CA Technologies
CA, INC. (Form: 8-K/A, Received: 07/31/2006 17:12:42)
 

 
 
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: March 3, 2006
(Date of earliest event reported)
 
CA, 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 CA 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))
 
 

 


 

EXPLANATORY NOTE
As previously disclosed, on March 3, 2006, CA, Inc. (the “Company”) completed its acquisition of Wily Technology, Inc. (“Wily”) by merger for total consideration of approximately $375 million. The Company is filing this report to provide the required financial statements of Wily, and the pro forma financial statements relating to the Wily acquisition, specified below. For more information about the Wily acquisition, see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 7, 2006, which is hereby amended.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The following financial statements of Wily are furnished as Exhibit 99.1 and are incorporated herein by reference:
 
  (i)   Report of Rowbotham & Company LLP, Independent Auditors for the year ended December 31, 2005
 
  (ii)   Report of PricewaterhouseCoopers LLP, Independent Auditors for the year ended December 31, 2004
 
  (iii)   Consolidated Balance Sheets as of December 31, 2005 & 2004
 
  (iv)   Consolidated Statements of Operations for the Years Ended December 31, 2005 and 2004
 
  (v)   Consolidated Statements of Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Deficit for the Years Ended December 31, 2005 and 2004
 
  (vi)   Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004
 
  (vii)   Notes to Consolidated Financial Statements for the Years Ended December 31, 2005 and 2004
(b) Pro Forma Financial Information.
The following pro forma financial statements are furnished as Exhibit 99.2 and are incorporated herein by reference:
(i) Unaudited pro forma Condensed Combined Balance Sheet for the fiscal year ended March 31, 2006, which gives effect to the Wily acquisition as if it had been completed on March 31, 2006.
(ii) Unaudited pro forma Condensed Combined Statements of Operations for the fiscal years ended March 31, 2006 and March 31, 2005, which give effect to the acquisitions of iLumin Software Services, Inc., Niku Corporation and Wily as if the acquisitions had been completed on April 1, 2004.

 


 

(d) Exhibits.
     
Exhibit No.   Description
Exhibit 23.1  
Consent of Independent Accountants
Exhibit 23.2  
Consent of Independent Accountants
Exhibit 99.1  
(i) Report of Rowbotham & Company LLP, Independent Auditors dated June 15, 2006
   
(ii) Report of PricewaterhouseCoopers LLP, Independent Auditors dated December 23, 2005
   
(iii) Consolidated Balance Sheets as of December 31, 2005 & 2004
   
(iv) Consolidated Statements of Operations for the Years Ended December 31, 2005 and 2004
   
(v) Consolidated Statement of Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Deficit for the Years Ended December 31, 2005 and 2004
   
(vi) Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004
   
(vii) Notes to Consolidated Financial Statements for the Years Ended December 31, 2005 and 2004
Exhibit 99.2  
Unaudited Pro Forma Condensed Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of Operations

 


 

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.
         
  CA, INC.
 
 
Date: July 31, 2006  By:   /s/ Kenneth V. Handal  
    Kenneth V. Handal   
    Executive Vice President, General Counsel and Corporate Secretary   
 

 

 

EXHIBIT 23.1
Consent of Independent Accountants
     We hereby 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 CA, Inc. of our report dated December 23, 2005 relating to the consolidated financial statements of Wily Technology, Inc. and subsidiaries, which appears in the Current Report on Form 8-K/A of CA, Inc. dated March 3, 2006.
/s/PricewaterhouseCoopers LLP
San Francisco, California
July 28, 2006

 

 

EXHIBIT 23.2
Consent of Independent Accountants
     We hereby 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 CA, Inc. of our report dated June 15, 2006 relating to the consolidated financial statements of Wily Technology, Inc. and subsidiaries, which appears in the Current Report on Form 8-K/A of CA, Inc. dated March 3, 2006.
/s/ Rowbotham & Company LLP
San Francisco, California
July 28, 2006

 

 

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Table of Contents
     
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  6-7
  8
  9-27

 


Table of Contents

Report of Independent Auditors
To the Board of Directors and Shareholders of
Wily Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Wily Technology, Inc. and Subsidiaries as of December 31, 2005, and the related consolidated statement of operations, mandatorily redeemable convertible preferred stock and shareholders’ deficit, and cash flows for the year then ended. 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 of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2005 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wily Technology, Inc. and Subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Rowbotham & Company LLP
San Francisco, California
June 15, 2006

 


Table of Contents

Report of Independent Auditors
To the Board of Directors and Shareholders of
Wily Technology, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations, of mandatorily redeemable convertible preferred stock and shareholders’ deficit and of cash flows present fairly, in all material respects, the financial position of Wily Technology, Inc. and its subsidiaries at December 31, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
December 23, 2005

 


Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Consolidated Balance Sheets
As of December 31, 2005 and 2004
Assets
                 
    2005     2004  
Current assets:
               
Cash and cash equivalents
  $ 13,299,100     $ 15,665,405  
Accounts receivables, less allowance for doubtful accounts of $107,562 and $72,500, at December 31, 2005 and 2004, respectively
    14,125,063       9,330,242  
Prepaid expenses and other current assets
    1,291,158       948,902  
 
           
Total current assets
    28,715,321       25,944,549  
 
               
Property and equipment, net
    1,722,134       1,423,986  
 
               
Purchased software products, net
    11,930,848        
 
               
Other assets
    213,016       136,456  
 
           
Total assets
  $ 42,581,319     $ 27,504,991  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2005 and 2004
Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Deficit
                 
    2005     2004  
Current liabilities:
               
Accounts payable
  $ 2,213,792     $ 952,055  
Accrued liabilities
    6,257,226       5,281,476  
Current portion of deferred revenue
    20,191,485       13,552,651  
Current portion of notes payable
    904,224       693,516  
 
           
Total current liabilities
    29,566,727       20,479,698  
 
               
Deferred revenue, net of current portion
    4,947,070       3,189,698  
 
               
Notes payable, net of current portion
    642,439       753,552  
 
           
Total liabilities
    35,156,236       24,422,948  
 
           
 
               
Commitments and contingencies
           
 
           
 
               
Mandatorily redeemable convertible preferred stock; no par value:
               
Authorized 21,700,000 and 20,450,000 shares at December 31, 2005 and 2004, respectively; 19,763,860 and 18,608,034 shares issued outstanding at December 31, 2005 and 2004, respectively (aggregate liquidation of $46,912,942 at December 31, 2005)
    46,883,155       42,593,875  
 
           
 
               
Shareholders’ deficit:
               
Common stock, no par value:
               
Authorized 43,500,000 shares at December 31, 2005 and 2004; 5,202,382 and 3,945,083 shares issued outstanding at December 31, 2005 and 2004, respectively
    24,062,187       3,854,678  
Deferred stock-based compensation
    (8,160,384 )     (2,183,861 )
Accumulated deficit
    (55,359,875 )     (41,182,649 )
 
           
Total stockholders’ deficit
    (39,458,072 )     (39,511,832 )
 
           
Total liabilities, mandatorily redeemable convertible preferred stock and stockholders’ deficit
  $ 42,581,319     $ 27,504,991  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

4


Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Consolidated Statements of Operations
For the Years Ended December 31, 2005 and 2004
                 
    2005     2004  
Revenues:
               
License
  $ 32,181,255     $ 20,762,746  
Support and service
    19,524,764       9,442,653  
 
           
Total revenues
    51,706,019       30,205,399  
 
               
Cost of support and service revenue
    6,401,731       3,809,792  
 
           
Gross profit
    45,304,288       26,395,607  
 
           
 
               
Operating expenses:
               
Research and development
    10,847,592       7,015,962  
Sales and marketing
    38,661,850       28,196,570  
General and administrative
    9,026,037       4,512,816  
 
           
Total operating expenses
    58,535,479       39,725,348  
 
           
Loss from operations
    (13,231,191 )     (13,329,741 )
 
           
 
               
Other income (expense):
               
Interest and other income (expense), net
    (303,847 )     72,869  
Interest expense
    (394,969 )     (69,620 )
 
           
Total other income (expense)
    (698,816 )     3,249  
 
           
Loss before income tax expense
    (13,930,007 )     (13,326,492 )
 
               
Income tax expense
    247,219       189,583  
 
           
Net loss
  $ (14,177,226 )   $ (13,516,075 )
 
           
The accompanying notes are an integral part of these consolidated financial statements.

