CA Technologies
COMPUTER ASSOCIATES INTERNATIONAL INC (Form: 8-K/A, Received: 12/30/2005 14:52:15)

 

UNITED STATES
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: October 14, 2005

(Date of earliest event reported)

 


 

Computer Associates International, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation)

 

1-9247

 

13-2857434

(Commission File Number)

 

(IRS Employer Identification No.)

 

 

 

One Computer Associates Plaza
Islandia, New York

 

11749

(Address of Principal Executive Offices)

 

(Zip Code)

 

(631) 342-6000

(Registrant’s Telephone Number, Including Area Code)

 

Not applicable

(Former name or former address, if changed since last report.)

 

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):

 

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

 

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

 

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

 

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

 

 



 

Item 9.01.  Financial Statement and Exhibits

 

As previously disclosed, on October 14, 2005, Computer Associates International, Inc. (the “Company”) completed its acquisition of iLumin Software Services, Inc. (“iLumin”) by merger for total consideration of approximately $47.35 million, including the assumption of debt. The Company is filing this report to provide the required financial statements of iLumin, and the pro forma financial statements relating to the iLumin acquisition, specified below. For more information about the iLumin acquisition, see the Company’s Current Report on Form 8-K filed with the SEC on October 20, 2005, which is hereby amended.

 

(a)  Financial Statements of Business Acquired .

 

The following audited financial statements of iLumin are furnished as Exhibit 99.1 and are incorporated herein by reference:

 

(i)                                        Report of Independent Auditors

 

(ii)                                   Consolidated Balance Sheets at September 30, 2005 and December 31, 2004

 

(iii)                                Consolidated Statements of Operations for the Nine Months Ended September 30, 2005 and the Year Ended December 31, 2004

 

(iv)                               Consolidated Statements of Stockholders’ Equity (Deficit) for the Year Ended December 31, 2004 and the Nine Months Ended September 30, 2005

 

(v)                                  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and for the Year Ended December 31, 2004

 

(vi)                               Notes to Consolidated Financial Statements

 

(b)  Pro Forma Financial Information.

 

The following pro forma financial statements are furnished as Exhibit 99.2 and incorporated herein by reference:

 

(i)                                      Unaudited pro forma Condensed Balance Sheet as of September 30, 2005, which gives effect to the iLumin acquisition as if it had been completed on September 30, 2005

 

(ii)                                   Unaudited pro forma Condensed Statements of Operations for the fiscal year ended March 31, 2005 and the nine months ended September 30, 2005, which give effect to the acquisition of iLumin and Niku Corporation as if the acquisitions had been completed on April 1, 2004

 

2



 

(d)  Exhibits

 

Exhibit No.

 

Description

Exhibit 23.1

 

Consent of Perlson, Touhy & Company, LLP

Exhibit 99.1

 

(i) Report of Independent Auditors

 

 

(ii) Consolidated Balance Sheets at September 30, 2005 and December 31, 2004

 

 

(iii) Consolidated Statements of Operations for the Nine Months Ended September 30, 2005 and the Year Ended December 31, 2004

 

 

(iv) Consolidated Statements of Stockholders’ Equity (Deficit) for the Year Ended December 31, 2004 and the Nine Months Ended September 30, 2005

 

 

(v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and for the Year Ended December 31, 2004

 

 

(vi) Notes to Consolidated Financial Statements

Exhibit 99.2

 

Unaudited Pro Form Condensed Balance Sheet and Unaudited Pro Forma Condensed Statements of Operations

 

3



 

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.

 

 

COMPUTER ASSOCIATES INTERNATIONAL, INC.

 

 

Date:  December 30, 2005

By:

/s/ KENNETH V. HANDAL

 

 

Kenneth V. Handal

 

 

Executive Vice President, General Counsel and Corporate Secretary

 

4


 

Exhibit 23.1

 

Consent of Independent Auditors

 

We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-127602, 333-127601, 333-120849, 333-126273, 333-108665, 333-100896, 333-88916, 333-32942, 333-31284, 333-83147, 333-80883, 333-79727, 333-62055, 333-19071, 333-04801, 33-64377, 33-53915, 33-53572, 33-34607, 33-18322, 33-20797, 33-30347, 33-35515, 2-92355, 2-87495 and 2-79751) of Computer Associates International, Inc. of our report dated December 5, 2005, with respect to the consolidated balance sheets of iLumin Software Services, Inc. and subsidiaries as of the nine months ended September 30, 2005 and the year ended December 31, 2004, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the nine months ended September 30, 2005 and the year ended December 31, 2004, which report appears in the Current Report on Form 8-K/A of Computer Associates International, Inc.

 

 

Perlson, Touhy & Company, LLP
North Massapequa, New York

 

 

December 30, 2005

 


 

Exhibit 99.1

 

 

ILUMIN SOFTWARE SERVICES, INC.

AND SUBSIDIARIES

 

Consolidated Financial Statements

 

For the Nine Months Ended September 30, 2005 and

the Year Ended December 31, 2004

 

with Report of Independent Auditors

 



 

iLumin Software Services, Inc. and Subsidiaries

Consolidated Financial Statements

 

For the Nine Months Ended September 30, 2005 and

the Year Ended December 31, 2004

 

Table of Contents

 

Report of Independent Auditors

3

 

 

Consolidated Balance Sheets

4

 

 

Consolidated Statements of Operations

5

 

 

Consolidated Statements of Stockholders’ Equity (Deficit)

6

 

 

Consolidated Statements of Cash Flows

7

 

 

Notes to Consolidated Financial Statements

9

 



 

Report of Independent Auditors

 

The Board of Directors and Stockholders
iLumin Software Services, Inc.

 

We have audited the accompanying consolidated balance sheets of iLumin Software Services, Inc. and Subsidiaries as of September 30, 2005 and December 31, 2004, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the nine months ended September 30, 2005 and the year ended December 31, 2004.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of iLumin Software Services, Inc. and Subsidiaries at September 30, 2005 and December 31, 2004, and the consolidated results of their operations and cash flows for the nine months ended September 30, 2005 and the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States.

 

 

 

December  5, 2005

 

3



 

iLumin Software Services, Inc. and Subsidiaries

Consolidated Balance Sheets

 

 

 

September 30,
2005

 

December 31,
2004

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

32,530

 

$

2,126,162

 

Restricted cash

 

250,000

 

300,000

 

Accounts receivable, net of allowance for doubtful accounts of $45,134 and $252,155 at September 30, 2005 and December 31, 2004, respectively

 

2,351,900

 

5,058,066

 

Amount due from purchaser of Escrow.com

 

225,000

 

225,000

 

Prepaid expenses and other current assets

 

395,655

 

467,502

 

Total current assets

 

3,255,085

 

8,176,730

 

 

 

 

 

 

 

Restricted cash, noncurrent portion

 

250,000

 

250,000

 

Property and equipment, net

 

1,125,190

 

1,052,456

 

Intangible assets, net

 

43,333

 

140,833

 

Other assets

 

26,084

 

18,912

 

Total assets

 

$

4,699,692

 

$

9,638,931

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities

 

 

 

 

 

Promissory note payable under revolving line of credit

 

$

2,000,000

 

$

 

Equipment financing facility debt, current portion - secured

 

333,333

 

304,303

 

Accounts payable

 

1,780,762

 

2,014,094

 

Accrued expenses

 

1,225,097

 

1,436,788

 

Deferred revenue

 

3,088,486

 

3,752,321

 

Capital lease obligations, current portion

 

245,539

 

242,523

 

Total current liabilities

 

8,673,217

 

7,750,029

 

 

 

 

 

 

 

Equipment financing facility debt, net of current portion – secured

 

347,849

 

532,531

 

Capital lease obligations, net of current portion

 

212,612

 

280,651

 

Other long-term liabilities

 

206,514

 

287,178

 

Total liabilities

 

9,440,192

 

8,850,389

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Series A Redeemable Preferred Stock, $.001 par value:
487,152,664 shares authorized; 483,683,465 shares issued and outstanding

 

7,127,076

 

7,127,076

 

Series A-2 Redeemable Preferred Stock, $.001 par value:
247,750,870 shares authorized; 770,487 and 164,107 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively

 

25,230

 

5,373

 

Series B Redeemable Preferred Stock, $.001 par value:
10,455,901 shares authorized, issued and outstanding

 

8,423,995

 

8,423,995

 

Common Stock, $.001 par value; 50,000,000 and 38,000,000 shares authorized at September 30, 2005 and December 31, 2004, respectively; 3,164,060 shares issued and outstanding at September 30, 2005 and December 31, 2004

 

51,539,028

 

51,539,028

 

Warrants

 

844,641

 

667,352

 

Accumulated deficit

 

(72,700,470

)

(66,974,282

)

Total stockholders’ equity (deficit)

 

(4,740,500

)

788,542

 

Total liabilities and stockholders’ equity (deficit)

 

$

4,699,692

 

$

9,638,931

 

 

See accompanying notes.

