Warp Technology Holdings Inc--Form 8-K/A

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): October 26, 2005

 

WARP TECHNOLOGY HOLDINGS, INC.

(Exact Name of Registrant as Specified in Charter)

 

Nevada   000-33197   88-0467845
(State of Incorporation)   (Commission File No.)  

(I.R.S. Employer

Identification

Number)

 

200 Railroad Avenue, Greenwich, Connecticut 06830

(Address of Principal Executive Offices)

 

(203) 422-2950

(Registrant’s Telephone Number, including area code)

 


 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 



The registrant, Warp Technology Holdings, Inc. operating under the name Halo Technology Holdings (the “Company” or “Halo”) hereby amends its Current Report on Form 8-K filed November 1, 2005 to provide the required financial statements and pro forma financial information relating to the acquisition by the Company of (i) Tesseract Corporation, and (ii) the David Corporation, ProfitKey International, LLC, Foresight Software, Inc. and Process Software, LLC, as described in such Current Report.

 

Section 9 – Financial Statements and Exhibits

 

Item 9.01 Financial Statements and Exhibits

 

(a) Financial statements of business acquired.

 

The following financial statements of the acquired businesses (i) Tesseract Corporation, and (ii) the David Corporation, ProfitKey International, LLC, Foresight Software, Inc. and Process Software, LLC, are submitted at the end of this Amendment to Current Report on Form 8-K/A, and are filed herewith and incorporated herein by reference:

 

Financial Statements


   Page

Financial Statements of Tesseract Corporation for the Years ended June 30, 2005 and June 30, 2004.

   F-1

Financial Statements of Process Software, LLC and Affiliates (consisting of David Corporation, ProfitKey International, LLC, Foresight Software, Inc. and Process Software, LLC) for the Years ended June 30, 2005 and June 30, 2004.

   F-17

 

(b) Pro forma financial information.

 

The following pro forma financial information of the Company and the acquired businesses (i) Tesseract Corporation, and (ii) the David Corporation, ProfitKey International, LLC, Foresight Software, Inc. and Process Software, LLC, is submitted at the end of this Amendment to Current Report on Form 8-K/A, and is filed herewith and incorporated herein by reference:

 

Pro Forma Financial Information


   Page

Warp Technology Holdings, Inc. and Tesseract Corporation, the David Corporation, ProfitKey International, LLC, Foresight Software, Inc. and Process Software, LLC Unaudited Pro Forma Consolidated Condensed Financial Statements.

   F-36


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Dated: January 9, 2006   

Warp Technology Holdings, Inc.

 

By:   /s/ Ernest C. Mysogland


Name: Ernest C. Mysogland

 

Title: Executive Vice President,

Chief Legal Officer and Secretary


FINANCIAL STATEMENTS

 

Tesseract Corporation

Years ended June 30, 2005 and 2004

with Report of Independent Registered Public Accounting Firm

 

F-1


Tesseract Corporation

 

Financial Statements

 

Contents

 

Report of Independent Registered Public Accounting Firm

   F-3

Balance Sheet as of June 30, 2005

   F-4

Statements of Income for the years ended June 30, 2005 and 2004

   F-5

Statements of Shareholder’s Deficit for the years ended June 30, 2005 and 2004

   F-6

Statements of Cash Flows for the years ended June 30, 2005 and 2004

   F-7

Notes to Financial Statements

   F-8 - F-16

 

F-2


Report of Independent Registered Public Accounting Firm

 

The Shareholders

Tesseract Corporation

 

We have audited the accompanying balance sheet of Tesseract Corporation (the “Company”) as of June 30, 2005, and the statements of income, shareholder’s deficit, and cash flows for the years ended June 30, 2005 and 2004. 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 audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tesseract Corporation as of June 30, 2005, and the results of its operations and its cash flows for the years ended June 30, 2005 and 2004 in conformity with accounting principles generally accepted in the United States.

 

Mahoney Cohen & Company, CPA, P.C.

 

January 6, 2006

 

New York, NY

 

F-3


Tesseract Corporation

 

Balance Sheet

 

     June 30, 2005

 

Assets

        

Current assets:

        

Cash

   $ 825,104  

Accounts receivable, net of allowance for doubtful accounts of $2,809

     126,630  

Prepaid expenses and other current assets

     89,036  
    


Total current assets

     1,040,770  

Property and equipment, net of accumulated depreciation of $193,316

     6,120  

Intangible assets, net of accumulated amortization of $1,225,918

     94,302  

Due from affiliates

     3,198,463  
    


Total assets

   $ 4,339,655  
    


Liabilities and shareholder’s deficit

        

Current liabilities:

        

Accounts payable

   $ 226,856  

Other accrued liabilities

     368,186  

Due to affiliates

     156,041  

Loan payable

     82,174  

Note payable

     72,442  

Deferred revenue-current portion

     4,649,081  
    


Total current liabilities

     5,554,780  

Deferred revenue-long-term portion

     101,734  
    


Total liabilities

     5,656,514  

Commitments

        

Shareholder’s deficit:

        

Common stock, $.01 par value, 1,000 shares authorized, 100 shares issued and outstanding at June 30, 2005

     1  

Additional paid in capital

     1,805,469  

Accumulated deficit

     (3,122,329 )
    


Total shareholder’s deficit

     (1,316,859 )
    


Total liabilities and member’s deficit

   $ 4,339,655  
    


 

See accompanying notes.

 

F-4


Tesseract Corporation

 

Statements of Income

 

     Years ended June 30,

 
     2005

    2004

 

Revenues:

                

Products

   $ 762,585     $ 127,604  

Services

     9,136,808       10,649,571  
    


 


Total revenues

     9,899,393       10,777,175  

Cost of revenues:

                

Cost of products

     85,647       128,767  

Cost of services

     1,522,840       1,637,651  
    


 


Total cost of revenues

     1,608,487       1,766,418  
    


 


Gross profit

     8,290,906       9,010,757  

Operating expenses:

                

Selling, general, and administrative expenses

     2,974,832       3,570,116  

Research and development expenses

     1,803,455       1,671,009  

Depreciation and amortization

     200,174       256,093  

Management fees to Platinum Equity, LLC

     2,575,000       2,400,000  
    


 


Total operating expenses

     7,553,461       7,897,218  
    


 


Income from operations

     737,445       1,113,539  

Other income (expense):

                

Interest income

     258,018       237,204  

Interest expense

     (102,354 )     (85,853 )

Other income (expense), net

     12,000       (10,127 )
    


 


Income before provision (benefit) for income taxes

     905,109       1,254,763  

Provision (benefit) for income taxes

     (2,281 )     43,066  
    


 


Net income

   $ 907,390     $ 1,211,697  
    


 


Earnings per share

   $ 9,073.90     $ 12,116.97  
    


 


Weighted-average number of common shares

     100       100  
    


 


 

See accompanying notes.

 

F-5


Tesseract Corporation

 

Statements of Shareholder’s Deficit

For the Years Ended June 30, 2005 and 2004

 

     Common Stock

       

Accumulated

Other

Comprehensive
(Loss)


         

Total

Shareholder’s
Deficit


 
     Shares

   Amount

   Paid in
Capital


     Accumulated
Deficit


   

Balance at July 1, 2003

   100    $ 1    $ 496,419    $ (53,253 )   $ (3,921,436 )   $ (3,478,269 )

Contributions

          —        500,000      —         —         500,000  

Distributions

          —        —        —         (1,319,980 )     (1,319,980 )

Unrealized holding gain arising during the year

          —        —        38,423       —         38,423  

Reclassification adjustment for realized loss

          —        —        14,830       —         14,830  

Net income

          —        —        —         1,211,697       1,211,697  
    
  

  

  


 


 


Balance at June 30, 2004

          1      996,419      —         (4,029,719 )     (3,033,299 )

Contributions

          —        809,050      —         —         809,050  

Net income

          —        —        —         907,390       907,390  
    
  

  

  


 


 


Balance at June 30, 2005

        $ 1    $ 1,805,469    $ —       $ (3,122,329 )   $ (1,316,859 )
    
  

  

  


 


 


 

See accompanying notes.