5


Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Deficit
Consolidated Statements of Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Deficit
For the Year Ended December 31, 2005
                                                         
    Mandatorily Redeemable                     Deferred             Total  
    Convertible Preferred Stock     Common Stock     Stock-Based     Accumulated     Shareholders'  
    Shares     Amount     Shares     Amount     Compensation     Deficit     Deficit  
 
                                                       
Balance at January 1, 2005
    18,608,034     $ 42,593,875       3,945,083     $ 3,854,678     $ (2,183,861 )   $ (41,182,649 )   $ (39,511,832 )
 
                                                       
Issuance of Series D Mandatorily Redeemable Convertible Preferred Stock
    155,826       575,000             157,385                   157,385  
 
                                                       
Issuance of Series D Mandatorily Redeemable Convertible Preferred Stock, Common Stock, and stock options
    1,000,000       3,690,000       714,803       8,095,921                   8,095,921  
 
                                                       
Deferred stock-based compensation to Timestock, Inc. employees
                            840,321       (840,321 )              
 
                                                       
Issuance of Common Stock to employee
                1,000       4,070                   4,070  
 
                                                       
Issuance of Preferred Stock warrant
                      263,943                   263,943  
 
                                                       
Issuance of Common Stock upon exercise of stock options
                541,496       322,233                   322,233  
 
                                                       
Compensation charge from modification to stock options
                      1,657,205                   1,657,205  
 
                                                       
Nonemployee stock-based compensation charge
                      344,760                   344,760  
 
                                                       
Deferred stock-based compensation to employees
                      8,545,951       (8,545,951 )            
 
                                                       
Amortization of deferred stock-based compensation
                            3,409,749             3,409,749  
 
                                                       
Accretion of mandatorily redeemable preferred stock to redemption value
          24,280             (24,280 )                 (24,280 )
 
                                                       
Net loss
                                  (14,177,226 )     (14,177,226 )
 
                                         
 
                                                       
Balance at December 31, 2005
    19,763,860     $ 46,883,155       5,202,382     $ 24,062,187     $ (8,160,384 )   $ (55,359,875 )   $ (39,458,072 )
 
                                         
The accompanying notes are an integral part of these consolidated financial statements.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Deficit
For the Year Ended December 31, 2004
                                                         
    Mandatorily Redeemable                     Deferred             Total  
    Convertible Preferred Stock     Common Stock     Stock-Based     Accumulated     Shareholders'  
    Shares     Amount     Shares     Amount     Compensation     Deficit     Deficit  
 
                                                       
Balance at January 1, 2004
    17,253,020     $ 37,576,694       3,560,177     $ 456,498     $     $ (27,666,574 )   $ (27,210,076 )
 
                                                       
Issuance of Series D Mandatorily Redeemable Convertible Preferred Stock in December 2004 for cash at $3.69 per share, net of issuance costs of $17,117
    1,355,014       4,982,885                                
 
                                                       
Issuance of Common Stock upon exercise of stock options
                384,906       189,927                   189,927  
 
                                                       
Nonemployee stock-based compensation
                      80,738                   80,738  
 
                                                       
Deferred stock-based compensation to employees
                      2,792,037       (2,792,037 )            
 
                                                       
Amortization of deferred stock-based compensation
                            608,176             608,176  
 
                                                       
Compensation charge from modification to stock options
                      369,774                   369,774  
 
                                                       
Accretion of mandatorily redeemable preferred stock to redemption value
          34,296             (34,296 )                 (34,296 )
 
                                                       
Net loss
                                  (13,516,075 )     (13,516,075 )
 
                                         
 
                                                       
Balance at December 31, 2004
    18,608,034     $ 42,593,875       3,945,083     $ 3,854,678     $ (2,183,861 )   $ (41,182,649 )   $ (39,511,832 )
 
                                         

The accompanying notes are an integral part of these consolidated financial statements.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005 and 2004
                 
    2005     2004  
Cash flows from operating activities:
               
Net loss
  $ (14,177,226 )   $ (13,516,075 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    1,428,504       480,533  
Interest related to issuance of Series D Mandatorily Redeemable Convertible Preferred Stock
    157,385        
Provision for doubtful accounts
    35,062        
Employee stock-based compensation
    4,070        
Employee stock option-based compensation
    3,409,749       608,176  
Nonemployee stock-based compensation
    2,001,965       450,512  
Change in operating assets and liabilities:
               
Accounts receivable
    (4,821,883 )     (4,007,276 )
Prepaid expenses and other current assets
    (335,881 )     (575,475 )
Other assets
    (76,560 )     161,683  
Accounts payable
    912,906       (301,342 )
Accrued liabilities
    1,101,329       2,332,730  
Deferred revenue
    8,373,512       9,006,092  
Other long-term liabilities
          (162,409 )
 
           
Net cash used in operating activities
    (1,987,068 )     (5,522,851 )
 
           
 
               
Cash flows from investing activities:
               
Purchase of property and equipment
    (1,013,520 )     (869,039 )
Cash used for purchase of business
    (489,996 )      
 
           
Net cash used in investing activities
    (1,503,516 )     (869,039 )
 
           
 
               
Cash flows from financing activities:
               
Proceeds from issuance of Series D Mandatorily Redeemable Convertible Preferred Stock, net of issuance costs
    575,000       4,982,885  
Proceeds from the exercise of stock options
    322,233       189,927  
Proceeds from notes payable
    1,000,000       2,178,738  
Payments under capital lease obligations
          (18,000 )
Payments under notes payable
    (636,462 )     (1,344,797 )
 
           
Net cash provided by financing activities
    1,260,771       5,988,753  
 
           
Effect of exchange rate changes on cash
    (136,492 )     61,274  
 
           
 
               
Net decrease in cash and cash equivalents
    (2,366,305 )     (341,863 )
 
               
Cash and cash equivalents — beginning of the year
    15,665,405       16,007,268  
 
           
Cash and cash equivalents — end of the year
  $ 13,299,100     $ 15,665,405  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
1.   Nature of Business
 
    Wily Technology, Inc. (the “Company”) was incorporated in the State of California on January 15, 1998. The Company designs and develops performance management software for Java applications.
 
    The Company completed five rounds of private equity financing since inception, which totaled approximately $46.9 million. However, the Company has incurred losses and negative cash flows from operations for every fiscal period since inception. For the year ended December 31, 2005, the Company incurred a net loss of approximately $14.2 million and negative cash flows from operations. As of December 31, 2005, the Company had an accumulated deficit of approximately $55.4 million. Operating losses and negative cash flows from operations may continue in the foreseeable future and losses may increase from current levels because of additional costs and expenses related to, among other things, brand development, marketing, other promotional activities, expansion of product offerings and development of relationships with other businesses. While management believes that the Company’s current cash resources are adequate to meet its needs for 2006, the Company may need to borrow funds or raise additional equity to achieve its longer-term business objectives, which may not be available on terms acceptable to the Company, or at all. Failure to generate sufficient revenues, raise additional capital or reduce spending could adversely affect the Company’s ability to achieve its intended business objectives. The Company’s Preferred shareholders also have the right to require the Company to redeem their stock beginning in 2009 (see note 7), which will impact the Company’s liquidity if redeemed.
 
2.   Summary of Significant Accounting Policies
 
    Principles of Consolidation and Basis of Presentation — The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
    Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. These estimates may affect the amounts of assets and liabilities reported in the balance sheet, the 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 presented. Actual results may differ from those estimates.
 
    Foreign Currency Translation — The Company established branch offices in Japan in 2005, Germany and France in 2004, Australia in 2003, and in the United Kingdom in 2002. For financial reporting purposes the functional currency of these branch offices is the U.S. dollar. For the years ended December 31, 2005 and 2004, a translation loss included in the consolidated statements of operations in interest and other income (expense), net, was $161,729 and $100,578, respectively.
 
    Cash and Cash Equivalents — The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    Fair Value of Financial Instruments — The carrying amounts of certain of the Company’s financial instruments, including cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. Debt and capital lease obligations are carried at cost, which approximates fair value due to the market value interest rates that these debts bear.
 
    Concentration of Credit Risk — Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions that management believes are credit-worthy.
 
    The Company’s accounts receivable are derived from revenue earned from customers located primarily in the United States and Europe. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable.
 
    At December 31, 2005, one customer accounted for 15% of accounts receivable. At December 31, 2004, two customers accounted for 14% and 11% of accounts receivable, respectively.
 
    Property and Equipment — Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:
     
Computers and office equipment
  3 - 5 years
Software
  3 years
Furniture and fixtures
  7 years
    Computers and equipment acquired under capital leases are amortized over the shorter of the lease term or the useful life of the asset. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the improvement. Repair and maintenance costs are expensed as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation or amortization are relieved from the accounts and the net gain or loss is included in the determination of income.
 
    Purchased Software Products — Purchased software costs are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over its estimates useful lives of the 5 years.
 
    Software Development Costs — Costs related to research, design and development of software products are generally expensed as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established up until the time of general release of the product. Based on the Company’s product development process, technological feasibility is established upon the completion of a working model. Costs eligible for capitalization, incurred after achieving technological feasibility and before general release of its product, were not material in any period presented. Accordingly, all software development costs have been charged to research and development expense in the accompanying statements of operations.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    Revenue Recognition — The Company recognizes revenue in accordance with the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. The Company’s revenues are primarily derived from two sources: (i) software license, revenue from sales to end users; and (ii) maintenance and consulting services revenue from providing post-contract customer support and software updates to end users and from providing training and consulting services to end users.
 
    When consulting or other services sold in connection with a software license are not essential to the functionality of the software, the Company recognizes revenue from software licenses upon delivery of the software and execution of a binding agreement with the customer, provided that the fee is fixed or determinable, collection is probable and there are no customer acceptance clauses. When customer acceptance clauses exist, revenues are recognized upon customer acceptance.
 
    For sales agreements with multiple obligations (e.g., delivered and undelivered products, post-contract support and other services), the Company allocates revenues to the undelivered elements of the contract based on objective evidence of fair value. This objective evidence is the sales price of the element when sold separately or the renewal rate specified in the agreement. The Company recognizes revenues allocated to undelivered elements when the criteria for software license revenues set forth above are met. When objective evidence of the fair value of maintenance and post-contact customer support services revenue has not yet been established, all contract revenue is recognized ratably over the term of the maintenance agreement.
 