 

4



 

iLumin Software Services, Inc. and Subsidiaries

Consolidated Statements of Operations

 

 

 

For the Nine
Mos. Ended
September 30,
2005

 

For the Year
Ended
December 31,
2004

 

Revenue

 

 

 

 

 

Software fees and other

 

$

4,106,739

 

$

6,052,292

 

Maintenance

 

3,804,189

 

3,780,206

 

Professional services

 

2,090,505

 

3,092,295

 

Subscription revenue

 

69,321

 

106,314

 

Other revenue

 

72,430

 

33,835

 

Total revenue

 

10,143,184

 

13,064,942

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

Sales and marketing

 

5,664,324

 

4,915,017

 

Commissions and royalties

 

2,472,331

 

2,937,367

 

Research and development

 

2,406,147

 

3,208,170

 

Professional services

 

1,827,458

 

3,840,221

 

General and administrative

 

2,702,471

 

3,154,026

 

Depreciation and amortization

 

596,779

 

2,674,125

 

Total operating expenses

 

15,669,510

 

20,728,926

 

 

 

 

 

 

 

Loss from operations

 

(5,526,326

)

(7,663,984

)

 

 

 

 

 

 

Other expense, net

 

 

 

 

 

Interest expense, net

 

(311,724

)

(72,735

)

Other expense, net

 

(14,684

)

(13,045

)

Total other expense, net

 

(326,408

)

(85,780

)

 

 

 

 

 

 

Loss from continuing operations

 

(5,852,734

)

(7,749,764

)

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

Escrow.com

 

 

 

 

 

Loss from operations

 

 

(256,935

)

Gain on disposal

 

 

732,281

 

 

 

 

475,346

 

 

 

 

 

 

 

Digital Suite Business

 

 

 

 

 

Income from operations

 

 

506,667

 

Gain on disposal

 

126,546

 

503,748

 

 

 

126,546

 

1,010,415

 

 

 

 

 

 

 

Total discontinued operations

 

126,546

 

1,485,761

 

 

 

 

 

 

 

Net loss

 

$

(5,726,188

)

$

(6,264,003

)

 

See accompanying notes.

 

5



 

iLumin Software Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

For the Year Ended December 31, 2004 and the Nine Months Ended September 30, 2005

 

 

 

Series A Preferred Stock

 

Series A-2 Preferred Stock

 

Series B Preferred Stock

 

Common Stock

 

 

 

Accumulated

 

Equity

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Warrants

 

(Deficit)

 

(Deficit)

 

Balance as of January 1, 2004

 

483,683,465

 

$

7,127,076

 

 

$

 

10,455,901

 

$

8,410,207

 

2,795,215

 

$

51,419,029

 

$

640,503

 

$

(60,710,279

)

$

6,886,536

 

Exercise of Series A-2 Preferred Stock Options by employees

 

 

 

164,107

 

5,373

 

 

 

 

 

 

 

5,373

 

Issuance of Series B Preferred Stock Warrants to Bank

 

 

 

 

 

 

 

 

 

26,849

 

 

26,849

 

Offering costs incurred to lawyers & investment bankers at actual in excess of amounts accrued in previous year

 

 

 

 

 

 

13,788

 

 

 

 

 

13,788

 

Issuance of common stock for Tumbleweed product line

 

 

 

 

 

 

 

368,845

 

119,999

 

 

 

119,999

 

Net loss

 

 

 

 

 

 

 

 

 

 

(6,264,003

)

(6,264,003

)

Balance as of December 31, 2004

 

483,683,465

 

7,127,076

 

164,107

 

5,373

 

10,455,901

 

8,423,995

 

3,164,060

 

51,539,028

 

667,352

 

(66,974,282

)

788,542

 

Exercise of Series A-2 Preferred Stock Options by employees

 

 

 

606,380

 

19,857

 

 

 

 

 

 

 

19,857

 

Issuance of Series B Preferred Stock Warrants to Bank

 

 

 

 

 

 

 

 

 

177,289

 

 

177,289

 

Net loss

 

 

 

 

 

 

 

 

 

 

(5,726,188

)

(5,726,188

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2005

 

483,683,465

 

$

7,127,076

 

770,487

 

$

25,230

 

10,455,901

 

$

8,423,995

 

3,164,060

 

$

51,539,028

 

$

844,641

 

$

(72,700,470

)

$

(4,740,500

)

 

See accompanying notes.

 

6



 

iLumin Software Services, Inc. and Subsidiaries

Statements of Cash Flows

 

 

 

For the Nine
Mos. Ended
September 30,
2005

 

For the Year
Ended
December 31,
2004

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(5,726,188

)

$

(6,264,003

)

Income from discontinued operations

 

126,546

 

1,485,761

 

Loss from continuing operations

 

(5,852,734

)

(7,749,764

)

Adjustments to reconcile net loss to net cash used by operating activities:

 

 

 

 

 

Depreciation and amortization

 

596,779

 

2,674,125

 

Provision for doubtful accounts

 

56,963

 

200,007

 

Non-cash interest expense related to warrants issued to Bank

 

177,289

 

26,849

 

Non-cash stock-based compensation related to exercise of employee Series B Preferred Stock options

 

16,219

 

4,388

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Restricted cash

 

50,000

 

(199,706

)

Accounts receivable

 

2,649,203

 

(2,740,386

)

Prepaid expenses and other assets

 

100,333

 

(190,941

)

Accounts payable

 

(230,719

)

1,414,528

 

Accrued expenses

 

(211,691

)

152,483

 

Deferred revenues

 

(663,835

)

1,651,733

 

Other long-term liabilities

 

(80,664

)

86,341

 

Net cash used by continuing operating activities

 

(3,392,857

)

(4,670,343

)

Net cash used by discontinued operations

 

 

(165,869

)

Net cash used by operating activities

 

(3,392,857

)

(4,836,212

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Cash restricted as security deposit on office facility

 

 

(250,000

)

Purchases of property and equipment

 

(446,372

)

(582,529

)

Cash paid in connection with Tumbleweed acquisition

 

 

(100,000

)

Cash received in connection with sale of Escrow.com

 

 

650,000

 

Cash received in connection with sale of Digital Suite Business

 

90,888

 

274,578

 

Net cash used by investing activities

 

(355,484

)

(7,951

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from promissory note payable under revolving line of credit

 

2,000,000

 

 

Proceeds from equipment financing facility debt

 

87,090

 

912,910

 

Payments against equipment financing facility debt

 

(242,742

)

(76,076

)

Payments on capital leases

 

(193,277

)

(166,258

)

Proceeds from exercise of Series A-2 Preferred Stock options

 

3,638

 

985

 

Net cash provided by financing activities

 

1,654,709

 

671,561

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(2,093,632

)

(4,172,602

)

Cash and cash equivalents at beginning of year

 

2,126,162

 

6,298,764

 

Cash and cash equivalents at end of year

 

$

32,530

 

$

2,126,162

 

 

See accompanying notes

 

7



 

iLumin Software Services, Inc. and Subsidiaries

Statement of Cash Flows – Supplemental Information

 

(Continued from page 7)

 

 

 

For the Nine
Mos. Ended
September 30,
2005

 

For the Year
Ended
December 31,
2004

 

Cash paid for interest

 

$

250,174

 

$

67,973

 

 

 

 

 

 

 

Noncash investing and financing activities

 

 

 

 

 

Assets acquired under capital leases

 

$

128,254

 

$

554,679

 

 

 

 

 

 

 

Tumbleweed product line acquisition

 

 

 

 

 

Intangible assets acquired in acquisition

 

$

 

$

159,999

 

Maintenance liability assumed by Company

 

$

 

$

40,000

 

Common Stock issued in connection with this acquisition

 

$

 

$

119,999

 

 

 

 

 

 

 

Liability for deferred revenue from Digital Suite Business assumed by the Buyer

 

$

 

$

270,316

 

 

See accompanying notes

 

8



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

For the Nine Months Ended September 30, 2005 and

the Year Ended December 31, 2004

 

Note 1 - ORGANIZATION AND BASIS OF PRESENTATION

 

Description of Business and Organization

iLumin Software Services, Inc. (“iLumin” or “the Company”) was  initially incorporated in the state of Utah on November 20, 1998, under the name “iLumin, Inc.”, as a subsidiary of Intelliquest Technologies, Inc. (“Intelliquest”).  On January 1, 1999, Intelliquest was merged into iLumin, which remained as the surviving corporation.  The Company was then incorporated in the state of Delaware in conjunction with a reorganization that moved its state of incorporation from the state of Utah.

 

The Company is a provider of comprehensive “Enterprise Message Management” software products and services that provide customers with intelligent enterprise message surveillance, archival, email security, encryption, and electronic signature services and solutions.

 

During 2002, the Company acquired two companies—Escrow.com and Assentor—for a combination of cash and stock (see Note 4). These acquisitions were consolidated into the operations of the Company from the date of acquisition.

 

During December 2003, the Company’s management entered into plans for the sale of Escrow.com.  The Company reflected losses from discontinued operations for Escrow.com during the year ended December 31, 2004 up to the date of its sale to a third party in May 2004.  Discontinued operations for the year ended December 31, 2004 also reflects the income from operations of its Digital Suite Business, which was sold in November 2004, up to the date of its sale to a third party.

 

During January 2004, the Company acquired substantially all of the assets of Tumbleweed Communications Corp. for a combination of cash and stock (See Note 4).

 

The Company’s operations are subject to certain risks and uncertainties associated with technology-oriented companies including, among others, the susceptibility of the Company’s products and services to rapid technological change, current and potential competitors with greater resources, dependence on significant customers, lack of operating history and uncertainty of future profitability and possible fluctuations in financial results.  The Company became a wholly-owned subsidiary of Computer Associates International, Inc. (“CA”) on October 14, 2005 as result of an “Agreement and Plan of Merger” dated September 30, 2005.  Accordingly, Management believes that existing working capital, combined with the available resources from its new parent, will be sufficient to fund ongoing operations.

 

9



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

 

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 the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original maturity of three months or less at the time of purchase to be cash and cash equivalents. Cash equivalents at September 30, 2005 and December 31, 2004 consisted of investments in money market accounts and certificates of deposit.

