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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): April 1, 2005
ENHERENT CORP.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-23315 13-3914972
- ---------------------------- ----------------------- -------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
192 Lexington Avenue, New York, New York 10016
- --------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 889-7722
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))
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EXPLANATORY NOTE
On April 1, 2005, we consummated the merger (the "Merger") between
ENHERENT CORP., a Delaware corporation ("ENHERENT"), and DYNAX SOLUTIONS, INC.,
a Delaware corporation ("DYNAX"), described in the joint proxy
statement/prospectus dated February 7, 2005 (the "Proxy Statement") previously
filed with the Securities and Exchange Commission ("SEC") relating to the
Special Meeting of Stockholders of the Company held on April 1, 2005 (the
"Stockholder Meeting").
We hereby amend Item 9.01 of our current report on Form 8-K filed on April
6, 2005 to include financial statements of the business acquired and pro forma
financial information in accordance with Items 9.01(a) and (b) within 71
calendar days after the date on which the initial report on Form 8-K was
required to be filed. Except as set forth in Item 9.01 below, no other changes
are being made to our current report on Form 8-K filed on April 6, 2005.
SECTION 9 -- FINANCIAL STATEMENTS AND EXHIBITS
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statement of Dynax Solutions, Inc.
Page
----
Report of Independent Registered Public Accounting Firm................................................ F-1
Consolidated Balance Sheets at December 31, 2003 and 2004 (audited) and March 31, 2005 (unaudited)..... F-2
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficiency) F-3
for the Years Ended December 31, 2002, 2003 and 2004 (audited) and the Three Months Ended
March 31, 2005 (unaudited)........................................................................
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003 and F-5
2004 (audited) and the Three Months Ended March 31, 2004 and 2005 (unaudited).....................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and F-6
2004 (audited) and the Three Months Ended March 31, 2004 and 2005 (unaudited).....................
Notes to Consolidated Financial Statements............................................................. F-7
(b) Pro Forma Financial Information
Page
----
Unaudited Pro Forma Condensed Consolidated Balance Sheets as of March 31, 2005......................... F-23
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year F-24
Ended December 31, 2004...........................................................................
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Three F-25
Months Ended March 31, 2005.......................................................................
Notes to Pro Forma Combined Financial Statements....................................................... F-26
1
(c) Exhibits. The following Exhibits have been filed as a part of this
Report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Agreement and Plan of Merger dated as of October 12, 2004, by and between ENHERENT CORP.
and DYNAX SOLUTIONS, INC. (Incorporated by reference to Exhibit 2.1 of ENHERENT's Form
10-Q filed November 15, 2004).
2.2 First Amendment to Agreement and Plan of Merger dated as of November 4, 2004, by and
between ENHERENT CORP. and DYNAX SOLUTIONS, INC. (Incorporated by reference to Exhibit
2.2 of ENHERENT's Form 10-Q filed November 15, 2004).
3.1* Certificate of Amendment of Restated Certificate of Incorporation of ENHERENT CORP. as
filed with the Secretary of State of Delaware on April 1, 2005.
3.2* Certificate of Merger merging DYNAX SOLUTIONS, INC. into ENHERENT CORP. as filed with
the Secretary of State of Delaware on April 1, 2005.
10.1 Preferred Stock Agreement dated as of October 28, 2004, by and among the Company and the
Preferred Stockholders named therein (Incorporated by reference to Exhibit 4.5 of the
Company's Form 10-Q filed November 15, 2004).
10.2* Amended and Restated Credit Agreement among ENHERENT CORP., certain subsidiaries listed
therein, Ableco Finance LLC and certain lenders party thereto.
10.3* Intercreditor and Subordination Agreement among ENHERENT CORP., certain subsidiaries
listed therein, Ableco Finance LLC and certain lenders party thereto.
10.4* Consulting Agreement dated April 1, 2005 between Douglas A. Catalano and ENHERENT CORP.
10.5* Employment Agreement dated April 1, 2005 between Lori Stanley and ENHERENT CORP.
10.6* Employment Agreement dated April 1, 2005 between Roger DiPiano and ENHERENT CORP.
10.7* Employment Agreement dated April 1, 2005 between David Green and ENHERENT CORP.
23.1 Consent of Cornick, Garber & Sandler, LLP (filed herewith)
99.1* Press Release dated April 1, 2005.
* Previously filed.
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
DYNAX SOLUTIONS, INC.
We have audited the accompanying consolidated balance sheets of DYNAX
SOLUTIONS, INC. AND SUBSIDIARIES as at December 31, 2004 and December 31, 2003
and the related consolidated statements of operations, changes in stockholders'
equity (capital deficiency) and cash flows for each of the three years in the
period ended December 31, 2004. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 consolidated financial position of Dynax
Solutions, Inc. and Subsidiaries as at December 31, 2004 and December 31, 2003,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with generally accepted accounting principles in the United States.
/s/ Cornick, Garber & Sandler, LLP
-----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK, NEW YORK
JUNE 13, 2005
F-1
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2005 December 31, December 31,
(Unaudited) 2004 2003
-------------- --------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 151,497 $ 28,647 $ 875,537
Accounts receivable 2,406,036 3,033,280 2,816,423
Prepaid and refundable taxes 5,643 9,733 52,987
Prepaid expenses and other current assets 105,252 113,012 3,881
-------------- --------------- --------------
TOTAL CURRENT ASSETS 2,668,428 3,184,672 3,748,828
FURNITURE, EQUIPMENT AND IMPROVEMENTS,
AT COST, LESS ACCUMULATED DEPRECIATION 253,959 285,725 479,394
DEFERRED ENHERENT ACQUISITION COSTS 638,653 383,049
OTHER ASSETS 135,012
-------------- --------------- --------------
TOTAL $ 3,561,040 $ 3,853,446 $ 4,363,234
============== =============== ==============
LIABILITIES
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,967,763 $ 3,172,885 $ 2,816,892
Accounts payable and accrued expenses 2,014,453 2,042,811 1,448,291
Deferred revenue 286,979 99,252 152,185
Accrued compensation and benefits 605,883 222,639 776,045
-------------- --------------- --------------
TOTAL CURRENT LIABILITIES 5,875,078 5,537,587 5,193,413
-------------- --------------- --------------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion above 2,167,658 2,203,715 2,614,207
Noncurrent rent payable 36,978 43,215 60,609
-------------- --------------- --------------
TOTAL LONG-TERM LIABILITIES 2,204,636 2,246,930 2,674,816
-------------- --------------- --------------
TOTAL LIABILITIES 8,079,714 7,784,517 7,868,229
-------------- --------------- --------------
COMMITMENTS
CAPITAL DEFICIENCY
COMMON STOCK ($.001 par value, 20,000,000 shares authorized,
5,908,259 issued in 2005 and 2004 and 5,516,276 issued in
2003) 5,908 5,908 5,516
ADDITIONAL PAID-IN CAPITAL 23,348,657 23,348,657 23,120,112
ACCUMULATED DEFICIT (27,873,239) (27,285,636) (26,609,560)
-------------- --------------- --------------
TOTAL (4,518,674) (3,931,071) (3,483,932)
LESS COST OF 108,017 SHARES OF COMMON STOCK HELD IN TREASURY (21,063)
-------------- --------------- --------------
TOTAL CAPITAL DEFICIENCY (4,518,674) (3,931,071) (3,504,995)
-------------- --------------- --------------
TOTAL $ 3,561,040 $ 3,853,446 $ 4,363,234
============== =============== ==============
The notes to financial statements are made a part hereof.
