SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 31, 2002
(Date of earliest event reported)
FRONT PORCH DIGITAL INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
333-16031 86-0793960
- ----------------------------------- ------------------
(Commission File No.) (I.R.S. Employer
Identification No.)
20000 Horizon Way, Suite 120, Mt. Laurel, New Jersey 08054
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(Address of Principal Executive Offices) (Zip Code)
(856) 439-9950
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(Registrant's telephone number, including area code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Paragraphs (a) and (b) of Item 7, "Financial Statements, Pro Forma
Financial Information and Exhibits" is hereby amended to include the following:
a) Financial Statements of Business Acquired (ManagedStorage International
France SAS).
(1) Audited Financial Statements: Page
Independent Auditors Report........................................ 3
Balance Sheets as of December 31, 2000 and 2001.................... 4
Statements of Operations for the period ended
December 31, 2000 and year ended December 31, 2001................ 5
Statements of Cash Flows for the period ended
December 31, 2000 and year ended December 31, 2001................ 6
Statement of Changes in Shareholders' Deficit for
the period ended December 31, 2000 and year ended
December 31, 2001................................................. 7
Notes to Financial Statements...................................... 8
(2) Unaudited Financial Statements: Page
Balance Sheet as of June 30, 2002 (Unaudited)...................... 16
Statement of Operations for the six months ended
June 30, 2002 (Unaudited)......................................... 17
Statement of Cash Flows for the six months ended
June 30, 2002 (Unaudited)......................................... 18
Selected Notes to Financial Statements (Unaudited)................. 19
b) Pro Forma Consolidated Financial Information (Unaudited): Page
Pro Forma Consolidated Statement of Operations
for the year ended December 31, 2001 (Unaudited).................. 24
Pro Forma Consolidated Statement of Operations
for the six months ended June 30, 2002 (Unaudited)................ 25
Notes to Pro Forma Consolidated Financial
Statements (Unaudited)............................................ 26
2
REPORT OF INDEPENDENT AUDITORS
To the controlling shareholder
ManagedStorage International France SAS
We have audited the accompanying balance sheets of ManagedStorage International
France SAS (the "Company") for the years ended December 31, 2000 and 2001 and
the related statements of operations, cash flows, and changes in shareholders'
deficit for the period May 1, 2000(formation) through December 31, 2000 and for
the year ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ManagedStorage International
France SAS at December 31, 2000 and 2001, and the results of its operations and
its cash flows for the period May 1, 2000(formation) through December 31, 2000
and for the year ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
ManagedStorage International France SAS will continue as a going concern. As
more fully described in Note 2, the Company has incurred recurring operating
losses and has a working capital deficiency. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/ Ernst & Young, LLP
Denver, Colorado
October 16, 2002
3
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
BALANCE SHEETS
DECEMBER 31,
2000 2001
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,702,711 $ 150,689
Accounts receivable, net of allowance for
doubtful accounts of $0 and $14,363 at
December 31, 2000 and 2001, respectively 508,130 867,981
Due from parent -- 762,908
Other assets 344,584 995,986
----------------------------
2,555,425 2,777,564
Property and equipment--net 1,912,411 971,881
Other assets 184,925 158,712
----------------------------
Total assets $ 4,652,761 $ 3,908,157
============================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,077,232 $ 691,039
Accrued and other current liabilities 646,681 952,098
Billings in excess of costs and revenue 117,205 89,297
Due to parent 363,315 341,681
Capital leases payable 41,065 674,088
----------------------------
Total current liabilities 3,245,498 2,748,203
Capital leases payable, less current portion 79,363 149,358
Other long-term liabilities -- 39,445
Due to parent 6,018,670 12,645,798
----------------------------
Total liabilities 9,343,531 15,582,804
----------------------------
SHAREHOLDERS' DEFICIT
Common stock, par value 1 Euro per share
Authorized, issued and outstanding - 500,000
and 500,000 shares at December 31, 2000
and 2001, respectively 471,050 443,000
Accumulated deficit (5,171,806) (12,512,269)
Accumulated other comprehensive income 9,986 394,622
----------------------------
Total shareholders' deficit (4,690,770) (11,674,647)
----------------------------
Total liabilities and shareholders' deficit $ 4,652,761 $ 3,908,157
============================
SEE ACCOMPANYING NOTES.