 

Restricted Cash

Restricted cash consists of monies that are restricted relating to two surety bonds required for the Company to do business in the states of Utah and California, a security deposit posted to the landlord of its Reston, VA office and a “Software License and Services Agreement” between the Company a customer.

 

The surety bonds are secured by letters of credit, in the amount of $50,000 each, which are secured by a security interest in all securities, cash, and other financial assets held in certain accounts.  In January 2005, the restricted cash related to California was paid directly to the state as a deposit and, therefore, is included in “Prepaid assets and other current liabilities”, not as restricted cash at September 30, 2005.

 

During 2004, the Company entered into a “Software License and Services Agreement” with a customer.  This agreement called for the Company to deliver a letter of credit in the amount of $200,000, no later than July 15, 2004, that would allow the customer to draw upon the letter of credit for the sole purpose of maintaining the products in the event that the Company ceases to do business or support the products sold to them.  The letter of credit has a one-year term that automatically renews, unless the Company provides at least thirty-day written notice, to a maximum of five years.

 

10



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The security deposit, pursuant to the “Deed of Lease” between the Company and the landlord of its corporate headquarters in Reston, VA, called for the Company to deliver an unconditional and irrevocable letter of credit in the face amount of $250,000.  This letter of credit is required to be issued for an effective period of time spanning the remainder of the lease term which expires in May 2009, otherwise, the Company must replace the letter of credit, at least 30 days prior to its expiration, with a new letter of credit in the same amount and upon the same terms as the original.  This amount is being reported as a noncurrent asset on the balance sheet.

 

Accounts Receivable

The Company reports accounts receivable inclusive of unbilled revenue and exclusive of data migration service income that has not yet been earned.  Unearned maintenance revenue that has been billed is included in the net balance reflected on the balance sheet.  The majority of customer balances are less than 61 days aged at both September 30, 2005 and December 31, 2004.  The Company does not anticipate writing off balances in excess of the reserves that were established.

 

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash balances at financial institutions that may at times exceed federally insured limits.  The Company maintains its cash at high credit quality institutions and, as a result, believes credit risk related to its cash is minimal. The Company had two customers who accounted for 24% of consolidated revenues for the nine months ended September 30, 2005 and one customer who accounted for 16% of consolidated revenues for the year ended December 31, 2004 (See Note 11 under “Legal Matters”).

 

Fair Value of Financial Instruments

The fair value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying amount due to the relatively short maturity of these items.  The fair value of debt and capital lease obligations approximate their carrying amount as of September 30, 2005 and December 31, 2004, based on rates currently available to the Company for debt with similar terms and maturities.

 

11



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally two to seven years.  Leasehold improvements are amortized over the shorter of the useful life or remaining lease term.

 

Deferred Revenue

The “Deferred revenue” reported on the Company’s balance sheets consists principally of payments received in advance of maintenance services rendered.

 

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “ Accounting for Stock Issued to Employees” (APB 25), and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, “ Accounting for Stock-Based Compensation” (SFAS No. 123). Under APB 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of the Company’s stock and the exercise price of the option.

 

The Company accounts for equity instruments issued to non-employees in accordance with SFAS No. 123 and EITF 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services.”   Accordingly, the estimated fair value of the equity instruments is recorded on the earlier of the performance commitment date or the date the services required are completed.  In accordance with SFAS No. 148, “ Accounting for Stock-Based Compensation—Transition and Disclosure” (SFAS 148), the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation is as follows:

 

 

 

For the Nine
Months Ended
September 30,
2005

 

For the
Year Ended
December 31,
2004

 

Net loss, as reported

 

$

(5,726,188

)

$

(6,264,003

)

Add: Amounts recognized as expense per APB 25

 

16,219

 

4,388

 

Deduct: Total stock-based employee compensation expense determined under the Black-Scholes model

 

(3,990,520

)

(3,843,454

)

Pro forma net loss

 

$

(9,700,489

)

$

(10,103,069

)

 

12



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Pro forma information regarding net loss is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the Black-Scholes model of FAS 123.

 

Revenue Recognition

The Company recognizes revenues in accordance with the provisions of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “ Software Revenue Recognition” , as amended by SOP 98-4, “ Deferral of the Effective Date Revenue Recognition, With Respect to Certain Transactions . SOP 97-2, as amended, generally requires revenues earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, post-contract customer support (PCS), installation and training to be allocated to each element based on the relative fair values of the elements.  The fair value of an element must be based on evidence that is specific to the Company.  If evidence of fair value does not exist for all elements of a license agreement including PCS, and PCS is the only undelivered element, then the Company recognizes revenue for the license arrangement ratably over the term of the agreement.  If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then the Company recognizes revenues using the residual method.  Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of the arrangement fee is recognized as revenue.

 

Revenue from consulting services is recognized using the proportional performance method for fixed-fee development arrangements or as the services are provided for time-and-materials arrangements.

 

Research and Development

The Company expenses its research and development costs associated with the development of the Company’s software product line.

 

Advertising Costs

Advertising costs are expensed as incurred.  Advertising expenses were $895,619 and $728,164 for the nine months ended September 30, 2005 and the year ended December 31, 2004, respectively.

 

Straight-Line Rent

In accordance with the provisions of SFAS No. 13, entitled “Accounting for Leases”, the Company recognizes rent concessions and stated increases in rent on a straight-line basis over the lease term.  Accrued rent was $260,293 and $246,932 at September 30, 2005 and

 

13



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

December 31, 2004, respectively, and represents the cumulative liability that results from straight-lining the concessions and stated increases from the beginning of the lease for such facilities.  Rent expense included $354,613 and $394,014 attributed to straight-lined leases for the nine months ended September 30, 2005 and the year ended December 31, 2004, respectively.

 

Impairment of Long-Lived Assets and Recoverability of Intangibles

The Company periodically evaluates the recoverability of the carrying value of its long-lived assets and identifiable intangibles whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  The Company considers historical performance and anticipated future results in its evaluation of potential impairment.  Accordingly, when indicators of impairment are present, the Company evaluates the carrying amounts of these assets in relation to the operating performance of the business and estimated future undiscounted cash flows associated with the asset.  No such impairment losses have been recognized to date.

 

Recent Accounting Pronouncements

In December 2004, the FASB issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation.”  This revised Statement, SFAS No. 123r, entitled “Share-Based Payment,” supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. It establishes standards for accounting for transactions in which an entity exchanges equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by issuance of those equity instruments.  This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.   This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services.”   This Statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.”  This Statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual period that begins after June 15, 2005.  The adoption of this Statement will have a material impact on the Company’s financial position and results of its operations.

 

14



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of:

 

 

 

September 30,
2005

 

December 31,
2004

 

Computer equipment

 

$

3,523,011

 

$

3,231,008

 

Purchased software

 

1,652,080

 

1,511,058

 

Furniture and fixtures

 

155,979

 

155,979

 

Leasehold improvements

 

295,709

 

156,721

 

 

 

5,626,779

 

5,054,766

 

Less: accumulated depreciation

 

(4,501,589

)

(4,002,310

)

 

 

$

1,125,190

 

$

1,052,456

 

 

Depreciation expense is summarized as follows:

 

 

 

For the Nine
Months Ended
September 30,
2005

 

For the
Year Ended
December 31,
2004

 

Depreciation included in:

 

 

 

 

 

Continuing operations

 

$

499,279

 

$

471,625

 

Discontinued operations for Escrow.com and Digital Suite Business

 

 

32,807

 

Total depreciation expense

 

$

499,279

 

$

504,432

 

 

Certain equipment held under capital leases, approximately $824,000 and $696,000 at September 30, 2005 and December 31, 2004, respectively, is included in computer equipment and is amortized using the straight-line method over the term of the lease.  Amortization of assets recorded under capital leases is included with depreciation and amortization expense.

 

NOTE 4 - ACQUISITIONS

 

Assentor

On October 26, 2002, the Company purchased Assentor, an unincorporated business unit of SRA International, Inc., a Delaware corporation. Assentor provides email and instant messaging scanning and archiving solutions for the securities regulatory compliance market.  The Company acquired substantially all of the net assets and assumed certain liabilities of the Assentor business for the cash purchase price of $4.5 million, which consisted of intangible assets valued at approximately $5.0 million less assumed net

 

15



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 4 – ACQUISITIONS (continued)

 

liabilities of approximately $0.5 million.  This acquisition was accounted for under the purchase method of accounting.  Accordingly, the operations of this acquired business are included in the Company’s results from the date of acquisition.  Assets and liabilities acquired in connection with this acquisition were recorded at their estimated fair market values.  The Company assigned a two-year economic useful life for the acquired intangible assets and is amortizing the assets over that period.

 

Tumbleweed Communications Corp.

On January 13, 2004, the Company acquired substantially all the assets of Tumbleweed Communications Corp. (“Tumbleweed”) in exchange for $100,000 in cash, approximately 369,000 common shares of iLumin, which equated to $119,999, and the assumption of $40,000 in liabilities.  The combined purchase price of approximately $259,999 (including closing costs) was allocated as follows: (i) $40,000 to maintenance liabilities assumed and (ii) $219,999 to customer lists.  The Company recorded the customer lists as intangible assets and is amortizing the assets over their estimated useful lives of two years.