 

F-6


Tesseract Corporation

 

Statements of Cash Flows

 

     Year ended June 30

 
     2005

    2004

 

OPERATING ACTIVITIES

                

Net income

   $ 907,390     $ 1,211,697  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     200,174       256,093  

Loss on sale of investments

     —         14,830  

Provision for bad debt

     2,810       (26,711 )

Changes in operating assets and liabilities:

                

Accounts receivable

     55,097       289,950  

Due from affiliates

     (258,018 )     (237,204 )

Prepaid expenses and other assets

     (11,869 )     (20,770 )

Accounts payable

     2,232       (220,309 )

Other accrued liabilities

     (105,951 )     (141,873 )

Due to affiliates

     1,927       (118,649 )

Deferred revenue

     (543,360 )     132,418  
    


 


Net cash provided by operating activities

     250,432       1,139,472  

INVESTING ACTIVITIES

                

Purchases of property and equipment

     (3,760 )     (5,589 )

Proceeds from sale of securities

     —         1,282,307  
    


 


Net cash (used in) provided by investing activities

     (3,760 )     1,276,718  

FINANCING ACTIVITIES

                

Shareholder distributions

     —         (1,319,965 )

Shareholder contributions

     809,050       500,000  

Repayments of note payable

     (1,271,256 )     (500,000 )

Repayments of loan payable

     (410,870 )     —    
    


 


Net cash used in financing activities

     (873,076 )     (1,319,965 )

Net (decrease) increase in cash

     (626,404 )     1,096,225  

Cash at beginning of year

     1,451,508       355,283  
    


 


Cash at end of year

   $ 825,104     $ 1,451,508  
    


 


Supplemental disclosures of cash flow information

                

Cash paid for income taxes

   $ 22,080     $ 43,066  
    


 


Cash paid for interest

   $ 102,354     $ 85,853  
    


 


 

See accompanying notes.

 

F-7


Tesseract Corporation

 

Notes to Financial Statements

 

June 30, 2005

 

1. Organization and Nature of Business

 

In January of 1999, Platinum Equity, LLC (“Platinum”), purchased Tesseract Corporation (“Tesseract” or “Company”) from Ceridian Corporation and Tesseract became a wholly owned subsidiary of Platinum. On October 26, 2005, the Company was acquired by WARP Technology Holdings, Inc. operating under the name Halo Technology Holdings, a publicly traded company. (See note 7). On December 31, 2004, Westgarde Holdings, Inc. (“Westgarde”), owned by Platinum, merged with Tesseract. Westgarde’s issued and outstanding shares of common stock were retired and cancelled, Westgarde ceased to exist and Tesseract was the surviving entity, Due to the common ownership of the companies, Tesseract’s financial statement give effect to the merger as of July 1, 2003.

 

Tesseract, headquartered in San Francisco, is a total HR solutions provider offering an integrated Web-enabled HRMS suite. Tesseract’s Web-based solution suite allows HR users, employees and external service providers to communicate securely and electronically in real time. The integrated nature of the system allows for easy access to data and a higher level of accuracy for internal reporting, assessment and external data interface. Tesseract’s customer base features Fortune 100 corporations operating in a diverse range of industries, including financial services, transportation, utilities, insurance, manufacturing, petroleum, pharmaceuticals and retail.

 

F-8


Tesseract Corporation

 

Notes to Financial Statements (continued)

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

 

Cash

 

The Company typically maintains cash at commercial banks. At times, bank account balances exceed FDIC insurance limits. Generally, the FDIC insures depositor funds up to $100,000.

 

Concentration of Credit Risk and Certain Other Risks

 

Financial instruments that subject the Company to concentrations of credit risk include accounts receivable. The Company sells its products and services primarily to end-users in the United States and limited in Canada. Credit is extended based on an ongoing evaluation of the customer’s financial condition and, generally, collateral is not required. The Company maintains allowances for potential credit losses based on management’s evaluation of the customer’s financial condition, past collection history, and age of the accounts receivable balances. Historically, losses have been within the range of management’s expectations.

 

Fair Value of Financial Instruments

 

At June 30, 2005, the respective carrying values of the Company’s financial instruments, including accounts receivable, accounts payable, accrued liabilities, loans payable and notes payable approximated their fair values.

 

Comprehensive Income

 

Comprehensive income is comprised of net income or loss and unrelated gain or loss on marketable securities for the year ended June 30, 2004. For the year ended June 30, 2005, comprehensive income consisted of net income only. Comprehensive income for the year ended June 30, 2004 is as follows:

 

Net income

   $ 1,211,697

Unrealized holding gain during the year

     38,423

Reclassification adjustment for realized loss

     14,830
    

Comprehensive income

   $ 1,264,950
    

 

F-9


Tesseract Corporation

 

Notes to Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Marketable Securities

 

Marketable securities are stated at fair value as determined by quoted market price. The Company has classified its securities as investments available for sale pursuant to Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The related unrealized holding gains and losses are excluded from operations and recorded in Accumulated Other Comprehensive Loss on the Statement of Shareholders Equity. Realized gains and losses and declines in value judged to be other-than-temporary on marketable securities are included in other expense. In September 2003, the Company sold all of its Marketable Securities and recognized a loss of $14,830 for the year ended June 30, 2004.

 

Property and Equipment

 

Property and equipment recorded as part of the acquisition by Platinum was recorded at fair value. Property and equipment acquired subsequent to the date of the acquisition is recorded at cost. Significant renewals and betterments to property and equipment are capitalized and maintenance and repairs that do not improve or extend the lives of the assets are expensed as incurred. When assets are sold, replaced, or otherwise retired, the cost and related accumulated depreciation or amortization is eliminated from the accounts in the year of disposal and the related gains and losses are included in income. Depreciation or amortization is computed on the straight-line method over one to three years, the estimated useful lives of the assets.

 

Intangible Assets

 

Amortization of intangible assets is computed using the straight-line method over seven years, the useful lives of the assets.

 

Earnings Per Share

 

Earnings per share has been calculated by dividing net income by the weighted-average shares outstanding.

 

F-10


Tesseract Corporation

 

Notes to Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Revenue Recognition

 

Revenues are derived from the licensing of software, maintenance contracts, training, and other consulting services.

 

The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended. In arrangements that include rights to multiple software products and/or services, the Company allocates and defers revenue for the undelivered items, based on vendor-specific objective evidence of fair value, and recognizes the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue. In arrangements in which the Company does not have vendor-specific objective evidence of fair value of maintenance, and maintenance is the only undelivered item, the Company recognizes the total arrangement fee ratably over the contractual maintenance term.

 

Software license revenues are recognized upon receipt of a purchase order and delivery of software, provided that the license fee is fixed or determinable; no significant production, modification, or customization of the software is required; and collection is considered probable by management.

 

Service revenue for maintenance contracts is deferred and recognized ratably over the term of the agreement. Revenue from training and other consulting services is recognized as the related services are performed.

 

At June 30, 2005, the Company recorded deferred revenue of $4,750,815, primarily for customer upfront payments on maintenance contracts and arrangements for which the Company is recognizing the total arrangement fee ratably over the contractual maintenance term.

 

Cost of Revenue

 

Cost of revenue includes costs related to product and service revenue. Cost of product revenue includes third-party licensing fees. Cost of service revenue includes salaries, benefits, and overhead costs associated with employees providing maintenance and technical support, training and consultant services. Third-party consultant fees are also included in cost of service revenue.

 

F-11


Tesseract Corporation

 

Notes to Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Impairment of Long-Lived Assets

 

The Company evaluates its long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the future discounted cash flows compared to the carrying amount of the asset.

 

Income Taxes

 

The Company is an S corporation and is treated as a disregarded entity for federal income tax purposes and, therefore, is not liable for United States (“U.S.”) federal income taxes. As an S corporation, the Company’s taxable income is included in the income tax returns of the shareholder. However, some states do not recognize the disregarded entity status and, therefore, the Company will continue to be taxed as a C corporation within those states. Additionally, there are certain states in the U.S. that assess a fee against S corporations. Accordingly, for those various states, the Company utilizes the liability method to determine the provision for income taxes.

 

Income tax expense and benefit relates to state income taxes and income tax refunds. The book and tax basis of the assets and liabilities with the exception of deferred revenue, intangible assets and accrued interest receivable are the same. Since the Company is an S corporation, a deferred tax asset or liability was not recorded.

 

Shipping and Handling Costs

 

Costs to ship products from the Company’s facilities to customers are recorded as a component of cost of products in the statements of income.

 

Advertising Expense

 

The Company expenses the costs of advertising when incurred. Advertising expense was $43,899 and $9,141 for the years ended June 30, 2005 and 2004, respectively.

 

Research and Development and Software Development Costs

 

Research and development expenses are charged to operations as incurred. Software development costs, which are required to be capitalized pursuant to Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, have been insignificant. Accordingly, no software development costs have been capitalized. Research and development expense was $1,803,455 and $1,671,009 for the years ended June 30, 2005 and 2004, respectively.

 

F-12


Tesseract Corporation

 

Notes to Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

New Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123 (R) will be effective for the interim period beginning July 1, 2006. The Company believes the adoption will not have an effect on our results of operations.

 

F-13


Tesseract Corporation

 

Notes to Financial Statements (continued)

 

3. Property and Equipment

 

At June 30, 2005, property and equipment consisted of the following:

 

Computer Equipment

   $ 199,436  

Less accumulated depreciation

     (193,316 )
    


Property and equipment, net

   $ 6,120  
    


 

Depreciation expense was $11,570 and $67,489 for the years ended June 30, 2005 and 2004 respectively.

