UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A,
SIXTH AMENDMENT TO
FORM 8-K FILED ON DECEMBER 30, 2005
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 21, 2005
AFTERSOFT GROUP, INC.
(Exact name of registrant as specified in its charter)
(formerly known as W3 Group, Inc.)
DELAWARE 0-27083 84-1108035
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Savannah House, 11-12 Charles II Street, London, UK SW1Y 4QU
(Address of principal executive offices)
Registrant's telephone number, including area code: 011 44 207 451 2468
N/A
-------------------------------------------------------------
(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:
[_] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b)
[_] Pre-commencement communications pursuant to Rule 13e-4 (c) under the
Exchange Act (17 CFR 240.13e-4(c)
SECTION 4 - MATTERS RELATED TO ACCOUNTANTS AND FINANCIAL STATEMENTS
ITEM 4.02 NON-RELIANCE ON PREVIOUSLY RELEASED FINANCIAL STATEMENTS OR A RELATED
AUDIT REPORT OR COMPLETED INTERIM REVIEW.
The Company filed a Form 8-K on December 30, 2005 relating to events
occurring on December 21, 2005. The filing contained the following report and
financial statements in error:
o The June 30, 2005 and 2004 consolidated balance sheets and the
consolidated statements of income, stockholders' equity and
cash flows for the years then ended of Aftersoft Group, Inc.,
along with accompanying notes to the consolidated financial
statements;
o The "Report of Independent Registered Accounting Firm" of
Corbin & Company, LLP on the June 30, 2005 and 2004 financial
statements mentioned above; and
o The unaudited interim consolidated balance sheet as of
September 30, 2005 and the unaudited interim consolidated
statements of operations and cash flows for the three months
ended September 30, 2005 and 2004, along with the accompanying
notes to the consolidated financial statements.
The Company was in the process of simultaneously drafting two
completely different Form 8-Ks for filing with the Commission in December 2005.
The first Form 8-K was to inform the public of the Company's change in its
fiscal year end from December 31 to June 30 and the change of its name from W 3
Group, Inc. to Aftersoft Group, Inc. The second Form 8-K was to inform the
public of the Company's acquisition of Aftersoft and to disclose required
information relating to the acquisition, including audited consolidated annual
financial statements and unaudited consolidated interim financial statesments of
Aftersoft Group, Inc. As the result of a simple miscommunication, the Company's
UK office inadvertently filed both Form 8-Ks on December 30, 2005, when they
were supposed to file only the first Form 8-K disclosing the change in the
Company's fiscal year end and name change. As of December 30, 2005, the audit of
the June 30, 2005 and 2004 consolidated financial statements of Aftersoft was
still in process, as was the review of the unaudited interim consolidated
financial statements as of September 30, 2005 and for the three months ended
September 30, 2005 and 2004.
The Company received notification on January 2, 2006 (through an email
communication dated December 30, 2005) by Aftersoft's independent registered
public accounting firm that they had not yet completed their audit or interim
review and that their report, together with the above-referenced financial
statements, were filed without their knowledge and permission. After thorough
investigation, the Company's Board of Directors (in the absence of an audit
committee) and management concluded on January 6, 2006 that the Form 8-K had
been mistakenly filed. As a result, the Company filed an Amended 8-K on January
23, 2006 disclosing its erroneous filing of the financial statements and the
related report of the independent registered public accounting firm. The
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Board of Directors and its advisors discussed the matters disclosed in this
filing with its independent registered public accounting firm at length and in
detail, and have provided them with the disclosures we are making here in
response to Item 4.02. Their letter stating their agreement with these
statements is included in Exhibit 16.1 attached to this filing.
We sincerely regret this mistake and we have taken steps to ensure this
type of error does not recur by requiring both certifying officers to the filing
to obtain the approval of the independent registered public accounting firm to
release its audit report in any future filing containing such report, or to
confirm completion of the interim review with the independent registered public
accounting firm for any future filing containing unaudited interim financial
statements. The above mentioned report and financial statements were completed
and filed in a Form 8-K/A dated February 1, 2005 and are also re-filed herein.
SECTION 1 - REGISTRANT'S BUSINESS AND OPERATIONS
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
On December 21, 2005, the Company (then known as W3 Group, Inc.)
consummated an Acquisition Agreement ("Agreement") to acquire all of the
outstanding shares of common stock of Aftersoft Group, Inc., a Delaware
corporation ("AFSG") in exchange for the issuance of 32,500,000 newly issued
shares of the Company, par value $.0001 per share (the "Common Stock"), to Auto
Data Network, Inc. ("AND"), a Delaware corporation and the sole shareholder of
AFSG. The Company reported entry into the Agreement on the Current Report on
Form 8-K dated July 22, 2005.
The shares so issued are "restricted shares" and may not be disposed of
except in compliance with an applicable exemption from registration under U.S.
securities laws or pursuant to an effective registration statement under U.S.
securities laws. Pursuant to the Agreement and as a result of consummation of
the Agreement, the then current shareholders of the Company became the owners of
1,601,167 shares, or approximately 4.7% of the 34,101,167 total outstanding
shares of the Company Common Stock with ADN owning 32,500,000 shares equal to
approximately 95.3% of the total outstanding shares. Concurrent with the closing
of the transaction, the Board of Directors of the Company appointed three
additional directors designated by ADN to serve until the next annual election
of directors. In addition, concurrent with the close of the transaction, the
Company (1) changed its corporate name from W3 Group, Inc. to Aftersoft Group,
Inc., (2) changed its corporate address to California, and replaced the
Company's corporate officers.
The foregoing summary of the terms and conditions of the Agreement does
not purport to be complete and is qualified in its entirety and incorporated by
reference to the full text of the Agreement filed as Exhibit 10.1 to the Current
Report on Form 8-K dated July 22, 2005.
3
SECTION 2 - FINANCIAL INFORMATION
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
See the response to Item 1.01 above, which is specifically incorporated
herein by reference. The parties to the Agreement were unrelated third parties
prior to the completion of the Acquisition on December 21, 2005 and the terms
thereof were negotiated on an arms-length basis.
The Company is a leading provider of business and supply chain
management solutions primarily to automotive parts manufacturers, retailers,
tire and service chains, independent installers and wholesale distributors in
the automotive aftermarket. The Company conducts its businesses through
subsidiaries with operations in Europe and North America. MAM Software Limited
("MAM Software") is the leading supplier of software to the automotive parts
market in the U.K. MAM Software consists of MAM Autopart Ltd, MAM AutoCat Ltd.
and MAM Autowork Ltd., which are all based in Sheffield, UK. Aftersoft Network
North America, Inc. is comprised of AFS Warehouse Distribution Management, Inc.
and AFS Tire Management Inc., which are based in San Juan Capistrano, California
and AFS Autoservice, Inc., which is based in Allentown PA. Aftersoft Network
North America was formerly known as CarParts Technologies Acquisition Corp. and
AFS Tire Management was formerly known as CarParts Technologies, Inc. Together
these subsidiaries are the second largest supplier of software to the automotive
parts market in the U.S.