 

Aggregate amortization and accumulated amortization of intangible assets  for all acquisitions

Amortization expense and accumulated amortization of intangible assets were as follows:

 

 

 

For the Nine Months Ended
September 30, 2005

 

For the Year Ended
December 31, 2004

 

 

 

Expense

 

Accumulated Amortization

 

Expense

 

Accumulated Amortization

 

Assentor*

 

$

 

$

5,000,000

 

$

2,083,333

 

$

5,000,000

 

Escrow.com*/**

 

 

2,758,568

 

344,821

 

2,758,568

 

Tumbleweed

 

97,500

 

216,667

 

119,167

 

119,167

 

 

 

$

97,500

 

$

7,975,235

 

$

2,547,321

 

$

7,877,735

 

 


* fully amortized as of December 31, 2004

** reclassified as discontinued operation (See Note 5)

 

NOTE 5 - DISCONTINUED OPERATIONS

 

Escrow.com

In April 2002, the Company acquired 100% of Escrow.com, Incorporated (“Escrow.com”) in exchange for 122,688,339 shares of common stock valued at $6.8 million.  Escrow.com provided online transaction management technology and business escrow services that facilitate and accelerate e-commerce by assuring secure

 

16



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 5 - DISCONTINUED OPERATIONS (continued)

 

settlement.  Approximately $8.0 million of net assets were acquired by the Company in connection with the acquisition, including intangible assets of approximately $2.8 million.  In addition, approximately $1.2 million of net liabilities were assumed by the Company.  This acquisition was accounted for under the purchase method of accounting.  Accordingly, the operations of this acquired business were included in the Company’s results of operations from the date of acquisition.  Assets and liabilities acquired in connection with this acquisition were recorded at their estimated fair market values.  The Company assigned a two-year economic useful life to the intangible assets and is amortizing the assets over that period.

 

During December 2003, the Company committed to sell all the assets of Escrow.com with a net book value of approximately $489,000.  On December 31, 2003, the Company determined that the plan of sale criteria in FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” had been met.  Accordingly, the Company determined that the carrying value of the assets was equal to the fair value less costs to sell, based on the evaluation of the assets as of September 30, 2003.

 

On May 7, 2004, the Company entered into an “Agreement and Plan of Merger” with an independent third party whereby the Company sold Escrow.com for $200,000 in cash plus a promissory note.  The promissory note provided for a first installment due in November 2004 of $500,000 plus 10% interest and a performance payment equal to the greater of 1) $600,000 plus 10% interest per annum from the date of closing or 2) an amount equal to 25% of the Gross Margins of Escrow.com for the one-year period from the closing date, which took place on May 28, 2004.

 

In accordance with terms of the of the agreement described in the preceding paragraph the Company received the $200,000 at the closing and received $450,000 in September 2004 which was accepted by the Company in lieu of the $500,000 plus 10% interest due in November 2004 because the amount was remitted early by the “Buyer.” Coincident to the one year period anniversary of the closing, in May 2005, the Buyer informed the Company of a dispute concerning the aggregate price it was required to pay the Company for the acquisition.  The Buyer and the Company entered into a “Settlement Agreement and Mutual General Release of All Claims” whereby the Company received a final payment from the Buyer of $225,000 in October 2005.  The Company has recorded a gain on the sale of Escrow.com of $732,281, reflected within “Discontinued Operations,” during the year ended December 31, 2004, based upon the settlement-reduced aggregate sales price of $875,000, as follows:

 

17



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 5 - DISCONTINUED OPERATIONS (continued)

 

Proceeds of the sale:

 

 

 

Cash received at closing in May 2004

 

$

200,000

 

Discounted installment of $500,000 due in November 2004 paid in reduced amount as agreed in September  2004

 

450,000

 

Amount received in October 2005 in final settlement

 

225,000

(A)

 

 

 

 

Aggregate adjusted sales price

 

875,000

 

 

 

 

 

Carrying value of net assets acquired by Buyer on date of closing as tabled below

 

142,719

 

 

 

 

 

Gain on disposal of Net Assets of discontinued Escrow.com business

 

$

732,281

 

 


(A)       This amount is reflected within Company “Current Assets” as “Amount due from purchaser of Escrow.com” at September 30, 2005 and December 31, 2004.

 

Net operations of Escrow.com are reported within discontinued operations on the consolidated statements of operations in the year ended December 31, 2004.  Revenue for Escrow.com for the year ended December 31, 2004 was $846,232. The following table presents the combined carrying amounts of the major classes of assets and liabilities of Escrow.com at May 28, 2004 (the closing on the sale of the Net Assets):

 

Current assets:

 

 

 

Cash

 

$

111,020

 

Prepaid expenses and other current assets

 

43,793

 

Total current assets of discontinued operations

 

154,813

 

Other assets

 

23,027

 

Total assets of discontinued operations

 

$

177,840

 

 

18



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 5 - DISCONTINUED OPERATIONS (continued)

 

Current liabilities:

 

 

 

Accounts payable

 

$

18,425

 

Accrued liabilities

 

16,696

 

Total current liabilities of discontinued operations

 

$

35,121

 

 

 

 

 

Carrying value of net assets on date of closing

 

$

142,719

 

 

For the year ended December 31, 2004, the Company recorded a loss from discontinued operations related to Escrow.com of $256,935.

 

Digital Suite Business

In November 2004, the Company entered into a “Business and Asset Purchase Agreement” with an unrelated third party whereby it committed to sell its “Digital Suite Business.”  The terms of the agreement, dated November 12, 2004, provided for the Company to received $274,578 at the closing of the sale on that date, of which $24,500 of the proceeds was received in payment to the Company for computer equipment employed in the business by the Company and $78 was received in payment for all of the issued and outstanding shares of capital stock of the Company’s United Kingdom subsidiary, iLumin Limited.  The Company received the remaining $250,000 at the closing in consideration for the sale of the Digital Suite Business’ assets to the buyer and assumption by the buyer of that business’ liabilities, excluding the amounts separately designated for computer equipment and subsidiary capital stock outstanding. The agreement further provided for the Company to receive the aggregate sum of the Digital Suite ”Adjusted Net Revenue” collected by the Buyer from customer contracts or customers for the next 12 months from the transfer date up to $500,000 and 50% of such Adjusted Net Revenue from $500,000 to $1,000,000.  According to the agreement, Adjusted Net Revenue above $1,000,000 belongs to the buyer, with no additional earn-out payments to the Company.    

 

During the year ended December 31, 2004, the Company recorded a gain on the sale of the Digital Suite Business of $503,748, reflected within “Discontinued Operations,”  based on an aggregate sales price of $544,894, including additional consideration provided for in the agreement in the form of an earn-out based on Adjusted Net Revenue. Below, is a summary of the gain on the sale of the Digital Suite Business of $503,748 recorded for the year ended December 31, 2004:

 

19



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 5 - DISCONTINUED OPERATIONS (continued)

 

Proceeds of the sale:

 

 

 

Total cash received from the buyer at the closing

 

$

274,578

 

Company’s liability for deferred revenue from the Digital Suite Business assumed by the Buyer at the closing

 

270,316

 

 

 

 

 

Aggregate sales price

 

544,894

 

 

 

 

 

Carrying value of net assets acquired by Buyer on date of closing as tabled below

 

41,146

 

 

 

 

 

Gain on disposal of Net Assets of discontinued Digital Suite Business

 

$

503,748

 

 

Additional contingent consideration in the form of an earn-out based on Digital Suite Business’ Adjusted Net Revenue, as per the Agreement, of $126,546 was earned by the Company from the Buyer, and recorded as “Gain on disposal” of Digital Suite Business, during the nine months ended September 30, 2005.

 

As of September 30, 2005 and December 31, 2004, there were no assets or liabilities of the Digital Suite Business that remained to be segregated within the consolidated balance sheet.  Net operations of the Digital Suite Business were reported within discontinued operations on the consolidated statements of operations for the year ended December 31, 2004, the year in which the Company closed on the sale of its Net Assets.  Revenue for the Digital Suite Business for the year ended December 31, 2004 was $1,433,043.  The following table presents the combined carrying amounts of the major classes of assets and liabilities of the Digital Suite Business at November 12, 2004 (the date of closing on the sale of the Net Assets):

 

Current assets:

 

 

 

Cash

 

$

25,749

 

Prepaid expenses and other current assets

 

6,273

 

Total current assets of discontinued operations

 

32,022

 

 

 

 

 

Property and equipment, net

 

46,666

 

 

 

 

 

Total assets of discontinued operations

 

$

78,688

 

 

20



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 5 - DISCONTINUED OPERATIONS (continued)

 

Current liabilities:

 

 

 

Accounts payable

 

$

37,542

 

 

 

 

 

Total liabilities of discontinued operations

 

$

37,542

 

 

 

 

 

Carrying Value of Net Assets on date of closing

 

$

41,146

 

 

For the year ended December 31, 2004, the Company recorded income from discontinued operations related to the Digital Suite Business of $506,667.

 

NOTE 6 - DEBT

 

Revolving Line of Credit Facility and Equipment Term Loan Facility  with Silicon Valley Bank

On August 12, 2004, the Company agreed and accepted terms outlined in a memorandum of understanding from Silicon Valley Bank (the “Bank”) concerning the Bank’s intention to extend a $2,000,000 Revolving Line of Credit Facility (“Revolving Line”) and a $1,000,000 Equipment Financing Facility (“Equipment Facility”) to the Company pending the Bank’s performing its due diligence and definitive loan documents being signed by the Bank and the Company.  A “Loan and Security Agreement” between the Bank and the Company was signed on September 23, 2004.