F-2
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 (AUDITED) AND
FOR THE THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
Series D Preferred Stock Common Stock
------------------------ ------------------
Number Number Additional
of of Paid-in
Shares Amount Shares Amount Capital
-------- ---------- --------- ------ ----------
BALANCE - JANUARY 1, 2002 1,015,594 $10,742,270 1,828,759 $ 1,829 $9,843,029
ACCRETION OF PREFERRED STOCK
STOCK DIVIDENDS ON SERIES D
PREFERRED STOCK 51,441 617,292 (617,292)
STOCK RECEIVED FROM FORMER
EXECUTIVE OFFICER
CASH IN LIEU OF FRACTIONAL SHARES
ON PREFERRED STOCK DIVIDEND
NET LOSS FOR THE YEAR ENDED
DECEMBER 31, 2002
--------- ----------- --------- ------- ----------
BALANCE - DECEMBER 31, 2002
(CARRIED FORWARD) 1,067,035 11,359,562 1,828,759 1,829 9,225,737
Common Stock
Held in Treasury
-------------------
Number Total
Accumulated of Stockholders' Equity
Deficit Shares Amount (Capital Deficiency)
------------- -------- -------- --------------------
BALANCE - JANUARY 1, 2002 $(19,908,741) $ 678,387
ACCRETION OF PREFERRED STOCK (107,783) (107,783)
STOCK DIVIDENDS ON SERIES D
PREFERRED STOCK
STOCK RECEIVED FROM FORMER
EXECUTIVE OFFICER 108,017 $(21,063) (21,063)
CASH IN LIEU OF FRACTIONAL SHARES (348) (348)
ON PREFERRED STOCK DIVIDEND
NET LOSS FOR THE YEAR ENDED
DECEMBER 31, 2002 (6,061,760) (6,061,760)
------------ -------- -------- --------------------
BALANCE - DECEMBER 31, 2002
(CARRIED FORWARD) (26,078,632) 108,017 (21,063) (5,512,567)
(Continued)
F-3
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 (AUDITED) AND
FOR THE THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
Series D Preferred Stock Common Stock
------------------------- ---------------------
Number Number Additional
of of Paid-in
Shares Amount Shares Amount Capital
----------- ------------ ---------- -------- -----------
BALANCE - DECEMBER 31, 2002
(BROUGHT FORWARD) 1,067,035 $ 11,359,562 1,828,759 $ 1,829 $ 9,225,737
STOCK DIVIDENDS ON SERIES
D PREFERRED STOCK 53,352 640,221 (640,221)
CASH IN LIEU OF FRACTIONAL SHARES
ON PREFERRED STOCK DIVIDEND
STOCK AND STOCK OPTIONS ISSUED
IN LIEU OF COMPENSATION/
SEVERANCE 134,211 134 63,366
COMMON STOCK ISSUED IN EX-
CHANGE OF SERIES D PREFERRED
STOCK (1,120,387) (11,999,783) 3,200,389 3,200 11,996,583
COMMON STOCK ISSUED IN EXCHANGE
OF SERIES A AND C MANDATORY
REDEEMABLE PREFERRED STOCK 352,917 353 2,474,647
NET LOSS FOR THE YEAR ENDED
DECEMBER 31, 2003
----------- ------------ ---------- ------- -----------
BALANCE - DECEMBER 31, 2003 -- -- 5,516,276 5,516 23,120,112
TREASURY STOCK RETIRED (108,017) (108) (20,955)
COMMON STOCK ISSUED RELATING TO
AMENDED CEO AGREEMENT 500,000 500 249,500
NET LOSS FOR THE YEAR ENDED
DECEMBER 31, 2004
----------- ------------ ---------- ------- -----------
BALANCE - DECEMBER 31, 2004 -- -- 5,908,259 5,908 23,348,657
NET LOSS FOR THE THREE MONTHS
ENDED MARCH 31, 2005
----------- ------------ ---------- ------- -----------
BALANCE - MARCH 31, 2005 -- $ -- 5,908,259 $ 5,908 $23,348,657
=========== ============ ========== ======= ===========
Common Stock
Held in Treasury
-------------------
Number Total
Accumulated of Stockholders' Equity
Deficit Shares Amount (Capital Deficiency)
------------ -------- --------- --------------------
BALANCE - DECEMBER 31, 2002
(BROUGHT FORWARD) $(26,078,632) 108,017 $ (21,063) $ (5,512,567)
STOCK DIVIDENDS ON SERIES
D PREFERRED STOCK
CASH IN LIEU OF FRACTIONAL SHARES
ON PREFERRED STOCK DIVIDEND (1,043) (1,043)
STOCK AND STOCK OPTIONS ISSUED
IN LIEU OF COMPENSATION/
SEVERANCE 63,500
COMMON STOCK ISSUED IN EX-
CHANGE OF SERIES D PREFERRED
STOCK
COMMON STOCK ISSUED IN EXCHANGE
OF SERIES A AND C MANDATORY
REDEEMABLE PREFERRED STOCK 2,475,000
NET LOSS FOR THE YEAR ENDED
DECEMBER 31, 2003 (529,885) (529,885)
------------ -------- --------- --------------------
BALANCE - DECEMBER 31, 2003 (26,609,560) 108,017 (21,063) (3,504,995)
TREASURY STOCK RETIRED (108,017) 21,063
COMMON STOCK ISSUED RELATING TO
AMENDED CEO AGREEMENT 250,000
NET LOSS FOR THE YEAR ENDED
DECEMBER 31, 2004 (676,076) (676,076)
------------ -------- --------- --------------------
BALANCE - DECEMBER 31, 2004 (27,285,636) -- -- (3,931,071)
NET LOSS FOR THE THREE MONTHS
ENDED MARCH 31, 2005 (587,603) (587,603)
------------ -------- --------- --------------------
BALANCE - MARCH 31, 2005 $(27,873,239) -- $ -- $ (4,518,674)
============ ======== ========= ====================
The notes to financial statements are made a part hereof.