ITEM 2.01(F)
ITEM 2.01(F) FINANCIAL STATEMENTS
PART F/S
Aftersoft Group, Inc.
CONSOLIDATED FINANCIAL STATEMENTS OF AFTERSOFT GROUP, INC. FOR THE YEARS
ENDED JUNE 20, 2005 AND 2004 ........................................ 5
CONSOLIDATED FINANCIAL STATEMENTS OF AFTERSOFT GROUP, INC. FOR THE THREE-MONTH
PERIODS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) ...............20
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Managers and Members
Aftersoft Group, Inc.
We have audited the accompanying consolidated balance sheet of Aftersoft Group,
Inc. (a Delaware corporation) and subsidiaries (the "Company") as of June 30,
2005, and the related consolidated statements of income and comprehensive
income, stockholders' equity and cash flows for each of the years in the
two-year period 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aftersoft Group,
Inc. and subsidiaries as of June 30, 2005, and the results of their operations
and their cash flows for each of the years in the two year-year period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/S/ CORBIN & COMPANY, LLP
Irvine, California
January 27, 2006
5
Aftersoft Group, Inc. Consolidated Balance Sheet
(In thousands, except share data)
As of June 30, 2005
ASSETS
Current Assets
Cash ....................................................... $ 194
Accounts receivable, net of allowance of $190 .............. 3,537
Inventories ................................................ 358
Prepaid expenses and other ................................. 115
--------
Total Current Assets ....................................... 4,204
Property and Equipment, Net ................................ 521
Notes Receivable - Related Party ........................... 510
Other Assets
Goodwill ................................................... 22,061
Amortizable intangible assets, net ......................... 6,396
Software development costs, net ............................ 987
Other ...................................................... 36
--------
Total Other Assets ......................................... 29,460
--------
Total Assets ................................................... $ 34,695
========
LIABILITIES
Current Liabilities
Accounts payable ........................................... $ 1,928
Accrued expenses ........................................... 956
Accrued legal expenses ..................................... 1,986
Current portion of long-term debt .......................... 1,072
Deferred revenue ........................................... 1,634
Taxes payable .............................................. 219
Other current liabilities .................................. 23
--------
Total Current Liabilities .................................. 7,818
Long-Term Liabilities
Deferred revenue ........................................... 960
Deferred income taxes ...................................... 880
Long-term debt ............................................. 879
Loan - ADN Inc. ............................................ 884
Other ...................................................... 487
--------
Total Liabilities .......................................... 11,908
Commitment and contingencies
STOCKHOLDERS' EQUITY
Common stock
Par value $0.001 per share; authorized,
issued and outstanding 1,500 shares ............... --
Additional paid-in-capital ................................. 20,937
Other comprehensive loss ................................... (302)
Retained earnings .......................................... 2,152
--------
Total Stockholders' Equity ................................. 22,787
--------
Total Liabilities and Stockholders' Equity ..................... $ 34,695
========
The accompanying notes are an integral part of these financial statements
6
Aftersoft Group, Inc. Consolidated Statements of Income and Comprehensive Income
(In thousands, except share data)
For Years Ended June 30,
----------------------
2005 2004
-------- --------
Net revenues ....................................... $ 22,062 $ 12,598
Cost of revenues ................................... 9,225 5,853
-------- --------
Gross Profit ....................................... 12,837 6,745
Operating Expenses:
Research and development ........................... 2,665 584
Sales and marketing ................................ 1,970 702
General and administrative ......................... 4,389 4,101
Depreciation and amortization ...................... 1,421 316
-------- --------
Total Operating Expenses ........................... 10,445 5,703
Operating income ................................... 2,392 1,042
Other expense:
Other, net ......................................... (12) --
Interest ........................................... (105) (19)
-------- --------
Total other expense ................................ (117) (19)
Income before provision for income taxes ........... 2,275 1,023
Provision for income taxes ......................... 337 299
-------- --------
Net income ......................................... 1,938 724
Foreign currency translation gain (loss) ........... 32 (334)
-------- --------
Comprehensive income ............................... $ 1,970 $ 390
======== ========
Earnings per share attributed to common stock
- basic and diluted ............................. $ 1,367 $ 1,095
Weighted average number of shares of common
stock outstanding - basic fully diluted ......... 1,417 661
The accompanying notes are an integral part of these financial statements.
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Aftersoft Group, Inc. Consolidated Statements of Stockholders' Equity
(In thousands)
Retained
Common Stock Other earnings
------------------- Paid In Comprehensive (Accumulated
Shares Amount Capital Income (Loss) deficit) Total
-------- -------- -------- ------------- ------------- --------
Balance, June 30, 2003 .......... 661 $ -- $ 9,063 $ -- $ (510) $ 8,553
Foreign currency translation . -- -- -- (334) -- (334)
Net income ...................... -- -- -- -- 724 724
-------- -------- -------- ------------- ------------- --------
Balance, June 30, 2004 .......... 661 -- 9,063 (334) 214 8,943
CarParts Technologies Acquisition 839 -- 11,874 -- -- 11,874
Foreign currency translation .... -- -- -- 32 -- 32
Net income ...................... -- -- -- -- 1,938 1,938
-------- -------- -------- ------------- ------------- --------
Balance, June 30, 2005 .......... 1,500 $ -- $ 20,937 $ (302) $ 2,152 $ 22,787
The accompanying notes are an integral part of these financial statements.
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Aftersoft Group, Inc. Consolidated Statements of Cash Flows
(In thousands)
For Years
Ended June 30,
--------------------
2005 2004
-------- --------
Operating activities:
Net income ............................................. $ 1,938 $ 724
Adjustments to net income
Depreciation and amortization ...................... 1,421 316
Deferred income taxes .............................. 118 299
Changes in assets and liabilities
(net of the effect of acquisition):
Accounts receivable ............................ 194 (717)
Inventories .................................... 107 57
Prepaid expenses and other assets .............. 155 334
Accounts payable ............................... 542 376
Taxes payable .................................. 219 --
Deferred revenue ............................... (4,497) 737
Accrued expenses and other liabilities ......... (386) (1,682)
-------- --------
Net cash (used in) provided by operating activities .... (189) 444
-------- --------
Investing Activities:
Cash acquired in acquisition ....................... 490 0
Purchases of property and equipment ................ (311) (86)
Capitalized software development costs ............. (285) (225)
-------- --------
Net cash used in investing activities .................. (106) (311)
-------- --------
Financing Activities:
Proceeds from debt facility ........................ 256 416
Proceeds from related party advances ............... 349 --
Payment on long-term debt .......................... (155) (224)
-------- --------
Net cash provided by financing activities .............. 450 192
-------- --------
Effect of exchange rate changes .................... 32 (334)
-------- --------
Net change in cash ................................. 187 (9)
Cash, beginning of year ............................ 7 16
-------- --------
Cash, end of year .................................. $ 194 $ 7
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ................................... $ (105) $ (19)
Income taxes ............................... $ 15 $ 0
Non cash investing and financing transactions
during the years for:
Shares issued for CarParts Technologies,
Inc. acquisition
Cash ....................................... $ 490
Other current assets ....................... 1,132
Property and equipment ..................... 140
Other long-term assets ..................... 37
Other current liabilities .................. (3,264)
Deferred revenue ........................... (4,872)
Long-term debt ............................. (1,151)
Other long-term liabilities ................ (487)
Goodwill ................................... 14,549
Amortizable intangibles .................... 5,300
--------
$ 11,874
========
The accompanying notes are an integral part of these financial statements.