 

Advances made under the Revolving Line, which was to expire on September 22, 2005, were limited to the lesser of the $2,000,000 commitment or a borrowing base tied to eligible accounts receivable, with a sublimit of $1,000,000 to support the issuance of letters of credit, business credit cards, foreign exchange risk management and cash management services.  Advances under the Revolving Line were evidenced by a Revolving Promissory Note delivered by the Company to the Bank on the date the agreement was signed.  Advances received under this line bore interest at floating Prime plus .25%, with interest payable monthly.  Principal under the Revolving Line was payable at the maturity date, although the balance due for principal might be reduced to zero from time to time during the term of the line.

 

The “Loan and Security Agreement” provided for the Bank to make advances under the Equipment Facility, not exceeding the $1,000,000 commitment, through June 30, 2005 to finance or refinance equipment purchased, as defined in the agreement, by the Company. Equipment advances were to be repaid in 36 equal monthly installments of principal plus

 

21



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 6 – DEBT (continued)

 

accrued interest at Prime plus 1%, commencing on the first day of the month following the date the advance was made.

 

Borrowings under the “Loan and Security Agreement” were secured by substantially all the assets of the Company on a first priority basis, except for certain permitted liens such as equipment acquisitions not financed with the Bank or related to taxes, fees, assessments or other government charges.

 

The “Loan and Security Agreement” contained affirmative and negative covenant compliance requirements to be met by the Company, including financial covenant provisions.  The financial covenants included maintenance of an agreement defined monthly “quick ratio” and minimum quarterly EBITDA (earnings before interest, taxes, depreciation and amortization) by the Company.  Other covenants involved, among other things, limits on Company distributions, investments and indebtedness, mergers, acquisitions and dispositions, and permission to make material changes in the business, management or its ownership.

 

On June 7, 2005, the Company entered into an “Intellectual Property Security Agreement” (“Intellectual Security”) with the Bank, whereby the Company specifically granted a security interest in its intellectual property consisting of copyrights, patents and trademarks, and proceeds derived therefrom such as license royalties and infringement suits.  The Intellectual Security was granted coincident to the Company entering into a “Forbearance Agreement” with the Bank on the same date, whereby the Bank agreed to a forbearance of the default provisions of the Loan and Security Agreement triggered by the Company’s failure to meet “Quick Ratio” compliances.  The forbearance period extended until July 31, 2005.  The Forbearance Agreement revised the Financial Covenant provisions and their measurement dates consistent with changing the maturity date of the Loan and Security Agreement to June 6, 2006, as well as resetting the borrowing base.

 

At December 31, 2004, the Company had not received any advances under the Revolving Line.  It drew down its first advance, in the amount of $515,000, under this line on March 23, 2005, and its indebtedness under this line was $2,000,000 at September 30, 2005.

 

The Bank had financed Company equipment purchases under the Equipment Financing Term Loan totaling $1,000,000 and $912,910 at September 30, 2005 and December 31, 2004,

 

22



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 6 – DEBT (continued)

 

respectively .  Maturities of the Equipment Financing Term Loan are as follows for the 12 month periods ending September 30:

 

2006

 

$

333,333

 

2007

 

333,333

 

2008

 

14,516

 

 

 

 

 

 

 

$

681,182

 

 

From time to time, the Company has entered into agreements with the Bank whereby the Bank received warrants to purchase Series B Preferred Stock of the Company, in order for the Bank to continue to provide financing for the Company.

 

NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASES

 

The Company is the lessee of computer equipment and office equipment under capital lease agreements expiring through 2007.  The Company recorded the assets and related liabilities at the net present value of the lease payments using interest rates from 5% to 12% per annum.  Depreciation of the assets under capital leases is included in depreciation and amortization expense for the period.  The future minimum capital lease payments are as follows for the 12 month periods ending September 30,:

 

2006

 

$

282,153

 

2007

 

195,983

 

2008

 

27,130

 

Total minimum lease payments

 

505,266

 

Less interest portion of payments

 

47,115

 

Present value of future minimum capital lease payments

 

458,151

 

Current portion

 

245,539

 

Obligations under capital lease long-term portion

 

$

212,612

 

 

23



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 8 - STOCKHOLDERS’ EQUITY AND PREFERRED STOCK

 

Preferred Stock

 

Authorization

The Company is authorized to issue two classes of stock to be designated as Common Stock and Preferred Stock.  As of September 30, 2005, the total number of shares that the Company is authorized to issue is 795,654,077 shares, of which 50,000,000 shall be designated as Common Stock and 745,654,077 shall be designated as Preferred Stock.  The Common Stock and Preferred Stock both have par values of $0.001 per share.

 

487,152,664 of the authorized shares of Preferred Stock are designated as Series A Convertible Preferred Stock and 247,750,870 shares are designated as Series A-2 Convertible Preferred Stock, both with an issue price of $0.014735 per share.  10,455,901 of the authorized shares of Preferred Stock are designated as Series B Convertible Preferred Stock with an issuance price of $0.8129735.   274,642 of the authorized shares of Preferred Stock are designated as Series B-2 Convertible Preferred Stock with an issuance price of $0.8129735.

 

Series A Convertible Preferred Stock

During October 2002, the Company issued 302,626,600 shares of Series A Convertible Preferred Stock (“Series A”) for proceeds of $4,459,203.  Subsequently, in April 2003, the Company issued an additional 135,731,252 shares of Series A for proceeds of $2.0 million to be used only for Company operations.  The $0.001 par value of Series A was issued at $.014735 per share. During January 2003, approximately $653,000 of 8% secured convertible promissory notes held by management and related parties plus accrued interest were converted into 45,325,613 shares of Series A Preferred Stock at a conversion price of $0.014735 per share One of the related party members did not convert their promissory note and the Company returned their original principal of $100,000.

 

Each Series A share was convertible into common stock on a one-for-one basis on the date of issuance.  The proceeds from the initial shares issued were used to finance the purchase of Assentor while the proceeds from the subsequent shares were used for Company operations.  Series A stockholders are entitled to receive noncumulative cash dividends when and if declared by the Board of Directors at the rate of 8% of the Series A issuance price.  As a result of a 1-for-100 reverse common stock split effected by the Company in December 2003, each Series A share was subsequently convertible into approximately 0.01 shares of common stock.

 

24



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 8 - STOCKHOLDERS’ EQUITY AND PREFERRED STOCK (continued)

 

The holders of each share of issued and outstanding Series A are entitled to a number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted at the record date for determination.  Each share of Series A is convertible into shares of the Company’s common stock, subject to appropriate adjustments for stock splits, stock dividends, and certain other transactions.  The number of shares of common stock into which each preferred share is to be converted is determined by dividing the issue price of the respective series stock by the conversion price of the respective series at the time of conversion.

 

Series A is convertible at any time at the option of the holder, or is automatically converted upon the consent of at least a majority of the outstanding series preferred shares or upon the closing of a firm underwritten public offering of common stock that reflects a sale price of not less than $8.00 per share and that results in aggregate cash proceeds to the Company of not less than $15.0 million.

 

Series A stockholders are entitled to receive, prior and in preference to any distribution of any assets or surplus funds of the Company to any holders of common stock or any other class or series of stock of the corporation ranking junior to the Series A preferred stock on liquidation, the issue price for such shares plus any dividends declared but unpaid on such shares.

 

Additionally, immediately prior to a sale or merger of the Company, or the closing of an initial public offering, the holders of Series A will be entitled to receive, in stock at the then current fair market value, a preference payment equal to their respective initial investments multiplied by two .    Immediately prior to a sale or merger of the Company, or the closing of an initial public offering, the holders of Series A will be entitled to receive stock at the then current fair market value.

 

Series A-2 Convertible Preferred Stock

During January 2003, in connection with Board’s approval of the Company’s 2003 Equity Incentive Plan (see Note 9), the Company initially reserved 248,005,439 shares of Series A-2 Convertible Preferred Stock (“Series A-2”) for issuance under the Plan.  The initial issue price for Series A-2 shares was $.014735 per share.

 

Each share of preferred stock was convertible into common stock on a one-for-one basis on the date of issuance.  Series A-2 stockholders are entitled to receive noncumulative cash dividends when and if declared, out of funds legally available, by the Board of

 

25



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 8 - STOCKHOLDERS’ EQUITY AND PREFERRED STOCK (continued)

 

Directors at the rate of 8% of the Series A-2 issuance price.  As a result of a 1-for-100 reverse common stock split effected by the Company in December 2003, each Series A-2 share was subsequently convertible into approximately 0.01 shares of common stock.  The holders of each share of issued and outstanding Series A-2 are entitled to a number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted at the record date for determination.  Each share of Series A-2 is convertible into shares of the Company’s common stock, subject to appropriate adjustments for stock splits, stock dividends, and certain other transactions.  The number of shares of common stock into which each preferred share is to be converted is determined by dividing the issue price of the respective series stock by the conversion price of the respective series at the time of conversion.

 

Series A-2 is convertible at any time at the option of the holder, or is automatically converted upon the consent of at least a majority of the outstanding series preferred shares or upon the closing of a firm underwritten public offering of common stock that reflects a sale price of not less than $8.00 per share and that results in aggregate cash proceeds to the Company of not less than $15.0 million.

 

Series A-2 stockholders are entitled to receive, prior and in preference to any distribution of any assets or surplus funds of the Company to any holders of common stock or any other class or series of stock of the corporation ranking junior to the Series A-2 preferred stock on liquidation, the issue price for such shares plus any dividends declared but unpaid on such shares.