F-4
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Year Ended
March 31, December 31,
--------------------------- --------------------------------------
2005 2004 2004 2003 2002
---------- ---------- ----------- ----------- -----------
(Unaudited)
REVENUES:
Service revenue $3,087,362 $3,406,204 $14,376,625 $16,363,720 $ 22,342,757
Equipment and software revenue 688,323 1,843,472 4,024,282 2,703,802 3,167,436
---------- ---------- ----------- ----------- ------------
TOTAL REVENUES 3,775,685 5,249,676 18,400,907 19,067,522 25,510,193
---------- ---------- ----------- ----------- ------------
COST OF REVENUES:
Cost of services 2,376,874 2,658,959 10,819,807 12,167,544 16,426,699
Cost of equipment and software revenue 510,409 1,566,148 3,330,868 2,012,549 2,744,728
---------- ---------- ----------- ----------- ------------
COST OF REVENUES 2,887,283 4,225,107 14,150,675 14,180,093 19,171,427
---------- ---------- ----------- ----------- ------------
GROSS PROFIT 888,402 1,024,569 4,250,232 4,887,429 6,338,766
---------- ---------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling, general and administrative 1,284,980 1,047,127 4,170,406 4,252,513 6,201,699
Software impairment charge 1,681,874
Restructuring charges 366,495 502,772
Depreciation and amortization expense 65,330 65,180 264,778 392,816 473,830
---------- ---------- ----------- ----------- ------------
TOTAL OPERATING EXPENSES 1,350,310 1,112,307 4,435,184 5,011,824 8,860,175
---------- ---------- ----------- ----------- ------------
LOSS BEFORE OTHER INCOME AND EXPENSES,
INCOME TAXES, AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (461,908) (87,738) (184,952) (124,395) (2,521,409)
OTHER INCOME AND (EXPENSES):
Other income 245,705
Interest expense (118,045) (122,112) (465,202) (507,071) (724,113)
Forgiveness of debt 426,965
Recapitalization costs (307,514)
---------- ---------- ----------- ----------- ------------
LOSS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (579,953) (209,850) (650,154) (512,015) (2,999,817)
INCOME TAX EXPENSE (7,650) (25,922) (17,870) (35,153)
---------- ---------- ----------- ----------- ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (587,603) (209,850) (676,076) (529,885) (3,034,970)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR GOODWILL (3,026,790)
---------- ---------- ----------- ----------- ------------
NET LOSS $ (587,603) $ (209,850) $ (676,076) $ (529,885) $ (6,061,760)
========== ========== =========== =========== ============
The notes to financial statements are made a part hereof.
F-5
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Year Ended
March 31, December 31,
--------------------------- -------------------------------------
2005 2004 2004 2003 2002
------------- ---------- ----------- ----------- ----------
(Unaudited)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (587,603) $ (209,850) $ (676,076) $ (529,885) $(6,061,760)
Adjustments to reconcile net loss to net
cash used in operating activities:
Bad debt expense (50,000) 247,573
Depreciation and amortization 65,330 65,180 264,778 392,816 473,830
Goodwill and software impairment charges 4,708,664
Deferred rent (6,237) (3,098) (17,394) (11,754) (18,475)
Deferred revenue 187,727 51,530 (52,933) 1,414 150,771
Forgiveness of debt (426,965)
Common stock issued to chief executive officer 250,000
Common stock and stock options issued
in lieu of compensation/severance costs 63,500
Deferred compensation 76,282
Other income not providing cash (21,063)
Changes in assets and liabilities:
Accounts receivable 627,243 350,546 (166,857) 1,557,423 1,210,031
Prepaid expenses and other current assets 7,760 7,374 (109,131) 47,451 741,210
Prepaid and refundable taxes 4,090 43,254 46,361 755,840
Other assets 135,012 (57,238) 43,759
Accounts payable, accrued expense and
accrued compensation and benefits 201,557 (47,842) (175,871) 403,290 (1,386,084)
------------- ---------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 499,867 213,840 (555,218) 1,486,413 920,578
------------- ---------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures, equipment
and improvements (33,564) (33,890) (35,695) (149,943) (50,750)
Deferred enherent acquisition costs (102,274) (166,064)
Repayments of officers' loans 1,379
------------- ---------- ----------- ----------- -----------
NET CASH USED FOR INVESTING
ACTIVITIES (135,838) (33,890) (201,759) (149,943) (49,371)
------------- ---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash in lieu of fractional shares on preferred
stock dividends (1,043) (348)
Repayment of acquisition loans (22,500) (37,492) (277,293) (177,861)
Repayment of compensation note payable (26,238) (86,880)
Net proceeds (repayments) under revolving loan (129,226) (133,379) 359,796 (669,969) (848,017)
Principal repayments on term loan (75,000) (75,000) (300,000) (325,000) (3,887,824)
Principal payments on capital lease obligations (10,715) (15,359) (25,336) (135,836) (248,290)
Decrease in restricted cash 3,048,821
Loan proceeds from related party 100,000
Repayment of related party loans (128,293) (48,000)
------------- ---------- ----------- ----------- -----------
NET CASH USED FOR FINANCING
ACTIVITIES (241,179) (246,238) (89,912) (1,537,434) (2,061,519)
------------- ---------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALANTS 122,850 (66,288) (846,889) (200,964) (1,190,312)
CASH AND CASH EQUIVALENTS - BEGINNING 28,647 875,536 875,536 1,076,501 2,266,813
------------- ---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 151,497 $ 809,248 $ 28,647 $ 875,537 $ 1,076,501
============= ========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid (received) during the
period for:
Interest $ 111,731 $ 89,625 $ 412,015 $ 576,253 $ 712,502
============= ========== =========== =========== ===========
Income taxes $ 3,560 $ (17,332) $ 22,894 $ 64,962
============= =========== =========== ===========
Noncash investing and financing transactions:
Equipment acquired under capital lease $ 35,414 $ 90,308
=========== ===========
Accrued deferred acquisition costs $ 118,330 $ 216,985
============= ===========
The notes to financial statements are made a part hereof.
F-6
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Dynax Solutions Inc. is a strategic solutions and professional services
company. The services the Company offers are integration services,
network security and application services. The Company offers solutions
for Home Healthcare, Sales Force Automation and Apparel Distribution.
The Company also utilizes its own software such as "Commercial Paper"
and "Accounting Software" in developing business solutions for
financial institutions.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries, which are wholly owned. All material
intercompany balances and transactions have been eliminated.
On April 1, 2005, the Company was merged into enherent Corp. (enherent)
in a transaction, which for financial accounting purposes is being
accounted for as a purchase of enherent by the Company (see Note B).
The attached financial statements do not include the operations or
amounts of enherent.
CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments with original
maturities of three months or less as cash equivalents.
DEPRECIATION OF FURNITURE, EQUIPMENT AND IMPROVEMENTS
Depreciation of furniture, equipment and improvements is computed on
the straight-line method for financial accounting purposes. For income
tax purposes, depreciation is computed by accelerated methods.
REVENUE RECOGNITION
The Company recognizes revenue when it is realized or realizable and
earned. The Company considers revenue realized or realizable and earned
when it has persuasive evidence of an arrangement, the product has been
shipped or the services have been provided to the customer, the sales
price is fixed or determinable and collectibility is reasonably
assured. The Company reduces revenue for estimated customer returns and
other allowances. In addition to the aforementioned general policy, the
following are the specific revenue recognition policies for each major
category of revenue.
(Continued)
F-7
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SERVICES
The terms of service contracts generally are for periods of less than
one year. Revenue from time and material service contracts is
recognized as the services are provided. Revenue from services
requiring the delivery of unique products and/or services is recognized
using the percentage-of-completion (POC) method of accounting. In using
the POC method, the Company records revenue by reference to the costs
incurred to date and the estimated costs remaining to fulfill the
contracts. Provisions for losses are recognized during the period in
which the loss first becomes apparent. Revenue from maintenance is
recognized over the contractual period or as the services are
performed.