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AFTERSOFT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED JUNE 30, 2005 AND 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The relevant accounting policies and procedures are listed below.
BASIS OF PRESENTATION
As of June 30, 2005, Aftersoft Group, Inc. was a wholly subsidiary of Auto Data
Network, Inc. ("ADN, Inc.")
Aftersoft Group is a leading provider of business and supply chain management
solutions primarily to automotive parts manufacturers, retailers, tire and
service chains, independent installers and wholesale distributors in the
automotive aftermarket. The Company conducts its businesses through subsidiaries
with operations in Europe and North America. MAM Software Limited is the leading
supplier of software to the automotive parts market in the U.K. MAM Software
consists of MAM Autopart Ltd, MAM AutoCat Ltd. and MAM Autowork Ltd., which are
all based in Sheffield, UK. Aftersoft Network North America, Inc. is comprised
of AFS Warehouse Distribution Management, Inc. and AFS Tire Management Inc.,
which are based in San Juan Capistrano, California and AFS Autoservice, Inc.,
which is based in Allentown PA. Aftersoft Network North America was formerly
known as CarParts Technologies Acquisition, Inc. and AFS Tire Management was
formerly known as CarParts Technologies, Inc. Together these subsidiaries are
the second largest supplier of software to the automotive parts market in the
U.S.
The Company operates on a June 30 fiscal year end.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
CONCENTRATIONS OF CREDIT RISK
CASH
The Company maintains cash balances at financial institutions that are insured
by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At June
30, 2005, the Company had approximately $1,105,000 in these accounts in excess
of the FDIC insurance limits.
CUSTOMERS
The Company performs periodic evaluations of its customers and maintains
allowances for potential credit losses as deemed necessary. The Company
generally does not require collateral to secure its accounts receivable. Credit
risk is managed by discontinuing sales to customers who are delinquent. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company expects
to collect amounts due, actual collections may differ from the estimated
amounts.
No customer accounted for more than 10% of the Company's revenues during the
years ended June 30, 2005 and 2004.
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SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires public companies to report selected segment information
in their quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company believes it operates in only one segment and as such has
not presented additional segment disclosures.
GEOGRAPHIC CONCENTRATIONS
The Company conducts business in the United States, Canada, and the United
Kingdom ("UK"). From customers headquartered in their respective countries, the
Company derives 1% of its revenues from Canada, 42% of its revenues from the
United States and 57% from its UK operations during 2005. 100% of revenues were
derived from its UK operations in 2004. At June 30, 2005, the Company maintains
86% of its property and equipment in the UK with the remaining 14% residing in
North America.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by the Company's
management include, but are not limited to, the collectibility of accounts
receivable, the recoverability of long-lived assets and valuation of deferred
tax assets. Actual results could materially differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's consolidated financial instruments consist of cash, accounts
receivable, notes receivable, related party loans, long-term debt, accounts
payable and accrued expenses. The carrying values of such instruments classified
as current approximate their fair values as of June 30, 2005 due to their
short-term maturities. The difference between the fair value and recorded values
of the related party loans, long-debt, and the note receivable are not
significant due to and the lack of significant differential between current
prevailing rates of similar instruments and the rates of the Company's
non-current instruments.
INVENTORIES
Inventories are stated at the lower of standard cost or current estimated market
value. Cost is determined using the first-in, first-out method. Inventories
consist primarily of hardware that will be sold to customers. The Company
periodically reviews its inventories and records a provision for excess and
obsolete inventories based primarily on the Company's estimated forecast of
product demand and production requirements. Once established, write-downs of
inventories are considered permanent adjustments to the cost basis of the
obsolete or excess inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the assets
or the related lease terms. Equipment under capital lease obligations is
depreciated over the shorter of the estimated useful lives of the related assets
or the term of the lease. Maintenance and routine repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. At the time
of retirement or other disposition of property and equipment,
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the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the statement of income.
SOFTWARE DEVELOPMENT COSTS
Costs incurred to develop computer software products to be sold or otherwise
marketed are charged to expense until technological feasibility of the product
has been established. Once technological feasibility has been established,
computer software development costs (consisting primarily of internal labor
costs) are capitalized and reported at the lower of amortized cost or estimated
realizable value. Purchased software development cost is recorded at its
estimated fair market value. When a product is ready for general release, its
capitalized costs are amortized using the straight-line method over a period of
three years. If the future market viability of a software product is less than
anticipated, impairment of the related unamortized development costs could
occur, which could significantly impact the recorded net income/loss of the
Company.
GOODWILL
Statement of Financial Accounting Standards No. 142, ("SFAS 142"), "Goodwill and
Other Intangible Assets," addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in the
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
be tested at least annually for impairment, and intangible assets that have
finite useful lives be amortized over their useful lives. In addition, SFAS 142
expands the disclosure requirements about goodwill and other intangible assets
in the years subsequent to their acquisition.
SFAS 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. Goodwill will be subject to
impairment reviews by applying a fair-value-based test at the reporting unit
level, which generally represents operations one level below the segments
reported by the Company. An impairment loss will be recorded for any goodwill
that is determined to be impaired. The Company performs impairment testing on
all existing goodwill at least annually. Based on its analysis, the Company's
management believes that no impairment of the carrying value of its goodwill
existed at June 30, 2005. There can be no assurance however, that market
conditions will not change or demand for the Company's products and services
will continue which could result in impairment of goodwill in the future.
LONG-LIVED ASSETS
The Company's management assesses the recoverability of other long-lived assets
by determining whether the depreciation and amortization of long-lived assets
over their remaining lives can be recovered through projected undiscounted
future cash flows. The amount of long-lived asset impairment, if any, is
measured based on fair value and is charged to operations in the period in which
long-lived asset impairment is determined by management. At June 30, 2005 the
Company's management believes there is no impairment of its long-lived assets.
There can be no assurance, however, that market conditions will not change or
demand for the Company's products and services will continue, which could result
in impairment of long-lived assets in the future.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions."
