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 three months ended September 30, 2008, cash decreased $0.8 million to $2.4 million compared with $3.2 million at March 31, 2008. Working capital at September 30, 2008 was $3.4 million as compared to a working capital deficit of $(3.3) million at March 31, 2008. Included in current liabilities at September 30, 2008 are obligations of $21.9 million relating to the Company’s secured financing facilities, described below. The Company successfully raised an additional $6.5 million in financing during the first fiscal quarter of 2009, the proceeds of which were primarily used to pay trade accounts payable.
As of September 30, 2008 the FirstMark and Constellation investment 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.
A detailed review of the financing arrangements entered into by the Company follows.
On February 28, 2008, the Company issued and sold to FirstMark promissory notes in the principal amount of $2,500,000 (the “FirstMark Notes”) and warrants entitling FirstMark to purchase 392,157 shares of the Company’s Series A-9 Preferred Stock at an exercise price of $0.6375 (the “FirstMark A-9 Warrants”). The FirstMark Notes bear interest at a rate per annum equal to 8.5% . Interest on the FirstMark Notes shall be due and payable in cash or, at the option of the Company, in shares of the Company’s Series A-9 Preferred Stock at a price per share of $0.561. Proceeds from the FirstMark Notes were used to fund working capital needs.
On March 28, 2008, the Company and FirstMark amended the FirstMark Notes (the “Amended FirstMark Notes”) to change the maturity date as follows: thirty percent (30%) of the principal amount of the Amended FirstMark 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.
On June 11, 2008, the Company and FirstMark further amended the Amended FirstMark 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 (the “Second Amended FirstMark Notes”).
The FirstMark A-9 Warrants expire on March 29, 2012. The holders of the FirstMark A-9 Warrants may exercise the purchase rights represented by the FirstMark A-9 Warrants at any time. Cashless exercise is permitted. The Company allocated and charged approximately $0.1 million to debt discount, which will be amortized over the life of the Second Amended FirstMark Notes to interest expense, and assigned and credited to additional paid in capital approximately $0.1 million for the fair value of the FirstMark A-9 Warrants. A more complete description of the FirstMark A-9 Warrants can be found in its entirety by reference to the full text of such document.
On June 11, 2008 and June 16, 2008, the Company issued and sold to FirstMark promissory notes in the aggregate principal amount of $3,000,000 (the “June FirstMark Notes”) and warrants entitling FirstMark to purchase 733,333 shares of the Company’s Series A-10 Preferred Stock at an exercise price of $0.375 and 64,516 shares of the Company’s Series A-11 Preferred Stock at an exercise price of $0.3875, at June 11, 2008 and June 16, 2008, respectively (the “FirstMark A-10 and A-11 Warrants”). Proceeds from the June FirstMark Notes were used to fund working capital needs.
On June 16, 2008, the Company issued and sold to Constellation promissory notes in the aggregate principal amount of $500,000 (the “Constellation Notes”) and warrants entitling Constellation to purchase 129,032 shares of the Company’s Series A-11 Preferred Stock at an exercise price of $0.3875 (the “Constellation A-11 Warrants”). Proceeds from the Constellation Notes were used to fund working capital needs.
The June FirstMark Notes and the Constellation 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 FirstMark Notes is due and payable in cash or, at the option of the Company, in shares of the Company’s Series A-10 Preferred Stock at a price per share of $0.33. Interest on the June 16 FirstMark Notes and the Constellation Notes is due and payable in cash or, at the option of the Company, in shares of the Company’s Series A-11 Preferred Stock at a price per share of $0.341.
The holders of the FirstMark A-10 and A-11 Warrants and the Constellation A-11 Warrants, collectively (the “June Warrants”) may exercise the purchase rights represented by the June Warrants at any time after the Company files an amendment to its Restated Certificate of Incorporation that effects the designation of the Series A-10 Preferred Stock and Series A-11 Preferred Stock for which they are exercisable. Cashless exercise is permitted. The June Warrants expire four years after the issue date. The Company allocated and charged approximately $0.2 million to debt discount, which will be amortized over the life of the June FirstMark Notes and the Constellation Notes to interest expense, and assigned and credited to additional paid in capital approximately $0.2 million for the fair value of the June Warrants. A more complete description of the June Warrants can be found in its entirety by reference to the full text of the respective documents.