In some of the Company's services contracts, the Company bills the
customer prior to performing the service. This situation gives rise to
deferred income. In other services contracts, the Company performs
services prior to billing the customer. This situation gives rise to
unbilled accounts receivable, which are included in accounts receivable
in the consolidated balance sheet. In these circumstances, billing
usually occurs shortly after the Company performs the services but can
range up to three months later. Unbilled receivables are expected to be
both billed and collected within six months.
HARDWARE
Revenue from the sale of hardware sales is recognized when the product
is shipped to the customer and there are no unfulfilled company
obligations that affect the customer's final acceptance of the
arrangement.
SOFTWARE
Revenue from the sale of one-time charge licensed software is
recognized at the inception of the license term. Revenue from
maintenance, unspecified upgrades and technical support is recognized
over the period such items are delivered.
(Continued)
F-8
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents and accounts receivable
and accounts payable and accrued expenses approximate fair value due to
the short-term maturities of the instruments between the Company and an
outside lender. The carrying values of the revolving credit facility,
long-term notes, loans payable and capital leases approximate fair
value as it is believed that the interest rates are approximately the
same as those that would be available to the Company in similar
borrowing arrangements.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes." Under this method, deferred taxes (when required)
are provided based on the difference between the financial reporting
and income tax bases of assets and liabilities and net operating losses
at the statutory rates enacted for future periods. The Company has a
policy of establishing a valuation allowance when it is more likely
than not that the Company will not realize the benefits of its deferred
tax assets in the future.
PREFERRED STOCK ACCOUNTING
Series A and C preferred shares that were issued as purchase
consideration to the sellers in business acquisition transactions were
recorded at their fair values on their respective dates of issuance.
The fair values were determined based upon independent valuation
analyses performed by an outside appraiser at date of issuance.
(Continued)
F-9
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREFERRED STOCK ACCOUNTING (CONTINUED)
Prior to recapitalization (Note C), the differences between the
carrying values of the preferred stock and the mandatory redemption
amounts (which represented a deemed dividend) were being accreted from
the date of issuance of each of the respective series by periodically
increasing the value of the preferred stock and charging accumulated
deficit.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, Statement of Financial Accounting Standards No. 142
("SFAS 142") "Goodwill and Other Intangible Assets" was issued. Under
SFAS 142, goodwill is no longer amortized after December 31, 2001.
However, it must be evaluated for impairment at least annually and any
losses due to impairment are recognized in earnings. SFAS 142 became
effective for the Company on January 1, 2002.
In August 2001, Statement of Financial Accounting Standards No. 144
("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived
Assets" was issued. Under SFAS 144, the Company is required to test
long-lived assets other than goodwill for impairment whenever events or
changes in circumstances indicate that their carrying value may not be
recoverable.
In 2002, the Company conducted independent valuations to test goodwill
and other intangible asset impairments in accordance with the
provisions of SFAS 142 and SFAS 144. As a result, the Company recorded
goodwill impairment losses of $3,026,790 and a software impairment
charge of $1,681,874 in 2002. The fair value of goodwill and software
intangible assets was estimated using cash flow projections to forecast
potential revenue growth and the profitability levels associated with
the future prospects of the related reporting units, as defined. In
accordance with the provisions of SFAS 142 the goodwill impairment
charge recorded in 2002 is reflected as a change in accounting
principle.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense,
including marketing expenses for the years ended December 31, 2004,
2003, and 2002 were approximately $38,000 $62,000 and $90,000,
respectively, and for the three month periods ended March 31, 2005 and
2004 were approximately $6,000 and $ 5,000, respectively.
(Continued)
F-10
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE A - 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 are reported in the consolidated financial
statements and accompanying disclosures. Although these estimates are
based on management's best knowledge of current events and actions that
the Company may undertake in the future, actual results may be
different from the estimates.
NOTE B - MERGER WITH ENHERENT CORP.
On October 12, 2004, the Company entered into a definitive Agreement
and Plan of Merger with enherent Corp. (enherent) to combine in a
stock-for-stock exchange with enherent as the legal surviving entity.
The merger was completed on April 1, 2005. In connection with the
merger, shares of enherent were issued in exchange for shares of the
Company on a ratio of 3.8539 shares of enherent for each share of the
Company. Enherent stock options were also exchanged for outstanding
stock options of the Company (See Note H) at the same exchange ratio.
Following the merger, the former stockholders of the Company own
approximately 50% of the common stock of enherent Corp. on a fully
diluted basis.
The merger will be accounted for using the purchase method of
accounting for financial reporting purposes. In a merger-of-equals
transaction, the purchase method requires the identification of the
acquiring entity based on the criteria of Statement of Financial
Accounting Standards No. 141 ("FAS 141"), "Accounting for Business
Combinations". Based on an analysis of minority interests in the
surviving corporation and the composition of the board of directors and
senior management of the surviving corporation, for accounting purposes
the Company has been identified as the acquiring entity, and enherent
as the acquired entity. Under purchase accounting, the assets and
liabilities of an acquired company (enherent) as of the effective time
of the acquisition are recorded at their respective fair values and
added to those of the acquiring company. Financial statements issued
after the consummation of an acquisition accounted for as a purchase
would reflect such values and not be restated retroactively to reflect
the historical financial position or results of operations of the
acquired company. The historical financial statements of the surviving
corporation will be those of the Company and comparative statements of
the surviving corporation will be those of the accounting acquirer
rather than enherent.
(Continued)
F-11
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE C - RECAPITALIZATION
On November 18, 2003, the Company's stockholders approved an offer to
exchange the then outstanding Series A, C and D preferred stock for
3,553,306 shares of common stock. In addition, the holder of a
short-term put warrant liability of $426,965 agreed to its
cancellation. The Company incurred $307,514 of legal and other
professional fees in connection with the recapitalization, which costs
have been charged to operations in 2003.
NOTE D - RESTRUCTURING CHARGES
During 2002 and continuing into 2003, the Company adopted a
restructuring plan to reduce operating costs and increase operating
efficiency. The plan included hiring a new Chief Executive Officer and
changing the Company's operating structure. Management has resolved to
operate the Company efficiently within its current working capital
constraints. Systematic cost reduction plans have been implemented and
further reductions are being considered. Although the results of these
actions cannot be predicted, management believes that these strategies
are appropriate and will help the Company effectively improve its
operations.
As a result of the cost reduction plan, in 2002 the Company charged to
operations approximately $120,000 for lease termination fees incurred
during the third quarter of 2002. In addition, the Company entered into
a separation agreement with a former executive officer in August 2002
providing, among other things, for severance and deferred compensation
totaling approximately $383,000. The total cost of the severance and
deferred compensation was charged to operations for the year ended
December 31, 2002.
As a result of the continuing restructuring measures in 2003, the
Company entered into separation agreements with former executives of
the Company, including settlement of all claims by the Company's former
Chairman of the Board. In this connection, the Company charged to
operations $366,495 representing the net compensation, severance and
deferred compensation of these former executives for the year ended
December 31, 2003 and claims for prior services.