 

4. Intangible Assets

 

At June 30, 2005, intangible assets consisted of the following:

 

     Gross Carrying
Amount


   Accumulated
Amortization


   Net

Customer relationships

   $ 1,320,220    $ 1,225,918    $ 94,302
    

  

  

 

Amortization expense was $188,604 for each of the years ended June 30, 2005 and 2004.

 

Amortization expense for the year ending June 30, 2006 will be $94,302 relating to customer relationships.

 

F-14


Tesseract Corporation

 

Notes to Financial Statements (continued)

 

5. Related Party Transactions

 

Note Receivable, Management Fees and Expense Reimbursements

 

The Note Receivable from Platinum was $3,198,463 for the year ended June 30, 2005. The Promissory Note has a principal amount of $2,000,000 with interest on unpaid principal amount at an interest rate equal to eight and one-half percent per annum due January 14, 2009. At June 30, 2005, accrued interest was $1,198,463. Interest income was $258,018 and $237,204 for the years ended June 30, 2005 and 2004, respectively.

 

The Company is party to a management agreement with Platinum that requires Platinum to provide the Company with financial, management and strategic services. The Company incurred management fees of $2,575,000 and $2,400,000 to Platinum for the years ended June 30, 2005 and 2004, respectively.

 

Expenses incurred by Platinum on behalf of the Company were $2,362 and $4,501 for the years ended June 30, 2005 and 2004, respectively. Such expense reimbursements are recorded in general and administrative expenses in the accompanying statements of operations. At June 30, 2005, the Company had $156,041 payable to Platinum for management fees and expense reimbursements.

 

Transactions with Affiliates

 

The Company enters into certain transactions with companies that are owned directly or indirectly by Platinum. Sales to affiliates were $12,000 during the year ended June 30, 2005. Purchases from affiliates were $1,673 and $14,523 during the years ended June 30, 2005 and 2004, respectively, and were included in selling, general, and administrative expenses in the statements of operations.

 

6. Notes and Loans Payable

 

The Company has a loan payable to a bank in the amount of $82,174 that bears interest at the bank’s prime lending rate (6.25% at June 30, 2005). The loan was due July 2005 and was paid in full.

 

The Company has an unsecured note payable to a lender in the amount of $72,442 that bears interest at 8.0% annually. The loan was due July 2005 and was paid in full.

 

F-15


Tesseract Corporation

 

Notes to Financial Statements (continued)

 

7. Commitments

 

Leases

 

The Company has operating leases for certain office facilities. Rental expense for the years ended June 30, 2005 and 2004 was approximately $471,000 and $392,000, respectively. Future minimum lease payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 2005, are as follows:

 

2006

   $ 471,345

2007

     392,790
    

Total minimum lease payments

   $ 864,135
    

 

Rental income in connection with a sublease was approximately $79,000 for the year ended June 30, 2004.

 

8. Employee Benefits

 

The Company has a 401(k) plan which includes an employer match of 50% of the first 6% of a participant’s eligible contributions. The Company made matching contributions of $78,149 and $96,498 for the years ended June 30, 2005 and 2004, respectively.

 

9. Subsequent Event

 

On October 26, 2005, WARP Technology Holdings, Inc. operating under the name Halo Technology Holdings (“Halo”) completed the transactions contemplated by that certain Merger Agreement (“the “Merger Agreement”) dated as of September 12, 2005 with Tac/Halo, Inc., a wholly owned subsidiary of Halo (the “Merger Sub”), Tesseract and Platinum Equity, LLC (“Seller”). Under the terms of the Merger Agreement, Tesseract shall be merged with and into the Merger Sub (the “Merger”) and shall survive as a wholly-owned subsidiary of Halo. The aggregate consideration shall consist of (a) $4,500,000 in cash payable at the closing of the Merger, (b) 7,045,454 shares of Series D Preferred Stock as calculated by dividing $7,750,000 by $1.10, (c) a Promissory Note in the original principal amount of $1,750,000, delivered at closing and payable no later than March 31, 2006, and (d) a Working Capital Adjustment of $1,000,000 to be paid no later than November 30, 2005 (which have not been paid). If the Promissory Note is paid on or before March 31, 2006, Platinum will return for cancellation, without additional consideration from the Company, 909,091 shares of Series D Preferred Stock to Halo.

 

In addition, the amount due from Platinum at the closing was forgiven by the Company and accordingly, will not be collected by the Company.

 

F-16


COMBINED FINANCIAL STATEMENTS

 

Process Software, LLC and Affiliates

Years ended June 30, 2005 and 2004

With Report of Independent Registered Public Accounting Firm

 

F-17


Process Software, LLC and Affiliates

 

Combined Financial Statements

 

Contents

 

Report of Independent Registered Public Accounting Firm

   F-19

Combined Balance Sheet as of June 30, 2005

   F-20

Combined Statements of Operations for the years ended June 30, 2005 and 2004

   F-21

Combined Statements of Member’s and Shareholder’s Equity for the years ended June 30, 2005 and 2004

   F-22

Combined Statements of Cash Flows for the years ended June 30, 2005 and 2004

   F-23

Notes to Combined Financial Statements

   F-24 - F-35

 

F-18


Report of Independent Registered Public Accounting Firm

 

The Members and Shareholders

Process Software, LLC and Affiliates

 

We have audited the accompanying combined balance sheet of Process Software, LLC and Affiliates (the “Company”) as of June 30, 2005, and the combined statements of operations, member’s and shareholder’s equity, and cash flows for the years ended June 30, 2005 and 2004. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.

 

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Process Software, LLC and Affiliates as of June 30, 2005, and the combined results of their operations and their cash flows for the years ended June 30, 2005 and 2004 in conformity with accounting principles generally accepted in the United States.

 

Mahoney Cohen & Company, CPA, P.C.

 

January 6, 2006

 

New York, NY

 

F-19


Process Software, LLC and Affiliate s

 

Combined Balance Sheet

 

     June 30, 2005

 

Assets

        

Current assets:

        

Cash and cash equivalents

   $ 983,630  

Accounts receivable, net of allowances of $112,281

Due from affiliates

    
 
1,546,015
22,138
 
 

Prepaid expenses and other assets

     322,782  
    


Total current assets

     2,874,565  

Property and equipment, net of accumulated depreciation of $2,411,177

     101,540  

Other assets

     111,154  

Goodwill

     1,642,760  

Intangible assets, net of accumulated amortization of $7,307,910

     5,992,090  
    


Total assets

   $ 10,722,109  
    


Liabilities and member’s and shareholder’s equity

        

Current liabilities:

        

Accounts payable and accrued expenses

   $ 1,214,904  

Deferred revenues—current portion

     5,688,873  

Due to Platinum Equity, LLC

     2,259,460  
    


Total current liabilities

Deferred revenues—long term

    
 
9,163,237
20,323
 
 

Commitments

        

Member’s and shareholder’s equity:

        

Member’s equity

Common stock

Paid in capital

    
 
 
2,026,293
120,000
3,672,736
 
 
 

Accumulated deficit

     (4,280,480 )
    


Total member’s and shareholder’s equity

     1,538,549  
    


Total liabilities and member’s and shareholder’s equity

   $ 10,722,109  
    


 

See accompanying notes.

 

F-20


Process Software, LLC and Affiliates

 

Combined Statements of Operations

 

     Year ended
June 30 2005


    Year-ended
June 30 2004


 

Revenues:

                

Products

   $ 2,463,329     $ 2,578,529  

Service

     13,654,402       15,364,931  
    


 


Total revenues

     16,117,731       17,943,460  

Cost of revenues:

                

Cost of products

     684,046       830,834  

Cost of services

     1,785,936       2,127,438  
    


 


Total cost of revenues

     2,469,982       2,958,272  
    


 


Gross profit

     13,647,749       14,985,188  

Operating expenses:

                

Engineering and development

     3,412,322       3,780,801  

Selling and marketing

     1,613,641       2,126,612  

General and administrative

     3,873,562       4,025,906  

Depreciation and amortization

     1,611,512       1,543,197  

Management fees to Platinum Equity, LLC

     2,916,046       4,509,677  
    


 


Total operating expenses

     13,427,083       15,986,193  
    


 


Income (loss) from operations

     220,666       (1,001,005 )

Other income (expense):

                

Interest income, net

     (35,924 )     17,488  

Other expense, net

     (2,248 )     (84,938 )
    


 


Income (loss) before provision for taxes

     182,494       (1,068,455 )

Provision for Income taxes

     22,707       6,900  
    


 


Net income (loss)

   $ 159,787     $ (1,075,355 )
    


 


 

See accompanying notes.