Accordingly, software license revenue is recognized when persuasive evidence of
an arrangement exists, delivery of the product component has occurred, the fee
is fixed and determinable, and collectibility is probable. If any of these
criteria are not met, revenue recognition is deferred until such time as all of
the criteria are met. In accordance with SOP 98-9, the Company
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accounts for delivered elements in accordance with the residual method when
arrangements include multiple product components or other elements and
vendor-specific objective evidence exists for the value of all undelivered
elements. Revenues on undelivered elements are recognized once delivery is
complete.
In those instances where arrangements include significant customization,
contractual milestones, acceptance criteria or other contingencies (which
represents the majority of the Company's arrangements), the Company accounts for
the arrangements using contract accounting, as follows:
1) When customer acceptance can be estimated, expenditures are capitalized
as work in process and deferred until completion of the contract at which time
the costs and revenues are recognized.
2) When customer acceptance cannot be estimated based on historical
evidence, costs are expensed as incurred and revenue is recognized at the
completion of the contract when customer acceptance is obtained.
The Company records amounts billed to customers in excess of recognizable
revenue as deferred revenue in the accompanying consolidated balance sheets.
Revenues for maintenance agreements are recognized ratably over the terms of the
service agreement.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. For the years ended June 30,
2005 and 2004, advertising expense totaled $40,000 and $62,000, respectively.
FOREIGN CURRENCY
Management has determined that the functional currency of its subsidiaries is
the local currency. Assets and liabilities of the UK subsidiary are translated
into U.S. dollars at the year end exchange rates. Income and expenses are
translated at an average exchange rate for the period and the resulting
translation gain (loss) adjustments are accumulated as a separate component of
stockholders' equity, which totaled $32,000 and $(334,000) for the years ended
June 30, 2005 and 2004, respectively.
Foreign currency gains and losses from transactions denominated in other then
respective local currencies are included in income. There were no foreign
currency transactions included in income during the years ended June 30, 2005
and 2004.
COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity (net assets) during a period
from non-owner sources. For the years ended June 30, 2005 and 2004, the
components of comprehensive income (loss) consist of foreign currency
translation gains (losses).
INCOME TAXES
The Company accounts for domestic and foreign income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. Deferred
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taxation is provided in full in respect of taxation deferred by timing
differences between the treatment of certain items for taxation and accounting
purposes.
BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per common share is computed based on the weighted average number
of shares outstanding for the period. Diluted earnings per share is computed by
dividing net income by the weighted average shares outstanding assuming all
potential dilutive common shares were issued. Basic and diluted earnings per
share are the same for the years ended June 30, 2005 and 2004 as the Company has
no dilutive securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-based Payment" ("Statement 123(R)") to provide
investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the equity or liability instrument
used. Statement 123 (R) covers a wide range of share based compensation
arrangements including share options, restricted share plans, performance based
awards, share appreciation rights, and employee share purchase plans. Statement
123(R) replaces SFAS No. 123 and supersedes APB 25. The Company will be required
to apply Statement 123(R) in 2006. The Company does not believe the adoption of
Statement 123(R) will have a significant impact on the Company's overall results
of operations or financial position as it has no share-based plans as of June
30, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets
- an amendment to ABP Opinion No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 eliminates the exception for non-monetary exchanges of similar
productive assets, which were previously required to be recorded on a carry over
basis rather then a fair value basis. Instead, this statement provides that
exchanges of non-monetary assets do not have a commercial substance be reported
at a carryover basis rather then a fair value basis. A non-monetary exchange is
considered to have commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The provisions
of this statement are effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of SFAS No. 153 to have an impact on its financial condition or results
of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This statement applies to all voluntary changes in accounting principle and
changes required by an accounting pronouncement where no specific transition
provisions are included. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Retrospective application is limited to the
direct effects of the change; the indirect effects should be recognized in the
period of the change. This statement carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate.
However, SFAS No. 154 redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error. The provisions of
SFAS No. 154 are effective for accounting changes and corrections of errors made
in fiscal periods that begin after December 15, 2005, although early adoption is
permitted. The Company does not anticipate that the implementation of this
standard will have a material impact on its results of operations, cash flows or
financial position.
14
NOTE 2. ACQUISITIONS
The accompanying consolidated statements of income include the results of
operations of the acquired entities from the date of acquisition.
CARPARTS TECHNOLOGIES
On August 6, 2004 the Company purchased 100% of the stock of CarParts
Technologies to expand the Company's influence into the US and Canadian markets.
Since the acquisition date the acquired companies results of operations have
been included in the Company's financial statements. The purchase price was
stock valued at $11,874,000, which was allocated to the fair value of the assets
acquired as follows:
Cash .......................................................... $ 490,000
Other current assets .......................................... 1,132,000
Property and equipment ........................................ 140,000
Other long-term assets ........................................ 37,000
Other current liabilities ..................................... (3,264,000)
Deferred revenue .............................................. (4,872,000)
Long-term debt ................................................ (1,151,000)
Other long-term liabilities ................................... (487,000)
------------
Estimated fair value of tangible net liabilities acquired ..... (7,975,000)
Goodwill ...................................................... 14,549,000
Amortizable intangibles ....................................... 5,300,000
------------
$ 11,874,000
============
NOTE 3. INTANGIBLE ASSETS
Intangible assets consist of the following as of June 30, 2005:
Goodwill .................................................... $ 22,061,000
============
Intangibles subject to amortization:
Completed software technology (9-10 years) .................. $ 3,213,000
Customer contracts/relationships (10 years) ................. 3,750,000
Automotive data services (20 years) ......................... 346,000
------------
7,309,000
Less:Accumulated amortization ............................... (913,000)
Net intangibles subject to amortization ..................... $ 6,396,000
============
Software development costs (3 years) ........................ $ 1,113,361
Less accumulated amortization ............................... (126,495)
------------
Net software development costs .............................. $ 987,000
============
Estimated amortization of intangibles is as follows:
Years Ending June 30,
2006 $ 1,275,000
2007 1,194,000
2008 1,024,000
2009 737,000
2010 737,000
Thereafter .................................................. 2,416,000
------------
Total ....................................................... $ 7,383,000
============
15
For the years ended June 30, 2005 and 2004, the Company recognized amortization
expense on its software development costs and other acquired intangibles of
$1,167,000 and $263,000, respectively.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30, 2005:
Computer and office equipment ................................ $ 433,000
Furniture and equipment ...................................... 372,000
Leasehold improvements ....................................... 118,000
Equipment under capital leases ............................... 291,000
---------
837,000
Less accumulated depreciation and amortization ............... (316,000)
---------
$ 521,000
=========
Depreciation expense on fixed assets for the years ended June 30, 2005 and 2004
was $254,000 and $53,000, respectively.
NOTE 5. LONG TERM DEBT
Long term debt consists of the following as of June 30, 2005:
Note payable to a bank, bearing interest at
8.75% per annum; payable in monthly
installments of principal and interest of
$2,197 through December 2005; secured by
accounts receivable and any work in process.