The Second Amended FirstMark Notes together with the June FirstMark Notes and the Constellation Notes, collectively are sometimes referred to herein as the “June 2008 Notes”. At September 30, 2008 the balance of the June 2008 Notes is approximately $5.8 million.
The right of repayment of principal and interest on the June 2008 Notes is subordinated to the rights and security interest of (i) CDF in connection with the August 21, 2007 Credit Facilities Agreement (described below in this Item), and (ii) CP Investment Manager and NEBF in connection with the CP/NEBF Credit Agreement (described below in this Item), (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 June 2008 Notes.
Upon an event of default, as set forth in the June 2008 Notes, the holders of the June 2008 Notes may declare all amounts outstanding under the June 2008 Notes immediately due and payable and exercise other remedies permitted by the June 2008 Notes or at law or in equity, subject to the above mentioned subordination. A more complete description of the June 2008 Notes can be found in its entirety by reference to the full text of the applicable documents.
Credit Facilities Agreement
On August 21, 2007, the Company entered into a secured Credit Facilities Agreement (the "Credit Facilities Agreement") with GE Commercial Distribution Finance Corporation (“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 refinanced 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. 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 of the Lenders fails to pay its allocated portion thereof. Amounts borrowed under the Revolving Credit Facility bear interest at LIBOR plus 3%, or LIBOR plus 4% during any default period.
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 September 30, 2008, the Company has no outstanding letters of credit.
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During fiscal 2008, the Company entered into several amendments to the Credit Facilities Agreement with CDF in order to modify certain terms including the definitions regarding certain covenant calculations and floor plan inventory value, to consent to and approve various indebtedness incurred by the Company and to update disclosures.
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.
On June 11, 2008, the Company entered into a Fifth Amendment with CDF to the Credit Facilities Agreement whereby CDF (a) consented to and approved the Second Amended FirstMark Notes, the June FirstMark Notes and the Constellation Notes in the principal amount of up to $6,000,000, (b) consented to the increase in the CP/NEBF Note by $3,000,000, and (c) modified certain financial covenants contained in the Credit Facilities Agreement.
Effective September 1, 2008, the Company entered into the Sixth Amendment with CDF to the Credit Facilities Agreement, dated November 13, 2008 (the “Sixth Amendment”), whereby CDF modified certain financial covenants and financial covenant definitions.
The Sixth Amendment requires, among other things, that the Company maintain certain financial covenants including Maximum Total Funded Indebtedness to EBITDA, as defined, 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; provided, however, for the period ended September 30, 2008, the Lenders have waived this financial covenant; Minimum EBITDA, as defined, for the fiscal quarter ending on September 30, 2008 of $150,000 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; provided, however, for the September 30, 2008, October 31, 2008, November 30, 2008, and December 31, 2008, calculation dates, the foregoing amount shall be $1,250,000; and Minimum Liquidation Multiple of 1.20 to 1.00 as of the last day of each fiscal month; as well as restrictions 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 any of the June 2008 Notes, the FirstMark A-9 Warrants, the June Warrants or the Senior Debt 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.
Available funds under the Credit Facilities Agreement as of September 30, 2008, net of the $1.5 million cash reserve, amounted to approximately $3.4 million.
Subsequent to September 30, 2008 certain other provisions of the Sixth Amendment became effective as of November 1, 2008 whereby CDF (a) amends the definition of “Eligible Accounts” to exclude previously allowed items, (b) reduces the Revolving Credit Facility to $15 million from $20 million and increases the Floorplan Loan Facility to $20 million from $14 million, (c) increases the cash reserve applicable to the Borrowing Base to $1,750,000 for the period November 1, 2008 to December 31, 2008, for all other times $1,500,000: minus and (d) modifies the definition of the adjusted LIBOR rate and increases the LIBOR Increment to 3.5% from 3.0% .
CP/NEBF Credit Agreement
On June 11, 2008 and June 17, 2008, the Company entered into Amendments No. 4 and 5 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 “CP/NEBF Note”), with CP Investment Management and NEBF, as Lender (the “Lender”). In connection therewith, CP Investment Management and the Lender each (a) consented to and approved the Second Amended Notes, the June FirstMark Notes and the Constellation Notes in the principal amount of up to $6,000,000, (b) modified certain financial covenants contained in the CP/NEBF Credit Agreement, (c) amended the existing CP/NEBF Note to increase the principal amount by $3,000,000 to $28,000,000 (the “CP/NEBF Amended Note”), and (d) amended the payment premium in respect of the CP/NEBF Amended 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 were used to fund working capital needs.