 

F-21


Process Software, LLC and Affiliates

 

Combined Statements of Member’s and Shareholder’s Equity

 

   

Member’s

Equity


    David Common
Stock


  Foresight Common Stock

  Paid in
Capital


  Accumulated
Deficit


    Accumulated
Other
Comprehensive
Loss


    Totals

 
      Shares

  Amount

  Shares

  Amount

       

Balance at June 30, 2003

  $ 1,003,019     10   $ —     12,000,000   $ 120,000   $ 3,568,394   $ (3,406,637 )   $ (109,986 )   $ 1,174,790  

Contributions

          —           —       —       104,342                     104,342  

Distributions to Shareholder

          —       —     —       —             (135,000 )             (135,000 )

Distributions to Member

    (6,251 )   —       —     —       —                             (6,251 )

Unrealized holding gain arising during the year

                                              41,039       41,039  

Reclassification adjustment for realized loss

                                              68,947       68,947  

Net loss

    (684,038 )                               (391,317 )             (1,075,355 )
   


 
 

 
 

 

 


 


 


Balance at June 30, 2004

    312,730     10     —     12,000,000     120,000     3,672,736     (3,932,954 )     —         172,512  
                  —     —       —                                

Contributions

    1,306,250           —     —       —       —                       1,306,250  

Distributions to Shareholder

                —     —       —             (100,000 )             (100,000 )

Net income (loss)

    407,313                                 (247,526 )             159,787  
   


 
 

 
 

 

 


 


 


Balance at June 30, 2005

  $ 2,026,293     10     —     12,000,000   $ 120,000   $ 3,672,736   $ (4,280,480 )   $ —       $ 1,538,549  
   


 
 

 
 

 

 


 


 


 

See accompanying notes.

 

F-22


Process Software, LLC and Affiliates

 

Combined Statements of Cash Flows

 

    

Year ended

June 30,

2005


   

Year ended
June 30,

2004


 

Operating activities

                

Net income (loss)

   $ 159,787     ($ 1,075,355 )

Adjustments to reconcile net income (loss) to cash used in operating activities:

                

Depreciation and amortization

     1,611,512       1,543,197  

Loss on sale of securities

             68,947  

Changes in operating assets and liabilities:

                

Accounts receivable

     251,954       333,473  

Due from affiliate

Prepaid expenses and other assets

Other assets

    
 
 
14,907
103,102
35,600
 
 
 
   
 
 
(3,387
70,293
13,093
)
 
 

Accounts payable and accrued expenses

     401,571       (467,159 )

Due to affiliates

     (3,519,528 )     (547,820 )

Deferred revenue

     (790,071 )     (668,804 )
    


 


Net cash used in operating activities

     (1,731,166 )     (733,522 )

Investing activities

                

Purchases of property and equipment

     (61,912 )     (170,789 )

Sale of marketable securities

     —         451,117  
    


 


Net cash (used in) provided by investing activities

     (61,912 )     280,328  

Financing activities

                

Stockholder’s and member’s distributions

     (100,000 )     (141,251 )

Member’s contribution

     1,306,250       104,342  
    


 


Net cash provided by (used in) in financing activities

     1,206,250       (36,909 )
    


 


Net decrease in cash and cash equivalents

     (586,828 )     (490,103 )

Cash and cash equivalents at beginning of year

     1,570,458       2,060,561  
    


 


Cash and cash equivalents at end of year

   $ 983,630     $ 1,570,458  
    


 


Supplemental disclosure of cash flow information:

                

Cash paid for income taxes

   $ 22,707     $ 6,900  
    


 


Cash paid for interest

   $ 35,770     $ 40,042  
    


 


 

See accompanying notes

 

F-23


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements

 

June 30, 2005

 

1. Organization and Nature of Business

 

The combined financial statements include Process Software, LLC (“Process”), David Corporation (“David”), ProfitKey International, LLC (“ProfitKey”) and Foresight Software, Inc. (“Foresight”) (combined the “Company”). These four entities are affiliated through common ownership and management. Platinum Equity, LLC (“Platinum”) either directly or indirectly owns all the common stock or complete membership interest in these affiliated companies. All intercompany balances and transactions have been eliminated in combination.

 

Process designs, develops and markets networking software solutions, including a suite of TCP/IP applications and services for Compaq’s OpenVMS Alpha and VAX systems. Process focuses on providing the most advanced, secure and reliable networking software available. Process products are cross-platform, directory-centric solution sets for the administration and proactive provisioning of secure reliable end-to-end network services and applications.

 

David provides risk management information systems, and serves clients ranging from Fortune 500 companies to public entities and third-party administrators. David offers client/server-based products to companies that provide their own workers’ compensation and liability insurance.

 

ProfitKey designs, develops and markets ERP Software and Manufacturing Execution Software (“MES”) to small to mid-market make-to-order/make-to-stock manufacturers. ProfitKey focuses on providing a comprehensive solution including quality control, engineering change management and e-commerce capabilities. ProfitKey’s products are written using the GUPTA programming language and operate on the Oracle, SQL server and Linux database platforms.

 

Foresight designs, develops and markets ERP and SMS software to small to mid-market make-to-order/make-to-stock manufacturers. The Foresight’s products are written using the Progress programming language and operate on the Progress database platform.

 

F-24


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentrations of Credit Risk and Major Customers

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable.

 

The credit risk with respect to accounts receivable is limited due to the creditworthiness of the Company’s customers, and the Company’s credit and collection policies. The Company performs ongoing credit evaluations of its customers, generally does not require collateral and maintains allowances for potential credit losses which, when realized, have been within the range of management’s expectations. No one customer accounted for a significant percentage of the Company’s revenue during the years ended June 30, 2004 or 2005. Additionally, no one customer accounted for a significant percentage of the Company’s accounts receivable at June 30, 2005.

 

Cash and Cash Equivalents

 

The Company invests its excess cash primarily in money market mutual funds. Accordingly, these investments are subject to minimal credit and market risk. For financial reporting purposes, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Income Taxes

 

Process and ProfitKey are single member limited liability companies that are treated as a disregarded entity for federal income tax purposes and, therefore, are not liable for United States (“U.S.”) federal income taxes. As a limited liability company treated as a disregarded entity, the Process and ProfitKey’s taxable income is included in the income tax returns of the member. However, some states do not recognize the disregarded entity status and, therefore, the Company will continue to be taxed as a C corporation in those states. Additionally, there are certain states in the U.S. that assess a fee against limited liability companies. Accordingly, for those various states, the Company utilizes the liability method to determine the provision for income taxes.

 

F-25


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

David and Foresight are entities that are an S corporation and are treated as a disregarded entity for federal income tax purposes and, therefore, are not liable for United States (“U.S.”) federal income taxes. As an S Corporation they are treated as a disregarded entity, the David and Foresight’s taxable income is included in the income tax returns of the shareholder. However, some states do not recognize the disregarded entity status and, therefore, the Company will continue to be taxed as a C corporation in those states. Additionally, there are certain states in the U.S. that assess a fee against S corporations. Accordingly, for those various states, the Company utilizes the liability method to determine the provision for income taxes.

 

Income tax expense relates to state income taxes. The book and tax basis of the assets and liabilities with the exception of deferred revenue, intangible assets and goodwill are the same. Since the Company comprises of entities that are limited liability companies and S corporations, a deferred tax asset or liability was not recorded.

 

Property and Equipment

 

Property and equipment recorded are cost. Property and equipment acquired subsequent to the date of acquisition is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized over the shorter of the estimated life of the asset or lease term.

 

Engineering and Development and Software Development Costs

 

Engineering and development expenses are charged to operations as incurred. Software development costs incurred subsequent to the establishment of technological feasibility are capitalized. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly no software development costs have been capitalized.

 

F-26


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Goodwill and Intangible Assets

 

Intangible assets are primarily comprised of customer relationships, and developed technology. Goodwill represents acquisition costs in excess of the net assets of businesses acquired. In accordance with SFAS 142, “Goodwill and Other Intangible Assets” goodwill is no longer amortized; instead goodwill is tested for impairment on an annual basis. We assess the impairment of identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider to be important which could trigger an impairment review include the following:

 

    Significant underperformance relative to expected historical or projected future operating results;

 

    Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and

 

    Significant negative industry or economic trends.

 

When we determine that the carrying value of intangibles and other long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, we record an impairment charge. We measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.

 

F-27


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Revenue Recognition

 

Revenues are derived from the licensing of software, annual maintenance contracts software, training and other support services.

 

Software license revenues are recognized upon receipt of a purchase order and delivery of software, provided that the license fee is fixed or determinable; no significant production, modification, or customization of the software is required; and collection is considered probable by management. For licensing of the Company’s software through its indirect sales channel, revenue is recognized when the distributor sells the software to its end-users, including value-added resellers. For licensing of the Company’s software to independent software vendors, revenue is recognized upon shipment to the independent software vendors. For licensing of the Company’s software through it’s indirect Sales channel revenue is recognized when the distributor sells the software to it’s end-user, including value-added resellers. For licensing of the Company’s software to independent software vendors, revenue is recognized upon shipment to the independent software vendors.