4
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
STATEMENTS OF OPERATIONS
PERIOD FROM MAY 1
(FORMATION) TO YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
---------------------------------------
Storage revenues $ 917,282 $ 3,288,631
Cost of storage revenues 2,350,302 4,129,911
---------------------------------------
Gross loss (1,433,020) (841,280)
---------------------------------------
Operating expenses:
Selling, general and administrative 3,606,527 5,230,133
Research and development 156,214 42,989
Restructuring costs -- 567,017
Asset impairment -- 723,915
---------------------------------------
Total operating expenses 3,762,741 6,564,054
---------------------------------------
Loss from operations (5,195,761) (7,405,334)
Interest income (expense), net 9 (78,048)
Currency transaction gain 23,946 142,919
---------------------------------------
Net loss $(5,171,806) $(7,340,463)
=======================================
SEE ACCOMPANYING NOTES.
5
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 1
(FORMATION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 2001
-------------------------------
OPERATING ACTIVITIES
Net loss $(5,171,806) $(7,340,463)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 191,548 1,122,148
Gain on disposal of assets -- (13,212)
Provision for uncollectible accounts -- 31,944
Asset impairment -- 723,915
Changes in operating assets and liabilities:
Increase in accounts and other (490,519) (392,658)
Receivables
Increase in other current assets (332,633) (676,331)
(Increase) decrease in other assets (178,511) 15,301
Increase (decrease) in accounts payable 2,005,186 (1,270,784)
Increase in accrued liabilities 624,252 346,183
Increase (decrease) in billings in excess
of costs and recognized revenue 113,153 (21,079)
Increase in other liabilities -- 39,704
----------------------------
Net cash used in operating activities (3,239,330) (7,435,332)
INVESTING ACTIVITIES
Purchase of property and equipment (1,537,033) (585,502)
Proceeds from sale of property and equipment -- 281,304
Assets transferred (from) to parent company (384,346) 189,993
----------------------------
Net cash used in investing activities (1,921,379) (114,205)
FINANCING ACTIVITIES
Proceeds from issuance of stock 454,712 --
Proceeds from advances provided by parent 6,160,637 6,651,388
Payment of capital lease obligations -- (155,986)
----------------------------
Net cash provided by financing activities 6,615,349 6,495,402
Effect of exchange rates on cash and
cash equivalents 248,071 (497,887)
----------------------------
Net increase in cash and cash equivalents 1,702,711 (1,552,022)
Cash and cash equivalents at beginning
of period -- 1,702,711
----------------------------
Cash and cash equivalents at end of period $ 1,702,711 $ 150,689
----------------------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITY
Cash paid for interest $ -- $ 24,409
Capital lease obligations incurred in
connection with the purchase of equipment $ 120,428 $ 943,548
SEE ACCOMPANYING NOTES.
6
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
ADDITIONAL ACCUMULATED TOTAL
PAID-IN OTHER COMP. ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL INCOME DEFICIT DEFICIT
--------------------------------------------------------------------------------------
Balance at May 1, 2000 (formation) 500,000 $ 453,922 $ -- $ -- $ -- $ 453,922
Net loss -- -- -- -- (5,171,806) (5,171,806)
Foreign currency translation adjustment -- 17,128 -- 9,986 -- 27,114
-------------
Comprehensive loss (5,144,692)
--------------------------------------------------------------------------------------
Balance at December 31, 2000 500,000 471,050 -- 9,986 (5,171,806) (4,690,770)
Net loss -- -- -- -- (7,340,463) (7,340,463)
Foreign currency translation adjustment
-- (28,050) -- 384,636 -- 356,586
-------------
Comprehensive loss (6,983,877)
--------------------------------------------------------------------------------------
Balance at December 31, 2001 500,000 $ 443,000 $ -- $394,622 $(12,512,269) $(11,674,647)
======================================================================================
7
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
ManagedStorage International France, a French SOCIETE PAR ACTIONS SIMPLIFEE
("the Company") acquired certain assets, liabilities and employees of SBG Europe
S.A., a subsidiary of StorageTek, for $13,837 on May 1, 2000 and additional
assets for $173,291 on July 6, 2000.