(Continued)
F-12
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE E - FURNITURE, EQUIPMENT AND IMPROVEMENTS
Furniture, equipment and improvements consist of the following:
December 31, Estimated
March 31, --------------------------- Useful Lives
2005 2004 2003 (Years)
------------ ----------- ----------- ------------
Furniture, fixtures and
equipment $ 1,973,945 $ 1,940,381 $ 1,869,272 7
Improvements 272,818 272,818 272,818 7-10
------------ ----------- -----------
Total 2,246,763 2,213,199 2,142,090
Less accumulated
depreciation (1,992,804) (1,927,474) (1,662,696)
------------ ----------- -----------
Balance* $ 253,959 $ 285,725 $ 479,394
============ =========== ===========
*Balance includes net assets under capital leases of approximately $51,000 in
2005 and $16,000 in 2004.
NOTE F - NOTES PAYABLE AND CAPITAL LEASES
Notes payable and capital leases consist of the following:
March 31, December 31,
2005 2004
---------- ------------
Ableco Finance LLC: (*)
Revolving Line $2,467,323 $ 2,596,549
Term Loan A 150,103 225,103
Term Loan B 1,700,000 1,700,000
Business Acquisition Notes: (**)
Due in monthly payments equal to
(i) $5,000 or (ii) $7,500 if EBITDA is
at least $75,000 or (iii) $10,000 if EBITDA
is $100,000 or greater, plus interest at
5.75% a year 112,623 112,623
Due in monthly payments equal to (i) $10,000 or (ii) $15,000
if EBITDA is at least $75,000 or (iii) $20,000 if EBITDA is
$100,000 or greater, plus interest at 4.75% a year. 344,207 344,207
(Continued)
F-13
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE F - NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
Due to former Board Chairman in
quarterly payments of $31,250
through March 2008; balance
stated net of imputed interest
at 8.6% a year $ 300,157 $ 326,395
Capital Leases 61,008 71,723
---------- ----------
Total notes payable and capital leases $5,135,421 $5,376,600
========== ==========
Capital leases are stated net of interest at nominal amounts. Payments
for notes payable and capital leases are due as follows:
Year ending March 31:
2006 $2,967,763
2007 313,294
2008 579,364
2009 425,000
2010 850,000
----------
Total $5,135,421
==========
*On April 1, 2005, following the consummation of the enherent merger,
the Company entered into an Amended and Restated Credit Agreement with
Ableco Finance LLC ("Ableco"). The Amended Credit Agreement provides
the Company with a three-year extension of the revolving credit
facility previously outstanding and an increase in the revolving credit
facility from $4.0 million to $6.0 million. The Amended Credit
Agreement also amended the terms of Term Loan A and Term Loan B
previously outstanding. The loans are collateralized by all the
tangible and intangible assets of the Company. Borrowings under the
revolving credit facility bear interest at 3% above the greater of (a)
the prime rate; or (b) 7.75% a year, payable monthly and are limited in
general to 85% of eligible accounts receivable and 80% of the net
amount of unbilled accounts receivable.
Term Loan A is payable in monthly installments of $25,000 plus interest
at 12.25% annually to September 30, 2005.
(Continued)
F-14
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE F - NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
Term Loan B is payable in semi-annual installments of $212,500
commencing October 1, 2007, with such installments increasing to
$425,000 on October 1, 2009, plus interest at 3% annually to April 1,
2010. The principal amount of Term Loan B will be reduced by $250,000
if the outstanding principal of the Term B loan less such $250,000
reduction has been repaid in full on or before April 1, 2006. The
principal amount of the Term Loan B will be reduced by $125,000 if the
outstanding principal of the Term Loan B less such $125,000 reduction
has been repaid in full between April 1, 2006 and April 1, 2007.
The loan agreement requires the Company to maintain certain financial
covenants. At March 31, 2005 and December 31, 2004, the Company was in
violation of one covenant which has been waived by the lender.
The classification of Term Loan B in the attached balance sheet gives
effect to the payment terms of the Amended and Restated Credit
Agreement. The loans under the revolving credit agreement are
classified as current liabilities on the balance sheets because such
loans contain subjective acceleration clauses and lock-box
requirements.
**These notes issued in connection with prior acquisitions are
subordinated to the Ableco loans. Payments of principal or interest on
this indebtedness may not be made without the consent of Ableco. No
payments have been made since March 31, 2004. However, for financial
statement presentation purposes the balance sheet classification of
these loans has been made based upon their minimum payment terms,
without regard to payments in arrears.
NOTE G - PUT WARRANT
In connection with the revolving credit line and Term Loan A (see Note
F), the Company issued 383,859 common stock warrants to the lender in
2000 with an aggregate fair market value of $839,285 at date of
issuance. Each warrant entitled the lender to purchase one share of
common stock for $0.01 from June 24, 2002 to March 31, 2004 and
contained an anti-dilution clause for future equity issuances.
In connection with a waiver and consent dated June 13, 2000, the
Company and the lender also entered into a Put Right Agreement (the
"Put Right"). The Put Right provided the lender with the right to sell
back to the Company its rights to purchase 308,859 shares pursuant to
the common stock purchase warrant discussed above, for a purchase price
of $2,126,965.
(Continued)
F-15
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE G - PUT WARRANT (CONTINUED)
In March 2003, the Company entered into a special loan agreement with
the lender for $1,700,000, with interest payable monthly at 3% a year
(see Term Loan B in Note F). The proceeds of the loan were applied to
purchase the lender's right to exercise warrants (and the related Put
Right) for 246,859 shares, pursuant to the common stock purchase
warrant discussed above. After this transaction, the Put Right provided
the lender with the right to sell back to the Company its right to
purchase the remaining 62,000 shares pursuant to the common stock
purchase warrant discussed above for $426,965.
In connection with the recapitalization in November 2003 (Note C), the
$426,965 put warrant liability associated with the remaining 62,000
shares pursuant to the common stock purchase warrant discussed above
was cancelled. Accordingly, the Company included the $426,965
forgiveness of debt in other income on the consolidated statement of
operations for the year ended December 31, 2003.
Warrants for the 75,000 shares not subject to the put warrant remained
outstanding until March 31, 2004, when they expired.
NOTE H - STOCK OPTIONS
The Company's 1998 Stock Option Plan (the "1998 Plan"), as amended,
provides for the granting of options to purchase up to 475,400 shares
of common stock to eligible employees. The options may either be
incentive stock options (as defined in the Internal Revenue Code) or
nonqualified options. However, options granted to nonemployee directors
or advisors must be nonqualified options. At March 31, 2005, options to
purchase 83,450 shares are outstanding under the 1998 Plan.
The Company's 2000 Stock Option Plan (the "2000 Plan") as amended
provides for the granting of options to purchase up to 500,000 shares
of common stock to eligible employees, directors and advisors. The
options may either be incentive stock options or nonqualified options
under substantially the same terms and conditions as the 1998 Plan. At
March 31, 2005, options to purchase 15,750 shares are outstanding under
the 2000 Plan.
Effective January 1, 2003, the Company adopted The Dynax Solutions,
Inc. Stock Option Plan 2003 (the "2003 Plan") to provide for the
granting of options to purchase up to 2,500,000 shares of common stock
to eligible employees, directors and advisors. The options may be
incentive stock options or nonqualified options. However, options
granted to nonemployee directors or advisors must be non-qualified
options. At March 31, 2005, options to purchase 1,341,039 shares are
outstanding under the 2003 plan.