 

The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended. In arrangements that include rights to multiple software products and/or services, the Company allocates and defers revenue for the undelivered items, based on vendor-specific objective evidence of fair value, and recognizes the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue. In arrangements in which the Company does not have vendor-specific objective evidence of fair value of maintenance, and maintenance is the only undelivered item, the Company recognizes the total arrangement fee ratably over the contractual maintenance term.

 

Service revenue for annual maintenance contracts is deferred and recognized ratably over the term of the agreement. Revenue from training and other services is recognized as the related services are performed.

 

Deferred Revenue

 

At June 30, 2005, the Company recorded deferred revenue of $5,709,196 primarily for customer upfront payments on maintenance contractual arrangements for which the Company is recognizing the total arrangement fee ratably over the contractual maintenance term.

 

F-28


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Cost of Revenue

 

Cost of revenue includes costs related to product and service revenue. Cost of product revenue includes material, packaging, shipping, and other production costs. Cost of service revenue includes salaries, benefits, and overhead costs associated with employees providing maintenance and technical support, training, and consulting services. Third-party consultant fees are also included in cost of service revenue.

 

Impairment of Long-Lived Assets

 

The Company evaluates its long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the future discounted cash flows compared to the carrying amount of the asset.

 

Comprehensive Income

 

For the year ended June 30, 2004, comprehensive loss consist of following:

 

Net loss

   $ (1,075,355 )

Unrealized holding gain arising during the year

     41,039  

Reclassification adjustment for realized loss

     68,947  
    


Comprehensive loss

   $ (965,369 )
    


 

For the year ended June 30, 2005, comprehensive income consisted of net income only.

 

Marketable Securities

 

Marketable securities are stated at fair value as determined by quoted stock price. The Company has classified its securities as investments available for sale pursuant to Statement of Financial Accounting Standards No.115 “Accounting for Certain Investments in Debt and Equity Securities”. The related unrealized holding gains or losses are excluded from operations and recorded in Accumulated Other Comprehensive Loss on the Combined Statement of Member’s and Shareholder’s Equity. Realized gains and losses and declines in value judged to be other than temporary on marketable securities are included in other expense. In May 2004, the Company sold all of its securities for proceeds of approximately $451,000 and recognized a loss of approximately $69,000 for the year ended June 30, 2004.

 

F-29


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Fair Value of Financial Instruments

 

At June 30, 2005, the respective carrying values of the Company’s financial instruments, including receivables, accounts payable, and accrued liabilities, approximated their fair values.

 

Shipping and Handling Costs

 

Costs to ship products from the Company’s warehouse facilities to customers are recorded as a component of cost of products in the combined statement of operations.

 

Advertising Expense

 

The Company expenses the costs of advertising when incurred. Advertising expense were $20,000 and $9,000 for the years ended June 30, 2005 and 2004, respectively.

 

Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123 (R) will be effective for the period beginning July 1, 2006. The adoption of SFAS No. 123 (R) will not have an effect on our results of operations.

 

F-30


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

2. Summary of Significant Accounting Policies (continued)

 

Earnings (Loss) Per Share

 

Earnings (Loss) per share for the years ended June 30, 2005 and 2004 is not applicable to the Company as they are a combination of privately held companies that are different legal entities, and accordingly, the weighted-average number of common shares outstanding is not determinable.

 

3. Property and Equipment

 

Property and equipment consisted of the following:

 

     June 30,
2005


Computer equipment

   $ 1,482,510

Furniture and fixtures

Leasehold improvements

    
 
757,409
272,798
    

       2,512,717

Less accumulated depreciation and amortization

     2,411,177
    

     $ 101,540
    

 

Depreciation and amortization expense was $199,012 in 2005 and $130,697 in 2004.

 

F-31


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

4. Intangible Assets

 

Intangible assets are amortized on a straight-line basis over their expected useful lives ranging from eight to ten years. Amortization expense was $1,412,500 in 2005 and 2004.

 

Intangible assets consisted of the following:

 

     Amortization
Period
(in Years)


   June 30

        2005

Customer relationships

   10    $ 10,000,000

Technology—core and developed

   8      3,300,000
         

            13,300,000

Less accumulated amortization

          7,307,910
         

          $ 5,992,090
         

 

The Company expects to incur amortization expense of the following:

 

Year ending June 30:


    

2006

   $ 1,413,000

2007

     1,413,000

2008

     1,344,000

2009

     1,000,000

2010

     822,000
    

     $ 5,992,000
    

 

F-32


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

5. Related Party Transactions

 

Management Fees and Expense Reimbursements

 

The Company is party to a management agreement with Platinum that requires Platinum to provide the Company with financial, management and strategic services. The Company incurred management fees of $2,916,046 and $4,509,677 to Platinum in 2005 and 2004, respectively. At June 30, 2005, $2,259,460 was payable to Platinum Equity, LLC for unpaid management fees.

 

Expenses incurred by Platinum on behalf of the Company were $165,491 and $826,041 during 2005 and 2004, respectively. Such expense reimbursements are recorded in general and administrative expense in the accompanying combined statements of operations.

 

The Company paid approximately $36,000 and $35,000, interest to Platinum for the years ended June 30, 2005 and 2004, respectively.

 

Transactions with Affiliates

 

The Company enters into certain transactions with companies that are owned directly or indirectly by Platinum. Purchases from affiliates were $181,225 and $253,533 during the years ended June 30, 2005 and 2004, respectively, and were included in general, and administrative expense in the combined statements of operations. Amounts due from affiliates at June 30, 2005 were $22,138.

 

6. Lease Commitments

 

The Company has operating leases for its principle office facilities.

 

Future minimum lease payments required under all operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 2005 are as follows:

 

Year ending June 30:


    

2006

   $ 668,735

2007

     572,488

2008

     379,620
    

     $ 1,620,843
    

 

Rent expense incurred under these leases for the years ended June 30, 2005 and 2004 were approximately $764,000 and $742,000, respectively.

 

Total minimum lease payments have not been reduced by $183,000 to be received in the future under a non-cancelable sublease with an uncombined affiliate. Rental income for the years ended June 30, 2005 and 2004 were approximately $88,000.

 

Note 7 - Common Stock

 

At June 30, 2005 and 2004, common stock consists of:

 

David Corporation, No par value:

      

Authorized - 10,000,000 shares

      

Issued and outstanding - 10 shares

   $ —  

Foresight Software, Inc., $0.01 par value:

      

Authorized - 15,000,000 shares

Issued and outstanding - 12,000,000

     120,000
    

     $ 120,000
    

 

F-33


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

8. Employee Benefit Plan

 

The Company maintains a qualified defined contribution plan for all employees. The Company’s plan is part of Platinum’s defined contribution plan. Platinum’s plan allows participating companies to have different contribution and vesting formula. Participants may elect to defer up to 19% of their wages (subject to the annual limitations imposed by Section 402 of the Internal Revenue Code). The Company matches participant contributions at the rate of 50% of the first 6% of salary contributed. The Company made matching contributions of $139,166 and $168,776 in 2005 and 2004, respectively.

 

9. Segment Information

 

For the years ended June 30, 2005 and 2004, the breakdown of revenues and depreciation and amortization and total assets by segment were as follows:

 

     Year ended June 30, 2005

 
     Process

    David

    ProfitKey

    Foresight

    Total

 

Revenue

                                        

Products

   $ 917,839     $ 391,266     $ 491,815     $ 662,409     $ 2,463,329  

Service

     8,320,292       1,887,756       2,395,812       1,050,542       13,654,402  
    


 


 


 


 


Total

   $ 9,238,131     $ 2,279,022     $ 2,887,627     $ 1,712,951     $ 16,117,731  
    


 


 


 


 


Depreciations and Amortization

   $ 1,567,496     $ 25,200     $ 13,570     $ 5,246     $ 1,611,512  

Net income (loss)

   $ 260,989     $ (372,312 )   $ 146,324     $ 124,786     $ 159,787  

Total Assets

   $ 9,155,899     $ 745,134     $ 446,310     $ 374,766     $ 10,772,109  
                                          
    


 


 


 


 


     Year ended June 30, 2004

 
     Process

    David

    ProfitKey

    Foresight

    Total

 

Revenue

                                        

Products

   $ 1,467,192     $ 415,942     $ 414,510     $ 280,885     $ 2,578,529  

Service

     9,574,852       2,013,645       2,388,011       1,388,423       15,364,931  
    


 


 


 


 


Total

   $ 11,042,044     $ 2,429,587     $ 2,802,521     $ 1,669,308     $ 17,943,460  
    


 


 


 


 


Depreciations and Amortization

   $ 1,486,779     $ 27,357     $ 23,411     $ 5,650     $ 1,543,197  

Net income (loss)

   $ (644,418 )   $ 101,770     $ (39,620 )   $ (493,087 )   $ (1,075,355 )

Total Assets

   $ 10,735,257     $ 1,299,345     $ 674,089     $ 555,469     $ 13,264,160  

 

No one customer accounted for more that 10% of the Company’s revenue for the years ended June 30, 2005 and 2004. The Company sells its product and services to customers primarily in North America.