ManagedStorage International France is a data-storage services provider
specializing in storage design, implementation and operation services and
content management services throughout the United States and Europe. The Company
is legally organized in France, operating in Toulouse, France (transacts
business in the local currency) for its main office and in Paris, France,
London, Great Britain and Amsterdam, The Netherlands where the Company created
two branches, and is a wholly-owned subsidiary of ManagedStorage International,
Inc. (the "parent company"). The Company was formed as part of the formation of
its parent company in the transaction with Storage Technology Corporation
("StorageTek"). The Company is organized in two main lines of business: (1) a
storage service provider business, divided into two main categories: storage on
demand and server back-up and (2) a software and services business which
includes among other software applications, DIVArchive, a software solution
designed to assist media, entertainment and medical companies in the
preservation, management and accessing of digital content consisting of large
digital data files.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDITY AND MANAGEMENT PLANS
The consolidated financial statements of the Company have been prepared on a
going-concern basis, which contemplates the realization of assets and
liabilities in the normal course of business. Accordingly, the consolidated
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue in existence. The Company has incurred
substantial operating losses and has a net capital deficiency. The Company is
completely dependent upon continued funding from its parent company. The parent
company intends to fund these deficiencies by utilizing its existing cash, cash
equivalents, increased cash flows from its business operations and an
anticipated third round of financing that is expected to be closed in early
2002.
BASIS OF PRESENTATION
The financial statements presented are for the periods from inception on May 1,
2000 to December 31, 2000 and for the year ended December 31, 2001.
8
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over their respective estimated useful lives of two to ten years.
Equipment recorded under capital leases and leasehold improvements is amortized
using the straight-line method over the shorter of the respective lease term or
estimated useful life of the asset.
CONCENTRATIONS OF CREDIT RISK
Carrying amounts of financial instruments held by the Company, which include
cash equivalents, accounts receivable, accounts payable and accrued expenses,
approximate fair value due to their short duration. Financial instruments that
potentially expose the Company to a concentration of credit risk principally
consist of cash and cash equivalents and accounts receivable. Services provided
to four customers represent 74% of revenues generated during fiscal year 2001.
Services provided to two customers represent 77% of revenues generated from May
1, 2000 to December 31, 2000. Accounts receivable from these customers were
$374,318 and $544,317 at December 31, 2000 and 2001, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and include costs to
develop, manage and enhance the Company's proprietary technology.
9
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes using the liability method under which
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of long-lived assets, including property
and equipment, to determine whether there are any indications of impairment
losses. If the assets are considered to be impaired, the impairment recognized
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Recoverability of long-lived assets is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. During the year ended December 31, 2001, the
Company recorded an asset impairment of $723,915.
REVENUE RECOGNITION
Revenue is recognized when all of the following criteria are met: Persuasive
evidence of an agreement exists, delivery has occurred or services have been
rendered, the sales price is fixed or determinable and collectibility is
reasonably assured. Revenues from storage services are recognized at the time
the services are provided and are billed on a monthly basis. System integration
revenues are recognized using the percentage of completion method by comparing
costs of progress completed during the period to total expected costs of the
project. A current liability for billings in excess of costs and recognized
revenue is recorded for billings sent to customers in which the Company has not
yet performed certain services or delivered goods per the billings.
Provisions for estimated losses on contracts are recorded when identified.
STOCK-BASED COMPENSATION
The Company does not have any stock-based incentive plans for its employees.
However, its employees are eligible to participate in the stock-based
compensation plans of its parent company in the United States. Accordingly, the
Company has no stock-based compensation expense for the periods presented.
10
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCUMULATED OTHER COMPREHENSIVE INCOME
There are no material differences between consolidated net loss and
comprehensive loss for the period presented, except for differences related to
foreign currency translation adjustments totaling $394,622 at December 31, 2001.
The financial statements of the Company, which are prepared using the function
local currency (francs and euros) have been translated into United States
dollars at the average exchange rate during the year for the statement of
operations and the statement of cash flows and year-end rates for the balance
sheets.
FOREIGN CURRENCY TRANSACTIONS
The Company also transacts business in currencies other than its functional
currency. As such, the Company recognizes foreign currency transaction gain or
loss on each individual transaction. For the period ended December 31, 2000 and
the year ended December 31, 2001, the Company recorded a foreign currency
transaction gain of $23,946 and $142,919, respectively.