Currently the company is negotiating the
extension of the maturity date ...................................... $ 25,000
Note payable to former owners of acquired
businesses, bearing interest at 9% per
annum; payable in monthly installments of
principal and interest of $13,177 through
May 2007; secured by certain assets of the
Company ............................................................. 277,000
Notes payable to former owners of acquired
businesses, bearing interest at 8% per
annum; payable in monthly installments of
principal and interest of $11,098 and
increasing periodically to $20,905 through
May 2007, at which time the remaining
balance is due; secured by certain assets of
the Company ......................................................... 791,000
Line of credit borrowings with the bank up
to a maximum of $537,900 with an interest of
base plus 3.5% (8.25% as of June 30, 2005).
Line of credit borrowings are secured by
substantially all of the assets of the
Company. Line of credit is renewable
annually in November 2006 ........................................... 559,000
Unsecured notes payable to a former owner of
acquired business; non-interest bearing,
payable in monthly installments of $12,551
through March 2006 .................................................. 105,000
Capital lease obligations, with various
interest rates ranging from 12% to 18%;
secured by related equipment; payable in
installments through December 2009 .................................. 194,000
----------
1,951,000
Less current maturities .............................................(1,072,000)
----------
$ 879,000
==========
16
Future maturities of long-term obligations at June 30, 2005 are as follows:
Years Ending June 30,
2006 ................................................... $1,072,000
2007 ................................................... 839,000
2008 ................................................... 36,000
2009 ................................................... 4,000
$1,951,000
NOTE 6. PROVISION FOR INCOME TAXES
The Company has United States federal and state tax net operating loss
carryforwards available for future periods in excess of $50 million at June 30,
2005, expiring through 2025. As a result of the changes in the ownership of the
Company, as defined in Section 382 of the Internal Revenue Code, there are
limitations on the amount of net operating loss carryforwards that may be
utilized in the future, estimated at $11 million.
The provision for income taxes consists of the following for the year ended June
30, 2005:
USA USA UK
Federal State Corporate Total
-------- -------- -------- --------
Current .................... $ -- $ 2,000 $217,000 $219,000
Deferred ................... -- -- 118,000 118,000
-------- -------- -------- --------
Total ...................... $ -- $ 2,000 $335,000 $337,000
======== ======== ======== ========
The tax provision for the year ended June 30, 2004 consists solely of deferred
UK corporate taxes.
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets consist of the following at June 30,
2005:
Deferred tax assets:
Net operating loss carryforwards ....................... $ 5,546,000
Deferred revenue ....................................... 548,000
Long-term liabilities .................................. 209,000
Reserves and accruals .................................. 129,000
-----------
Total deferred tax assets ................................. 6,432,000
-----------
Deferred tax liabilities:
Other acquired amortizable intangibles ................. (2,395,000)
Software development costs ............................. (386,000)
Depreciation and amortization .......................... (277,000)
State taxes ............................................ (274,000)
-----------
Total deferred tax liabilities ............................ (3,332,000)
-----------
Valuation allowance .................................... (3,980,000)
-----------
Net deferred tax liabilities .............................. $ (880,000)
===========
The Company believes that uncertainty exists with respect to future realization
of the U.S. deferred tax assets and has established a valuation allowance for
the full amount as of June 30, 2005. The Company established an allowance of
approximately $4.5 million when it purchased CarParts Technologies.
17
The provision for income taxes for the years ended June 30, 2005 and 2004
differs from the amount computed by applying the U.S. Federal income tax rates
to net income before taxes as a result of the following:
2005 2004
--------- ---------
Taxes at statutory rates applied
to income before taxes ....................... $ 773,000 $ 348,000
--------- ---------
State taxes, net of federal effect ............. 71,000 --
Non deductible expenses ........................ 37,000 21,000
Research and development relief (UK) ........... (51,000) --
Differential in UK corporate tax rate .......... (5,000) (70,000)
Change in valuation allowance .................. (488,000) --
--------- ---------
Total adjustments .............................. (436,000) (49,000)
--------- ---------
Provision for income taxes ..................... $ 337,000 $ 299,000
========= =========
NOTE 7. STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of One Thousand Five
Hundred (1,500) shares of common stock, $0.001 par value, all of which shares
are or will be issued and outstanding at the time of closing. The Company
initially had 27 shares outstanding during its formation. The Company issued 634
shares valued at $13,711 per share for the acquisition of MAM Software Limited
in fiscal 2003. The Company then issued 839 shares valued at $14,152 per share
for the acquisition of CarParts Technologies, Inc in fiscal 2005. The per share
prices were established based on the fair value of ADN, Inc. shares, which were
originally issued in the acquisitions to the sellers of the entities before the
legal formation of the Company.
NOTE 8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities and certain equipment pursuant to month to
month and non-cancelable operating lease agreements that expire on various dates
through February 2008. Terms of the leases provide for monthly payments ranging
from $350 to $11,000. For the years ended June 30, 2005 and 2004, the Company
incurred rent expense totaling approximately $643,000 and $366,000 respectively.
Future annual minimum payments under non-cancelable operating leases are as
follows:
Years Ending June 30,
2006 ................................................ $285,000
2007 ................................................ 282,000
2008 ................................................ 131,000
--------
$698,000
========
18
INDEMNITIES AND GUARANTEES
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party, in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Delaware. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. In
connection with its customers contracts the Company indemnifies the customer
that the software provided does not violate any US patent. The duration of the
guarantees and indemnities varies, and is generally tied to the life of the
agreement. These guarantees and indemnities do not provide for any limitation of
the maximum potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance sheet.
NOTE 9. LITIGATION
From time to time, the Company is subject to various legal claims and
proceedings arising in the ordinary course of business. The ultimate disposition
of these proceedings could have a materially adverse effect on the financial
position or results of operations of the Company.
The Company has been informed of a verdict against it in a litigation in the
Court of Common Please of Allegheny County, Pennsylvania, in favor of Aidan
McKenna totaling $3,555,000, which it intends to vigorously appeal. The Company
filed a claim against McKenna for $1,000,000 for breach of contract alleging
that McKenna continued to conduct business in the Open Webs Corporation in
violation of the asset purchase agreement. The Company has made a provision of
$1,650,000 in its legal expense accrual account to cover the cost of any verdict
with respect to this litigation as of June 30, 2005.
Homann Tire Ltd. filed a complaint against CarParts Technologies, Inc in
California District Court on August 11, 2005. The complaint seeks $271,000 in
damages and alleges breach of contract, breach of warranty and intentional and
negligent misrepresentative. The Company maintains the complaint is without
merit.
NOTE 10. RELATED PARTY TRANSACTIONS
From time to time ADN, Inc. advances funds to the Company. Such advances are non
interest bearing and currently have no specific due date. ADN, Inc. has
indicated that it will not make any demands on this balance prior to July 1,
2006; as a result, the Company has classified this loan as a long-term
liability.