 

Additionally, immediately prior to a sale or merger of the Company, or the closing of an initial public offering, the holders of Series A-2 will be entitled to receive, in stock at the then current fair market value, a preference payment equal to their respective initial investments multiplied by two Immediately prior to a sale or merger of the Company, or the closing of an initial public offering, the holders of Series A will be entitled to receive stock at the then current fair market value.

 

Series B Convertible Preferred Stock

On December 20, 2003, the Company issued 10,455,901 shares of Series B Convertible Preferred Stock (“Series B”) for proceeds of $8.5 million.  The $.001 par value of Series B was issued at $.8129735 per share.  Each share of preferred stock is convertible into common stock on a one-for-one basis on the date of issuance.  Series B stockholders are entitled to receive noncumulative cash dividends when and as declared by the Board of

 

26



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 8 - STOCKHOLDERS’ EQUITY AND PREFERRED STOCK (continued)

 

Directors at the rate of 8% of the Series B issuance price prior and in preference to the holders of Series A, Series A-2, and Common Stock.

 

The holders of each share of issued and outstanding Series B are entitled to a number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted at the record date for determination. Each share of Series B is convertible into shares of the Company’s common stock, subject to appropriate adjustments for stock splits, stock dividends, and certain other transactions. The number of shares of common stock into which each preferred share is to be converted is determined by dividing the issue price of the respective series stock by the conversion price of the respective series at the time of conversion. Series B convertible preferred stock is convertible at any time at the option of the holder, or is automatically converted upon the consent of at least a majority of the outstanding series preferred shares or upon the closing of a firm underwritten public offering of common stock.

 

At any time on or after December 30, 2008, upon the written request of the holders of at least 55% of the then outstanding Series B Stock, the Company has to redeem in two annual installments all of the then outstanding shares of Series B by paying cash per share equal to the greater of the original issue price for the Series B, as adjusted for any stock splits, stock dividends, recapitalizations (or the like) plus all unpaid cumulative dividends on such shares.

 

The first Series B redemption date shall occur within ninety (90) days after the redemption request is given to the Company and the second redemption date shall occur on the first business day following the first anniversary of the first Series B redemption date.

 

Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of the Series A or any Junior Stock, the holders of Series B shall be entitled to be paid out of the assets of the Company legally available for distribution, an amount per share of Series B equal to the Series B original issue price, as adjusted for any stock dividends, any stock splits, stock dividends, recapitalizations (or the like) for each share held by them.  If, upon any such liquidation, dissolution, or winding up, the assets of the Company shall be insufficient to make payment in full to all hold of Series B of the Series B liquidation preference, then such assets shall be distributed among the holders of Series B then

 

27



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 8 - STOCKHOLDERS’ EQUITY AND PREFERRED STOCK (continued)

 

outstanding, ratably in proportion to the full amount to which they would otherwise by respectively entitled.

 

Additionally, immediately prior to a sale or merger of the Company, or the closing of an initial public offering, the holders of Series B will be entitled to receive, in stock at the then current fair market value, a preference payment equal to their respective initial investments multiplied by two Immediately prior to a sale or merger of the Company, or the closing of an initial public offering, the holders of Series B will be entitled to receive stock at the then current fair market value.

 

Series B-2 Convertible Preferred Stock

In September 2004, in order to provide for a limited rights Series B share as a subset to the Series B shares, the Company granted warrants, to Silicon Valley Bank, to buy up to 274,642 shares of Series B-2 Convertible Preferred Stock (“Series B-2”).  Series B-2 shares are identical, in substance, to Series B shares, with the exception that the holders of each share of issued and outstanding Series B-2 would not be entitled to the voting rights that Series B holders possess.  The issue price of these warrants was $0.8129735, with a term that expires 7 years after the issue date.

 

Common Stock

The Company was authorized to issue 50,000,000 and 38,000,000 shares of common stock, $0.001 par value, as of September 30, 2005 and December 31, 2004, respectively.  At both September 30, 2005 and December 31, 2004 there were 3,164,060 shares of common stock issued and outstanding.

 

In January 2004, the Company issued 368,845 shares of common stock valued at $119,999 to Tumbleweed in connection with the acquisition of substantially all the assets of Tumbleweed (see Note 4).

 

Common Stock Warrants

In September 2004, the Company granted 44,642 warrants to purchase Series B-2 Preferred Stock to the Silicon Valley Bank (“the Bank”) at a purchase price per share of $1.30 per share in order for the Bank to provide financing (See Note 6).  At December 31, 2004, this equated to 14,120 shares of iLumin common stock.  The warrants were immediately exercisable and were to expire in September 2011.  The Bank would have been entitled to exercise the warrants by paying the purchase price to the Company or, after an IPO, by delivering a written notice to the Company to effect a cashless exercise.

 

28



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 8 - STOCKHOLDERS’ EQUITY AND PREFERRED STOCK (continued)

 

The Company recorded a stock compensation charge (reflected as interest expense in the financial statements) of $26,849 in 2004 based on amounts actually received by the Bank in cash as a result of the Company being acquired by Computer Associates in October 2005 (See Note 14).  In June 2005 and September 2005, the Company granted the Bank 150,000 and 80,000 warrants, respectively, to purchase Series B-2 Preferred Stock, for similar reasons, at a purchase price of $1.30 and $.8129735 per share, respectively, resulting in the recording of an aggregate stock compensation charge of $177,289 in the nine month period ended September 30, 2005.

 

NOTE 9 - STOCK OPTIONS

 

1998 Stock Plan

Effective December 1998, the Board of Directors of the Company approved the Company’s 1998 Stock Plan (the Plan) under which employees, officers, directors and consultants of the Company or an affiliate or subsidiary were eligible for non-statutory stock options.  The exercise price of the stock options was to be above, at or below the fair market value of the stock on the date of grant.  The Plan provided for the issuance of options to purchase up to an aggregate 45,444 common shares.

 

The term of the options was not to exceed 10 years from the date of grant. Options vest at predetermined intervals determined by the Board of Directors. Options generally vested over four years with vesting of 25% after one year, then 6.25% per quarter. Activity under the Plan is summarized as follows:

 

 

 

Exercisable
Shares

 

Outstanding
Shares

 

Weighted-
Average
Exercise
Price

 

Outstanding at January 1, 2004

 

 

 

17,424

 

$

72.46

 

Granted

 

 

 

 

 

Exercised

 

 

 

 

 

Cancelled or expired

 

 

 

(1,787

)

21.01

 

Outstanding at December 31, 2004

 

 

 

15,637

 

$

78.34

 

Exercisable at December 31, 2004

 

14,714

 

 

 

$

78.07

 

Shares available for future issuance at December 31, 2004

 

29,492

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2005

 

 

 

15,637

 

$

78.34

 

Granted

 

 

 

 

 

Exercised

 

 

 

 

 

Cancelled or expired

 

 

 

 

 

Outstanding at September 30, 2005

 

 

 

15,637

 

$

78.34

 

Exercisable at September 30, 2005

 

15,637

 

 

 

$

78.34

 

Shares available for future issuance at September 30, 2005

 

29,492

 

 

 

 

 

 

29



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 9 - STOCK OPTIONS (continued)

 

All of the options outstanding had exercise prices that range from $10.00 to $475.00.  The weighted average remaining contractual life of these options was 5.4 years and 6.0 years as of September 30, 2005 and December 31, 2004, respectively.  The weighted average exercise price was $78.34 at both September 30, 2005 and December 31, 2004.  The weighted-average exercise price in the table above reflects the effects of the 1-for-100 common stock split that occurred in December 2003.

 

2003 Equity Incentive Plan

Effective January 21, 2003, the Board of Directors of the Company approved the Company’s 2003 Equity Incentive Plan under which employees could purchase shares of Series A-2 Preferred Stock.  The initial exercise price was $0.006 per share.  The Company had reserved 248,005,439 shares of Series A-2 Convertible Preferred Stock for issuance under the Plan.  The term of the options was not to exceed 10 years from the date of grant.  The shares vested as follows: 12.5% six months after the date of issuance and 2.083% monthly thereafter over the next 42 months.

 

Activity under the Plan is summarized as follows:

 

 

 

Exercisable
Shares

 

Outstanding
Shares

 

Weighted-
Average
Exercise Price

 

Outstanding at January 1, 2004

 

 

 

116,162,229

 

$

0.0060

 

Granted

 

 

 

116,481,062

 

0.0071

 

Exercised

 

 

 

(164,107

)

0.0060

 

Cancelled or expired

 

 

 

(33,551,685

)

0.0061

 

Outstanding at December 31, 2004

 

 

 

198,927,499

 

$

0.0066

 

Exercisable at December 31, 2004

 

64,483,228

 

 

 

$

0.0061

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2005

 

 

 

198,927,499

 

$

0.0066

 

Granted

 

 

 

51,388,132

 

0.0073

 

Exercised

 

 

 

(606,380

)

0.0060

 

Cancelled or expired

 

 

 

(7,210,216

)

0.0092

 

Outstanding at September 30, 2005

 

 

 

242,499,035

 

$

0.0082

 

Exercisable at September 30, 2005

 

111,790,851

 

 

 

$

0.0063

 

 

30



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 9 - STOCK OPTIONS (continued)

 

The outstanding options had exercise prices of either $0.006 or $0.012.  The weighted average remaining contractual lives of these options were 8.8 years and 9.2 years and the weighted average exercise prices were $0.0082 and $0.0066 at September 30, 2005 and December 31, 2004, respectively.  As a result of a 1-for-100 reverse common stock split effected by the Company in December 2003, each Series A-2 share was subsequently convertible into approximately 0.01 shares of common stock.