3. ASSET IMPAIRMENT
During 2001, several events occurred that caused significant adverse conditions
in the data storage market. Such conditions forced several companies (customers)
to downsize their operations in order to survive. Those events, along with the
oversupply of data storage equipment in the secondary market, caused the
Company, along with its parent company, to evaluate the ongoing value of the
equipment associated with its current revenue stream. Based on this evaluation,
equipment with a carrying value of $794,442 was impaired in the amount of
$723,915. The impairment has adjusted these assets to their estimated fair value
and is recorded to the impairment loss within the income statement. Fair value
was determined from bids from third parties to purchase the equipment, actual
equipment sale transactions and general market information obtained from OEM
representatives.
4. RESTRUCTURING CHARGES
During 2001, as a result of significant adverse market conditions, along with
the rapid consumption of cash, the Company announced plans to eliminate numerous
positions. As a result approximately 31 employees jobs were terminated. The
terminations were dispersed throughout the Company and included positions in
sales, operations, finance, human resources, marketing and technical areas. The
termination benefits of $567,017 were paid in cash and were charged to
restructuring expenses in the statement of operations. Included in the balance
sheet at December 31, 2001 is $65,876 of accrued but unpaid restructuring costs.
11
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING CHARGES (CONTINUED)
In addition, the Company incurred other related restructuring expenses primarily
for contract and lease termination fees and related legal costs.
5. PROPERTY AND EQUIPMENT
Property and equipment, if acquired at the formation date, has been recorded at
estimated fair market value at that time. Otherwise, all other property and
equipment has been recorded at cost.
Property and equipment consists of the following items:
AS OF DECEMBER 31,
2000 2001
----------------------------------
Storage equipment $ 1,520,253 $ 1,349,181
Storage software 53,224 397
Furniture, fixtures, computer
equipment and software 537,364 237,358
----------------------------------
Total $ 2,110,841 $ 1,586,936
Less accumulated depreciation (198,430) (615,055)
----------------------------------
Property and equipment--net $ 1,912,411 $ 971,881
==================================
Depreciation expense for the period May 1, 2000 through December 31, 2000 was
$198,430. Depreciation expense for the year ended December 31, 2001 was
$1,133,306. Included in the balance above is property and equipment under
capital lease with a cost of $120,428 and $881,077 and accumulated depreciation
of $3,345 and $337,194 at December 31, 2000 and 2001, respectively.
12
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain executives that provide for
up to one year of salary upon termination with the Company.
The Company leases facilities and equipment under non cancelable capital and
operating leases. Rental expense relating to operating leases was $290,155 and
$683,379 for the years ended December 31, 2000 and 2001, respectively. Certain
of the operating lease agreements have renewal provisions. Future minimum lease
payments as of December 31, 2001 are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31 LEASES LEASES
----------------------------------------------------------------------------
2002 $ 734,001 $ 357,847
2003 159,380 288,643
2004 -- 189,882
2005 -- 141,700
2006 -- 105,473
----------------------------------
Total minimum lease payments 893,381 $ 1,083,545
=================
Less amounts representing interest (69,935)
---------------
Present value of minimum lease payments 823,446
Less current portion (674,088)
---------------
Capital lease obligations long term $ 149,358
===============
7. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following items:
AS OF DECEMBER 31,
2000 2001
-------------------------------
Wages, benefits and payroll taxes $ 124,012 $ 610,659
Contract labor 153,163 57,068
Professional service fees 158,761 62,589
Equipment maintenance -- 14,876
Collocation fees 184,408 --
Other liabilities 26,337 141,030
--------------------------------
646,681 886,222
Restructuring costs -- 65,876
-------------------------------
Total accrued and other current liabilities $ 646,681 $ 952,098
===============================
13
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. DUE TO PARENT
The Company is a wholly-owned subsidiary of ManagedStorage International, Inc.
and is completely dependent on it for its sole source of funding and continued
funding of its operating losses. If the Company were to not continue receiving
such funding, it would have no other sources of capital available to it and it
would likely not be able to continue as a going concern. As of December 31, 2000
and 2001, the Company was indebted to its parent company as follows:
AS OF DECEMBER 31,
2000 2001
------------------------------------
Due to parent (current portion) $ 363,315 $ 341,681
Due to parent (non-current portion) 6,018,670 12,645,798
------------------------------------
Total due to parent $ 6,381,985 $ 12,987,479
====================================
In addition, at December 31, 2001, the Company had a receivable from its parent
company totaling $762,908.