The Company currently holds a note receivable with a related party known as MAM
North America, Inc. in the amount of $510,000. ADN, Inc., as part of the merger
with W3 (see Note 2), has agreed to accept the assignment all the issued shares
of MAM North America, Inc. from the Company and to forgive the $510,000 note
receivable on October 1, 2005. This will be effected by the Company reducing its
balance of loans due to ADN, Inc. Furthermore MAM North America has indemnified
MAM UK against all past or current liabilities. As a result, MAM North America
is not considered to be a variable interest entity under FIN 46(R) and has not
been consolidated for the years ended June 30, 2005 and 2004.
NOTE 11. SUBSEQUENT EVENTS
GENERAL
ADN, Inc. has provided the Company $290,000 in non-interest bearing advances
between October 1, 2005 and December 7, 2005 to assist in paying down of the
Company's vendors.
19
On December 21, 2005, W3 Group, Inc. ("W3") consummated an Acquisition Agreement
("Agreement") to acquire all of the outstanding shares of common stock of the
Company in exchange for the issuance of 32,500,000 newly issued shares of W3,
par value $0.0001 per share (the "Common Stock"), to ADN, Inc., the sole
shareholder of the Company.
The acquisition will be recorded as a reverse acquisition, whereby the assets
and liabilities of the Company will be reported at their historical cost.
Pursuant to the Agreement and as a result of consummation of the Agreement, the
current shareholders of the W3 own 1,601,167 shares, or approximately 4.7% of
the 34,101,167 total outstanding shares of the Common Stock and ADN owns
32,500,000 shares or approximately 95.3% of the total outstanding shares.
Concurrent with the closing of the transaction, the Board of Directors of W3
appointed three additional directors designated by ADN to serve until the next
annual election of directors. In addition, concurrent with the close of the
transaction, W3 (1) changed its corporate name from W3 Group, Inc. to Aftersoft
Group, Inc., (2) changed its corporate address to California, and replaced the
corporate officers.
20
Aftersoft Group, Inc. Consolidated Financial Statements for the Three Months
ended September 30, 2005 and 2004 (unaudited):
For Three Months ended September 30, 2005 and 2004
Aftersoft Group, Inc.
Consolidated Balance Sheet
(In thousands, except share data)
As of 9/30/2005
ASSETS (unaudited)
---------------
Current Assets
Cash .................................................... $ 159
Accounts receivable, net of allowance of $195 ........... 3,682
Inventories ............................................. 414
Prepaid and other ....................................... 112
---------------
Total Current Assets .................................... 4,367
Property and Equipment, Net ................................. 468
Notes Receivable ............................................ 510
Other Assets
Goodwill ................................................ 22,061
Amortizable intangible assets, net ...................... 6,213
Software development costs, net ......................... 1,055
Other ................................................... 39
---------------
Total Other Assets ...................................... 29,858
---------------
Total Assets ................................................ $ 34,693
===============
LIABILITIES
Current Liabilities
Accounts payable ........................................ $ 1,700
Accrued expenses ........................................ 1,474
Accrued legal expenses .................................. 1,986
Current portion of long-term debt ....................... 1,091
Deferred revenue ........................................ 1,583
Taxes payable ........................................... 300
Other ................................................... 22
---------------
Total Current Liabilities ............................... 8,156
Long-Term Liabilities
Deferred income ......................................... 904
Deferred income taxes ................................... 880
Long-term debt .......................................... 765
Loan - ADN Inc. ......................................... 890
Other ................................................... 487
---------------
Total Liabilities ....................................... 12,082
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock
Par value $0.001 per share; authorized,
issued and outstanding 1,500 shares ........... --
Additional paid-in-capital .............................. 20,937
Other comprehensive loss ................................ (315)
Retained earnings ....................................... 1,989
---------------
Total Stockholders' Equity .............................. 22,611
---------------
Total Liabilities and Stockholders' Equity .................. $ 34,693
===============
The accompanying notes are an integral part of these financial statements.
21
Aftersoft Group, Inc. Statements of Operations
(In thousands, except share data)
For The Three Months Ended
September 30,
--------------------------
2005 2004
(unaudited) (unaudited)
----------- -----------
Net revenues ...................................... $ 4,779 $ 5,487
Cost of revenues .................................. 2,439 2,209
----------- -----------
Gross Profit ...................................... 2,340 3,278
Operating Expenses:
Research and development .......................... 774 709
Sales and marketing ............................... 479 477
General and administrative ........................ 860 850
Depreciation and amortization ..................... 278 375
----------- -----------
Total Operating Expenses .......................... 2,391 2,411
Operating income/(loss) ........................... (51) 867
----------- -----------
Other expense:
Interest .......................................... (31) (18)
----------- -----------
Total other expense ............................... (31) (17)
Income before provision for income taxes .......... (82) 850
Provision for income taxes ........................ 81 117
----------- -----------
Net income/(loss) ................................. $ (163) $ 732
Foreign currency translation (loss) gain .......... (13) 1
----------- -----------
Comprehensive Income .............................. $ (176) $ 733
=========== ===========
(Loss) earnings per share attributed to
common stock - basic and diluted ................ $ (109) $ 629
Weighted average number of shares of
common stock outstanding - basic and diluted .... 1,500 1,164
The accompanying notes are an integral part of these financial statements.
22
Aftersoft Group, Inc. Consolidated Statements of Cash Flows
(In thousands)
For three
months Ended
September 30,
--------------------
2005 2004
-------- --------
Operating activities:
Net (loss) income ...................................... $ (163) $ 732
Adjustments to net (loss) income
Depreciation and amortization ...................... 278 375
Deferred income taxes .............................. -- 64
Changes in assets and liabilities
(net of the effect of acquisition):
Accounts receivable ............................ (145) 433
Inventories .................................... (57) 47
Prepaid expenses and other assets .............. 3 (341)
Accounts payable ............................... (228) (918)
Taxes payable .................................. 81 48
Deferred revenue ............................... (107) (1,565)
Accrued expenses and other liabilities ......... 516 532
-------- --------
Net cash (used in) provided by operating activities .... 178 (593)
Investing Activities:
Cash acquired in acquisition ....................... -- 490
Purchases of property and equipment ................ -- (4)
Capitalized software development costs ............. (111) (86)
-------- --------
Net cash provided by (used in) investing activities .... (111) 400
Financing Activities:
Proceeds from debt facility ........................ 6 --
Proceeds from related party advances ............... -- 721
Payment on long-term debt .......................... (95) (223)
-------- --------
Net cash provided by (used in) financing activities .... (89) 498
Effect of exchange rate changes ....................... (13) 1
-------- --------
Net change in cash ................................. (35) 306
Cash, beginning of period .......................... 194 7
-------- --------
Cash, end of period ................................ $ 159 $ 313
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ................................... $ 31 $ 18
Income taxes ............................... $ 0 $ 0
Non cash investing and financing transactions
during the years for:
shares issued for CarParts Technologies, Inc. ..
acquisition
Cash ....................................... $ 490
Other current assets ....................... 1,132
Property and equipment ..................... 140
Other long-term assets ..................... 37
Other current liabilities .................. (3,264)
Deferred revenue ........................... (4,872)
Long-term debt ............................. (1,151)
Other long-term liabilities ................ (487)
Goodwill ................................... 14,549
Amortizable intangibles ................... 5,300
--------
$ 11,874
========
The accompanying notes are an integral part of these financial statements
23
AFTERSOFT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THREE MONTHS ENDING SEPTEMBER 30, 2005
NOTE 1. MANAGEMENT'S REPRESENTATION
The financial statements included herein have been prepared by Aftersoft Group,
Inc. (the "Company"), without audit, pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission. Certain information normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America has been omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management, all adjustments (consisting primarily of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Operating results for the three months ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2006. It is suggested that the financial statements be read in
conjunction with the audited financial statements and notes thereto for the year
ended June 30, 2005.
