UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 28, 2006
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INCENTRA SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 7371 86-0793960
(State or (Primary Standard Industrial (I.R.S.Employer
Other Jurisdiction Classification Code Number) Identification No.)
of Incorporation
1140 PEARL STREET
BOULDER, COLORADO 80302
(303) 440-7930
(Address and Telephone Number of Principal Executive Offices)
1140 PEARL STREET
BOULDER, COLORADO 80302
(Address of Principal Place of Business or Intended Principal Place of Business)
THOMAS P. SWEENEY III, CHIEF EXECUTIVE OFFICER
INCENTRA SOLUTIONS, INC.
1140 PEARL STREET
BOULDER, COLORADO 80302
(303) 440-7930
(Name, address and telephone number of agent for service)
-----------------------
COPIES TO:
Eric M. Hellige, Esq.
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022-4441
Telephone: (212) 421-4100
Facsimile: (212) 326-0806
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] 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 1 - REGISTRANT'S BUSINESS AND OPERATIONS
ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
In connection with our sale of substantially all of the assets of our
wholly-owned subsidiary, Front Porch Digital, Inc., as discussed in Item 2.01
below, on July 31, 2006, we entered into the Purchase Agreement described
therein. The description of the Purchase Agreement contained in Item 2.01 is
incorporated herein by reference.
In connection with our settlement of an arbitration award in favor of
one of our creditors, as discussed in Item 8.01 below, effective July 28, 2006,
we entered into the Letter Agreement described therein. The description of the
Letter Agreement contained in Item 8.01 is incorporated herein by reference.
SECTION 2 - FINANCIAL INFORMATION
ITEM 2.01. COMPLETION OF ACQUISITION OF DISPOSITION OF ASSETS.
On July 31, 2006, we sold substantially all of the assets of our
wholly-owned subsidiary, Front Porch Digital, Inc., a Delaware corporation
("Front Porch"), to FPD Acquisition Corporation, a newly-formed Delaware
corporation ("FPD"), and 1706045 Ontario Limited, an Ontario corporation
("Ontario" and collectively with FPD, the "Buyers"), each owned by Genuity
Capital Management Services, Inc., pursuant to the terms of the Purchase
Agreement (the "Purchase Agreement"), dated as of July 31, 2006, among our
company, Managed Storage International, Inc. (one of our wholly-owned
subsidiaries) and the Buyers. Front Porch provides digital archive management
solutions to broadcasters and media companies. The material assets owned and
operated by Front Porch, all of which were transferred to the Buyers in the
sale, included, without limitation, all of the outstanding capital stock of
Front Porch International SAS, its wholly-owned French subsidiary, its
DIVArchive and Bitscream software and all intellectual property rights
associated with that software and all tangible personal property, contracts,
account receivables relating to Front Porch's business.
The purchase price was $33,000,000 plus an amount by which the net
working capital amount (defined as current assets minus current liabilities) of
Front Porch on the closing date exceeded a targeted amount of $660,000, or less
an amount by which $660,000 exceeded such net working capital amount. Of such
purchase price, $30,500,000 was paid in cash at the closing and $2,500,000 was
placed in escrow to secure payment of indemnification claims the Buyers may have
against us following the closing. Following the closing, the parties will
reconcile the net working capital amount of Front Porch as of the closing date.
In addition to the purchase price payable at the closing, we may receive up to
$5,000,000 pursuant to an earn-out provision. Under the terms of the earn-out,
we are entitled to receive an amount equal to five percent (5%) of Front Porch's
gross software sales, net of customer discounts, for each of the years ending
December 31, 2006, 2007 and 2008, not to exceed $5,000,000 in the aggregate.
Under the terms of the Purchase Agreement, we also agreed not to engage
in or otherwise compete with the business of Front Porch in any geographic area
for a period of three years after the closing.
Proceeds of the sale are being used primarily to pay down our secured
debt to Laurus Master Fund, Ltd. and for working capital purposes.
Pagemill Partners LLC acted as our exclusive mergers and acquisitions
advisor in this transaction and in consideration of its services we paid
Pagemill Partners LLC the sum of $1,060,000.
The above description of the transaction and the Purchase Agreement is
not a complete description of the terms of the transactions or the Purchase
Agreement and is qualified in its entirety by reference to the agreements
entered into in connection with the transaction, copies of which are included as
exhibits to this Current Report on Form 8-K.
SECTION 5 - CORPORATE GOVERNANCE AND MANAGEMENT
ITEM 5.02. DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS.