At March 31, May 31 and December 1, 2001, in connection with the restructuring
and saving plan, the Company transferred assets to its parent company with a
carrying value of $189,076 and recorded an intercompany receivable for that
amount.
9. SHARE CAPITAL
The Company has authorized 500,000 shares of capital stock, par value 1 euro per
share. At December 31, 2000 and 2001, all 500,000 shares were issued and
outstanding. The shares were issued in connection with the acquisition by
ManagedStorage International, Inc. on May 1, 2000 described in Note 1 -
Organization.
10. INCOME TAXES
As of December 31, 2001, the Company had foreign net operating loss
carryforwards of $12,390,260. The foreign net operating loss carryforwards will
expire at various dates through 2006.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes consist of the following:
AS OF DECEMBER 31,
2000 2001
--------------------------------
Deferred tax assets:
Net operating loss carryforwards (ordinary) $ 1,696,094 $ 3,891,804
Net operating loss carryforwards (evergreen) 56,911 361,773
Accumulated depreciation 8,950 303,375
--------------------------------
Deferred tax assets 1,761,955 4,556,952
Deferred tax liability -- --
--------------------------------
Total deferred tax assets, net 1,761,955 4,556,952
Valuation allowance (1,761,955) (4,556,952)
--------------------------------
Net deferred tax assets (liabilities) $ -- $ --
================================
14
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The Company believes that, based on a number of factors, the available objective
evidence creates sufficient uncertainty regarding the realization of the
deferred tax assets such that a full valuation allowance has been recorded. The
Company will continue to assess the realization of the deferred tax assets based
on actual and forecasted operating results.
The following table reconciles the amount which would be provided by applying
the 34.33% foreign statutory rate to loss before income tax benefit to income
taxes actually provided for the years ended December 31, 2000 and 2001
YEAR ENDED DECEMBER 31,
2000 2001
-------------------------------
Income taxes at federal statutory rate of 34.33% $(1,688,879) $(2,544,178)
Effect of permanent differences -- 15,957
Valuation allowance 1,688,879 2,528,221
-------------------------------
Income tax expense $ -- $ --
===============================
11. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company transacts business with
StorageTek, a significant shareholder of its parent company. During the period
ended December 31, 2000 and the year ended December 31, 2001, the Company
generated revenue through sales of product and services through StorageTek of
$504,586 and $90,188, respectively. The Company purchased $772,505 and $413,054
of equipment and services from StorageTek for the period ended December 31, 2000
and the year ended December 31, 2001, respectively.
12. SUBSEQUENT EVENTS
On July 31, 2002, the Company was acquired by Front Porch Digital, Inc. ("Front
Porch"), a publicly traded (OTCBB: FPDI) Delaware corporation with headquarters
in Mount Laurel, NJ. In the transaction, Front Porch acquired all of the
outstanding shares of capital stock of the Company as well as certain assets of
the parent company. Pursuant to the terms of the agreement, Front Porch acquired
from the parent company (i) all of the issued and outstanding shares of capital
stock of the Company and (ii) certain software and related intellectual property
rights, including DIVArchive, a software solution designed to assist media,
entertainment and medical companies in the preservation, management and
accessing of digital content consisting of large digital data files.
The CEO and shareholder of the parent company is also a shareholder in Front
Porch through Equity Pier, a venture capital and management consulting
enterprise of which he is the founder and managing partner.