(Continued)
F-16
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE H - STOCK OPTIONS (CONTINUED)
Options granted under the 1998 Plan vest at a rate of 25% a year and
vesting schedules for options granted under the 2000 and 2003 Plans are
determined at the time each option is granted. The length, option price
and other terms of the options granted under both plans are determined
at the time the options are granted, although the term of the options
cannot exceed 10 years and incentive stock option prices may not be
less than the fair market value of the stock at the date of grant.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock Based Compensation," for stock options granted to employees and
directors and, therefore, continues to apply Accounting Principles
Board Opinion No. 25 and related interpretations in its accounting for
stock options. Accordingly, no compensation cost has been recognized
for options granted under its stock option plans. If the Company had
elected to recognize compensation cost for options granted under these
plans based on a calculated fair value at the grant dates, consistent
with the methodology prescribed by SFAS 123, the pro forma net losses
would have been approximately as follows:
Three Months Ended Year Ended
March 31, December 31,
- ------------------------ --------------------------------------
2005 2004 2004 2003 2002
- -------- -------- -------- -------- ----------
$595,603 $417,850 $902,076 $587,000 $6,165,000
======== ======== ======== ======== ==========
The fair value of the Company's options was estimated at the dates of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for options granted: expected volatility
of 222% for the years ended 2002 and 2003 and 198% for the subsequent
periods, risk-free interest rate of approximately 4% for all periods
and expected lives of ten years.
(Continued)
F-17
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE H - STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's outstanding stock options as
of March 31, 2005 and the changes during the three years and three
months then ended are as follows:
Weighted
Average
Shares Price per Share
--------- ---------------
Outstanding - January 1, 2002 519,999 $ 6.34
2002 transactions:
Forfeited (42,636) 4.51
Granted --
---------
Outstanding - December 31, 2002 477,363 6.52
2003 transactions:
Forfeited (71,813) 4.47
Granted 800,039 .47
---------
Outstanding - December 31, 2003 1,205,589 2.63
2004 transactions:
Forfeited (315,266) 7.45
Granted 550,750 .44
---------
Outstanding - December 31, 2004 1,441,073 .74
2005 transactions:
Forfeited (43,334) 1.25
Granted 42,500 .50
---------
Outstanding - March 31, 2005 1,440,239 .72
=========
(Continued)
F-18
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE H - STOCK OPTIONS (CONTINUED)
The following table summarizes information about the stock options
outstanding as at March 31, 2005:
Weighted
Average
Remaining
Exercise Number Number Contractual
Prices Outstanding Exercisable Life
- -------- ----------- ----------- -----------
$ .19 309,574 309,574 9.0
.50 941,465 800,309 9.0
.95 90,000 90,000 9.0
3.00 64,800 64,800 4.0
6.00 18,650 18,650 5.0
7.00 15,750 15,750 6.0
----------- -----------
Total 1,440,239 1,299,083
=========== ===========
The above information is stated prior to the effect of the April 1,
2005 merger with enherent (see Note B). As of merger the date, stock
options of enherent were issued in exchange for the Company's stock
options at the 3.853 for 1 exchange ratio. The exercise price of the
exchanged options was adjusted for the exchange ratio, with all other
provisions of the options remaining unchanged.
NOTE I - CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations
of credit risk primarily consist of cash and cash equivalents and trade
accounts receivable. The Company deposits its cash with high quality
credit institutions. At times, such balances may be in excess of the
Federal Deposit Insurance Corporation limit.
For the three months ended March 31, 2005, two customers accounted for
approximately 23% of revenues. For the year ended December 31, 2004,
one customer accounted for approximately 13% of revenues. No customer
accounted for over 10% of revenues for the years ended December 31,
2003 and 2002.
NOTE J - RELATED PARTY TRANSACTIONS
For the year ended December 31, 2002, the Company had sales of
approximately $250,000 to a company that is a minority stockholder of
the Company.
(Continued)
F-19
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE K - OTHER INCOME
Other income for the year ended December 31, 2002 includes an $83,000
adjustment of an estimate for a preferential payment claim by a former
bankrupt customer, the receipt of a World Trade Center Business
Recovery Grant of approximately $87,000 and the approximately $21,000
fair value of 108,017 shares of the Company's common stock received
from a former executive officer of the Company in connection with the
settlement of his obligations to the Company.
NOTE L - EMPLOYEE BENEFIT PLAN
The Company maintains a profit sharing plan under Section 401(k) of the
Internal Revenue Code covering substantially all full-time employees
who have completed one year of qualified service and meet certain age
requirements. The plan provides for optional profit sharing
contributions by the Company as determined by management. No optional
profit sharing contributions were authorized for 2005, 2004, 2003 and
2002.
NOTE M - INCOME TAXES
As of March 31, 2005, the Company has federal net operating loss
carryforwards of approximately $5,920,000 and state net operating loss
carryforwards of approximately $9,260,000 that will be available to
offset future taxable income, if any, through December 2024. A 100%
valuation allowance has been established as a reserve against the
deferred tax assets arising from the net operating losses and other net
temporary differences since it cannot, at this time, be considered more
likely than not that their benefit will be realized in the future.
The significant components of the deferred tax assets (liabilities) are
summarized below:
Net operating loss carryforwards $ 2,400,000
Deferred rent 18,000
Allowance for bad debts 14,000
Deferred compensation 138,000
Amortization 1,164,000
Depreciation 30,000
------------
Total 3,764,000
Less valuation allowance (3,764,000)
------------
Balance $ --
============
(Continued)
F-20
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE M - INCOME TAXES (CONTINUED)
As a result of the merger with enherent (Note B), the amount of net
operating loss carryforward available to be utilized in reduction of
future taxable income may be reduced to approximately $300,000 annually
as a result of the change in control provisions of Section 382 of the
Internal Revenue Code.
NOTE N - COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and operating facilities under
noncancelable operating leases, expiring at various dates through May
2007. The leases contain real estate tax and operating escalations. The
Company leases other offices on a month-to-month basis.
Rent expense is included in general and administrative expenses in the
consolidated financial statement of operations. The rentals under these
leases are recorded for financial accounting purposes on a
straight-line basis. Accrued future rentals give effect to both future
scheduled increases and certain concessions at lease inception. This
liability will be reduced in future years to the extent that the
minimal rentals payable in those years exceeds the average net expense
recorded on the straight-line basis.
The Company also leases office equipment under noncancelable operating
leases, expiring at various times through 2007.
Future minimum lease payments under operating leases are as follows:
Year ending March 31:
2006 $299,193
2007 249,866
2008 8,403
--------
Total minimum lease payments $557,462
========
Rent expense for the years ended December 31, 2004, 2003 and 2002 was
approximately $370,000, $380,000 and $449,000, respectively. Rent
expense for the three months ended March 31, 2005 and 2004 was
approximately $97,000 and $90,000, respectively.
(Continued)
F-21
DYNAX SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 IS UNAUDITED)
NOTE O - EMPLOYMENT AGREEMENTS-
As of March 31, 2005, the Company had employment agreements with two of
its executive officers which provide for aggregate annual compensation
of approximately $460,000 plus incentive bonuses as defined in the
agreements. These agreements, which were scheduled to expire in
December 2005 and in June 2005, were amended subsequent to the enherent
merger (Note B).