As a result of our sale of Front Porch to FPD, as described in Item 2.01
above, Michael Knaisch, the President of Front Porch, no longer serves as an
executive officer of our company.
SECTION 7 - REGULATION FD
ITEM 7.01. REGULATION FD DISCLOSURE.
On August 2, 2006, we issued a press release in connection with the
transaction described in Item 2.01 above, a copy of which is attached hereto as
Exhibit 99.1. On August 2, 2006, we issued a press release in connection with
the settlement described in Item 8.01 below, a copy of which is attached hereto
as Exhibit 99.2.
The information contained in the accompanying press releases is being
furnished pursuant to "Item 7.01 Regulation FD." The information contained in
the accompanying press releases shall not be incorporated by reference into any
filing of our company, whether made before or after the date hereof, regardless
of any general incorporation language in such filing, unless expressly
incorporated by reference to such filing. The information in the press releases
attached hereto shall not be deemed to be "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that section or Sections 11 and 12(a)(2) of the Act.
SECTION 8 - OTHER EVENTS
ITEM 8.01. OTHER EVENTS.
On July 28, 2006, we entered into a Letter Agreement with Alfred Curmi
("Curmi"), as amended on July 31, 2006, pursuant to which we settled all claims
and disputes with Curmi that, as previously reported, arose from our claimed
adjustment of the purchase price paid in connection with our acquisition of STAR
Solutions of Delaware, Inc. (now known as Incentra of CA, Inc.) in February
2005. Pursuant to the Letter Agreement, as amended, we agreed to pay Curmi
$2,380,000, of which $505,000 was paid upon execution of the Letter Agreement
and $1,875,000 was paid on August 2, 2006. As part of the settlement, Curmi
returned to us all of the 1,135,580 shares of our common stock owned by him and
cancelled the $2.5 million promissory note issued to him in February 2005. Upon
full performance of each party's obligations, the parties will seek a dismissal
of the action. We previously included $2.3 million of the unsecured note
obligation as a current liability in our March 31, 2006 unaudited consolidated
balance sheet.
SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(b) Pro Forma Financial Information (Unaudited).
(i) Headnote to Pro Forma Financial Information
(ii) Pro Forma Consolidated Balance Sheet as of March 31,
2006.
(iii) Pro Forma Consolidated Statement of Operations for the
three months ended March 31, 2006.
(iv) Pro Forma Consolidated Statement of Operations for
fiscal year ended December 31, 2005.
(c) Exhibits. We hereby furnish the following exhibits:
Exhibit Number Exhibit Title
-------------- -------------
2.1 Purchase Agreement, dated July 31, 2006, among
our company, Managed Storage International,
Inc., FPD Acquisition Corporation and 1706045
Ontario Limited.
10.1 Letter Agreement, dated July 27, 2006,
between our company and Alfred Curmi.
10.2 Amendment to Letter Agreement , dated July 27,
2006, between our company and Alfred Curmi.
99.1 Press release dated August 2, 2006 announcing
the consummation of the sale of our Front
Porch division.
99.2 Press release dated August 2, 2006 announcing
the settlement with one of our creditors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be singed on its behalf
by the undersigned hereunto duly authorized.
INCENTRA SOLUTIONS, INC.
Dated: August 3, 2006 By: /s/ Paul McKnight
-----------------------------
Paul McKnight
Chief Financial Officer
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma financial information presented below reflects the sale of
substantially all of the assets of Front Porch Digital, Inc., a Delaware
corporation wholly-owned by our company ("Front Porch") to FPD Acquisition
Corporation ("FPD") and 1706045 Ontario Limited corporation ("Ontario" and
collectively with FPD, the "Buyers"), each owned by Genuity Capital Management
Services Inc. The sales price for the assets was $33,000,000, of which
$30,500,000 was received in cash at closing and $2,500,000 was placed in escrow
to secure payment of any indemnification claims the Buyers may have against us
following the closing; however, no significant adjustments are expected. In
addition to the purchase price received at closing, we may receive up to
$5,000,000 pursuant to an earn-out provision based on sales of Front Porch
software for each of the years ending December 31, 2006, 2007 and 2008.
The historical financial information on which the pro forma statements
are based is included in our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2005 filed on April 4, 2006 and our Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 2006 filed on May 15, 2006. No
significant assumptions are included in the pro forma financial information,
except for including $2,000,000 out of a maximum $5,000,000 of the earn-out
provision described above. We believe the inclusion of this portion of the
earn-out provision is appropriate based on the past performance of Front Porch
and reasonable estimates of future sales of software during the earn-out period.