NOTE 2. NATURE OF BUSINESS
BASIS OF PRESENTATION
Aftersoft Group, Inc. is a wholly subsidiary of Auto Data Network, Inc. ("ADN,
Inc.").
Aftersoft Group is a leading provider of business and supply chain management
solutions primarily to automotive parts manufacturers, retailers, tire and
service chains, independent installers and wholesale distributors in the
automotive aftermarket. The Company conducts its businesses through subsidiaries
with operations in Europe and North America. MAM Software Limited is the leading
supplier of software to the automotive parts market in the U.K. MAM Software
consists of MAM Autopart Ltd, MAM AutoCat Ltd. and MAM Autowork Ltd., which are
all based in Sheffield, UK. Aftersoft Network North America, Inc. is comprised
of AFS Warehouse Distribution Management, Inc. and AFS Tire Management Inc.,
which are based in San Juan Capistrano, California and AFS Autoservice, Inc.,
which is based in Allentown PA. Aftersoft Network North America was formerly
known as CarParts Technologies Acquisition Corp. and AFS Tire Management was
formerly known as CarParts Technologies, Inc. Together these subsidiaries are
the second largest supplier of software to the automotive parts market in the
U.S.
The Company operates on a June 30 fiscal year end.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
CONCENTRATIONS OF CREDIT RISK
CASH
The Company maintains cash balances at financial institutions that are insured
by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At
September 30, 2005, the Company had approximately $58,000 in these accounts in
excess of the FDIC insurance limits.
24
CUSTOMERS
The Company performs periodic evaluations of its customers and maintains
allowances for potential credit losses as deemed necessary. The Company
generally does not require collateral to secure its accounts receivable. Credit
risk is managed by discontinuing sales to customers who are delinquent. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company expects
to collect amounts due, actual collections may differ from the estimated
amounts.
No customer accounted for more than 10% of the Company's revenues during the
three-month periods ended September 30, 2005 and 2004.
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires public companies to report selected segment information
in their quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company believes it operates in only one segment and as such has
not presented additional segment disclosures.
GEOGRAPHIC CONCENTRATIONS
The Company conducts business in the United States, Canada, and the United
Kingdom ("UK"). From customers headquartered in their respective countries, the
Company derives 1% of its revenues from Canada, 30% of its revenues from the
United States and 69% from its UK operations during the three months ended
September 30, 2005. 100% of revenues were derived from its UK operations in
2004. At September 30, 2005, the Company maintains 86% of its net property and
equipment in the UK with the remaining 14% in North America.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by the Company's
management include, but are not limited to, the collectibility of accounts
receivable, the recoverability of long-lived assets and valuation of deferred
tax assets. Actual results could materially differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's consolidated financial instruments consist of cash, accounts
receivable, notes receivable, related party loans, long-term debt, accounts
payable and accrued expenses. The carrying values of such instruments classified
as current approximate their fair values as of June 30, 2005 due to their
short-term maturities. The difference between the fair value and recorded values
of the related party loans, long-debt, and the note receivable are not
significant due to and the lack of significant differential between current
prevailing rates of similar instruments and the rates of the Company's
non-current instruments.
INVENTORIES
Inventories are stated at the lower of standard cost or current estimated market
value. Cost is determined using the first-in, first-out method. Inventories
consist primarily of hardware that will be sold to customers. The Company
periodically reviews its inventories and records a provision for excess and
obsolete inventories based primarily on the Company's estimated forecast of
product demand and production requirements. Once established, write-downs of
inventories are considered permanent adjustments to the cost basis of the
obsolete or excess inventories.
25
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the assets
or the related lease terms. Equipment under capital lease obligations is
depreciated over the shorter of the estimated useful lives of the related assets
or the term of the lease. Maintenance and routine repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. At the time
of retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in the statement of income.
SOFTWARE DEVELOPMENT COSTS
Costs incurred to develop computer software products to be sold or otherwise
marketed are charged to expense until technological feasibility of the product
has been established. Once technological feasibility has been established,
computer software development costs (consisting primarily of internal labor
costs) are capitalized and reported at the lower of amortized cost or estimated
realizable value. Purchased software development cost is recorded at its
estimated fair market value. When a product is ready for general release, its
capitalized costs are amortized using the straight-line method over a period of
three years. If the future market viability of a software product is less than
anticipated, impairment of the related unamortized development costs could
occur, which could significantly impact the recorded net income/loss of the
Company.
GOODWILL
Statement of Financial Accounting Standards No. 142, ("SFAS 142"), "Goodwill and
Other Intangible Assets," addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in the
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
be tested at least annually for impairment, and intangible assets that have
finite useful lives be amortized over their useful lives. In addition, SFAS 142
expands the disclosure requirements about goodwill and other intangible assets
in the years subsequent to their acquisition.
SFAS 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. Goodwill will be subject to
impairment reviews by applying a fair-value-based test at the reporting unit
level, which generally represents operations one level below the segments
reported by the Company. An impairment loss will be recorded for any goodwill
that is determined to be impaired. The Company performs impairment testing on
all existing goodwill at least annually. Based on its analysis, the Company's
management believes that no impairment of the carrying value of its goodwill
existed at September 30, 2005. There can be no assurance however, that market
conditions will not change or demand for the Company's products and services
will continue which could result in impairment of goodwill in the future.
LONG-LIVED ASSETS
The Company's management assesses the recoverability of other long-lived assets
by determining whether the depreciation and amortization of long-lived assets
over their remaining lives can be recovered through projected undiscounted
future cash flows. The amount of long-lived asset impairment, if any, is
measured based on fair value and is charged to operations in the period in which
long-lived asset impairment is determined by management. At September 30, 2005
the Company's management believes there is no impairment of its long-lived
assets. There can be no assurance, however, that market conditions will not
change or demand for the Company's products and services will continue, which
could result in impairment of long-lived assets in the future.
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REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions."