Pursuant to Amendment No. 2 and the 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 CP/NEBF Credit Agreement was extended until November 23, 2010. The amount outstanding on the CP/NEBF Amended Note bears interest equal to 4.52%; of which the Applicable Current Cash Rate of interest was 1% per annum through August 21, 2008, which rate was increased 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. Pursuant to Amendment No. 5 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 15% per annum from the Closing Date, 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 September 30, 2008, $11.1 million in interest has been accrued on the Note, $0.1 million is accrued and payable within the next quarter, and $11.0 million is accrued and is payable at maturity.
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Effective September 1, 2008, the Company entered into Amendment No. 6, dated November 11, 2008 (“Amendment No. 6”), with CP Investment Management and the Lender, to the CP/NEBF Credit Agreement, whereby CP Investment Management and the Lender modified certain financial covenants and financial covenant definitions. Required financial covenants under the CP/NEBF Agreement are less restrictive in nature and coincide substantially with those under the Credit Facilities Agreement. The CP/NEBF Credit Agreement requires, among other things, that the Company maintain certain financial covenants including Maximum Total Funded Indebtedness to EBITDA, as defined, 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; provided, however, pursuant to Amendment No. 6, for the period ended September 30, 2008, CP Investment Management and the Lender have waived this financial covenant.
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.
On November 23, 2005, in connection with the issuance of the CP/NEBF Note the Company issued and sold to the Lender a warrant entitling the Lender to purchase 46,666 shares of the Company’s Common Stock at an exercise price of $60.90 per share (the “Lender Warrant”), the Company allocated and charged $2.2 million to debt discount, which will be amortized over the life of the CP/NEBF Amended 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 to the Lender for the right to purchase up to the maximum number of 46,666 shares of the Company’s Common Stock at an exercise price of $17.55 per share, (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 CP/NEBF Amended Note to interest expense, and assigned and credited to additional paid in capital $0.5 million for the fair value of the second Warrant.
For the six months ended September 30, 2008, the Company used cash of $3.8 million in operating activities. The cash used is derived from a net loss of $11.1 million plus a decrease in net operating liabilities of $3.0 million offset by non-cash charges of $10.3 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. Additionally, accounts payable decreased as proceeds from the promissory notes with FirstMark and Constellation were used to pay vendors.
Cash used in investing activities was $1.1 million for the six months ended September 30, 2008 related to additions to capital expenditures. The level of investment was comparable to the prior year period. 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 $4.1 million for the six months ended September 30, 2008, which was primarily the result of net cash proceeds received of $3.4 million from our issuance of the June FirstMark Notes and the Constellation Notes, and an additional $2.9 million of net cash proceeds received from the CP/NEBF Amended Note which increased the principal amount by $3,000,000, both for the purpose of funding working capital needs. The increase in cash generated from financing activities was partially offset by the increase in cash collections used to repay a portion of the borrowings on our working capital lines under our Credit Facilities Agreement with CDF. The Company had net borrowings under its Credit Facilities Agreement of a decrease of $2.0 million during the first half of fiscal 2009, which consisted of additional gross borrowings of $164.9 million offset by gross repayments of $166.9 million.
The Company sustained net losses for the three and six months ended September 30, 2008 and during the fiscal years ended March 31, 2008 and 2007. Our decline in performance in the first half of fiscal 2009 continued to be impacted by a weaker US economy and reduced access to business credit by not only ourselves but our customer base. Working capital at September 30, 2008 was $3.4 million as compared to a working capital deficit of $(3.3) million at March 31, 2008. The Company has made a concerted effort in the past two years to improve its working capital position, including the following actions:
- 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 FirstMark Notes, another $3.5 million in June 2008 from the June FirstMark Notesand the Constellation Notes, and in June 2008 we raised an additional $3.0 million in financing under the CP/NEBF Credit Agreement,
- We issued additional shares of preferred stock raising over $9.0 million in the prior fiscal year alone,
- In August 2007, we successfully refinanced our working capital lines of credit with a $34 million credit facilities agreement with CDFwhich provided the Company with additional capital and increased purchasing flexibility,
- In fiscal 2007 we implemented a $6.0 million restructuring and have since then instituted other cost control initiatives and programs aswell as further headcount reductions in an effort to streamline operations and better manage costs, and finally
- We have significantly reduced our infrastructure investment by limiting future capital expenditures including the internal developmentof purchased and developed software. The Company currently has no commitments for material capital expenditures.