All other adjustments are of an historical nature.
The pro forma financial information reflects our balance sheet as of
March 31, 2006 as if the sale had been consummated on that date and statements
of operations for the three months ended March 31, 2006 and the year ended
December 31, 2005 as if the sale had been consummated at the beginning of the
periods presented.
The pro forma financial information should be read in conjunction with
our historical consolidated financial statements used in the preparation of the
pro forma financial information. THE PRO FORMA INFORMATION PRESENTED IS NOT
NECESSARILY INDICATIVE OF THAT WHICH WOULD HAVE BEEN ATTAINED HAD THE
TRANSACTION OCCURRED AT AN EARLIER DATE.
F-1
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
HISTORICAL PRO FORMA PRO FORMA
ASSETS MARCH 31, 2006 ADJUSTMENTS MARCH 31, 2006
-------------- ------------- --------------
Current assets:
Cash and cash equivalents $ 457,183 $ 28,132,896 (1) (2) $ 28,590,079
Accounts receivable 10,211,945 (5,153,673) (2) 5,058,272
Other current assets 1,300,385 2,643,641 (1) (2) (3) 3,944,026
----------------------------- --------------
Total current assets 11,969,513 25,622,864 37,592,377
Property and equipment, net 2,417,939 (354,971) (2) 2,062,968
Capitalized software development costs 2,312,001 (1,417,516) (2) 894,485
Goodwill 5,857,770 - 5,857,770
Intangible assets, net 12,946,473 (12,279,973) (2) 666,500
Restricted cash 38,046 - 38,046
Other assets 519,109 1,475,692 (2) (3) 1,994,801
----------------------------- --------------
Total assets $ 36,060,851 $ 13,046,096 $ 49,106,947
============================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable, capital leases and other
long term debt obligations $ 10,964,731 $ - $ 10,964,731
Accounts payable 8,479,312 (958,013) (2) 7,521,299
Accrued expenses 4,509,564 (2,127,009) (2) 2,382,555
Deferred revenue - current portion 2,346,146 (1,774,670) (2) 571,476
----------------------------- --------------
Total current liabilities 26,299,753 (4,859,692) 21,440,061
----------------------------- --------------
Notes payable, capital leases and other long term obligations,
net of current portion 232,079 - 232,079
Deferred revenue - LT 98,270 - 98,270
----------------------------- --------------
Total liabilities 26,630,102 (4,859,692) 21,770,410
----------------------------- --------------
Preferred Stock - Series A 25,272,725 - 25,272,725
----------------------------- --------------
Stockholders' equity (15,841,976) 17,905,788 (3) 2,063,812
----------------------------- --------------
----------------------------- --------------
Total liabilities and stockholders' equity $ 36,060,851 $ 13,046,096 $ 49,106,947
============================= ==============
F-2
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
HISTORICAL FOR THREE PRO FORMA FOR
MONTHS ENDED PRO FORMA THREE MONTHS ENDED
MARCH 31, 2006 ADJUSTMENTS MARCH 31, 2006
-------------------- ------------- ------------------
(Note 2)
Revenues:
Products $ 9,543,801 $ (3,704,333) $ 5,839,469
Services 3,365,370 (845,500) 2,519,870
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TOTAL REVENUE 12,909,172 (4,549,833) 8,359,339
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Cost of revenue:
Products 5,443,048 (788,103) 4,654,945
Services 2,348,442 (406,664) 1,941,777
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Total cost of revenue 7,791,490 (1,194,767) 6,596,723
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GROSS MARGIN 5,117,682 (3,355,066) 1,762,616
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- -
Selling, general and administrative 5,987,905 (2,028,856) 3,959,049
Amortization 644,547 (580,995) 63,552
Depreciation 107,376 (40,652) 66,724
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6,739,829 (2,650,503) 4,089,326
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LOSS FROM OPERATIONS (1,622,147) (704,563) (2,326,710)
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Other income (expense)
Interest income 239 (106) 133
Interest expense (628,934) 5,375 (623,559)
Loss on Debt refinancing (1,232,174) (1,232,174)
Other income (expense) (59,107) 68,260 9,153
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(1,919,975) 73,529 (1,846,446)
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- -
LOSS BEFORE INCOME TAX (3,542,122) (631,034) (4,173,156)
Income tax expense (94,339) 94,339 -
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NET LOSS (3,636,461) (536,695) (4,173,156)
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Accretion of redeemable preferred stock to
redemption amount (654,392) (654,392)
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NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (4,290,852) $ (536,695) $ (4,827,548)