    Revenues from maintenance and post-contract support services are recognized ratably over the contractual period. Payments for maintenance and support services are generally made in advance and are non-refundable. Revenues from training and consulting services are recognized as the related services are performed. Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue. Deferred revenue also includes advance payments received for maintenance and support services and license revenues received or due under the terms of the contracts for which customer acceptance had not been received.
 
    Service revenue includes reimbursements received from customers for out-of-pocket expenses and travel costs of $190,137 and $193,763 for the years ended December 31, 2005 and 2004, respectively, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-14, Income Statement Characterization of Reimbursement Received for ‘Out-of-Pocket’ Expenses .
 
    Advertising — The Company expenses advertising costs to sales and marketing expense as incurred. Advertising expense for the years ended December 31, 2005 and 2004 was $2,688,903 and $2,033,763, respectively.
 
    Cost of Support and Service Revenue — Cost of maintenance and professional services revenues consists of direct customer support and service costs. There were no material direct costs of license revenues for any period presented.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    Income Taxes — Deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to reverse. Valuation allowances are established when, in management’s estimate, deferred tax assets do not meet the criteria of being “more likely than not” to be realized.
 
    Accounting for Long-Lived Assets — The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future net cash flows, which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.
 
    Stock-Based Compensation — The Company accounts for activity under its employee stock-based compensation arrangements using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25, and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure . The Company accounts for stock-based compensation relating to equity instruments issued to nonemployees using the fair value method prescribed by Emerging Issues Task Force (“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 . Compensation expense is amortized using the multiple option approach in accordance with FIN No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans .
 
    The following table illustrates the effect on net loss if the Company had elected to recognize stock-based employee compensation expense based on the fair value method as prescribed by SFAS No. 123, as amended by SFAS No. 148 for the years ended December 31, 2005 and 2004:
                 
    2005     2004  
Net loss as reported
  $ (14,177,226 )   $ (13,516,075 )
Add — Total stock-based employee compensation expense included in reported net loss
    3,409,749       608,176  
Deduct — Total stock-based employee compensation expense determined under fair value method for all awards
    (5,177,144 )     (979,720 )
 
           
Proforma net loss
  $ (15,944,621 )   $ (13,887,619 )
 
           
    Comprehensive Loss — The Company has no components of comprehensive income (loss) other than its net loss and, accordingly, comprehensive loss is the same as the net loss for all periods presented.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    Recent Accounting Pronouncements — In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity . SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity and further requires that an issuer classify as liability (or an asset in some circumstances) financial instruments that fall within its scope because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for nonpublic entities, as defined, for whom it is effective beginning after December 31, 2004. The Company is currently evaluating the potential impact of this standard.
 
    In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payment (“SFAS No. 123R”). SFAS No. 123R addresses all forms of share-based payment (“SBP”) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require companies to expense SBP awards as compensation cost measured at fair value. For nonpublic companies SFAS No. 123R is effective for their first annual reporting period that begins after December 15, 2005. The Company expects the adoption of SFAS No. 123 may have a material adverse impact in the Company’s operating results. The Company is currently in the process of evaluating the extent of such impact.
 
    On June 29, 2005, the staff of the FASB issued FASB Staff Position (FSP) FAS 150-5, Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable . This FSP clarifies that warrants on redeemable shares are within the scope of SFAS No. 150, regardless of the location of the redemption feature (for example in the underlying security instead of the warrant), the likelihood of redemption, or the timing and amount of the redemption feature. FSP FAS 150-5 goes into effect in the first reporting period that begins after June 30, 2005. If the FSP’s guidance makes it necessary for an entity to change previously reported information, the cumulative effect shall be reported according to the transition provisions of SFAS No. 150 in the first reporting period beginning after June 30, 2005. In accordance with the transition provisions in SFAS No. 150, the fair value of the freestanding warrant (or other similar instrument) should be determined as of the beginning of the first reporting period that begins after June 30, 2005. The difference between the previous carrying amount and the fair value as of the beginning of the reporting period is recognized in the statement of operations. For non-public entities, the first reporting period will be the first fiscal year that begins after June 30, 2005 (or the beginning of an upcoming interim period prior to the beginning of the next fiscal year, if the entity decides to early adopt this FSP). The Company is currently evaluating the potential impact of this FSP.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
3.   Balance Sheet Components
 
    The balance sheet components as of December 31, 2005 and 2004 are as follows:
                 
    2005     2004  
Property and equipment:
               
Computers and office equipment
  $ 2,720,968     $ 1,970,709  
Software
    763,802       469,958  
Furniture and Fixtures
    45,548       10,158  
Leasehold Improvements
    112,168       78,217  
 
           
Total property and equipment
    3,642,486       2,529,042  
Accumulated depreciation and amortization
    (1,920,352 )     (1,105,056 )
 
           
Property and equipment, net
  $ 1,722,134     $ 1,423,986  
 
           
    Depreciation and amortization expense for the years ended December 31, 2005 and 2004 was $800,565 and $480,533, respectively.
 
    Included in depreciation and amortization expense is $0 and $14,297 of amortization expense on capital leased assets for the years ended December 31, 2005 and 2004, respectively.
                 
    2005     2004  
Accrued liabilities:
               
Accrued compensation
  $ 4,758,798     $ 3,908,017  
Accrued taxes
    247,219       189,583  
Accrued other
    1,251,209       1,183,876  
 
           
Accrued liabilities
  $ 6,257,226     $ 5,281,476  
 
           
4.   Intangible Assets
 
    On September 30, 2005, the Company acquired all of the assets and liabilities of Timestock, Inc. The aggregate consideration paid for the acquisition was $12,285,921 (1,000,000 shares of the Company’s Series D Mandatorialy Redeemable Convertible Preferred Stock issued at a fair value of $3,690,000, 714,803 shares of the Company’s Common Stock issued at a fair value of $7,678,140, a $500,000 loan made to Timestock, Inc. in August 2005 to fund continuing operations prior to but in contemplation of the acquisition, and 200,686 common stock options in contemplation of the acquisition that were valued at $417,781). Subsequent to the acquisition, the Company issued 578,500 common stock options to Timestock, Inc. employees in connection with their employment with Wily Technology, Inc. The difference between the exercise price and fair market value of the option amounted to $840,321 and is included in deferred stock-based compensation to employees.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    As summary of the acquisition is as follows:
         
Liabilities assumed
  $ (382,438 )
Total tangible assets acquired
    109,572  
Purchased software products
    12,558,787  
 
     
Total aggregate consideration paid
  $ 12,285,921  
 
     
    The results of the acquired business will be included in the Company’s results of operations beginning October 1, 2005.
 
    The consideration paid in excess of the fair market value of tangible assets acquired and liabilities assumed was all allocated to purchased software products. Amortization of purchased software products is computed using the straight-line method over the estimated useful lives of the assets, 5 years.
 
    The change in carrying amounts of purchased software products, net for the year ended December 31, 2005 was as follows:
         
    2005  
Balance, January 1, 2005
  $  
Purchased software products acquired in 2005
    12,558,787  
Amortization expense
    (627,939 )
 
     
Purchased software products, net
  $ 11,930,848  
 
     
    Amortization expense for the year ended December 31, 2005 was $627,939.
 
    The following unaudited pro forma information for the years ended December 31, 2005 and 2004, gives effect to the acquisition, as if the acquisition was completed as of the beginning of the periods presented below:
                 
    Unaudited  
    2005     2004  
 
               
Pro forma revenues
  $ 52,142,981     $ 30,462,809  
 
           
 
               
Pro forma cost of support and service revenue
  $ 8,285,548     $ 6,321,548  
 
           
 
               
Pro forma gross profit
  $ 43,857,433     $ 24,141,261  
 
           
 
               
Loss before income tax expense
  $ (17,938,965 )   $ (17,204,919 )
 
           
 
               
Net loss
  $ (18,192,302 )   $ (17,394,502 )
 
           

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
5.   Notes Payable
 
    During fiscal 2003 the Company entered into an agreement with a lending institution comprising of an equipment line of credit of up to $1.5 million in notes payable and a one-time term note payable of up to $750,000. All outstanding notes payable bear interest at the greater of the prime rate plus 1.0% or 5.0%. Under the terms of the agreement, borrowings are collateralized by substantially all of the Company’s assets and the Company is required to comply with certain reporting and financial covenants, including maintaining a certain level of net tangible worth. Notes payable established under the equipment line of credit are to be repaid over 36 equal monthly installments and the term note is to be repaid over 30 monthly installments from the commitment date. During certain periods of 2004, the Company was in violation of certain covenants of its outstanding term note and equipment line of credit. On September 1, 2004, the financial covenants related to the term note and equipment line of credit were amended. The Company received waivers for all periods with covenant violations during 2004.
 
    On February 9, 2005, the Company amended its loans related to its equipment line of $1.5 million and its term loan of $750,000. Upon signing the agreement, the Company issued warrants to purchase 5,420 shares of Series D Preferred Stock at $3.69 per share. Advances under the equipment line bear interest at 1.75% above the prime rate. The existing balance on February 9, 2005 of $1.0 million continues to bear interest at the greater of 1% above the prime rate or 5.0%.
 