Under the previous terms of the employment arrangement with the
Company's chief executive officer, the chief executive officer would be
entitled to receive a cash payment of $1,500,000 in connection with the
enherent merger. However, the chief executive officer has agreed to
forego the full cash payment and instead receive a cash payment of
$250,000 payable after consummation of the merger. The $250,000 has
been accrued at March 31, 2005.
In consideration of an earlier amendment of the existing employment
agreement, including reduction in the cash payment on the change of
control and a waiver of a portion of the annual bonuses to which the
chief executive officer was entitled to, on December 15, 2004, the
Company issued the chief executive officer 500,000 shares of common
stock valued at $250,000. The Company charged $250,000 to operations
relating to stock issuance during the year ended December 31, 2004.
F-22
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
HISTORICAL
-------------------------------------
CONSOLIDATED CONSOLIDATED
DYNAX AND ENHERENT AND PRO FORMA PRO FORMA
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS COMBINED
------------ ------------ ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 151 $ 892 $ - $ 1,043
Accounts receivable 2,406 2,590 - 4,996
Prepaid expenses and other current
assets 111 169 - 280
------------ ------------ ----------- ---------
Total current assets 2,668 3,651 - 6,319
Fixed assets, net 254 14 - 268
Other assets, net - 50 - 50
Deferred enherent acquisition costs 639 - (639)(1) -
Goodwill and intangible assets - - 4,842 (2) 4,842
------------ ------------ ----------- ---------
Total $ 3,561 $ 3,715 $ 4,203 $ 11,479
============ ============ =========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Current portion of long-term debt $ 2,968 $ 50 $ - $ 3,018
Accounts payable and accrued expenses 2,014 1,390 - 3,404
Deferred revenue 287 - - 287
Accrued compensation and benefits 606 897 - 1,503
------------ ------------ ----------- ---------
Total current liabilities 5,875 2,337 - 8,212
Long term debt, net of current portion above 2,167 100 1,600 (5) 3,867
Non current rent payable 37 - - 37
------------ ------------ ----------- ---------
Total liabilities 8,079 2,437 1,600 12,116
------------ ------------ ----------- ---------
Commitments and contingencies
Series A Preferred Stock - 4,214 (4,214)(4) -
------------ ------------ ----------- ---------
Common Stockholders' Deficiency
Common Stock, par value $.001 (issued
18,448,854 enherent shares historical,
49,612,344 shares pro forma) 6 20 24 (3) 50
Additional paid in capital 23,349 94,502 (90,665)(6) 27,186
Treasury Stock (1,849,123 shares
historical) - (366) 366 (7) -
Accumulated deficit (27,873) (97,092) 97,092 (8) (27,873)
------------ ------------ ----------- ---------
Total common stockholders' deficiency (4,518) (2,936) 6,817 (637)
------------ ------------ ----------- ---------
Total $ 3,561 $ 3,715 $ 4,203 $ 11,479
============ ============ =========== =========
F-23
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
HISTORICAL
-------------------------------
CONSOLIDATED CONSOLIDATED
DYNAX AND ENHERENT AND PRO FORMA PRO FORMA
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS COMBINED
------------ ------------ ----------- ---------
Revenues $ 18,400 $ 12,963 $ - $ 31,363
Cost of revenues 14,150 9,572 - 23,722
------------ ------------ ----------- ---------
Gross profit 4,250 3,391 - 7,641
------------ ------------ ----------- ---------
Operating expenses
Selling, general and administrative expenses 4,435 4,310 (600)(9) 8,145
------------ ------------ ----------- ---------
Total operating expenses 4,435 4,310 (600) 8,145
------------ ------------ ----------- ---------
Loss from operations (185) (919) 600 (504)
Other income (expenses)
Miscellaneous (expense) income - (12) - (12)
Additional cash compensation to Dynax chief
executive officer - - (250)(11) (250)
Merger expenses (1,205) (9) (1,205)
Interest expense (465) (5) (85)(10) (555)
Interest income 3 - 3
Income tax (26) - - (14) (26)
------------ ------------ ----------- ---------
Net loss (676) (933) (940) (2,549)
Preferred stock redemption benefit to common
stockholders, net of accretion - 1,614 (1,614)(12) -
------------ ------------ ----------- ---------
Net income (loss) available to common stockholders $ (676) $ 681 $ (2,554) $ (2,549)
============ ============ =========== =========
Basic net income (loss) per share applicable to common
stockholders $ 0.04 $ (0.08)(13) $ (0.05)
============ =========== =========
Number of shares used in computing basic net income
(loss) per share 17,884 31,163 49,047
============ =========== =========
Diluted income (loss) per share $ 0.04 $ (0.08) $ (0.05)
============ =========== =========
Number of shares used in computing diluted income
(loss) per share 17,884 31,163 49,047
============ =========== =========
F-24
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
HISTORICAL
-------------------------------
CONSOLIDATED CONSOLIDATED
DYNAX AND ENHERENT AND PRO FORMA PRO FORMA
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS COMBINED
------------ ------------ ----------- ---------
Revenues $ 3,775 $ 3,729 $ - $ 7,504
Cost of revenues 2,887 2,768 - 5,655
------------ ------------ ----------- ---------
Gross profit 888 961 - 1,849
------------ ------------ ----------- ---------
Operating expenses
Selling, general and administrative expenses 1,100 1,630 (605)(9) 2,125
------------ ------------ ----------- ---------
Total operating expenses 1,100 1,630 (605) 2,125
------------ ------------ ----------- ---------
Loss from operations (212) (669) 605 (276)
Other income (expenses)
Miscellaneous (expense) income - - - -
Additional compensation to Dynax chief
executive officer (250) - - (11) (250)
Merger expenses - - (605) (9) (605)
Interest expense (118) (1) (22)(10) (141)
Interest income - - - -
Income tax (8) - - (14) (8)
------------ ------------ ----------- ---------
Net loss (588) (670) (22) (1,280)
Preferred stock redemption benefit to common
stockholders, net of accretion - (105) 105(12) -
------------ ------------ ----------- ---------
Net income (loss) available to common stockholders $ (588) $ (775) $ 83 $ (1,280)
============ ============ =========== =========
Basic net income (loss) per share applicable to
common stockholders $ (0.04) $ 0.00(13) $ (0.03)
============ =========== =========
Number of shares used in computing basic net income
(loss) per share 18,449 31,163 49,612
============ =========== =========
Diluted loss per share $ (0.04) $ 0.00 $ (0.03)
============ =========== =========
Number of shares used in computing diluted income
(loss) per share 18,449 31,163 49,612
============ =========== =========
F-25
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENT
General:
A. The merger is to be accounted for using the purchase method. In a
merger of near equals the purchase method of accounting requires the
identification of the acquiring entity. For financial accounting
purposes, Dynax Solutions, Inc. ("Dynax") is considered as the
accounting acquirer of enherent Corp. ("enherent") primarily as a
result of the following factors:
i. At the date of merger, the surviving corporation's
ownership consists of both Dynax and enherent
stockholders owning approximately 50% on a fully diluted
basis;
ii. Subsequent to the merger, the majority of the surviving
corporation's board of directors is comprised of
directors nominated by the Dynax stockholders; and
iii. Subsequent to the merger, the senior executives of the
surviving corporation are comprised of the former
officers of Dynax.