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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 alternative financing arrangements. We continue to drive collection of accounts receivable and are actively managing our expenses. The Company anticipates that the weakening economy and the impact of the current financial market crisis is likely to persist throughout the remainder of fiscal 2009 and into at least the first half of fiscal 2010.
Our future liquidity and capital requirements will depend on numerous factors, including, general economic conditions and conditions in the financial services, government and technology industry in particular; the ability to extend or refinance our current maturities; the ability to negotiate additional flexibility in borrowing restrictions and reserves under our current financing facilities and vendor lines of credit; our dependence on third party licenses and our ability to maintain our status as an authorized reseller/service provider of IT products; the cost effectiveness of our product and service development activities and our ability to reduce and leverage our centralized infrastructure, all of which may impact our ability to fund our operations for 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 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.
Adoption of New Accounting Standards
On April 1, 2008, the Company adopted the Financial Accounting Standards Board (“FASB”) Statement No. 157,“Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157, issued in September 2006, defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. In February 2008, the FASB deferred the effective date for SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities and removed certain leasing transactions from its scope. SFAS No. 157 was adopted by the Company, as it applies to its financial instruments, effective April 1, 2008. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position or results of operations.
Effective April 1, 2008, the Company adopted FASB Statement No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS No. 159”) which was issued in February 2007. 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. The Company has not elected to apply the fair value option to any of its financial instruments. As a result, adoption of this statement had no impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
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.
In February 2008, the FASB issued Staff Position (“FSP”) No. 157-1 and FSP No. 157-2. FSP No. 157-1 removes certain leasing transactions from the scope of SFAS No. 157. FSP No. 157-2 partially defers the effective date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities that are recognized at fair value on a nonrecurring basis. Under FSP No. 157-2, the effective date for non-financial assets and liabilities that are recognized at fair value on a nonrecurring basis will be for fiscal years beginning after November 15, 2008. FSP No. 157-2 is effective for the Company from the first quarter of fiscal year 2010. The Company is assessing the potential impact of adopting FSP No. 157-2, but does not believe that the adoption will have a significant impact on the Company’s consolidated financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3,“Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible Assets”(“SFAS No. 142”). The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R). FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and is effective for the Company from the first quarter of fiscal year 2010. The Company is assessing the potential impact that the adoption of FSP FAS 142-3 will have on the useful lives of its intangible assets but does not expect it to have a material impact on its consolidated results of operations and financial condition.
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In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis and will be adopted by the Company in the first quarter of fiscal year 2010. The Company is assessing the potential impact that the adoption of FSP APB 14-1 may have on its consolidated results of operations and financial condition. However, it is expected that the allocation of the proceeds to the conversion option will result in an increase in interest expense.
In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement shall be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company is assessing the potential impact that the adoption of SFAS No. 162 may have on its consolidated results of operations and financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
An evaluation was performed, as of September 30, 2008, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on such evaluation, our chief executive officer and chief financial officer, has concluded 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 as of September 30, 2008.
(b) Changes in Internal Control
There have been no changes made in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with our evaluation as of the end of our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
(c) 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this Item may be found under the caption “Legal Proceedings” in Note 8 to the Condensed Consolidated Financial Statements under Part I, Item 1 of this report, which information is incorporated into this Item by reference.
Item 5. Other Information
On November 13, 2008, the Company entered into the Sixth Amendment with CDF to the Credit Facilities Agreement whereby CDF modified effective September 1, 2008 certain financial covenants and financial covenant definitions and waived compliance with certain other financial covenants as of September 30, 2008. Certain other provisions of the Sixth Amendment became effective as of November 1, 2008 whereby CDF (a) amends the definition of “Eligible Accounts” to exclude previously allowed items, (b) reduces the Revolving Credit Facility to $15 million from $20 million and increases the Floorplan Loan Facility to $20 million from $14 million, (c) increases the cash reserve applicable to the Borrowing Base to $1,750,000 for the period November 1, 2008 to December 31, 2008, for all other times $1,500,000: minus and (d) modifies the definition of the adjusted LIBOR rate and increases the LIBOR Increment to 3.5% from 3.0%. The description of the Sixth Amendment with CDF is qualified in its entirety by reference to the terms of such amendment attached hereto as Exhibit 10.2.