15
Item 7(a)(2) Unaudited Interim Financial Statements of Business Acquired
ManagedStorage International France SAS
Balance Sheet
June 30, 2002
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 139,666
Accounts receivable, net of allowance for
doubtful accounts of $13,613 1,480,551
Due from parent 1,189,959
Other assets 1,050,241
-----------------
Total current assets 3,860,417
Property and equipment--net 307,467
Other assets 167,152
-----------------
Total assets $ 4,335,036
-----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 527,393
Accrued and other current liabilities 1,273,565
Due to parent 382,598
Capital leases payable 103,103
-----------------
Total current liabilities 2,286,659
Capital leases payable, less current portion 16,362
Other long-term liabilities 44,168
Due to parent 16,426,746
-----------------
Total liabilities 18,773,935
SHAREHOLDERS' DEFICIT
Common stock, par value 1 Euro per share
Authorized, issued and outstanding - 500,000
and 500,000 shares 496,050
Accumulated deficit (13,709,796)
Currency translation loss (1,225,153)
-----------------
Total shareholders' deficit (14,438,899)
-----------------
Total liabilities and shareholders' deficit $ 4,335,036
=================
SEE ACCOMPANYING NOTES
16
ManagedStorage International France SAS
Statement of Operations
Six Months Ended June 30, 2002
(Unaudited)
Storage revenues $ 2,079,780
Cost of storage revenues 1,211,908
-----------------
Gross margin 867,872
-----------------
Operating expenses:
Selling, general and administrative 1,687,491
Research and development 297,120
Restructuring 26,134
-----------------
Total operating expenses 2,010,745
Loss from operations (1,142,873)
Interest income 17
Interest expense (25,333)
Currency transaction gain (loss) (29,338)
-----------------
Net loss $(1,197,527)
=================
SEE ACCOMPANYING NOTES.
17
ManagedStorage International France SAS
Statement of Cash Flows
Six Months Ended June 30, 2002
(Unaudited)
OPERATING ACTIVITIES
Net loss $(1,197,527)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 144,684
Loss on disposal of assets 92,879
Provision for uncollectible accounts --
Changes in operating assets and liabilities:
Increase in accounts and other receivables (476,526)
Increase in other current assets (31,202)
Increase in other assets 9,642
Decrease in accounts payable (224,831)
Increase in accrued liabilities 284,449
Increase in billings in excess of costs and
recognized revenue (91,238)
------------------
Net cash used in operating activities (1,489,670)
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 113,815
Assets transferred to parent company 88,731
------------------
Net cash used in investing activities 202,546
FINANCING ACTIVITIES
Proceeds from advances provided by parent 1,761,880
Payment of capital lease obligations (50,694)
------------------
Net cash provided by financing activities 1,711,186
Effect of exchange rates on cash and
cash equivalents (435,085)
Net increase in cash and cash equivalents (11,023)
Cash and cash equivalents at beginning
of period 150,689
------------------
Cash and cash equivalents at end of period $ 139,666
==================
Cash paid for interest $ 78,247
SEE ACCOMPANYING NOTES.
18
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
SELECTED NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDITY AND MANAGEMENT PLANS
The financial statements of the Company have been prepared on a going-concern
basis, which contemplates the realization of assets and liabilities in the
normal course of business. Accordingly, the financial statements do not include
any adjustments that might be necessary should the Company be unable to continue
in existence. The Company has incurred substantial operating losses and has a
net capital deficiency. The Company is completely dependent upon continued
funding from its parent company. The parent company intends to fund these
deficiencies by utilizing its existing cash, cash equivalents, increased cash
flows from its business operations and an anticipated third round of financing
that is expected to be closed in early 2002.
BASIS OF PRESENTATION
The financial statements presented are for the interim period for the six months
ended June 30, 2002. The accompanying unaudited financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. Management of the
Company believes the disclosures are adequate to make the information presented
not misleading. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and such adjustments are of
a normal and recurring nature. Operating results for the six months ended June
30, 2002 are not necessarily indicative of the operating results expected for
the year ending December 31, 2002.
USE OF ESTIMATES
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
19
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
SELECTED NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over their respective estimated useful lives of two to ten years.
Equipment recorded under capital leases and leasehold improvements is amortized
using the straight-line method over the shorter of the respective lease term or
estimated useful life of the asset.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of long-lived assets, including property
and equipment, to determine whether there are any indications of impairment
losses. If the assets are considered to be impaired, the impairment recognized
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Recoverability of long-lived assets is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset.
