EXHIBIT 99.26
LANDesk Group, Ltd.
Consolidated Financial Statements (Unaudited)
June 30, 2006
LANDesk Group, Ltd.
Index to Consolidated Financial Statements (Unaudited)
Page | |
Consolidated Financial Statements (Unaudited): | |
Consolidated Balance Sheets at June 30, 2006 and December 31, 2005 | 2 |
Consolidated Statements of Operations for the six months ended June 30, 2006 and 2005 | 3 |
Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 | 4 |
Notes to Consolidated Financial Statements | 5 |
LANDesk Group, Ltd.
Consolidated Balance Sheets
(Unaudited, in thousands)
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 19,779 | $ | 18,885 | |||
Trade accounts receivable, net of allowance of $445 and $419 | |||||||
at June 30, 2006 and December 31, 2005, respectively | 29,463 | 27,079 | |||||
Deferred tax asset | 1,380 | 1,380 | |||||
Other current assets | 2,265 | 1,243 | |||||
Total current assets | 52,887 | 48,587 | |||||
Property and equipment, net | 3,915 | 3,117 | |||||
Intangible assets, net | 2,519 | 4,445 | |||||
Goodwill | 22,591 | 20,267 | |||||
Deferred tax asset | 268 | 268 | |||||
Other assets | 641 | 730 | |||||
Total assets | $ | 82,821 | $ | 77,414 | |||
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 5,083 | $ | 4,545 | |||
Accrued liabilities | 11,559 | 10,717 | |||||
Notes payable - related parties | 2,500 | 3,125 | |||||
Notes payable - bank | - | 500 | |||||
Consideration payable | 9,816 | 7,492 | |||||
Deferred revenue | 36,696 | 32,080 | |||||
Total current liabilities | 65,654 | 58,459 | |||||
Notes payable - related parties net of current portion | 26,508 | 27,018 | |||||
Notes payable - bank, net of current portion | - | 530 | |||||
Deferred revenue, net of current portion | 5,276 | 5,604 | |||||
Deferred tax liability | 3 | 3 | |||||
Accrued interest-related parties | 11,305 | 9,753 | |||||
Total liabilities | 108,746 | 101,367 | |||||
Series A redeemable convertible preferred stock, $0.001 par value, | |||||||
102,853 shares authorized, 100,222 issued and outstanding | |||||||
(liquidation preference of $2,855 at June 30, 2006 and | |||||||
December 31, 2005) | 100 | 100 | |||||
Shareholders' deficit: | |||||||
Common stock, $0.00001 par value, 250,000 shares authorized, | |||||||
15,581 and 15,309 shares issued and outstanding at June 30, 2006 | |||||||
and December 31, 2005, respectively | - | - | |||||
Additional paid-in capital | 4,346 | 3,882 | |||||
Accumulated deficit | (30,371 | ) | (27,935 | ) | |||
Total shareholders' deficit | (26,025 | ) | (24,053 | ) | |||
Total liabilities, redeemable convertible preferred stock | |||||||
and shareholders' deficit | $ | 82,821 | $ | 77,414 |
The accompanying notes are an integral part of the consolidated financial statements |
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LANDesk Group, Ltd.
Consolidated Statements of Operations
(Unaudited, in thousands)
For the six months ended | |||||||
June 30, | |||||||
2006 | 2005 | ||||||
Revenue: | |||||||
Software | $ | 29,202 | $ | 22,104 | |||
Services | 18,446 | 15,908 | |||||
Total revenue | 47,648 | 38,012 | |||||
Cost of revenue: | |||||||
Software | 389 | 185 | |||||
Services | 3,735 | 3,318 | |||||
Total cost of revenue (exclusive of depreciation and | |||||||
amortization shown separately below) | 4,124 | 3,503 | |||||
Research and development expenses | 10,748 | 9,044 | |||||
Selling and marketing expenses | 25,981 | 21,096 | |||||
General and administrative expenses | 3,997 | 3,477 | |||||
Depreciation and amortization | 2,875 | 2,877 | |||||
Total operating expenses | 47,725 | 39,997 | |||||
Loss from operations | (77 | ) | (1,985 | ) | |||
Net interest expense | (1,836 | ) | (2,286 | ) | |||
Gain (loss) on foreign currency transactions | 919 | (999 | ) | ||||
Other expense | (181 | ) | (87 | ) | |||
Net loss before provision for income taxes | (1,175 | ) | (5,357 | ) | |||
Provision for income taxes | (1,261 | ) | (943 | ) | |||
Net loss | (2,436 | ) | $ | (6,300 | ) |
The accompanying notes are an integral part of the consolidated financial statements |
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LANDesk Group, Ltd.