    In addition, on February 9, 2005, the Company entered into an Amended and Restated Loan and Security Agreement that allows up to $5.0 million of Growth Capital Advances. The Company may take advances through December 31, 2005, in minimum increments of $1,000,000. The line of credit is collateralized by all of the Company’s assets plus a lien on intellectual property needed to collect accounts receivable. Upon signing the agreement, the Company issued warrants to purchase 67,751 shares of Series D Preferred Stock at $3.69 per share. An additional warrant for 5,420 shares will be granted if any advances are taken, plus warrants for 10,840 shares will be granted upon each $1 million advance under the loan. The outstanding principal of the loan is due on May 1, 2008. All outstanding Growth Capital Advances bear interest rate of 5.25% above the prime rate. As of the date of this report the Company has not drawn on Growth Capital Advances.
 
    At December 31, 2005, the Company had $1,424,038 outstanding under the equipment line of credit and had $122,625 outstanding under the term note.
 
    Future principal payments under the notes payable are as follows:
         
Year ended December 31,
       
2006
  $ 904,224  
2007
    515,994  
2008
    126,445  
 
     
Total notes payable
  $ 1,546,663  
 
     

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    For the years ended December 31, 2005 and 2004, interest expense was $394,969 and $69,620, respectively. Interest expense for the year ended December 31, 2005, includes $96,779 of amortization of interest related to warrants and $157,384 related to the issuance of Series D Preferred Stock, see Note 7.
 
6.   Commitments and Contingencies
 
    The Company leases its office space and certain computer equipment under non-cancelable operating leases with various expiration dates through January 2007. Total rent expense under operating leases was $1,322,949 and $1,047,218 for the years ended December 31, 2005 and 2004, respectively.
 
    Future minimum lease payments under non-cancelable operating leases at December 31, 2005 are as follows:
         
Year ended December 31,
       
2006
  $ 1,282,929  
2007
    1,029,238  
2008
    911,850  
2009
    292,425  
 
     
Total future minimum lease payments
  $ 3,516,442  
 
     
    Under the indemnification of the Company’s standard software license agreements, the Company agrees to defend the licensee against third party claims asserting infringement by Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the licensee. The Company has not incurred significant expense defending its licensees against third party claims. Further, the Company has never incurred significant expense under its standard product or services performance warranties. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements at December 31, 2005.
 
    As permitted under California law, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. All of these indemnification agreements were grandfathered under the provisions of FIN 45 as they were in effect prior to December 31, 2002. Accordingly, the Company had no liabilities recorded for these agreements at December 31, 2005.
 
    The Company is subject to claims and assessments from time to time in the ordinary course of business. Management does not believe that any such matters, individually or in the aggregate, will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
7.   Mandatorily Redeemable Convertible Preferred Stock
 
    Mandatorily redeemable convertible preferred stock (“Preferred Stock”) comprises the following at December 31, 2005:
                                 
            Number of     Liquidation        
    Number of     Shares Issued     Preference        
    Shares     and     Per     Liquidation  
Shares   Authorized     Outstanding     Share     Preference  
A
    3,000,000       2,861,408     $ 0.900     $ 2,575,267  
B
    10,000,000       8,815,404     $ 2.277       20,072,675  
C
    5,850,000       5,576,208     $ 2.690       15,000,000  
D
    2,850,000       2,510,840     $ 3.690       9,265,000  
 
                         
 
    21,700,000       19,763,860             $ 46,912,942  
 
                         
    In 2005, in connection with the issuance of Series D Preferred Stock, the Company recorded a charge to interest totaling $157,384. The charge was calculated as the difference between the purchase price and the fair value of common stock at the date of issuance because the value of common stock was deemed to be higher than the Series D Preferred Stock at the issuance date.
 
    The rights, privileges and preferences of Series A, Series B, Series C and Series D Preferred Stock are as follows:
      Voting Rights — Holders of Series A, Series B, Series C and Series D Preferred Stock are entitled to one vote for each share of common stock into which each share of Preferred Stock is convertible.
 
      Dividends — The holders of Series A, Series B, Series C and Series D Preferred Stock are entitled to receive, when and as declared by the Board of Directors and out of funds legally available, noncumulative dividends at the annual rate of $0.072, $0.18216, $0.2152 and $0.2952 per share, respectively. Such dividends are payable in preference and priority to any payment of any dividend on common stock. No dividends or other distributions shall be made with respect to common stock, until all declared dividends on the Series A, Series B, Series C and Series D Preferred Stock have been paid. Through December 31, 2005, no dividends have been declared or paid by the Company.
 
      Liquidation Preference — In the event of any liquidation, dissolution, or winding up of the Company either voluntary or involuntary, holders of Series A, Series B, Series C and Series D Preferred Stock are entitled to receive in preference over holders of common stock, an amount of $0.90 per share for Series A Preferred Stock, $2.277 per share for Series B Preferred Stock, $2.69 per share for Series C Preferred Stock, and $3.69 per share for Series D preferred stock plus any declared but unpaid dividends.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
      If the assets of the Company are insufficient to make payment in full to all holders of Preferred Stock as set forth above, then such assets shall be distributed among the holders of Preferred Stock ratably in proportion to the full amounts to which they would otherwise be respectively entitled. After this payment, any remaining payments shall be made ratably to the holders of common stock.
 
      Conversion — Each share of Series A, Series B, Series C and Series D Preferred Stock may be converted into shares of common stock on a one-for-one basis, subject to adjustments under specific circumstances. Conversion is either (i) at the option of the preferred stockholders or (ii) automatic upon the closing of an initial public offering which results in gross cash proceeds to the Company of at least $15.0 million. The Company has reserved shares of common stock for the conversion of the outstanding shares of Preferred Stock that will be sufficient to effect the conversion of all outstanding shares of Preferred Stock.
 
      Redemption — Upon the written election of holders of the majority of the Preferred Stock, the Series A, Series B, Series C and Series D Preferred Stock shall be redeemable to the extent of one-third of the outstanding shares on the fifth, sixth and seventh anniversary dates of the closing of the Series D Preferred Stock financing. The redemption price is the purchase price plus any declared but unpaid dividends.
 
      If the Company does not have sufficient funds legally available to redeem all shares of Preferred Stock to be redeemable at the Redemption Date, then the Company shall redeem such shares ratably to the extent possible and shall redeem the remaining shares as soon as sufficient funds are legally available.
 
      Required redemption amounts of Preferred Stock at December 31, 2005, excluding any unpaid dividends are as follows:
         
December 15, 2009
  $ 15,637,647  
December 15, 2010
    15,637,647  
December 15, 2011
    15,637,648  
 
     
Required redemption amount
  $ 46,912,942  
 
     
      Warrants — In connection with the extension of the line of credit agreement, a warrant to purchase 8,783 shares of Series B Preferred Stock at an exercise price of $2.277 per share was issued to a financial institution in July 2002. The Company valued the warrant using the Black-Scholes option pricing model on the grant date, applying a contractual life of seven years, risk-free interest rate of 4.49%, an expected dividend yield of 0%, volatility of 100% and a fair value for Preferred Stock of $2.277 per share. This resulted in an estimated fair value of $16,835, which had been recorded as a debt discount and being amortized to interest expense through July 2005. The unamortized debt discount was written off during 2003 as the line of credit agreement was terminated. This warrant is outstanding and exercisable at December 31, 2005 and expires in July 2009.

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WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
      In connection with the line of credit agreement, a warrant to purchase 13,175 shares of Series B Preferred Stock at an exercise price of $2.277 per share was issued to a financial institution in March 2001. The Company valued the warrant using the Black-Scholes option pricing model on the grant date, applying a contractual life of seven years, risk-free rate of 4.90%, an expected dividend yield of 0%, volatility of 100% and a fair value for Preferred Stock of $2.277 per share. This resulted in an estimated fair value of $25,300, which had been recorded as a debt discount and was being amortized to interest expense. The unamortized debt discount was written off in full when the line of credit agreement was terminated in fiscal 2003. This warrant is outstanding and exercisable at December 31, 2005 and expires in March 2008.
 
      In addition, on February 9, 2005, the Company entered into an Amended and Restated Loan and Security Agreement. Upon signing the agreement, the Company issued warrants to purchase 73,171 shares of Series D Preferred Stock at $3.69 per share. The Company valued the warrant using the Black-Scholes option pricing model on the grant date, applying a contractual life of seven years, risk-free rate of 4.17%, an expected dividend yield of 0%, volatility of 100% and a fair value for Preferred Stock of $4.26 per share. This resulted in an estimated fair value of $263,943, which has been recorded as prepaid interest and is being amortized to interest expense. The amount expensed as interest for the year ended December 31, 2005 was $96,779. An additional warrant for 5,420 shares will be granted if any advances are taken, plus warrants for 10,840 shares will be granted upon each $1 million advance under the loan. As of the date of this report, the Company has not drawn on Growth Capital Advances.
8.   Common Stock
 
    Holders of common stock are entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding. The holder of each share of common stock is entitled to one vote. The Company issued shares of its common stock to certain employees under stock purchase agreements, some of which contain repurchase provisions in the event of separation of employment. The shares are generally released from repurchase provisions ratably over four years.
 