Accordingly, software license revenue is recognized when persuasive evidence of
an arrangement exists, delivery of the product component has occurred, the fee
is fixed and determinable, and collectibility is probable. If any of these
criteria are not met, revenue recognition is deferred until such time as all of
the criteria are met. In accordance with SOP 98-9, the Company accounts for
delivered elements in accordance with the residual method when arrangements
include multiple product components or other elements and vendor-specific
objective evidence exists for the value of all undelivered elements. Revenues on
undelivered elements are recognized once delivery is complete.
In those instances where arrangements include significant customization,
contractual milestones, acceptance criteria or other contingencies (which
represents the majority of the Company's arrangements), the Company accounts for
the arrangements using contract accounting, as follows:
1) When customer acceptance can be estimated, expenditures are capitalized
as work in process and deferred until completion of the contract at which time
the costs and revenues are recognized.
2) When customer acceptance cannot be estimated based on historical
evidence, costs are expensed as incurred and revenue is recognized at the
completion of the contract when customer acceptance is obtained.
The Company records amounts billed to customers in excess of recognizable
revenue as deferred revenue in the accompanying consolidated balance sheets.
Revenues for maintenance agreements are recognized ratably over the terms of the
service agreement.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. For the three months ended
September 30, 2005 and 2004, advertising expense totaled $7,000 and $5,000,
respectively.
FOREIGN CURRENCY
Management has determined that the functional currency of its subsidiaries is
the local currency. Assets and liabilities of the UK subsidiary are translated
into U.S. dollars at the year end exchange rates. Income and expenses are
translated at an average exchange rate for the period and the resulting
translation gain (loss) adjustments are accumulated as a separate component of
stockholders' equity, which totaled $(13,000) and $1,000 for the three months
ended September 30, 2005 and 2004, respectively.
Foreign currency gains and losses from transactions denominated in other then
respective local currencies are included in income. There were no foreign
currency transactions included in income during the three months ended September
30, 2005 and 2004.
COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity (net assets) during a period
from non-owner sources. For the three months ended September 30, 2005 and 2004,
the components of comprehensive income (loss) consist of foreign currency
translation gains (losses).
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INCOME TAXES
The Company accounts for domestic and foreign income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. Deferred taxation is provided in full in respect of taxation
deferred by timing differences between the treatment of certain items for
taxation and accounting purposes.
BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per common share is computed based on the weighted average number
of shares outstanding for the period. Diluted earnings per share is computed by
dividing net income by the weighted average shares outstanding assuming all
potential dilutive common shares were issued. Basic and diluted earnings per
share is the same for the periods presented as the Company has no dilutive
securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-based Payment" ("Statement 123(R)") to provide
investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the equity or liability instrument
used. Statement 123 (R) covers a wide range of share based compensation
arrangements including share options, restricted share plans, performance based
awards, share appreciation rights, and employee share purchase plans. Statement
123(R) replaces SFAS No. 123 and supersedes APB25. The company will be required
to apply Statement 123(R) in 2006. The Company does not believe the adoption of
Statement 123(R) will have a significant impact on the Company's overall results
of operations or financial position as it has no stock based payments as of
September 30, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets
- an amendment to ABP Opinion No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 eliminates the exception for non-monetary exchanges of similar
productive assets, which were previously required to be recorded on a carry over
basis rather then a fair value basis. Instead, this statement provides that
exchanges of non-monetary assets do not have a commercial substance be reported
at a carryover basis rather then a fair value basis. A non-monetary exchange is
considered to have commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The provisions
of this statement are effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of SFAS No. 153 to have an impact on its financial condition or results
of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This statement applies to all voluntary changes in accounting principle and
changes required by an accounting pronouncement where no specific transition
provisions are included. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Retrospective application is limited to the
direct effects of the change; the indirect effects should be recognized in the
period of the change. This statement carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate.
However, SFAS No. 154 redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error.
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The provisions of SFAS No. 154 are effective for accounting changes and
corrections of errors made in fiscal periods that begin after December 15, 2005,
although early adoption is permitted. The Company does not anticipate that the
implementation of this standard will have a material impact on its results of
operations, cash flows or financial position.
NOTE 3. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
From time to time, the Company is subject to various legal claims and
proceedings arising in the ordinary course of business. The ultimate disposition
of these proceedings could have a materially adverse effect on the financial
position or results of operations of the Company.
The Company has been informed of a verdict against it in a litigation in the
Court of Common Please of Allegheny County, Pennsylvania, in favor of Aidan
McKenna totaling $3,555,000, which it intends to vigorously appeal. The Company
filed a claim against McKenna for $1,000,000 for breach of contract alleging
that McKenna continued to conduct business in the Open Webs Corporation in
violation of the asset purchase agreement. The Company has made a provision of
$1,650,000 in its legal expense accrual account to cover the cost of any verdict
with respect to this litigation as of September 30, 2005.
Homann Tire LTD Vs. CarParts Technologies filed a complaint against the Company
in California District Court on August 11, 2005 regarding the Company's
obligations pursuant to a software license agreement that it entered into with
Homann on October 18, 2002 (the "Agreement"). Homann alleges breach of contract,
breach of warranty and intentional and negligent misrepresentation. The Company
maintains the complaint is without merit.
INDEMNITIES AND GUARANTEES
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party, in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Delaware. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. In
connection with its customers contracts the company indemnifies the customer
that the software provided does not violate any US patent. The duration of the
guarantees and indemnities varies, and is generally tied to the life of the
agreement. These guarantees and indemnities do not provide for any limitation of
the maximum potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying balance sheet.
NOTE 4. SUBSEQUENT EVENTS
GENERAL
ADN, Inc. has provided the Company $290,000 in non-interest bearing advances
between October 1, 2005 and December 7, 2005 to assist in paying down of the
Company's vendors.
On December 21, 2005, W3 Group, Inc. ("W3") consummated an Acquisition Agreement
("Agreement") to acquire all of the outstanding shares of common stock of the
Company in exchange for the issuance of 32,500,000 newly issued shares of W3,
par value $0.0001 per share (the "Common Stock"), to ADN, Inc., the sole
shareholder of the Company.
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The acquisition will be recorded as a reverse acquisition, whereby the assets
and liabilities of the Company will be reported at their historical cost.
Pursuant to the Agreement and as a result of consummation of the Agreement, the
current shareholders of W3 own 1,601,167 shares, or approximately 4.7% of the
34,101,167 total outstanding shares of the Common Stock and ADN owns 32,500,000
shares or approximately 95.3% of the total outstanding shares. Concurrent with
the closing of the transaction, the Board of Directors of W3 appointed three
additional directors designated by ADN to serve until the next annual election
of directors. In addition, concurrent with the close of the transaction, W3 (1)
changed its corporate name from W3 Group, Inc. to Aftersoft Group, Inc., (2)
changed its corporate address to California, and replaced the corporate
officers.
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SIGNATURE
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.
AFTERSOFT GROUP, INC.[f/k/a W3 Group, Inc.]
By: /s/ Ian Warwick
------------------------------------------
Ian Warwick, Chief Executive and President
Date: April 13, 2007
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