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
For the six months ended | |||||||
June 30, | |||||||
2006 | 2005 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (2,436 | ) | $ | (6,300 | ) | |
Adjustments to reconcile net loss to | |||||||
net cash used in operating activities: | |||||||
Provision for doubtful accounts | 90 | 109 | |||||
Depreciation and amortization | 2,875 | 2,877 | |||||
Stock-based compensation | 364 | - | |||||
Amortization of discount on notes payable - related parties | |||||||
and minimum consideration payable | 115 | 382 | |||||
Deferred taxes | - | 262 | |||||
Trade accounts receivable | (2,474 | ) | 1,548 | ||||
Other current assets and prepaids | (1,028 | ) | (169 | ) | |||
Accounts payable | 538 | (338 | ) | ||||
Accrued liabilities | 842 | 239 | |||||
Deferred revenue | 4,288 | 4,676 | |||||
Accrued interest-related parties | 1,552 | 1,588 | |||||
Net cash provided by operating activities | 4,726 | 4,874 | |||||
Cash flows from investing activities: | |||||||
Purchase of property and equipment | (1,652 | ) | (772 | ) | |||
Net cash used in investing activities | (1,652 | ) | (772 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from issuance for common stock | 100 | 34 | |||||
Payment for Bank Debt | (1,030 | ) | (232 | ) | |||
Payments for Notes Payable-related parties | (1,250 | ) | - | ||||
Net cash used in financing activities | (2,180 | ) | (198 | ) | |||
Net increase in cash | 894 | 3,904 | |||||
Cash and cash equivalents at beginning of period | 18,885 | 13,688 | |||||
Cash and cash equivalents at end of period | $ | 19,779 | $ | 17,592 | |||
Supplemental disclosure of noncash investing and financing activities | |||||||
Goodwill recorded based on additional consideration payable | 2,324 | - |
The accompanying notes are an integral part of the consolidated financial statements |
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LANDesk Group, Ltd.
Notes to Consolidated Financial Statements
(Unaudited, in thousands)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods shown. The results of operations for these periods are not necessarily indicative of the results expected for the full fiscal year or for any future periods. The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates and assumptions.
The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes contained in the Landesk Group, Ltd. Consolidated financial statements for the year ended December 31, 2005. The balance sheet presented in the accompanying financial statements for December 31, 2005, was derived from the audited financial statements for the period ended December 31, 2005, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The consolidated financial statements include the financial statements of LANDesk and its wholly-owned subsidiaries, (collectively, the Company). LANDesk’s subsidiaries are located in the United States, Asia, Latin America and Europe. All intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States of America.
2. Stock Options
On January 1, 2006, the Company adopted SFAS 123R (revised 2004), Share-Based Payment , (“SFAS 123R”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including grants of employee stock options, based on estimated fair values. SFAS 123R supersedes SFAS No. 123 Accounting for Stock Based Compensation and Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), which was previously applied.
The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. The Company’s consolidated financial statements for the six months ended June 30, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Company’s consolidated statements of operations for prior periods have not been revised to reflect the impact of SFAS 123R. New awards are valued and accounted for prospectively upon adoption. Prior outstanding stock option awards that were not fully vested as of January 1, 2006 will be recognized as compensation expense in the Company’s consolidated statements of operations over their remaining requisite service periods.
Prior to the adoption of SFAS 123R, the Company recorded the intrinsic value of stock-based compensation as expense, in accordance with APB No. 25, as allowed under SFAS No. 123, Accounting for Stock-based Compensation Expense (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recorded in the Company’s consolidated statements of operations prior to January 1, 2006, because the exercise price of the Company’s stock options granted equaled the fair market value of the underlying stock at the date of grant. In the pro forma disclosures required under SFAS 123, the Company accounted for forfeitures as they occurred.
SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest will be recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. Stock-based compensation expense recognized in the Company’s consolidated statements of operations for the six months ended June 30, 2006 includes compensation expense for stock-based payment awards granted prior to, but not yet vested as of, January 1, 2006 based on the grant
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LANDesk Group, Ltd.
Notes to Consolidated Financial Statements
(Unaudited, in thousands)
date fair value estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for the stock-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Compensation expense for all stock-based payment awards is recognized using the ratable single-option approach. Stock-based compensation expense recognized in the Company’s consolidated statements of operations for the six months ended June 30, 2006 is based on awards ultimately expected to vest; therefore, the expense has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company use the Black-Scholes option pricing model (the “Black-Scholes Model”) for the purpose of determining the estimated fair value of stock-based payment awards on the date of grant under SFAS 123R. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, existing models may not provide reliable measures of fair value of these employee stock options. The Company will continue to assess the assumptions and methodologies used to calculate estimated fair value of stock-based compensation. If circumstances change, and additional data becomes available over time, the Company may change these assumptions and methodologies, which may materially impact the Company’s fair value determination.
