to fund working capital needs.
Credit Facilities Agreement
On June 11, 2008, the Company entered into an amendment with CDF to the Credit Facilities Agreement whereby CDF (a) consents to and approves an amendment to an unsecured subordinated indebtedness to the Pequot in the principal amount of $2,500,000, (b) consents to and approves the incurrence by the Company of certain unsecured subordinated indebtedness to Pequot in the principal amount up to $3,000,000, (c) consents to and approves of the incurrence of an unsecured subordinated indebtedness by the Company to Constellation in the principal amount up to $500,000, (d) consents to the increase in the CP/NEBF Note by $3,000,000 (e) obtains a waiver of certain terms of the Credit Facilities Agreement in relation to the foregoing request, and (e) modifies certain financial covenants contained in the Credit Facilities Agreement by (i) reducing required minimum EBITDA amounts for the fiscal quarter ending on June 30, 2008, and (ii) lowering the cash requirement for the June 30, 2008, July 31, 2008 and August 31, 2008 calculation dates to $750,000 from $1.5 million.
MTM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CP/NEBF Credit Agreement
On June 11, 2008 and June 17, 2008, the Company entered into Amendments No. 4 and 5 to the CP/NEBF Credit Agreement with CP Investment Management, as Investment Manager and NEBF, as Lender whereby each of Investment Manager and Lender (a) consents to and approves an amendment to an unsecured subordinated indebtedness to the Pequot in the principal amount of $2,500,000, (b) consents to and approves the incurrence by the Company of certain unsecured subordinated indebtedness to Pequot in the principal amount up to $3,000,000, (c) consents to and approves the incurrence of an unsecured subordinated indebtedness by the Company to Constellation in the principal amount up to $500,000, (d) obtains a waiver of certain terms of the CP/NEBF Credit Agreement in relation to the foregoing request, (e) modifies certain financial covenants contained in the CP/NEBF Credit Agreement by (i) reducing required minimum EBITDA amounts for the fiscal quarter ending on June 30, 2008, and (ii) lowering the cash requirement for the June 30, 2008, July 31, 2008 and August 31, 2008 calculation dates to $675,000 from $1,350,000, and (e) amending the existing CP/NEBF Note to increase the principal amount by $3,000,000 to $28,000,000 and amend the payment premium in respect of the CP/NEBF Note equal to an amount which, when combined with previous payments made, will yield an internal rate of return of 15% per annum from the Closing Date.
Proceeds from the additional funding of $3,000,000 will be used to fund working capital needs.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/S/ GERALD A. POCH
Chairman of the Board of Directors
June 24, 2008
Gerald A. Poch
/S/ STEVEN STRINGER
President and Chief Operating Officer
June 24, 2008
Steven Stringer
(Principal Executive Officer)
/S/ J.W. BRAUKMAN III
Senior Vice President and Chief Financial Officer
June 24, 2008
J.W. Braukman III
(Principal Financial and Accounting Officer)
/S/ KEITH B. HALL
Director
June 24, 2008
Keith B. Hall
/S/ WILLIAM LERNER
Director
June 24, 2008
William Lerner
/S/ ALVIN E. NASHMAN
Director
June 24, 2008
Alvin E. Nashman
/S/ STERLING PHILLIPS
Director
June 24, 2008
Sterling Phillips
/S/ ARNOLD J. WASSERMAN
Director
June 24, 2008
Arnold J. Wasserman
/S/ THOMAS WASSERMAN
Director
June 24, 2008
Thomas Wasserman
MTM TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended March 31, 2008
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