 

F-34


Process Software, LLC and Affiliates

 

Notes to Combined Financial Statements (continued)

 

10. Subsequent Event

 

On October 26, 2005, WARP Technology Holdings Inc. (“Halo”) completed the transactions contemplated by WARP Technology Holdings Inc. operating under that certain Purchase Agreement (the “Purchase Agreement”) dated as of September 12, 2005 by and among the Halo and Platinum Equity, LLC (“Platinum”), EnergyTRACS Acquisition Corp. (the “Foresight Seller”) and Milgo Holdings, LLC (the “Process Seller” and together with Platinum and the Foresight Seller, the “Sellers”) for the acquisition of 100% of the Equity Interests in David, ProfitKey, Foresight, and Process (the “Acquisition”). Pursuant to the Purchase Agreement, Platinum sold, assigned and delivered 100% of the common stock of David and a 100% membership interest in ProfitKey, the Foresight Seller sold, assigned and delivered 100% of the common stock of Foresight, and the Process Seller sold, assigned and delivered a 100% membership interest in Process to Halo in exchange for the payment of an aggregate of $12,000,000.

 

In addition, the amount due to Platinum at the closing was not be assumed by the Company.

 

F-35


WARP TECHNOLOGIES HOLDINGS, INC.

 

TESSERACT Corporation/ Process Software, LLC and Affiliates

 

UNAUDITED PRO FORMA

CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

On October 26, 2005, Warp Technology Holdings, Inc. operating under the name Halo Technology Holdings (the “Company” or “WARP”), completed the transactions contemplated by that certain Merger Agreement (the “Merger Agreement”) dated as of September 12, 2005 by and among the Company and TAC/Halo, Inc., a wholly owned subsidiary of the Company (the “Merger Sub”), Tesseract Corporation (“Tesseract”) and Platinum Equity, LLC (“Platinum”), as amended by Amendment No. 1 to Merger Agreement (the “Amendment”) dated October 26, 2005 by and among such parties and TAC/Halo, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“New Merger Sub”). Pursuant to the Merger Agreement, Tesseract was merged with and into the New Merger Sub (the “Merger”) which survived as a wholly-owned subsidiary of the Company. The Amendment provided that the Merger Consideration shall consist of (i) $4,500,000 in cash payable at Closing, (ii) 7,045,454 shares of Series D Preferred Stock of the Company, and (iii) $1,750,000 payable no later than March 31, 2006 and evidenced by a Promissory Note. The Amendment provided for a Working Capital Adjustment of $1,000,000 to be paid no later than November 30, 2005. If not paid by such date, at the option of the Seller, the Working Capital Adjustment may be converted into up to 1,818,181 shares of Series D Preferred Stock. Additionally, if the Working Capital Adjustment is not paid on or before November 30, 2005, the Company must pay Platinum a monthly transaction advisory fee of $50,000 per month, commencing December 1, 2005. Under the Amendment, Platinum agrees to retain 909,091 shares of Series D Preferred Stock delivered as part of the Merger Consideration. If the Promissory Note is paid on or before March 31, 2006, Platinum will return for cancellation, without additional consideration from the Company, 909,091 shares of Series D Preferred Stock to the Company. The Amendment further provides that the rights, preferences and privileges of the Series D Preferred Stock will adjust to equal the rights, preferences and privileges of the next round of financing if such financing is a Qualified Equity Offering (as defined in the Amendment). If the next round is not a Qualified Equity Offering, the rights, preferences and privileges of the Series D Preferred Stock will adjust to equal the rights, preferences and privileges of the next round of financing at the option of the holder. The descriptions of the Merger Agreement and Amendment No. 1 to the Merger Agreement are qualified in their entirety by reference to the Merger Agreement, which was previously filed as Exhibit 10.87 of the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on September 16, 2005, and to Amendment No. 1 to the Merger Agreement filed as Exhibit 10.94 of the Current Report on Form 8-K filed on November 1, 2005

 

Also on October 26, 2005, the Company completed the transactions contemplated by that certain Purchase Agreement (the “Purchase Agreement”) dated as of September 12, 2005 by and among Warp Technology Holdings, Inc. operating under the name Halo Technology Holdings (“Company”) and Platinum Equity, LLC (“Platinum”), EnergyTRACS Acquisition Corp. (the “Foresight Seller”) and Milgo Holdings, LLC (the “Process Seller” and together with Platinum and the Foresight Seller, the “Sellers”) for the acquisition of 100% of the Equity Interests in David Corporation, ProfitKey International, LLC, Foresight Software, Inc. and Process Software, LLC (the “Acquisition”). Pursuant to the Purchase Agreement, Platinum sold, assigned and delivered 100% of the common stock, no par value per share of the David Corporation, a California Corporation and a 100% membership interest in ProfitKey International LLC, a Delaware limited liability company, the Foresight Seller sold, assigned and delivered 100% of the common stock, par value $0.01 per share of the Foresight Software, Inc., a Delaware corporation and the Process Seller sold, assigned and delivered a 100% membership interest in Process Software, LLC, a Delaware limited liability company to the Company in exchange for the payment of an aggregate of twelve million dollars ($12,000,000) in cash. These four companies are collectively referred to as “Process and Affiliates”. The Purchase Agreement has previously been filed as Exhibit 10.86 of the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on September 16, 2005 and is incorporated herein by reference.

 

This unaudited pro forma information should be read in conjunction with the consolidated financial statements of the Company included in our Annual Report filed on Form 10-KSB for the year ended June 30, 2005 and our Quarterly Report filed on Form 10-QSB for the three months ended September 30, 2005 filed on November 14, 2005. In addition, this pro forma information should be read in conjunction with the financial statements of Tesseract for the years ended June 30, 2005 and 2004 and with the financial

 

F-36


statements of Process and Affiliates for the years ended June 30, 2005 and 2004, both of which are included within this Amendment to Current Report on Form 8-K/A.

 

The following unaudited pro forma statement of operations for the year ended June 30, 2005 has been prepared in accordance with accounting principles generally accepted in the United States to give effect to the October 26, 2005 acquisition of Tesseract, and Process and Affiliates as if the transaction occurred on July 1, 2004. The pro forma statement of operations combines the results of operations of the Company for the year ended June 30, 2005 with the results of operations of Tesseract, and Process and Affiliates for the year ended June 30, 2005. Pro forma adjustments include decrease in intangible amortization, decrease in deferred revenue amortization, elimination of management fees paid to Platinum, interest on debt relating to this acquisition, amortization of financing costs, and accretion of the fair value of the warrants issued as part of this financing. Platinum was the sole owner of Tesseract, and Process and Affiliates at June 30, 2005.

 

The following unaudited pro forma statement of operations for the three months ended September 30, 2005 has been prepared in accordance with accounting principles generally accepted in the United States to give effect to the October 26, 2005 acquisition of Tesseract, and Process and Affiliates as if the transaction occurred on July 1, 2005. Such pro forma statement of operations combines the results of operations of the Company for the three months ended September 30, 2005 with the results of operations of Tesseract, and Process and Affiliates for the three months ended September 30, 2005. Pro forma adjustments include decrease in intangible amortization, decrease in deferred revenue amortization, elimination of management fees paid to Platinum, interest on debt relating to this acquisition, amortization of financing costs, and accretion of the fair value of the warrants issued as part of this financing.

 

The following unaudited pro forma balance sheet has been prepared in accordance with accounting principles generally accepted in the United States; gives effect to the October 26, 2005 acquisition of Tesseract, and Process and Affiliates and the financing raised in connection with the acquisition as if the acquisition and financing occurred on September 30, 2005; and combines the consolidated balance sheet of the Company as of September 30, 2005, which is included in the Company’s Quarterly Report filed on Form 10-QSB for the three months ended September 30, 2005 with the balance sheets of Tesseract, and Process and Affiliates as of September 30, 2005.

 

Under the purchase method of accounting, the estimated cost of approximately $14 million to acquire Tesseract, plus transaction costs, will be allocated to Tesseract’s underlying net assets at their respective fair values. Similarly, the estimated cost of approximately $12 million to acquire Process and Affiliates, plus transaction costs, will be allocated to their underlying net assets at their respective fair values. As more fully described in the notes to the pro forma consolidated condensed financial statements, a preliminary allocation of the excess of the purchase price over the value of the net assets acquired has been allocated to goodwill. Intangible assets consisting of trade names, customer relationships, and developed technologies, are expected to be amortized over approximately seven years. At this time, the work needed to provide the basis for estimating these fair values, and amortization periods, has not been completed. As a result, the final allocation of the purchase price, intangible assets acquired, and their estimated useful lives, as well as the amount recorded as goodwill could differ materially. Accordingly, a change in the amortization period would impact the amount of annual amortization expense.