    At December 31, 2005 and 2004, there were 3,032 and 14,808 unvested shares of common stock subject to repurchase at a price of $0.50 per share.
 
    Stock Option Plan — In 1999, the Company adopted the 1999 Equity Incentive Plan (the “Plan”) under which shares of the Company’s common stock are reserved for issuance to employees, directors and consultants as determined by the Board of Directors. Options granted under the Plan may be incentive stock options or non-qualified stock options. Stock purchase rights may also be granted under the Plan. Incentive stock options may only be granted to employees. The Board of Directors determines the period over which options become exercisable, however, options shall become exercisable at a rate of not less than 20% per year over five years from the date the options are granted. The exercise price of incentive stock options and non-qualified stock options shall be no less than 100% and 85%, respectively, of the fair market value per share of the Company’s common stock on the grant date. If an individual owns stock representing more than 10% of the outstanding shares of the Company, the price of each share shall be at least 110% of fair market value, as determined by the Board of Directors. The maximum term of the options is ten years.

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Table of Contents

    A total of 11,960,255 shares of common stock have been reserved as of December 31, 2005 for the Plan.
 
    The following table summarizes activity under the Plan:
                         
    Shares             Weighted  
    Reserved     Number     Average  
    for     of     Exercise  
    Grant     Options     Price  
Balance at January 1, 2004
    1,529,754       6,352,397     $ 0.61  
Additional options reserved
    930,000           $  
Shares granted
    (1,642,000 )     1,642,000     $ 1.25  
Shares exercised
          (422,498 )   $ 0.49  
Options cancelled
    377,057       (377,057 )   $ 0.75  
 
                   
 
                       
Balance at December 31, 2004
    1,194,811       7,194,842     $ 0.76  
Additional options reserved
    2,455,840           $  
Shares granted
    (2,642,732 )     2,642,732     $ 2.03  
Shares exercised
          (575,072 )   $ 0.56  
Options cancelled
    416,006       (416,006 )   $ 1.00  
 
                   
Balance at December 31, 2005
    1,423,925       8,846,496     $ 1.14  
 
                   

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Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    The following table summarizes information about stock options outstanding and exercisable at December 31, 2005:
                                 
    Options Outstanding   Options Exercisable
            Weighted            
            Average            
            Remaining           Weighted
    Number   Contractual   Number   Average
Exercise   Of   Life   of   Exercise
Price   Shares   (In Years)   Shares   Price
 
                               
$0.25
    390,300       4.01       390,300     $ 0.25  
$0.30
    114,067       8.57       114,650     $ 0.30  
$0.50
    3,060,423       5.79       3,060,423     $ 0.50  
$0.60
    59,495       9.59       59,495     $ 0.60  
$0.75
    79,500       7.06       79,500     $ 0.75  
$0.90
    442,479       7.23       442,479     $ 0.90  
$1.00
    1,722,932       8.11       1,310,848     $ 1.00  
$1.50
    279,500       8.74       279,500     $ 1.50  
$1.75
    342,000       8.94       342,000     $ 1.75  
$2.00
    742,000       9.21       742,000     $ 2.00  
$2.25
    1,407,150       9.69       1,407,150     $ 2.25  
$2.50
    206,650       9.93       206,650     $ 2.50  
 
                               
 
                               
 
    8,846,496       7.53       8,434,995     $ 1.14  
 
                               
    At December 31, 2004, the Company had 6,408,627 stock options outstanding and exercisable with a weighted average exercise price of $0.75 per share.
 
    Stock Option Grants to Employees — In connection with employee stock option grants, the Company recorded deferred stock-based compensation costs, net of cancellations, totaling $8,545,951 and $2,792,037 for the years ended December 31, 2005 and 2004, respectively. Deferred stock-based compensation costs are calculated as the difference between the exercise price and the fair value of the underlying stock at the date of grant and are recognized over the vesting period of the underlying stock options, generally four years, and in accordance with FIN 28. Amortization of deferred stock-based compensation, net of cancellations, resulted in a net charge to the statements of operations, $3,256,531 and $608,176 for the years ended December 31, 2005 and 2004, respectively. Future amortization of deferred stock-based compensation expense, excluding impact of future cancellations, is estimated to be $4,585,716, $1,928,464, $812,686 and $146,415 for the years ending December 31, 2006, 2007, 2008 and 2009, respectively.

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Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    Employee non-cash stock-based compensation associated with grants of stock options to employees recorded in the accompanying statements of operations relates to the following categories for the years ended December 31, 2005 and 2004:
                 
    2005     2004  
 
               
Cost of support and service revenue
  $ 159,425     $ 29,704  
Research and development
    757,477       63,711  
Sales and marketing
    1,820,100       325,408  
General and administrative
    672,747       189,353  
 
           
 
               
Total employee non-cash stock-based compensation
  $ 3,409,749     $ 608,176  
 
           
    Stock Option Grants to Nonemployees — Stock-based compensation expense related to stock options granted to nonemployees is recognized as earned. At each reporting date, the Company re-values the stock-based compensation using the Black-Scholes pricing model. As a result, stock-based compensation expense will fluctuate as the estimated fair market value of the Company’s common stock fluctuates. In connection with the grant of stock options to nonemployees the Company, for the years ended December 31, 2005 and 2004, recorded $344,760 and $80,738 of stock-based compensation expense, respectively, which is included in general and administrative expense.
 
    During the year ended December 31, 2004, the Company extended the vesting and exercise period on 180,754 options previously granted to an employee who later converted to a consultant. The resulting nonemployee stock-based compensation charge of $369,774 is included in sales and marketing expense for year ended December 31, 2004.
 
    During the year ended December 31, 2005, the Company extended the vesting and exercise period on 436,313 options previously granted to two employees who later converted to consultants. The resulting nonemployee stock-based compensation charges are classified as follows: $51,815 is included in research and development expense, $487,875 is included in sales and marketing expense, and $1,117,515 is included in general and administrative expense.
 
    The fair value of each option grant is estimated on the date of grant using the following weighted-average assumptions for the years ended December 31, 2005 and 2004:
                 
    2005     2004  
 
               
Average remaining contractual life in years
    6       7  
 
           
 
               
Average risk free interest rate
    4.42       3.43  
 
           
 
               
Expected dividend yield
           
 
           
 
               
Volatility
    100 %     100 %
 
           

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Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
9.   Income Taxes
 
    The components of the provision for income tax expense are as follows for the years ended December 31, 2005 and 2004:
                 
    2005     2004  
 
               
Current:
               
Federal
  $ 35,000     $  
State
    16,513       1,500  
Foreign
    195,706       188,083  
 
           
Total current
    247,219       189,583  
 
           
 
               
Deferred:
               
Federal
           
State
           
Foreign
           
 
           
Total deferred
           
 
           
Income tax expense
  $ 247,219     $ 189,583  
 
           
    A reconciliation of income tax expense with the expected income tax expense computed by applying the federal statutory income tax rate of 34.00% to loss before income tax expense, is as follows for the years ended December 31, 2005 and 2004:
                 
    2005     2004  
 
               
Income tax benefit at statutory rate
    (34.00 )%     (34.00 )%
State income tax benefit
    (6.80 )     3.20  
Meals and entertainment
          0.40  
Credits
    (3.50 )     (2.80 )
Foreign rate differential
    (0.20 )     (0.30 )
Change in valuation allowance
    38.00       30.40  
Deferred compensation
    7.20        
Other, net
    1.10       4.50  
 
           
 
               
Income tax expense
    1.80 %     1.40 %
 
           

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Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    The components of the net deferred tax assets as of December 31, 2005 and 2004 are as follows:
                 
    2005     2004  
 
               
Depreciation and amortization
  $ (59,591 )   $ (80,017 )
Accruals
    2,346,774       23,845  
Credits
    2,647,064       1,819,824  
Capitalized research and development costs
    326,091       372,938  
Net operating losses
    15,162,734       14,520,194  
Stock-based compensation for nonemployees
    59,355        
Purchased software products
    (4,752,581 )      
Reserves
    1,016,711       28,880  
 
           
Gross deferred tax assets
    16,746,557       16,685,664  
Valuation allowance
    (16,746,557 )     (16,685,664 )
 
           
Net deferred tax assets
  $     $  
 
           
    For financial reporting purposes, the Company has incurred a loss in each period since inception. Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets at December 31, 2005 and 2004. The valuation allowance increased by $60,893 and $4,057,029 for the years ended December 31, 2005 and 2004, respectively.
 
    As of December 31, 2005, the Company has net operating loss carryforwards of approximately $41.3 million for federal and $19.2 million for state tax purposes. If not utilized, these carryforwards will begin to expire in 2018 for federal tax purposes and 2006 for state tax purposes.
 
    As of December 31, 2005, the Company has research credit carryforwards of approximately $1.5 million and $1.7 million for federal and state tax purposes, respectively. If not utilized, the federal carryforward will expire in various amounts beginning in 2013. The California credit can be carried forward indefinitely.
 
    Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The amount of limitation on net operating loss carryforwards, if any, has yet to be determined.