 

During 2004, certain employees exercised 164,107 stock options in exchange for shares of Series A-2 Preferred Stock for an aggregate amount of $5,373.

 

During the nine months ended September 30, 2005, certain employees exercised 606,380 stock options in exchange for shares of Series A-2 Preferred Stock for an aggregate amount of $19,857.

 

NOTE 10 - INCOME TAXES

 

The Company provides for income taxes based on the asset and liability method required by SFAS No. 109, Accounting for Income Taxes.  Under the asset and liability method, deferred tax assets and deferred tax liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

31



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 10 - INCOME TAXES (continued)

 

Significant components of the Company’s net deferred income taxes consists of the following as of:

 

 

 

September 30,
2005

 

December 31,
2004

 

Deferred tax assets:

 

 

 

 

 

Net operating loss carryforwards

 

$

45,056,444

 

$

42,579,303

 

Amortization of intangible assets

 

1,679,515

 

1,800,310

 

Research and development credits

 

663,828

 

513,828

 

Depreciation

 

306,351

 

319,738

 

Bad debt reserve

 

18,505

 

103,384

 

Total deferred tax assets

 

47,724,643

 

45,316,563

 

Valuation allowance for deferred tax assets

 

(47,724,643

)

(45,316,563

)

Net deferred tax assets

 

$

 

$

 

 

FAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  After consideration of all the evidence, management has determined that a full valuation allowance as of September 30, 2005 and December 31, 2004 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized.

 

At September 30, 2005 and December 31, 2004, the Company had net operating loss (NOL) carryforwards of approximately $109.9 million and $103.9 million, respectively.  The Company’s NOL carryforwards will start to expire in 2019.  The Company’s ability to recognize its net operating loss carryforwards and federal income tax credits probably will be limited since the Company had a change in ownership as defined by Section 382 of the Internal Revenue Code.

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES

 

Operating Leases

The Company has various noncancelable operating leases, primarily for office facilities and computer equipment.  Lease terms are generally 36 months for the equipment and 60 months for the facilities. Future minimum lease payments under these operating lease commitments, including payments related to the lease termination, are as follows for the 12 month periods ending September 30,:

 

32



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)

 

2006

 

$

559,202

 

2007

 

546,517

 

2008

 

560,165

 

2009

 

330,165

 

 

 

$

1,996,049

 

 

The new lease for facilities located in Reston, Virginia entered into in March 2004 provided for abatements of rent as follows: 100% abatement of monthly rent from the date of Company facility occupation in May through August 2004 of approximately $37,100 per month; and a $5,000 monthly rent abatement from September 2004 through September 2005.  The lease also provided for the landlord to reimburse up to $160,664 for construction of leasehold improvements made by the Company in making the premises ready for occupancy and use by it.  The cost of “Leasehold Improvements” capitalized during the year ended December 31, 2004 reflect a credit for the full reimbursement by the landlord of $160,664.

 

As a result of Hurricane Katrina in August 2005, premises under a noncancelable operating lease in New Orleans, Louisiana became uninhabitable.  The above lease table excludes amounts due under the lease after August 2005, since the Company does not expect to be able to occupy the premises from that date until its expiration on March 31, 2006.  The Company also ceased paying the monthly rent of approximately $13,000 and stopped relieving the related liability (see Note 12) after August 2005.

 

Rent expense was approximately $541,000 and $951,000 for the nine months ended September 30, 2005 and the year ended December 31, 2004, respectively.

 

Employment Agreements

The Company has entered into employment contracts with certain of its Officers and other key employees for terms that cease in subsequent years with total annual minimum commitments as follows:

 

Year ending December 31, 2005

 

$

400,000

 

 

 

 

 

Total

 

$

400,000

 

 

These contracts also provided for discretionary and performance bonuses and severance under certain circumstances which, among other things, includes terminations after a

 

33



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)

 

Company “sale event.”   To the date of the issuance of these consolidated financial statements no such Company sale related severance liability has been incurred that requires provision in the Company’s financial statements.  At December 31, 2004, accrued expenses includes $258,000 of discretionary and performance bonuses.  The Company incurred $300,000 of basic compensation under these agreements during the nine months ending September 30, 2005.

 

The above-tabled officer employment agreements and at-will employment agreements with two other key employees provided for an aggregate severance obligation of $537,500 in the event of termination without cause for these four individuals, none of whom have been terminated as of the date of issuance of these financial statements.  As a result of the CA acquisition of the Company described in Note 14, all of these individuals agreed to become at-will employees effective October 14, 2005.  The two officers will receive “stay bonuses” if they remain in the employ of the Company at dates that are 6 months and 12 months after the effective date, which stay periods have not yet been completed.   The other two employees have no such “stay bonus” arrangements.

 

Legal Matters

 

UBS/Renew Data Settlement

On November 24, 2005, the Company and one of its previously significant customers advised the judge in New York Supreme Court that a “settlement in principle” had been reached whereby that customer and the Company were in the process of drafting agreements whereby 2 lawsuits relating to Company work performed on a data migration project related to archived e-mail for the customer involving a significant Company subcontractor would be settled.  In principle, the three parties (the customer, the subcontractor and the Company) agreed that: 1) each of the parties would withdraw all claims and discontinue the lawsuits, 2) the customer would pay the subcontractor $250,000, 3) the Company also would pay the subcontractor $250,000, and 4) the Company would freeze the maintenance fee it was charging the customer for the Company’s Assentor product for a period of one year.

 

The legal disputes arose out of contracts between the Company and the customer entered into in 2004, which called for delivery to the customer to take place in late 2004, and that the Company would be subject to financial penalties if it was unable to complete the project on time on December 10, 2004.  In that regard, the customer was to bear daily data storage charges from the Company’s subcontractor up to the agreed delivery date. The project experienced significant delays involving disputes with the customer over their failure to provide data and information.  The project also experienced delays

 

34



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)

 

ascribed by the Company to the subcontractor’s performance on the project and the Company asserted that the subcontractor repeatedly breached its contractual obligation not to directly communicate with the customer.  The subcontractor, on the other hand demanded payment for storage charges occurring after the project’s due date of December 10, 2004.

 

Based on the “settlement in principle” reached between the parties on November 24, 2005, the Company has reflected the impact of the settlement as it relates to amounts billed by the Company to the customer as of December 31, 2004 within the consolidated financial statements for the year then ended, on the assumption that the parties will be able to finalize definitive written agreements that are consistent with the “settlement in principle.”  The Company has also reflected the impact of the settlement with its subcontractor, that requires the Company to pay the settlement amount of $250,000, within the consolidated financial statements for the year ended December 31, 2004.

 

As a result of the legal dispute arising out of the contract entered into, iLumin recognized an overall loss on the contract.  This loss totals approximately $388,540 and is represented in entirety during the year ended December 31, 2004.  As of September 30, 2005, the remaining liability on the project is $250,000.

 

Accounts receivable included $0 and $1,010,315 owed to the Company by the customer, after giving effect to the “settlement in principle” as of September 30, 2005 and December 31, 2004, respectively.  The Company continues to do business with this customer who accounted for 4% of revenue during the nine months ended September 30, 2005 and 16% of revenue during the year ended December 31, 2004.

 

Accounts payable included $250,000 and $925,709 owed by the Company to the subcontractor as of September 30, 2005 and December 31, 2004, respectively. The Company no longer does business with this subcontractor.  The subcontractor provided services exclusively in connection with the services provided by the Company to the aforementioned customer, therefore, this will not materially impact the business operations.

 

35



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)

 

Other

The Company is subject to various other customer, vendor, personnel related and other claims and assessments during the normal course of business.  In the opinion of management, none of these matters, except as specifically described above, will result in a material adverse impact on the consolidated financial statements.  Accordingly, no liability has been recorded in the accompanying consolidated financial statements related to these type matters.

 

NOTE 12 – RESTRUCTURING CHARGES

 

During 2002, the Company approved a plan to terminate certain employees and to cancel an office lease facility in New Orleans, Louisiana.  At December 31, 2004, approximately $161,000 and $40,000 of accrued restructuring costs related to the lease termination were included in accrued expenses and other long-term liabilities in the balance sheet, respectively.

 

During the nine months ended September 30, 2005, the Company made payments of approximately $106,000 for these restructuring charges and at September 30, 2005, approximately $94,000 and $0 of accrued restructuring costs related to the lease termination were included in current accrued expenses and other long-term liabilities in the balance sheet, respectively.

 

NOTE 13 - EMPLOYEE BENEFIT PLAN

 

Effective May 1, 2000, the Company adopted the iLumin Corporation 401(k) Plan (the 401(k) Plan), which covers substantially all employees and allows them to defer up to 15% of their income, subject to IRS limitations. Under the terms of the 401(k) Plan, the Company makes discretionary matches of the employees’ contributions, which vest over four years. For both the nine months ended September 30, 2005 and the year ended December 31, 2004, the Company matched 100% of the first 3% of employee contributions, which totaled approximately $136,000 for each period.

 

36



 

iLumin Software Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

 

NOTE 14 - SUBSEQUENT EVENTS

 

Acquisition of C ompany by Computer Associates International, Inc. (“CA”)

Computer Associates International, Inc. (“CA”) acquired all the issued and outstanding stock of the Company on October 14, 2005 pursuant to an “Agreement and Plan of Merger” dated as of September 30, 2005.  Consideration paid by CA for the Company’s stock totaled $47,000,000, from which Company debt outstanding on the date the acquisition took place was to be paid out of the proceeds.  As a result of this transaction the Company became a wholly-owned subsidiary of CA by virtue of CA acquiring all common stock, preferred stock, and warrants or options convertible directly into common stock and convertible to common via preferred stock.