The following table summarizes fixed option activity for the six months ended June 30, 2006:
Weighted | |||||||
Average | |||||||
Options | Exercise | ||||||
Outstanding | Price | ||||||
Balance. January 1, 2006 | 13,195 | $ | 0.76 | ||||
Granted | 773 | 1.74 | |||||
Canceled | (409 | ) | 0.95 | ||||
Exercised | (272 | ) | 0.37 | ||||
Balance. June 30, 2006 | 13,287 | $ | 0.82 |
The following table summarizes information about fixed stock options outstanding as of June 30, 2006:
Outstanding | Exercisable | |||||||||||||||
Weighted | ||||||||||||||||
Number of | Average | Weighted | Number of | Weighted | ||||||||||||
Exercise | Options | Remaining | Average | Options | Average | |||||||||||
Price Range | Outstanding | Contractual Life | Exercise | Exercisable | Exercise | |||||||||||
(in years) | Price | Price | ||||||||||||||
$ 0.28 | 6,288 | 6.65 | $ | 0.28 | 4,128 | $ | 0.28 | |||||||||
$ 1.25 | 6,632 | 8.48 | $ | 1.25 | 2,278 | 1.25 | ||||||||||
$ 1.75 | 150 | 9.58 | $ | 1.75 | - | $ | - | |||||||||
$ 2.84 | 217 | 9.82 | $ | 2.84 | - | $ | - | |||||||||
13,287 | 7.65 | $ | 0.82 | 6,406 | $ | 0.62 |
The following table summarizes stock-based compensation expense related to employee stock options under SFAS 123R for the six months ended June 30, 2006, which was allocated as follows:
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LANDesk Group, Ltd.
Notes to Consolidated Financial Statements
(Unaudited, in thousands)
Six Months Ended | ||||
June 30, 2006 | ||||
Cost of Revenue | $ | 11 | ||
Research and development | 76 | |||
Selling and marketing | 213 | |||
General and administrative | 64 | |||
Total stock-based compensation | $ | 364 |
The table below illustrates the effect on net loss as if the Company had applied the fair-value recognition provisions of SFAS 123 to all stock-based compensation awards for the period prior to the adoption of SFAS 123R:
For the Six Months Ended June 30, 2005 | ||||
Net loss: | ||||
Net loss, as reported | $ | (6,300 | ) | |
Less: Total stock-based employee compensation expense | ||||
determined under the fair value based method for all awards, | ||||
net of related tax effects | (169 | ) | ||
Pro forma net loss | $ | (6,469 | ) |
The Company estimated the fair value of options using the Black-Scholes Model. This model requires the input of assumptions regarding a number of complex and subjective variables that will usually have a significant impact on the fair value estimate. These variables include, but are not limited to, the estimated volatility of the Company’s stock and the employee exercise behaviors. The assumptions and variables used for the current period grants were developed based on SFAS 123R guidance. The weighted-average estimated fair value of stock options granted to employees during the six months ended June 30, 2006 was $1.62 per share using the Black-Scholes Model with the following weighted-average assumptions:
Six Months Ended | ||||
June 30, 2006 | ||||
Weighted Average Risk-free Interest Rate | 4.60% | |||
Expected Life | 6.25 years | |||
Expected Volatility | 127% | |||
Expected Dividend Yield | 0% |
The weighted-average estimated fair value of stock options granted to employees during the six months ended June 30, 2005 was $0.23 per share using the Black-Scholes Model with the following weighted-average assumptions:
Six Months Ended | ||||
June 30, 2005 | ||||
Weighted Average Risk-free Interest Rate | 3.90% | |||
Expected Life | 5 years | |||
Expected Volatility | 0% | |||
Expected Dividend Yield | 0% |
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LANDesk Group, Ltd.
Notes to Consolidated Financial Statements
(Unaudited, in thousands)
3. Income Taxes
The Company operates in more than ten federal tax jurisdictions, reporting operating income in certain jurisdictions and operating loss in others. Accordingly, the Company records a valuation allowance in those jurisdictions where loss carryforwards and other deferred tax assets are not expected to be realized. In addition, the Company pays withholding taxes and other taxes that are not a direct function of net income. Based on these factors, the Company generally experiences a negative effective tax rate due to its consolidated operating loss position.
For the six month period ended June 30, 2005, the Company’s net loss before provision for income taxes was $5,357 and the provision for income tax expense was $943, for an effective rate of negative 18%. For the six month period ended June 30, 2006, the Company’s net loss before provision for income taxes was $1,175 and the provision for income taxes was $1,261, for an effective rate of negative 107%. The change in effective tax rate is primarily due to operating losses from which no benefit is derived and withholding taxes which were applied to a lessor level of consolidated net loss for the six-month period ended June 30, 2006.
In April 2006, the company entered into a definitive agreement to be acquired by Avocent Corporation. The agreement provides for total consideration of approximately $400,000, including approximately $200,000 in stock and approximately $200,000 in cash, plus assumed unvested employee stock options. The transaction value may be increased by up to $60,000 in cash if the Company meets certain revenue growth targets specified in the agreement. An escrow account with $60,000 of the stock consideration for indemnifiable events specified in the acquisition agreements will be open for 18 months. The Company expects to close this transaction August 31, 2006. In connection with the transaction, on August 28, 2006, the Company paid $3,367 and $9,816 to retire the company’s senior subordinated secured notes and the consideration payable, respectively.
For purposes of the presentation of the accompanying balance sheets, the Company has reclassified its Series A redeemable convertible preferred stock to a separate line item, outside of shareholders' deficit, in accordance with Securities and Exchange Commission rule S-X-5.02.28 and financial reporting policy 2.11.02.
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