REVENUE RECOGNITION
Revenue is recognized when all of the following criteria are met: Persuasive
evidence of an agreement exists, delivery has occurred or services have been
rendered, the sales price is fixed or determinable and collectibility is
reasonably assured. Revenues from storage services are recognized at the time
the services are provided and are billed on a monthly basis. System integration
revenues are recognized using the percentage of completion method by comparing
costs of progress completed during the period to total expected costs of the
project. A current liability for billings in excess of costs and recognized
revenue is recorded for billings sent to customers in which the Company has not
yet performed certain services or delivered goods per the billings. Provisions
for estimated losses on contracts are recorded when identified.
STOCK-BASED COMPENSATION
The Company does not have any stock-based incentive plans for its employees.
However, its employees are eligible to participate in the stock-based
compensation plans of its parent company in the United States. Accordingly, the
Company has no stock-based compensation expense for the six months ended June
30, 2002.
ACCUMULATED OTHER COMPREHENSIVE INCOME
There are no material differences between consolidated net loss and
comprehensive loss for the period presented, except for differences related to
foreign currency translation adjustments totaling a loss of $1,225,153 at June
30, 2002. The financial statements of the Company, which are prepared using the
function local currency (francs and euros) have been translated into United
States dollars at the average exchange rate during the year for the statement of
operations and the statement of cash flows and year-end rates for the balance
sheets.
20
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
SELECTED NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSACTIONS
The Company also transacts business in currencies other than its functional
currency. As such, the Company recognizes foreign currency transaction gain or
loss on each individual transaction. For the six months ended June 30, 2002, the
Company recorded a foreign currency transaction loss of $29,338.
2. PROPERTY AND EQUIPMENT
Property and equipment, if acquired at the formation date, has been recorded at
estimated fair market value at that time. Otherwise, all other property and
equipment has been recorded at cost.
Property and equipment as of June 30, 2002 consists of the following items:
Storage equipment $ 410,026
Storage software 3,352
Furniture, fixtures, computer equipment and software 261,210
---------------
Total $ 674,588
Less accumulated depreciation (367,121)
---------------
Property and equipment--net $ 307,467
===============
Depreciation expense for the six months ended June 30, 2002 was $142,726.
Included in the balance above is property and equipment under capital lease with
a cost of $105,424 and accumulated depreciation $55,641 at June 30, 2002.
3. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company transacts business with
StorageTek, a significant shareholder of its parent company. During the six
months ended June 30, 2002, the Company generated revenue through sales of
product and services through StorageTek of $480,411. The Company also purchased
$67,012 of equipment and services from StorageTek for the six months ended June
30, 2002.
21
MANAGEDSTORAGE INTERNATIONAL FRANCE SAS
SELECTED NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (CONTINUED)
4. DUE TO PARENT
The Company is a wholly-owned subsidiary of ManagedStorage International, Inc.
and is completely dependent on it for its sole source of funding and continued
funding of its operating losses. If the Company were to not continue receiving
such funding, it would have no other sources of capital available to it and it
would likely not be ability to continue as a going concern. As of June 30, 2002,
the Company was indebted to its parent company as follows:
Due to parent (current portion) $ 382,598
Due to parent (non-current portion) 16,426,746
------------------
Total due to parent $ 16,809,344
==================
In addition, at June 30, 2002, the Company had a receivable from its parent
company totaling $1,189,959.
5. SUBSEQUENT EVENTS
On July 31, 2002, the Company was acquired by Front Porch Digital, Inc. ("Front
Porch"), a publicly traded (OTCBB: FPDI) Delaware corporation with headquarters
in Mount Laurel, NJ. In the transaction, Front Porch acquired all of the
outstanding shares of capital stock of the Company as well as certain assets of
the parent company. Pursuant to the terms of the agreement, Front Porch acquired
from the parent company (i) all of the issued and outstanding shares of capital
stock of the Company and (ii) certain software and related intellectual property
rights, including DIVArchive, a software solution designed to assist media,
entertainment and medical companies in the preservation, management and
accessing of digital content consisting of large digital data files.
The CEO and shareholder of the parent company is also a shareholder in Front
Porch through Equity Pier, a venture capital and management consulting
enterprise of which he is the founder and managing partner.
22
Item 7(b) Pro Forma Financial Information
On July 31, 2002, Front Porch Digital, Inc. ("Front Porch") completed its
acquisition (the "Acquisition") of the outstanding shares of Managed Storage
International France SAS ("MSI France").