On November 11, 2008, the Company entered into Amendment No. 6 to the CP/NEBF Credit Agreement with CP Investment Management and the Lender, whereby CP Investment Management and the Lender modified effective September 1, 2008 certain financial covenants and financial covenant definitions and waived compliance with certain other financial covenants as of September 30, 2008. The description of Amendment No. 6 to CP/NEBF Credit Agreement is qualified in its entirety by reference to the terms of such amendment attached hereto as Exhibit 10.1.
Item 6. Exhibits
(a) Exhibits
Set forth below is a list of the exhibits to this Quarterly Report on Form 10-Q.
| | | |
| | Exhibit | | |
| | Number | | Description |
| | 10.1 | | Amendment No.6 dated November 11, 2008, to the Credit Agreement, dated November 23, 2005, among MTM Technologies, Inc., MTM Technologies (California), Inc., MTM Technologies (Texas), Inc., MTM Technologies (US), Inc., MTM Technologies (Massachusetts), LLC, and Info Systems, Inc. as borrowers and Columbia Partners, L.L.C. Investment Management, as Investment Manager and National Electrical Benefit Fund, as Lender |
| |
| | 10.2 | | Sixth Amendment dated November 13, 2008 to Credit Facilities entered into as of August 21, 2007 among MTM Technologies, Inc, MTM Technologies (US), Inc., MTM Technologies (Massachusetts), LLC, and Info Systems, Inc., as Borrowers, and GE Commercial Distribution Finance Corporation as Administrative Agent and the sole lender |
| |
| | 31.1 | | Certification pursuant to Exchange Act Rule 13a-14(a) of Steven Stringer |
| |
| | 31.2 | | Certification pursuant to Exchange Act Rule 13a-14(a) of J.W. Braukman III |
| |
| | 32.1 | | Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Steven Stringer |
| |
| | 32.2 | | Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of J.W. Braukman, III |
| |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| | | MTM TECHNOLOGIES, INC. |
| |
| November 14, 2008 | | By: | /s/ Steven Stringer |
| | | | Steven Stringer |
| | | | President and Chief Executive Officer |
| | | | (Principal Executive Officer) |
| |
| |
| |
| November 14, 2008 | | By: | /s/ J.W. Braukman III |
| | | | J.W. Braukman III |
| | | | Senior Vice President and Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer) |
MTM Technologies, Inc.
QUARTERLY REPORT ON FORM 10-Q
Fiscal Quarter Ended September 30, 2008
EXHIBIT INDEX
| | Exhibit | | |
| | Number | | Description |
| | | | |
| | 10.1 | | Amendment No.6 dated November 11, 2008, to the Credit Agreement, dated November 23, 2005, among MTM Technologies, Inc., MTM Technologies (California), Inc., MTM Technologies (Texas), Inc., MTM Technologies (US), Inc., MTM Technologies (Massachusetts), LLC, and Info Systems, Inc. as borrowers and Columbia Partners, L.L.C. Investment Management, as Investment Manager and National Electrical Benefit Fund, as Lender |
| | | | |
| | 10.2 | | Sixth Amendment dated November 13, 2008 to Credit Facilities entered into as of August 21, 2007 among MTM Technologies, Inc, MTM Technologies (US), Inc., MTM Technologies (Massachusetts), LLC, and Info Systems, Inc., as Borrowers, and GE Commercial Distribution Finance Corporation as Administrative Agent and the sole lender |
| |
| | 31.1 | | Certification pursuant to Exchange Act Rule 13a-14(a) of Steven Stringer |
| | | | |
| | 31.2 | | Certification pursuant to Exchange Act Rule 13a-14(a) of J.W. Braukman III |
| | | | |
| | 32.1 | | Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of Steven Stringer |
| | | | |
| | 32.2 | | Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of J.W. Braukman III |