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Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
10.   Employee Benefit Plan
 
    During 2001, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Board of Directors. In January 2006, the company made a contribution equal to $500 per active employee at December 31, 2005.
11.   Related Party Transactions
 
    In December 2001, the Company loaned a founder $100,000 and received a promissory note in exchange. The interest rate on the note is 5.0% compounded annually. The note matures in December 2006 or upon demand if the Company makes an initial public offering of its common stock, if there is a sale of assets representing more than 50% of the Company’s consolidated assets, or if there is an exchange of more than 50% of the Company’s shares. The note is collateralized by 300,000 shares of the Company’s common stock, which is owned by the founder and were valued at $0.50 per share upon issuance. This note receivable is included with prepaid expenses and other current assets in the balance sheet. The Company recorded interest income associated with the note of $5,788 and $5,513 at December 31, 2005 and 2004, respectively.
12.   Cash Flow Information
 
    Supplemental disclosure of cash flow information for the years ended December 31, 2005 and 2004:
                 
    2005     2004  
 
               
Cash paid of interest
  $ 123,050     $ 81,074  
 
           
 
               
Cash paid for taxes
  $ 339,114     $ 64,702  
 
           
    Supplemental disclosure of non-cash investing and financing activities for the years ended December 31, 2005 and 2004:
                 
    2005     2004  
 
               
Accretion of Mandatorily Redeemable Preferred Stock to redemption value
  $ 24,280     $ 34,296  
 
           
 
               
Issuance of warrants
  $ 263,943     $  
 
           
 
               
Deferred stock-based compensation
  $ 9,386,272     $ 2,792,037  
 
           

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Table of Contents

WILY TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
    Detail of acquisition for the year ended December 31, 2005:
         
    2005  
 
       
Cash and cash equivalents
  $ (10,004 )
Accounts receivable
    (8,000 )
Property and equipment
    (85,193 )
Goodwill
    (12,558,787 )
Other assets
    (6,375 )
Accounts payable
    348,831  
Accrued liabilities
    10,913  
Deferred revenue
    22,694  
Series D Mandatorily Redeemable Preferred Stock
    3,690,000  
Common stock
    7,678,140  
Stock options
    417,781  
 
     
 
       
Cash paid
    (500,000 )
Cash acquired in acquisition
    10,004  
 
     
Cash used for purchase of business
  $ (489,996 )
 
     
13.   Subsequent Events
 
    On January 5, 2006, Computer Associates International, Inc and the Company entered into an Agreement and Plan of Merger. Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of common stock, no par value, of the Company will be converted into the right to receive approximately $11.30 in cash. At the effective time of the Merger, each outstanding, vested and unexercised option to purchase the Company’s Common Stock will be converted into the right to receive cash equal to the difference between the option price and approximately $11.70 per share. Additionally, outstanding unvested options will be converted into the right to receive cash on a quarterly basis equal to the difference between the option price and approximately $11.70 per share. The Merger Agreement has been unanimously approved by the Company’s Board of Directors and the Company’s stockholders. On March 3, 2006, the transactions contemplated by the Merger Agreement and all required antitrust clearance and customary closing conditions were satisfied and the deal was closed.
 
    On February 27, 2006 the Company repaid both the current and long-term portions of the notes payable outstanding as of that date.

27

 

Exhibit 99.2
CA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
     The following unaudited pro forma condensed combined balance sheet as of March 31, 2006 and the unaudited pro forma condensed combined statements of operations for the years ended March 31, 2006 and 2005 are based on the historical financial statements of CA, Inc. (“CA”), Niku Corporation (“Niku”), iLumin Software Services, Inc. (“iLumin”), and Wily Technology, Inc. (“Wily”) 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, the merger of Lost Ark Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of CA, with and into iLumin, a Delaware corporation, and the merger of Watermelon Merger Company, a California corporation and wholly owned subsidiary of CA, with and into Wily, a California 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 year ended March 31, 2006 includes CA’s historical condensed consolidated statement of operations for the year ended March 31, 2006 (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 March 31, 2006 (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, 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 for the fiscal year ended March 31, 2006 and Niku’s annual report on Form 10-K.
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 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 year ended March 31, 2006 includes CA’s historical condensed consolidated statement of operations for the year ended March 31, 2006 (which incorporates iLumin’s results from operations since of the date of acquisition – October 14, 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 March 31, 2006 (which incorporates balances acquired from iLumin 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 iLumin 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, 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 iLumin 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 iLumin included in CA’s annual report on Form 10-K for the fiscal year ended March 31, 2006 and iLumin’s audited financial statements for the fiscal year ended December 31, 2004 and the nine months ended September 30, 2005.
Wily
     CA and Wily 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 Wily’s historical consolidated statement of income for the year ended December 31, 2004. 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 year ended March 31, 2006 combines CA’s historical condensed consolidated statement of operations for the year ended March 31, 2006 (which incorporates Wily’s results from operations since of the date of acquisition – March 3, 2006) with Wily’s historical condensed consolidated statement of income for the year ended December 31, 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 includes CA’s historical condensed consolidated balance sheet as of March 31, 2006 (which incorporates balances acquired from Wily since the date of acquisition – March 3, 2006). 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 Wily acquired in connection with the acquisition, based on their estimated fair values. The primary areas of the purchase price allocation which are not yet finalized relate to identifiable intangible assets, 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 Wily 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 Wily included in CA’s annual report on Form 10-K for the fiscal year ended March 31, 2006 and Wily’s audited financial statements for the fiscal years ended December 31, 2005 and 2004, included in this Form 8-K filing.

 


 

CA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of March 31, 2006

(in millions, except per share amounts)
                         
    Historical     Pro Forma        
    March 31, 2006     Adjustments     Pro Forma  
    CA     (Note 3)     Combined  
ASSETS
                       
CURRENT ASSETS
                       
Cash and Cash equivalents
  $ 1,831               1,831  
Marketable securities
    34               34  
Trade and installment accounts receivable, net
    505               505  
Federal and state income taxes payable
                   
Deferred income taxes
    228               228  
Other current assets
    50               50  
           
TOTAL CURRENT ASSETS
  $ 2,648     $     $ 2,648  
           
 
                       
Installment accounts receivable, due after one year, net
    449               449  
Property and equipment, net
    634               634  
Purchased software products, net
    461               461  
Goodwill, net
    5,308               5,308  
Deferred income taxes
    150               150  
Other noncurrent assets, net
    788               788  
             
TOTAL ASSETS
  $ 10,438     $     $ 10,438  
           
 
                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
CURRENT LIABILITIES
                       
Current portion of long-term debt and loans payable
  $ 1             $ 1  
Government investigation settlement
    2               2  
Accounts payable
    411               411  
Salaries, wages and commissions
    292               292  
Accrued expenses and other current liabilities
    373               373  
Deferred subscription revenue (collected) — current
    1,517               1,517  
Deferred maintenance revenue
    250               250  
Taxes payable, other than income taxes payable
    129               129  
Federal, state and foreign income taxes payable
    370               370  
Deferred income taxes
    32               32  
           
TOTAL CURRENT LIABILITIES
    3,377             3,377  
           
 
                       
Long-term debt, net of current portion
    1,810               1,810  
Deferred income taxes
    46               46  
Deferred subscription revenue (collected) — noncurrent
    448               448  
Other noncurrent liabilities
    77               77  
           
TOTAL LIABILITIES
    5,758             5,758  
           
 
                       
Stockholders’ equity
    4,680               4,680  
 
                       
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 10,438     $     $ 10,438  
           
See notes to unaudited pro forma condensed combined financial statements.

 


 

CA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended March 31, 2006

(in millions, except per share amounts)
                                                                         
    Historical              
    Year Ended     3 Months Ended     Month Ended     6 Months Ended     Month Ended     Year Ended     Month Ended              
                                              Pro Forma      
    31-Mar-2006     30-Apr-2005     29-Jul-2005     30-Sep-2005     14-Oct-2005     31-Dec-2005     31-Mar-2006     Adjustments     Pro Forma  
    CA     Niku     Niku     iLumin     iLumin     Wily     Wily     (Note 3)     Combined  
             
Revenue:
                                                                       
Subscription revenue
  $ 2,838     $     $     $     $     $     $     $     $ 2,838  
Maintenance
    430       5       1       3             14       (1 )           452  
Software fees and other
    162       7       6       3               32       (1 )     (1 ) (a)     208  
Financing fees
    45                                                         45  
Professional services
    321       7       3       1               6       (1 )           337  
           
TOTAL REVENUE
    3,796       19       10       7             52       (3 )     (1 )     3,880  
           
 
                                                                       
Operating Expenses:
                                                                       
Amortization of capitalized software costs
    449                                           (1 )     13 (b)     461  
Cost of professional services
    272       5       2       1               6       (1 )           285  
Selling, general, and administrative
    1,597       10       11       5       1       41       (6 )     11 (c)     1,668  
 
                                                            (1 ) (a)        
 
                                                            (6 ) (d)        
 
                                                            5 (e)        
Product development and enhancements
    697       2       1       1               11                     712  
Commissions and royalties
    394       1             2               5       (1 )           401  
Depreciation and amortization of other intangible assets
    134                   1               1       (1 )     20 (f)     155  
Other gains/expenses, net
    (15 )           12                       1               (11 ) (d)     (13 )
 
                                                                       
Restructuring charge
    88                                                         88  
Acquisition in-process research and development cost
    18                                             (14 ) (g)     4  
Shareholder litigation and government investigation settlements
                                                             
           
TOTAL EXPENSES BEFORE INTEREST AND TAXES
    3,634       18       26       10       1       65       (10 )     17       3,761  
           
 
                                                                       
Income (loss) from continuing operations before interest and taxes
    162       1       (16 )     (3 )     (1 )     (13 )     7       (18 )     119  
 
                                                                       
Interest expense, net
    41                               1               14 (h)     56  
           
 
                                                                       
Income (loss) before taxes
    121       1       (16 )     (3 )     (1 )     (14 )     7       (32 )     63  
 
                                                                       
Income tax (benefit) expense
    (35 )     1                                       (12 ) (i)     (46 )
           
 
                                                                       
INCOME (LOSS) FROM CONTINUING OPERATIONS
  $ 156     $     $ (16 )   $ (3 )   $ (1 )   $ (14 )   $ 7       (20 )   $ 109  
 
                                                                       
           
 
                                                                       
BASIC EARNINGS (LOSS) PER SHARE
  $ 0.27                                                             $ 0.19  
 
                                                                   
 
                                                                       
Basic weighted average shares used in computation
    581                                                               581  
 
                                                                       
DILUTED EARNINGS (LOSS) PER SHARE
  $ 0.26                                                             $ 0.18  
 
                                                                   
 
                                                                       
Diluted weighted average shares used in computation
    607                                                               607  
See notes to unaudited pro forma condensed combined financial statements.