The Pro Forma Consolidated Statements of Income for the year ended December 31,
2001 and the six months ended June 30, 2002 are based on the historical
financial statements of Front Porch and MSI France. The acquisition of MSI
France has been accounted for using the purchase method of accounting with the
results of MSI France included in Front Porch's historical statements of income
beginning on the date of acquisition. The Pro Forma Consolidated Statement of
Income for the year ended December 31, 2001 has been prepared assuming the
acquisition was completed on January 1, 2001.
The Unaudited Pro Forma financial statement information is presented for
informational purposes only. The Pro Forma Statements of Income do not purport
to represent what Front Porch's actual financial position or results of
operations would have been had the acquisition of MSI occurred as of such dates,
or to project Front Porch's financial position or results of operations for any
period or date, nor does it give effect to any matters other than those
described in the notes thereto. The unaudited Pro Forma Statements of Income
should be read in conjunction with Front Porch's consolidated financial
statements and notes thereto, and the historical financial statements of MSI
France which are incorporated by reference in this Current Report on Form 8-K/A.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
23
FRONT PORCH DIGITAL, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
Front Porch Pro Forma Pro Forma
Digital, Inc. MSI France Adjustments Notes Consolidated
----------- ----------- ----------- ----- ------------
Revenue $ 1,132,154 $ 3,288,631 $ -- $ 4,420,785
Cost of revenue 1,017,527 4,129,911 -- 5,147,438
----------- ----------- ----------- ------------
Gross margin 114,627 (841,280) -- (726,653)
Selling, general and administrative expenses 5,094,765 5,230,133 10,324,898
Research and development 656,607 42,989 -- 699,596
Depreciation 574,684 -- -- 574,684
Amortization 1,892,024 -- 240,000 (1) 2,132,024
Restructuring Expense 567,017 567,017
Asset impairment -- 723,915 -- 723,915
----------- ----------- ----------- ------------
Total operating expenses 8,218,080 6,564,054 240,000 15,022,134
Income (loss) from operations $(8,103,453) $(7,405,334) $ (240,000) $(15,748,787)
=========== =========== =========== ============
Income (loss) per common share $ (0.32) $ (0.48)
=========== ============
Weighted average number of common
shares outstanding 25,008,310 7,500,000 (2) 32,508,310
=========== =========== ============
24
Front Porch Digital, Inc.
Pro Forma Consolidated Statement of Income
For the Six Months Ended June 30, 2002
(Unaudited)
Front Porch Pro Forma Pro Forma
Digital, Inc. MSI France Adjustments Notes Consolidated
------------ ----------- ------------ ----- ------------
Revenue $ 1,030,349 $ 2,079,780 $ -- $ 3,110,129
Cost of revenue 329,386 1,211,908 -- 1,541,294
------------ ----------- ------------ -----------
Gross margin 700,963 867,872 -- 1,568,835
Selling, general and administrative expenses 1,661,484 1,687,491 -- 3,348,975
Research and development 218,777 297,120 -- 515,897
Depreciation 306,192 -- -- 306,192
Restructuring Expense 26,134 26,134
Amortization 117,858 -- 120,000 (1) 237,858
------------ ----------- ------------ -----------
Total operating expenses 2,304,311 2,010,745 120,000 4,435,056
Income (loss) from operations $ (1,603,348) $(1,142,873) $ (120,000) $(2,866,221)
============ =========== ============ ===========
Income (loss) per common share $ (0.06) $ (0.08)
============ ===========
Weighted average number of common
shares outstanding 26,386,128 7,500,000 (2) 33,886,128
============ ============ ===========
25
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Represents amortization expense for the period related to the recording
of the intellectual property as part of the acquisition purchase price
paid by Front Porch. Intellectual property of $720,779 was recorded
which is being amortized over a three-year period. Amortization of the
intellectual property amounts to $20,000 per month.
(2) Represents the inclusion (in calculating earnings per share) of 7.5
million shares of Front Porch common stock issued to ManagedStorage
International as consideration for the purchase of MSI France.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
FRONT PORCH DIGITAL INC.
Date: October 8, 2003 By: /s/ Matthew Richman
--------------------------------
Matthew Richman
Chief Financial Officer
and Treasurer
27