=======================================================
Weighted average number of common shares
outstanding - basic and diluted 13,326,810 13,326,810
============= =============
Loss per share - basic and diluted:
Net loss per share applicable to common stockholders $ (0.32) $ (0.04) $ (0.36)
=======================================================
F-3
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
HISTORICAL FOR PRO FORMA FOR
YEAR ENDED PRO FORMA YEAR ENDED
DECEMBER 31, 2005 ADJUSTMENTS DECEMBER 31, 2005
----------------- --------------- -----------------
(NOTE 2)
Revenues:
Products $ 37,607,872 $ (10,167,537) $ 27,440,335
Services 13,224,064 (2,729,771) 10,494,293
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TOTAL REVENUE 50,831,936 (12,897,308) 37,934,628
--------------------------------------------------------
Cost of revenue:
Products 25,448,135 (2,645,428) 22,802,707
Services 9,058,835 (2,077,948) 6,980,888
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Total cost of revenue 34,506,970 (4,723,375) 29,783,595
--------------------------------------------------------
GROSS MARGIN 16,324,965 (8,173,933) 8,151,033
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Selling, general and administrative 20,516,251 (6,407,991) 14,108,260
Amortization 3,229,919 (2,305,679) 924,240
Depreciation 465,747 (139,833) 325,913
Impairment of Goodwill 4,151,450 - 4,151,450
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28,363,367 (8,853,503) 19,509,864
--------------------------------------------------------
LOSS FROM OPERATIONS (12,038,401) 679,570 (11,358,831)
--------------------------------------------------------
Other income (expense):
Interest income 33,317 (29,719) 3,598
Interest expense (2,424,218) (2,424,218)
Other income (expense) 672,779 (705,836) (33,058)
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(1,718,122) (735,555) (2,453,678)
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LOSS BEFORE INCOME TAX (13,756,524) (55,985) (13,812,509)
Income tax expense (469,034) 469,034 -
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NET LOSS (14,225,558) 413,049 (13,812,509)
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Accretion of redeemable preferred stock
to redemption amount (2,617,567) (2,617,567)
--------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (16,843,125) $ 413,049 $ (16,430,076)
========================================================
Weighted average number of common shares
outstanding - basic and diluted 12,541,642 12,541,642
================ ===============
Loss per share - basic and diluted:
Net loss per share applicable to common
stockholders $ (1.34) $ (0.03) $ (1.31)
========================================================
F-4
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATD FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2006, AND THE
YEAR ENDED DECEMBER 31, 2005
Entry 1) To reflect the sales price of $33 million, of which $30.5 million
was received in cash at the closing date of the sale, and
$2,500,000 was placed in escrow (presented as other current
assets in the March 31, 2006 pro forma balance sheet). This entry
also reflects the payment of $2,360,000 of costs incurred by our
company in connection with the sale.
Entry 2) To reflect the sale of FPDI assets and assumption of FPDI
liabilities by the Buyers, as if the transaction had occurred on
March 31, 2006 for the pro forma consolidated balance sheet and
January 1 of each period for the pro forma consolidated
statements of operations.
Entry 3) To reflect a decrease in stockholders' deficit based on a
calculated gain on the sale of approximately $17.5 million. This
gain includes $2,000,000 of earn-out (presented as a receivable
in other current assets at March 31, 2006). This earn-out amount
is the portion of the potential $5 million that is reasonably
estimated to be received for fiscal years 2006, 2007 and 2008
(the earn-out period) at the date of the transaction.
We do not anticipate incurring any income tax expense related to
the gain based on available net operating loss carry forwards.
F-5
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
2.1 Purchase Agreement, dated July 31, 2006, among
our company, Managed Storage International,
Inc., FPD Acquisition Corporation and 1706045
Ontario Limited.
10.1 Letter Agreement, dated July 27, 2006,
between our company and Alfred Curmi.
10.2 Amendment to Letter Agreement , dated July 27,
2006, between our company and Alfred Curmi.
99.1 Press release dated August 2, 2006 announcing
the consummation of the sale of our Front
Porch division.
99.2 Press release dated August 2, 2006 announcing
the settlement with one of our creditors.