 


 

CA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended March 31, 2005

(in millions, except per share amounts)
                                                 
    Historical              
    For the Year Ended     Pro Forma        
    31-Mar-2005     31-Jan-2005     31-Dec-2004     31-Dec-2004     Adjustments     Pro Forma  
    CA     Niku     iLumin     Wily     (Note 3)     Combined  
             
Revenue:
                                               
Subscription revenue
  $ 2,587     $     $     $     $     $ 2,587  
Maintenance
    441       18       4       6             469  
Software fees and other
    254       30       6       21       (1 ) (a)     310  
Financing fees
    77                                   77  
Professional services
    244       18       3       3             268  
           
TOTAL REVENUE
    3,603       66       13       30       (1 )     3,711  
           
 
                                               
Operating Expenses:
                                               
Amortization of capitalized software costs
    447                             13 (b)     460  
Cost of professional services
    230       15       4       3             252  
Selling, general, and administrative
    1,353       36       8       30       7 (c)     1,441  
 
                                    (1 ) (a)        
 
                                    8 (e)        
 
                                               
Product development and enhancements
    708       8       3       7             726  
Commissions and royalties
    339       1       3       4             347  
Depreciation and amortization of other intangible assets
    130             3             20 (f)     151  
 
                                    (2 ) (j)        
 
                                               
Other gains/expenses, net
    (5 )                               (5 )
Restructuring charge
    28       2                             30  
Shareholder litigation and government investigation settlements
    234                                   234  
           
TOTAL EXPENSES BEFORE INTEREST AND TAXES
    3,464       62       21       44       45       3,636  
           
 
                                               
Income (loss) from continuing operations before interest and taxes
    139       4       (8 )     (14 )     (46 )     76  
 
                                               
Interest expense, net
    106       (1 )                 14 (h)     119  
           
 
                                               
Income (loss) before taxes
    33       5       (8 )     (14 )     (60 )     (44 )
 
                                               
Income tax (benefit) expense
    7       1                   (23 ) (i)     (15 )
           
 
                                               
INCOME (LOSS) FROM CONTINUING OPERATIONS
    26       4       (8 )     (14 )     (37 )     (29 )
 
                                               
Discontinued operations, net of income taxes
    (2 )           2                    
           
 
                                               
NET INCOME (LOSS)
  $ 24     $ 4     $ (6 )   $ (14 )   $ (37 )   $ (29 )
           
 
                                               
BASIC EARNINGS (LOSS) PER SHARE
  $ 0.04                                     $ (0.05 )
 
                                           
 
                                               
Basic weighted average shares used in computation
    588                                       588  
 
                                               
DILUTED EARNINGS (LOSS) PER SHARE
  $ 0.04                                     $ (0.05 )
 
                                           
 
                                               
Diluted weighted average shares used in computation
    590                                       590  
See notes to unaudited pro forma condensed combined financial statements.

 


 

1. Basis of Presentation
     On August 1, 2005, CA announced that the merger of Nebraska Acquisition Corp. (“Niku Merger Sub”), a Delaware corporation and a wholly owned subsidiary of CA, with and into Niku, a Delaware corporation, was consummated on July 29, 2005 in accordance with the Agreement and Plan of Merger (the “Niku Merger Agreement”), dated as of June 9, 2005, by and among CA, Niku Merger Sub and Niku (the “Niku Merger”). As a result of the Niku Merger, Niku is now a wholly owned subsidiary of CA.
     The aggregate cash consideration paid by CA to acquire the common stock of Niku was approximately $337 million. In addition, the Company converted options to acquire the common stock of Niku and incurred acquisition costs of approximately $5 million and $3 million, respectively, for an aggregate purchase price of $345 million.
     The total purchase price of the acquisition is summarized as follows (in millions):
         
Cash paid
  $ 337  
Fair value of vested options assumed
    5  
Direct transaction costs
    3  
 
       
Total purchase price
  $ 345  
 
       
     Under the purchase method of accounting, the total purchase price as shown in the table above is allocated to Niku’s net tangible and intangible assets based on their estimated fair values as of July 29, 2005. Management has allocated the purchase price based on various factors as described in the introduction to these unaudited pro forma condensed combined financial statements. The acquisition cost of Niku has been allocated to assets acquired, liabilities assumed and in-process research and development based on estimated fair values. The allocation of the purchase price, estimated useful lives and first year amortization on an annualized basis associated with certain assets is as follows (in millions):
                     
            Annualized      
            First Year     Estimated
    Amount     Amortization     Useful Life
Cash
    44           n/a
Marketable securities
    19           n/a
Deferred income tax asset
    102           n/a
Other assets acquired
    20           n/a
Purchased software products
    23       6     3-6 years
Customer contracts and relationships
    42       5     8 years
Trademark/trade names
    2           7 years
Goodwill
    143           n/a
Deferred revenue
    (4 )         n/a
Deferred income tax liability
    (28 )         n/a
Other liabilities assumed
    (32 )         n/a
In-process research and development
    14           n/a
 
               
Total purchase price
  $ 345     $ 11      
 
               
     Approximately $47 million has been allocated to net tangible assets acquired. This amount reflects adjustments to certain Niku assets and liabilities to fair value. Approximately $67 million has been allocated to amortizable intangible assets acquired. The amortization related to the amortizable intangible assets is reflected as pro forma adjustments to the unaudited pro forma condensed combined statements of operations.
      Identifiable intangible assets. Identifiable intangible assets acquired consist of purchased software (developed and core technology), trade names, customer contracts and relationships, and in-process research and development.
     Purchased software relates to developed technology of Niku’s products across all of their product lines that have reached technological feasibility and core technology related to a combination of Niku processes, patents and trade secrets developed through years of experience in design and development of their products. CA will amortize the fair value of purchased software on a straight-line basis over an estimated life ranging from 3 to 6 years.
     Customer contracts and relationships represent existing contracts that relate primarily to underlying customer relationships. CA will amortize the fair value of these assets on a straight-line basis over an average estimated life of 8 years.
     Trade names relate to the Niku trade name, which CA will amortize on a straight-line basis over an estimated life of 7 years.
      Goodwill. Approximately $143 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. In accordance with the SFAS No. 142, Goodwill and Other Intangible Assets , goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that the management of the combined company determines that the value of goodwill has become

 


 

impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. The allocation of a significant portion of the Niku purchase price to goodwill was predominantly due to the relatively short lives of the acquired developed technology assets, whereby a substantial amount of the purchase price was based on earnings beyond the estimated lives of the intangible assets.
      In-process research and development. Approximately $14 million has been allocated to in-process research and development and was charged to expense in CA’s quarter ending September 30, 2005. Due to its non-recurring nature, the in-process research and development expense has been excluded from the unaudited pro forma condensed combined statements of operations.
     At the time of acquisition, Niku was developing new products in multiple product areas that qualified as in-process research and development. Projects that qualified as in-process research and development represent those that have not yet reached technological feasibility. Technological feasibility is defined as being equivalent to completion of a beta-phase working prototype in which there is no remaining risk relating to the development.
     At the time of acquisition, Niku was involved in numerous research and development projects, which were focused on developing new products, integrating new technologies, improving product performance and broadening features and functionalities. There is a risk that these development efforts and enhancements will not be competitive with other products using alternative technologies that offer comparable functionality.
     The value assigned to in-process research and development was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased in-process research and development into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Niku and its competitors.
     The rate utilized to discount the net cash flows to their present value is based on Niku’s weighted average cost of capital. The weighted average cost of capital was adjusted to reflect the difficulties and uncertainties in completing each project and thereby achieving technological feasibility, the percentage of completion of each project, anticipated market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets.
     The estimates used in valuing in-process research and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may vary from the projected results.
iLumin
     On October 14, 2005, CA announced that the merger of Lost Ark Acquisition, Inc. (“ILumin Merger Sub”), a Delaware corporation and a wholly owned subsidiary of CA, with and into iLumin, a Delaware corporation, was consummated on October 14, 2005 in accordance with the Agreement and Plan of Merger (the “ILumin Merger Agreement”), dated as of September 30, 2005, by and among CA, ILumin Merger Sub and iLumin (the “ILumin Merger”). As a result of the ILumin Merger, iLumin is now a wholly owned subsidiary of CA.
     The aggregate cash consideration paid by CA was approximately $48 million. Under the purchase method of accounting, the total purchase price as shown in the table below is allocated to iLumin’s net tangible and intangible assets based on their estimated fair values as of October 14, 2005. Management has allocated the purchase price based on various factors as described in the introduction to these unaudited pro forma condensed combined financial statements. The acquisition cost of iLumin has been allocated to assets acquired and liabilities assumed based on estimated fair values. The allocation of the purchase price, estimated useful lives and first year amortization on an annualized basis associated with certain assets is as follows (in millions):
                     