 

These unaudited pro forma financial statements are prepared for informational purposes only and are not necessarily indicative of future results or of actual results that would have been achieved had the acquisition of Tesseract, and Process and Affiliates been consummated as of the dates specified above.

 

F-37


WARP Technology Holdings, Inc.

 

Pro Forma Consolidated Condensed Balance Sheet

September 30, 2005

(Unaudited)

 

                      Pro forma Adjustments

     
    WARP (A)

    Tesseract (B)

    Process and
Affiliates (C)


    Financing

        Tesseract
Purchase
Accounting


        Process and
Affiliate
Purchase
Accounting


        WARP
Pro forma


 

Assets

                                                                   

Current assets:

                                                                   

Cash and cash equivalents

  $ 751,033     $ 369,075     $ 947,953     $ 14,704,906     D   $ (3,500,000 )   G   $ (12,000,000 )   H   $ 1,272,967  

Accounts receivable, net

    2,129,875       64,673       1,677,514       —             —             —             3,872,062  

Due from Platinum Equity, LLC and Affiliates

    —         3,266,430       124,183       —             (3,275,685 )   G     —             114,928  

Prepaid expenses and other current assets

    443,217       72,534       249,195       —             —             —             764,946  
   


 


 


 


     


     


     


Total current assets

    3,324,125       3,772,712       2,998,845       14,704,906           (6,775,685 )         (12,000,000 )         6,024,903  

Property and equipment, net

    246,688       4,339       79,618       —             —             —             330,645  

Deferred financing cost, net

    1,325,110       —         —         295,094     F     —             —             1,620,204  

Intangible assets, net

    16,462,587       47,150       5,638,961       —             3,919,650     G     (891,481 )   H     25,176,867  

Goodwill

    7,601,420       —         1,642,765       —             12,094,214     G     6,998,535     H     28,336,934  

Investment and other assets

    1,086,360       —         111,154       —             (1,000,000 )   G     —             197,514  
   


 


 


 


     


     


     


Total assets

  $ 30,046,290     $ 3,824,201     $ 10,471,343     $ 15,000,000         $ 8,238,179         $ (5,892,946 )       $ 61,687,067  
   


 


 


 


     


     


     


Liabilities and stockholders’ equity

                                                                   

Current liabilities:

                                                                   

Accounts payable

  $ 997,060     $ 169,432     $ 312,678     $ —           $ —           $ —           $ 1,479,170  

Accrued expenses

    3,579,633       407,048       833,740       —             84,000     G     266,000     H     5,170,421  

Due to Platinum Equity, LLC and Affiliates

    —         153,537       1,356,897       —             (153,537 )   G     (1,039,123 )   H     317,774  

Note payable to Bristol Technology, Inc

    500,000       —         —         —             —             —             500,000  

Note payable

    254,128       —         —         —             2,750,000     G     —             3,004,128  

Deferred revenue

    4,098,187       3,532,063       5,694,951       —             (1,681,030 )   G     (2,879,758 )   H     8,764,413  

Due to ISIS

    1,293,701       —         —         —             —             —             1,293,701  
   


 


 


 


     


     


     


Total current liabilities

    10,722,709       4,262,080       8,198,266       —             999,433           (3,652,881 )         20,529,607  

Subordinated notes payable

    1,083,336       —         —         —             —             —             1,083,336  

Senior notes payable

    8,467,035       —         —         13,107,585     D,E     —             —             21,574,620  

Other long term liabilities

    41,602       50,867       33,012       —             —             —             125,481  
   


 


 


 


     


     


     


Total liabilities

    20,314,682       4,312,947       8,231,278       13,107,585           999,433           (3,652,881 )         43,313,044  

Commitments and Contingencies

    —         —         —         —             —             —             —    

Stockholders’ equity:

                                                                   

Preferred stock (Canadian subsidiary)

    2       —         —         —             —             —             2  

Series C Preferred Stock

    13,936,644       —         —         —             —             —             13,936,644  

Series D Preferred Stock

    —         —         —         —             6,750,000     G     —             6,750,000  

Shares of Common Stock to be issued for accrued dividends on Series C Preferred Stock

    211,636       —         —         —             —             —             211,636  

Shares of Common Stock to be issued for accrued interest on subordinated debt

    42,500       —         —         —             —             —             42,500  

Common stock

    35       1       120,000       —             (1 )   I     (120,000 )   I     35  

Additional paid-in capital

    61,885,439       1,805,469       3,672,736       1,892,415     E     (1,805,469 )   I     (3,672,736 )   I     63,777,854  

Deferred compensation

    (870,562 )     —         —         —             —             —             (870,562 )

Accumulated other comprehensive loss

    (62,664 )     —         —         —             —             —             (62,664 )

(Accumulated deficit) retained earnings

    (65,411,422 )     (2,294,216 )     (4,259,470 )     —             2,299,216     I     4,259,470     I     (65,411,422 )

Member’s equity

    —         —         2,706,799       —             —             (2,706,799 )   I     —    
   


 


 


 


     


     


     


Total stockholders’ equity

    9,731,608       (488,746 )     2,240,065       1,892,415           7,238,746           (2,240,065 )         18,374,023  
   


 


 


 


     


     


     


Total liabilities and stockholders’ equity

  $ 30,046,290     $ 3,824,201     $ 10,471,343     $ 15,000,000         $ 8,238,179         $ (5,892,946 )       $ 61,687,067  
   


 


 


 


     


     


     


 

 

See accompanying notes to unaudited pro forma consolidated condensed financial statements.

 

F-38


NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)

 

  (A) Reflects the historical financial position of the Company at September 30, 2005.

 

  (B) Reflects the historical financial position of Tesseract at September 30, 2005.

 

  (C) Reflects the historical financial position of Process and Affiliates at September 30, 2005

 

  (D) The Company used a credit facility previously secured with Fortress Credit Corp. (“Lender”) in order to complete the acquisition of Tesseract, and Process and Affiliates. The Lender made a loan of $15,000,000 under the credit facility. The cash received by the company is net of financing costs of $295,094.

 

  (E) The company issued 1,265,425 shares of warrants in connection with the $15,000,000 loan. The fair market value of these warrants, $1,892,415 as estimated by using the Black-Scholes method, adjusts the original amount of the loan down and increases the equity.

 

  (F) The Company has paid $295,094 for financing costs in connection with the financing raised, as it is included in other assets as deferred financing costs.

 

  (G) The following represents the acquisition of Tesseract and the preliminary allocation of the purchase price: The final allocation of the purchase price will be determined based on a comprehensive final evaluation of the fair value of the tangible and intangible assets acquired and liabilities assumed.

 

Calculation of Purchase Price for Tesseract:

 

Cash

   $ 3,500,000

Advances to Platinum made prior to September 30, 2005

     1,000,000

Promissory note and Working Capital Adjustment

     2,750,000

Series D Preferred Stock (6,136,363 shares)

     6,750,000

Transaction costs

     84,000
    

Total purchase price

   $ 14,084,000
    

 

Allocation of Purchase Price for Tesseract:

 

Assets:

        

Tesseract’s historical assets

   $ 3,824,201  

Write-up of intangibles assets consisting of trade names, developed technologies and customer relationships

     3,919,650  

Write-up of goodwill

     12,094,214  

Forgiveness of receivables due from Platinum

     (3,275,685 )

Liabilities:

        

Tesseract’s historical liabilities

     (4,312,947 )

Adjustment of deferred revenues to fair market value

     1,681,030  

Forgiveness of payables to Platinum

     153,537  
    


Total purchase price

   $ 14,084,000  
    


 

  (H) The following represents the acquisition of Process and Affiliates and the preliminary allocation of the purchase price: The final allocation of the purchase price will be determined based on a comprehensive final evaluation of the fair value of the tangible and intangible assets acquired and liabilities assumed.

 

Calculation of Purchase Price for Process and Affiliates:

 

Cash

   $ 12,000,000

Transaction costs

     266,000
    

Total purchase price

   $ 12,266,000
    

 

Allocation of Purchase Price for Process and Affiliates:

 

F-39


Assets:

        

Process and Affiliates’ historical assets

   $ 10,471,343  

Write-down of intangibles assets consisting of developed technologies and customer relationships

     (891,481 )

Increase in goodwill

     6,998,535  

Liabilities:

        

Process and Affiliates’ historical liabilities

     (8,231,278 )

Adjustment of deferred revenues to fair market value

     2,879,758  

Forgiveness of payables to Platinum

     1,039,123  
    


Total purchase price

   $ 12,266,000  
    


 

  (I) Eliminate Tesseract’s stockholder’s equity of $488,746 and Process and Affiliates’ member’s and stockholder’s equity of $2,240,065 related to the pre-acquisition period.