 

37


 

Exhibit 99.2

 

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The following unaudited pro forma condensed combined balance sheet as of September 30, 2005 and the unaudited pro forma condensed combined statements of operations for the year ended March 31, 2005 and the six months ended September 30, 2005 are based on the historical financial statements of Computer Associates International, Inc. (“CA”), Niku Corporation (“Niku”), and iLumin Software Services, Inc. (“iLumin”) after giving effect to the merger of Nebraska Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of CA, with and into Niku, a Delaware corporation and the merger of Lost Ark Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of CA, with and into iLumin, a Delaware corporation.

 

Niku

 

CA and Niku have different fiscal year ends. Accordingly, the unaudited pro forma condensed combined statement of operations for the year ended March 31, 2005 combines CA’s historical consolidated statement of operations for the year then ended with Niku’s historical consolidated statement of income for the year ended January 31, 2005. The unaudited pro forma condensed combined statement of operations for the year ended March 31, 2005 give effect to the merger as if it had occurred on April 1, 2004.  The unaudited pro forma condensed combined statement of operations for the six months ended September 30, 2005 includes CA’s historical condensed consolidated statement of operations for the six months ended September 30, 2005 (which incorporates Niku’s results from operations since of the date of acquisition – July 29, 2005 and includes pro forma adjustments to give effect to the merger as if it had occurred on April 1, 2004). The unaudited pro forma condensed combined balance sheet includes CA’s historical condensed consolidated balance sheet as of September 30, 2005 (which incorporates balances acquired from Niku since the date of acquisition). The unaudited pro forma condensed financial statements are based upon available information, estimates and certain assumptions that we believe are reasonable.

 

The acquisition has been accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations . Under the purchase method of accounting, the total purchase price, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible and intangible assets of Niku acquired in connection with the acquisition, based on their estimated fair values.  The primary areas of the purchase price allocation relate to identifiable intangible assets, in-process research and development, and goodwill and the fair value of deferred revenues.

 

The unaudited pro forma condensed combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the condensed consolidated financial position or results of operations in future periods or the results that actually would have been realized had CA and Niku been a combined company during the specified periods. The pro forma adjustments are based on the information available at the time of the preparation of this document. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with the historical consolidated financial statements and accompanying notes of CA and Niku included in CA’s annual report on Form 10-K/A, Niku’s annual report on Form 10-K, and their respective quarterly reports on Form 10-Q.

 

iLumin

 

CA and iLumin have different fiscal year ends. Accordingly, the unaudited pro forma condensed combined statement of operations for the year ended March 31, 2005 combines CA’s historical consolidated statement of operations for the year then ended with iLumin’s historical consolidated statement of income for the year ended December 31, 2004. The unaudited pro forma condensed combined statement of operations for the six months ended September 30, 2005 combines CA’s historical condensed consolidated statement of operations for the six months ended June 30, 2005 with iLumin’s historical condensed consolidated statement of income for the six months ended September 30, 2005. The unaudited pro forma condensed combined statements of operations give effect to the merger as if it had occurred on April 1, 2004. The unaudited pro forma condensed combined balance sheet combines CA’s historical condensed consolidated balance sheet as of September 30, 2005 with iLumin’s historical condensed consolidated balance sheet as of September 30, 2005, giving effect to the merger as if it had occurred on September 30, 2005. The unaudited pro forma condensed financial statements are based upon available information, preliminary estimates and certain assumptions that we believe are reasonable.

 

The acquisition has been accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations . Under the purchase method of accounting, the total purchase price, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible and intangible assets of iLumin acquired in connection with the acquisition, based on their estimated fair values.  The allocation of the purchase price is preliminary pending finalization of various estimates and analyses.  The primary areas of the purchase price allocation which are not yet finalized relate to identifiable intangible assets, goodwill, in-process research and development, and the fair value of deferred revenues.

 



 

The unaudited pro forma condensed combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the condensed consolidated financial position or results of operations in future periods or the results that actually would have been realized had CA and iLumin been a combined company during the specified periods. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this document. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with the historical consolidated financial statements and accompanying notes of CA and iLumin included in CA’s annual report on Form 10-K/A and quarterly reports on form 10Q, and iLumin’s audited financial statements for the fiscal year ended December 31, 2004 and the nine months ended September 30, 2005, included in this Form 8-K filing.

 



 

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of September 30, 2005

(in millions)

 

 

 

 

 

 

 

Pro Forma

 

 

 

 

 

Historical

 

Adjustments

 

Pro Forma

 

 

 

CA

 

iLumin

 

(Note 4)

 

Combined

 

ASSETS

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,529

 

$

1

 

$

(47

)(a)

$

1,483

 

Marketable securities

 

111

 

 

 

111

 

Trade and installment accounts receivable, net

 

371

 

2

 

 

373

 

Deferred income taxes

 

136

 

 

 

136

 

Other current assets

 

89

 

1

 

 

90

 

TOTAL CURRENT ASSETS

 

2,236

 

4

 

(47

)

2,193

 

 

 

 

 

 

 

 

 

 

 

Installment accounts receivable, due after one year, net

 

549

 

 

 

549

 

Property and equipment, net

 

634

 

1

 

 

635

 

Purchased software products, net

 

584

 

 

4

(b)

588

 

Goodwill, net

 

5,120

 

 

34

(c)

5,154

 

Deferred income taxes

 

115

 

 

 

115

 

Other noncurrent assets, net

 

630

 

 

8

(b)

638

 

TOTAL ASSETS

 

$

9,868

 

$

5

 

$

(1

)

$

9,872

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

Current portion of long-term debt and loans payable

 

$

1

 

$

2

 

$

(2

)(d)

$

1

 

Government investigation settlement

 

77

 

 

 

77

 

Accounts payable

 

323

 

2

 

 

325

 

Salaries, wages, and commissions

 

234

 

 

 

234

 

Accrued expenses and other current liabilities

 

295

 

2

 

 

297

 

Deferred subscription revenue (collected) — current

 

1,109

 

 

 

1,109

 

Deferred revenue

 

 

3

 

(2

)(e)

1

 

Taxes payable, other than income taxes payable

 

78

 

 

 

78

 

Federal, state, and foreign income taxes payable

 

410

 

 

 

410

 

TOTAL CURRENT LIABILITIES

 

2,527

 

9

 

(4

)

2,532

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

1,810

 

 

 

1,810

 

Deferred income taxes

 

57

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

Deferred subscription revenue (collected) — noncurrent

 

297

 

 

 

297

 

Deferred maintenance revenue

 

237

 

 

 

237

 

Other noncurrent liabilities

 

52

 

1

 

 

53

 

TOTAL LIABILITIES

 

4,980

 

10

 

(4

)

4,986

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

4,888

 

(5

)

5

(f)

4,886

 

 

 

 

 

 

 

(2

)(g)

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

9,868

 

$

5

 

$

(1

)

$

9,872

 

 

See notes to unaudited pro forma condensed combined financial statements.

 



 

COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Six Months Ended September 30, 2005

(in millions, except per share amounts)

 

 

 

Historical

 

 

 

 

 

 

 

 

 

Six

 

Four

 

Nine

 

iLumin

 

 

 

 

 

 

 

Months Ended

 

Months Ended

 

Months Ended

 

Three Month

 

Pro Forma

 

 

 

 

 

Sep 30, 2005

 

July 29, 2005

 

Sep 30, 2005

 

Adjustment

 

Adjustments

 

Pro Forma

 

 

 

CA

 

Niku (Note 3)

 

iLumin

 

(Note 3)

 

(Note 4)

 

Combined

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription revenue

 

$

1,391

 

$

 

$

 

$

 

$

 

$

1,391

 

Maintenance

 

220

 

6

 

4

 

(1

)

 

229

 

Software fees and other

 

80

 

13

 

4

 

(1

)

(1

)(l)

95

 

Financing fees

 

27

 

 

 

 

 

27

 

Professional services

 

144

 

10

 

2

 

(1

)

 

155

 

TOTAL REVENUE

 

1,862

 

29

 

10

 

(3

)

(1

)

1,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of capitalized software costs

 

224

 

 

 

 

3

(m)

228

 

 

 

 

 

 

 

 

 

 

 

1

(i)

 

 

Cost of professional services

 

125

 

7

 

2

 

(1

)

 

133

 

Selling, general, and administrative

 

770

 

21

 

9

 

(3

)

1

(n)

794

 

 

 

 

 

 

 

 

 

 

 

(1

)(l)

 

 

 

 

 

 

 

 

 

 

 

 

(6

)(r)

 

 

 

 

 

 

 

 

 

 

 

 

3

(s)

 

 

Product development and enhancements

 

350

 

3

 

2

 

(1

)

 

354

 

Commissions and royalties

 

130

 

1

 

2

 

 

 

133

 

Depreciation and amortization of other intangible assets

 

62

 

 

1

 

 

3

(o)

67

 

 

 

 

 

 

 

 

 

 

 

1

(j)

 

 

Other gains/expenses, net

 

11

 

12

 

 

 

(11

)(r)

(2

)

 

 

 

 

 

 

 

 

 

 

(14

)(t)

 

 

Restructuring charge and other

 

45

 

 

 

 

 

45

 

TOTAL EXPENSES BEFORE INTEREST AND TAXES

 

1,717

 

44

 

16

 

(5

)

(20

)

1,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before interes