            Annualized      
            First Year     Estimated
    Amount     Amortization     Useful Life
Purchased software products
    2           7 years
Customer contracts and relationships
    21       2     10 years
Goodwill
    36           n/a
Other assets acquired
    4           n/a
Deferred income tax liability
    (9 )         n/a
Other liabilities assumed
    (6 )         n/a
 
               
Total purchase price
  $ 48     $ 2      
 
               
     Approximately $(2) million has been allocated to net tangible liabilities acquired. This reflects adjustments to certain iLumin assets and liabilities to fair value. Approximately $23 million has been allocated to amortizable intangible assets acquired. The amortization related to the amortizable intangible assets is reflected as pro forma adjustments to the unaudited pro forma condensed combined statement of operations.

 


 

      Identifiable intangible assets. Identifiable intangible assets acquired consist of purchased software (developed technology) and customer contracts and relationships.
     Purchased software relates to developed technology of iLumin’s products across all of their product lines that have reached technological feasibility and core technology related to a combination of iLumin processes, patents and trade secrets developed through years of experience in design and development of their products. CA will amortize the fair value of purchased software on a straight-line basis over an estimated life of 7 years.
     Customer contracts and relationships represent existing contracts that relate primarily to underlying customer relationships. CA will amortize the fair value of these assets on a straight-line basis over an average estimated life of 10 years.
      Goodwill. Approximately $36 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. In accordance with the SFAS No. 142, Goodwill and Other Intangible Assets , goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that the management of the combined company determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. The allocation of a significant portion of the iLumin purchase price to goodwill was predominantly due to the relatively short lives of the acquired developed technology assets, whereby a substantial amount of the purchase price was based on earnings beyond the estimated lives of the intangible assets.
Wily
     On March 7, 2006, CA announced that the merger of Watermelon Merger Company (“Wily Merger Sub”), a California corporation and a wholly owned subsidiary of CA, with and into Wily, a Delaware corporation, was consummated on March 3, 2006 in accordance with the Agreement and Plan of Merger (the “Wily Merger Agreement”), dated as of January 5, 2006, by and among CA, Wily Merger Sub and Wily (the “Wily Merger”). As a result of the Wily Merger, Wily is now a wholly owned subsidiary of CA.
     The total purchase price of the acquisition was approximately $374 million which included a holdback of approximately 10% of the initial purchase price. Additionally, the underlying shares for both vested and unvested Wily equity awards that were outstanding immediately prior to the closing have been converted to a cash obligation which is payable by CA in accordance with the terms and conditions set forth in the Wily Merger Agreement. The aggregate cash consideration paid by CA at closing was approximately $328 million.
     The total purchase price of the acquisition is summarized as follows (in millions):
         
Cash paid
  $ 328  
Holdback amount
    36  
Liability on outstanding equity awards
    9  
Direct transaction costs
    1  
 
     
Total purchase price
  $ 374  
 
     
     Under the purchase method of accounting, the total purchase price as shown in the table below is allocated to Wily’s net tangible and intangible assets based on their estimated fair values as of March 3, 2006. Management has allocated the purchase price based on estimates and on comparisons to prior acquisitions. The acquisition cost of Wily has been allocated to assets acquired and liabilities assumed based on estimated fair values. The allocation of the purchase price, estimated useful lives and first year amortization on an annualized basis associated with certain assets is as follows (in millions):
                     
            Annualized      
            First Year     Estimated
    Amount     Amortization     Useful Life
Cash and cash equivalents
    13           n/a
Purchased software products
    54       7     8 years
Customer contracts and relationships
    119       12     10 years
Trade names
    7       1     10 years
Goodwill
    232           n/a
Deferred income tax assets
    34           n/a
Other assets assumed
    8           n/a
Deferred income tax liability
    (74 )         n/a
Deferred revenue
    (10 )         n/a
Other liabilities assumed
    (9 )         n/a
 
               
Total purchase price
  $ 374     $ 20      
 
               

 


 

     Approximately $2 million has been allocated to net tangible assets acquired. This amount reflects adjustments to certain Wily assets and liabilities to fair value. Approximately $180 million has been allocated to amortizable intangible assets acquired. The amortization related to the amortizable intangible assets is reflected as pro forma adjustments to the unaudited pro forma condensed combined statement of operations.
      Identifiable intangible assets. Identifiable intangible assets acquired consist of purchased software (developed and core technology), trade names, and customer contracts and relationships.
     Purchased software relates to developed technology of Wily’s products across their entire product lines that have reached technological feasibility and core technology related to a combination of Wily processes, patents and trade secrets developed through years of experience in design and development of their products. CA will amortize the fair value of purchased software on a straight-line basis over an estimated life of 8 years.
     Customer contracts and relationships represent existing contracts that relate primarily to underlying customer relationships. CA will amortize the fair value of these assets on a straight-line basis over an average estimated life of 10 years.
     Trade names relate to the Wily trade name, which CA will amortize on a straight-line basis over an estimated life of 10 years.
      Goodwill. Approximately $232 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The allocation of a significant portion of the Wily purchase price to goodwill is predominantly due to the relatively short lives of the developed technology assets; whereby a substantial amount of the purchase price is based on earnings beyond the estimated lives of the intangible assets. In accordance with the SFAS No. 142, Goodwill and Other Intangible Assets , goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that the management of the combined company determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.
2. Reclassifications
     Certain reclassification adjustments have been made to conform Niku’s, iLumin’s and Wily’s historical reported balances to the pro forma combined condensed financial statement basis of presentation.
3. Pro Forma Adjustments
     Pro forma adjustments are necessary to reflect the purchase price and allocation of such purchase price to Niku’s, iLumin’s, and Wily’s net tangible and intangible assets at an amount equal to their estimated fair values, to reflect the amortization expense related to the estimated amortizable intangible assets for Niku, iLumin, and Wily as well as deferred stock-based compensation for Niku, iLumin, and Wily in order to conform to CA’s accounting for stock based compensation in accordance with FAS123(R), to reflect changes in interest expense from the reduction in CA’s cash balance and to reflect the income tax effect related to the pro forma adjustments, if applicable.
     Significant intercompany balances and transactions between CA and Niku as of the dates and for the periods of these pro forma condensed combined financial statements have been eliminated.
     CA has not identified any pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available which would indicate it is probable that such events have occurred and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.
     We estimate that revenues at our Niku, iLumin and Wily subsidiary for the twelve months following the consummation of the mergers will be reduced by approximately $5 million, $1 million and $14 million, respectively, because the mergers were and will be accounted for under the purchase method of accounting. Under the purchase method of accounting, deferred revenue was estimated based upon the direct costs of fulfilling the obligation, which includes direct Niku, iLumin and Wily costs as well as additional incremental direct costs that CA will expend, plus a normal profit margin. The purchase method of accounting will not affect our revenues in periods subsequent to this twelve-month period. This purchase accounting adjustment is non-recurring and has no impact on cash flows.

 


 

     The pro forma adjustments included in the unaudited pro forma condensed combined financial statements are as follows:
a)   To eliminate intercompany sales from Niku to CA.
 
b)   To amortize purchased software for Niku, iLumin, and Wily.
 
c)   To amortize deferred stock-based compensation based on the estimated weighted average remaining vesting period, net of historical expense recorded by Niku, iLumin, and Wily.
 
d)   To eliminate Niku acquisition related expenses (i.e. bankers, attorneys, change in control provisions, acceleration of stock options, etc).
 
e)   To recognize the value of CA’s compensation expense relating to Wily unvested stock options that were converted to a cash liability to be paid over the remaining vesting period per the Wily Merger Agreement.
 
f)   To amortize Niku, iLumin, and Wily other intangible assets.
 
g)   To eliminate the charge in CA’s results for in-process research and development related to the Niku acquisition.
 
h)   To record a reduction in interest income as a result of cash paid for the shares of Niku, iLumin, and Wily using the average historical rate of return on cash and cash equivalents and marketable securities of 2.0%.
 
i)   To adjust tax provision to reflect the effect of the pro forma adjustments at our statutory rate of 38.5%.
 
j)   To eliminate the charge in iLumin’s results for amortization of other intangible assets relating to companies acquired by iLumin.
4. Pro Forma Net Income (Loss) Per Share
     The pro forma basic net income (loss) per share is based on the number of CA shares used in computing basic net income (loss) per share. The pro forma diluted net income (loss) per share is based on the number of CA shares used in computing diluted net income (loss) per share adjusted for the estimated common stock dilution under the treasury stock method for Niku options assumed.