 

F-40


WARP Technology Holdings, Inc.

 

Pro forma Consolidated Condensed Statements of Operations

Three Months ended September 30, 2005

(Unaudited)

 

     WARP (J)

    Tesseract (K)

   Process and
Affiliates (L)


    Pro forma
Adjustment


         WARP
Pro forma


 

Revenue

                                            

Licenses

   $ 1,314,569     $ 56,250    $ 877,518     $ —            $ 2,248,337  

Services

     1,893,760       2,144,550      3,129,265       (1,929,564 )   P      5,238,011  
    


 

  


 


      


Total revenue

     3,208,329       2,200,800      4,006,783       (1,929,564 )          7,486,348  

Cost of revenue

                                            

Cost of licenses

     45,734       —        232,505       —              278,239  

Cost of services

     293,908       268,526      373,969       —              936,403  
    


 

  


 


      


Total cost of revenue

     339,642       268,526      606,474       —              1,214,642  
    


 

  


 


      


Gross Profit

     2,868,687       1,932,274      3,400,309       (1,929,564 )          6,271,706  

Product development

     956,557       162,500      636,011       —              1,755,068  

Sales, marketing and business development

     1,372,525       51,194      355,697       —              1,779,416  

General and administrative

     1,315,926       818,388      1,064,075       —              3,198,389  

Amortization of intangibles

     486,432       47,151      366,610       (118,274 )   O      781,919  

Platinum management fees

     —         50,000      (317,130 )     267,130     Q      —    
    


 

  


 


      


Income (Loss) before interest

     (1,262,753 )     803,041      1,295,046       (2,078,420 )          (1,243,086 )

Interest (expense) income

     (1,296,102 )     25,101      203,533       (653,488 )   R, S, T      (1,720,956 )
    


 

  


 


      


Net Income (loss) before income taxes

     (2,558,855 )     828,142      1,498,579       (2,731,908 )        $ (2,964,042 )

Income taxes

     52,163       30      2,061       —       U      54,254  
    


 

  


 


      


Net Income (loss)

   $ (2,611,018 )   $ 828,112    $ 1,496,518     $ (2,731,908 )        $ (3,018,296 )
    


 

  


 


      


Computation of loss applicable to common shareholders

                                            

Net Income (loss) before beneficial conversion and preferred dividends

   $ (2,611,018 )   $ 828,112    $ 1,496,518     $ (2,731,908 )        $ (3,018,296 )

Beneficial conversion and preferred dividends

     (220,179 )     —        —         —              (220,179 )
    


 

  


 


      


Income (Loss) attributable to common stockholders

   $ (2,831,197 )   $ 828,112    $ 1,496,518     $ (2,731,908 )        $ (3,238,475 )
    


 

  


 


      


Basic and diluted net loss per share

   $ (0.88 )                               $ (1.01 )
    


                             


Weighted-average shares outstanding

   $ 3,209,597                                   3,209,597  
    


                             


 

See accompanying notes to unaudited pro forma consolidated condensed financial statement

 

F-41


WARP Technology Holdings, Inc.

 

Pro forma Consolidated Condensed Statements of Operations

Year ended June 30, 2005

(Unaudited)

 

     WARP (J)

    Tesseract (M)

    Process and
Affiliates (N)


    Pro forma
Adjustment


         WARP
Pro forma


 

Revenue

                                             

Licenses

   $ 2,986,752     $ 762,585     $ 2,463,329     $ —            $ 6,212,666  

Services

     2,137,170       9,136,808       13,654,402       (4,560,788 )   P      20,367,592  
    


 


 


 


      


Total revenue

     5,123,922       9,899,393       16,117,731       (4,560,788 )          26,580,258  

Cost of revenue

                                             

Cost of licenses

     151,051       85,647       684,046       —              920,744  

Cost of services

     396,490       1,522,840       1,785,936       —              3,705,266  
    


 


 


 


      


Total cost of revenue

     547,541       1,608,487       2,469,982       —              4,626,010  
    


 


 


 


      


Gross Profit

     4,576,381       8,290,906       13,647,749       (4,560,788 )          21,954,248  

Product development

     1,589,099       1,803,455       3,412,322       —              6,804,876  

Sales, marketing and business development

     3,652,117       239,348       1,613,641       —              5,505,106  

General and administrative

     4,042,702       2,747,054       4,072,574       —              10,862,330  

Amortization of intangibles

     946,063       188,603       1,412,500       (419,155 )   O      2,128,011  

Platinum management fees

     —         2,575,000       2,916,046       (5,491,046 )   Q      —    

Late filing penalty

     1,033,500       —         —         —              1,033,500  

Intangible impairment

     62,917       —         —         —              62,917  

Goodwill impairment

     3,893,294       —         —         —              3,893,294  
    


 


 


 


      


Income (Loss) before interest

     (10,643,311 )     737,446       220,666       1,349,413            (8,335,786 )

Interest (expense) income

     (4,631,683 )     167,663       (38,172 )     (2,416,074 )   R, S, T      (6,918,266 )
    


 


 


 


      


Net Income (loss) before income taxes

     (15,274,994 )     905,109       182,494       (1,066,661 )          (15,254,052 )

Income taxes (benefit)

     97,945       (2,281 )     22,707       —       U      118,371  
    


 


 


 


      


Net Income (loss)

   $ (15,372,939 )   $ 907,390     $ 159,787     $ (1,066,661 )        $ (15,372,423 )
    


 


 


 


      


Computation of loss applicable to common shareholders

                                             

Net Income (loss) before beneficial conversion and preferred dividends

   $ (15,372,939 )   $ 907,390     $ 159,787     $ (1,066,661 )        $ (15,372,423 )

Beneficial conversion and preferred dividends

     (7,510,590 )     —         —         —              (7,510,590 )
    


 


 


 


      


Income (Loss) attributable to common stockholders

   $ (22,883,529 )   $ 907,390     $ 159,787     $ (1,066,661 )        $ (22,883,013 )
    


 


 


 


      


Basic and diluted net loss per share

   $ (11.97 )                                $ (11.97 )
    


                              


Weighted-average shares outstanding

     1,912,033                                    1,912,033  
    


                              


 

See accompanying notes to unaudited pro forma consolidated condensed financial statements.

 

F-42


NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

  (J) Reflects the Company’s historical statement of operations for the three months ended September 30, 2005 and the year ended June 30, 2005.

 

  (K) Reflects Tesseract’s historical statement of operations for the three months ended September 30, 2005.

 

  (L) Reflects Process and Affiliates’ historical statement of operations for the three months ended September 30, 2005.

 

  (M) Reflects the historical operations of Tesseract for the year ended June 30, 2005, including various reclassifications to conform to the company’s financial statement presentation.

 

  (N) Reflects the historical operations of Process and Affiliates for the year ended June 30, 2005, including various reclassifications to conform to the company’s financial statement presentation.

 

  (O) To record the decreased amortization of intangibles for the three months ended September 30, 2005 for $118,274. To record decreased amortization of intangibles for the year ended June 30, 2005 of $419,155. The decrease in the amortization results from the increase in the estimated useful lives of the intangible assets acquired.

 

  (P) To record the decrease in amortization of the deferred revenue as a result of a fair value adjustment of $1,929,564 and $4,560,788 for the three months ended September 30, 2005 and for the year ended June 30, 2005, respectively, which is included in services revenue.

 

  (Q) Elimination of Platinum fees / (credits) of ($267,130) and $5,491,046 for the three months ended September 30, 2005 and for the year ended June 30, 2005, respectively as Tesseract, and Process and Affiliates will operate on their own and will not have these costs.

 

  (R) Record interest expense of $516,769 and $1,869,197 for the three months ended September 30, 2005 and for the year ended June 30, 2005, respectively, on the debt raised by the Company in connection with the acquisition of Tesseract, and Process and Affiliates.

 

  (S) To record amortization of deferred financing cost of $18,443 and $73,773 for the three months ended September 30, 2005 and for the year ended June 30, 2005, respectively, which is included in interest expense.

 

  (T) To record accretion of fair market value of the warrants issued in connection with the debt raised of $118,276 and $473,104 for the three months ended September 30, 2005 and for the year ended June 30, 2005, respectively, which is included in interest expense.

 

The following summarizes the adjustment to interest expense:

 

Note


   Year Ended
June 30,
2005


  

Three Months Ended
September 30,

2005


(R)

   $ 1,869,197    $ 516,769

(S)

     73,773      18,443

(T)

     473,104      118,276
    

  

     $ 2,416,074    $ 653,488
    

  

 

  (U) The Company did not record an income tax benefit because the company provided a full valuation allowance against the deferred tax asset.

 

F-43