B. The pro forma condensed balance sheet has been prepared assuming the
merger was consummated on March 31, 2005. The pro forma condensed
statements of operations have been prepared assuming the transaction
was consummated at the beginning of the periods indicated.
C. The following pro forma adjustments have been applied to give effect
to the merger as follows:
Balance Sheet:
1. PURCHASE PRICE: Gives effect to the issuance of 22,663,490 shares of
enherent Corp. common stock in exchange for 100% of the equity of
Dynax. Since enherent is deemed to be the acquired entity for
accounting purposes, its purchase price is recorded at the value of
its common shares and stock options.
After consideration of the historical market price of enherent's
common stock on or about the date of the merger announcement, the
purchase price of enherent is estimated at $4.520 million. The
purchase price represents the sum of (i) the $3.769 million fair
value (or $.14 per common share) of the 26,918,854 shares of
enherent common stock, $.001 par value, to be retained by the former
common stockholders of enherent, (ii) the estimated fair value of
$112,000 for 1,335,561 outstanding enherent stock options and (iii)
Dynax merger costs of approximately $639,000.
2. ALLOCATION OF COST OF THE ACQUIRED ENTITY: The $4.842 million
excess of the fair value of enherent's common shares over the
carrying amount of enherent's net assets has been allocated to
goodwill. No allocation to other intangible assets has been included
in the pro forma unaudited condensed consolidated balance sheet as
such amount is currently believed to be immaterial. The final
allocation of the purchase price is subject to adjustment upon a
detailed review of the net assets acquired and their fair values.
F-26
The following is a summary of the goodwill computation:
Purchase price and closing costs $4,520,000
Value of tangible assets acquired:
enherent common stockholders' capital
deficiency at March 31, 2005 $2,936,000
Less conversion of enherent preferred stock
to common shares (see Note 3) (2,614,000) 322,000
---------- ----------
Goodwill $4,842,000
==========
3. COMMON STOCK: The pro forma condensed consolidated financial statements
reflect the issuance of 22,663,490 shares of enherent common stock,
$.001 par value, to the common shareholders of Dynax, at an exchange
ratio of $3.8359 shares of enherent for each outstanding share of
Dynax.
The following is a summary of enherent common stock outstanding after
the merger:
Shares held by existing enherent common stockholders
at of March 31, 2005 18,448,854
Shares issued to holders of enherent Series A Preferred
Stockholders as of April 1, 2005 (See Note 4) 8,500,000
----------
Common shares outstanding (at April 1, 2005 date
of merger) 26,948,854
Shares of enherent common stock issued to Dynax
Stockholders 22,663,490
----------
Total shares outstanding after merger 49,612,344(1)
==========
(1) Does not include 1,278,015 shares reserved for outstanding enherent stock
options and 5,524,613 shares to be reserved for existing Dynax stock
options, at 3.8359 exchange ratio.
4. PREFERRED STOCK: Represents exchange of enherent's Series A Preferred
Stock for 8,500,000 shares of enherent common stock and a note
obligation of $1.6 million of senior subordinated debt.
5. LONG-TERM DEBT: This adjustment represents the issuance of a long-term
note obligation of $1.6 million issued to enherent's Series A Preferred
Stockholders.
F-27
6. ADDITIONAL PAID-IN CAPITAL: This adjustment represents the elimination
of enherent's historical accumulated deficit, less the elimination of
treasury stock, the effects of the conversion of enherent's Series A
Preferred Stock in common stock and the issuance of the additional
shares of enherent's common stock to Dynax stockholders.
7. TREASURY STOCK: This adjustment represents the elimination of
enherent's treasury stock.
8. DEFICIT: This adjustment represents the elimination of enherent's
accumulated deficit as Dynax is considered as the acquiring entity for
financial accounting purposes.
Statement of Operations:
9. MERGER COSTS: This adjustment represents the expenses and one-time
charges related to the merger incurred by enherent prior to April 1,
2005 (the date of merger). Merger related costs incurred by enherent
were included in selling, general and administrative expenses,
enherent's merger related costs charged against operations totaled
approximately $600,000 and $605,000 for the year ended December 31,
2004 and three months ended March 31, 2005, respectively.
10. INTEREST EXPENSE: This adjustment assumes additional interest expense
for the senior subordinated debt.
11. ADDITIONAL COMPENSATION OF DYNAX'S CHIEF EXECUTIVE OFFICER: This
adjustment represents a charge of $250,000 related to a special cash
bonus to Dynax's chief executive officer related to the merger which
was accrued on March 31, 2005.
12. PREFERRED STOCK REDEMPTION: This adjustment represents the elimination
of any net benefit or accretion from Series A Senior Preferred Stock
as the benefit is considered as non-recurring and the accretion will
be eliminated as a result of the conversion of the Series A Senior
Preferred Stock.
13. BASIC AND FULLY DILUTED LOSS PER SHARE: Pro forma loss per share
amounts have been computed based on the average outstanding shares of
enherent reported for historical purposes (17,884,000 shares for 2004
and 18,449,000 for 2005) plus the 8,500,000 shares of enherent common
stock issued to Series A Preferred Stockholders and the 22,663,490
shares issued to Dynax's stockholders. The effect of outstanding
options has not been included in the pro forma amounts as it would be
anti-dilutive.
14. INCOME TAXES: As a result of the cumulative losses of enherent and
Dynax to date, no provision has been made for any income tax effect
applicable to the forgoing pro forma adjustments.
F-28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENHERENT CORP.
/s/ Pamela Fredette
--------------------------------
Pamela Fredette, President and
Chief Executive Officer
DATED: June 16, 2005
S-1
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Agreement and Plan of Merger dated as of October 12, 2004, by and between ENHERENT CORP.
and DYNAX SOLUTIONS, INC. (Incorporated by reference to Exhibit 2.1 of ENHERENT's Form
10-Q filed November 15, 2004).
2.2 First Amendment to Agreement and Plan of Merger dated as of November 4, 2004, by and
between ENHERENT CORP. and DYNAX SOLUTIONS, INC. (Incorporated by reference to Exhibit
2.2 of ENHERENT's Form 10-Q filed November 15, 2004).
3.1* Certificate of Amendment of Restated Certificate of Incorporation of ENHERENT CORP. as
filed with the Secretary of State of Delaware on April 1, 2005.
3.2* Certificate of Merger merging DYNAX SOLUTIONS, INC. into ENHERENT CORP. as filed with
the Secretary of State of Delaware on April 1, 2005.
10.1 Preferred Stock Agreement dated as of October 28, 2004, by and among the Company and the
Preferred Stockholders named therein (Incorporated by reference to Exhibit 4.5 of the
Company's Form 10-Q filed November 15, 2004).
10.2* Amended and Restated Credit Agreement among ENHERENT CORP., certain subsidiaries listed
therein, Ableco Finance LLC and certain lenders party thereto.
10.3* Intercreditor and Subordination Agreement among ENHERENT CORP., certain subsidiaries
listed therein, Ableco Finance LLC and certain lenders party thereto.
10.4* Consulting Agreement dated April 1, 2005 between Douglas A. Catalano and ENHERENT CORP.
10.5* Employment Agreement dated April 1, 2005 between Lori Stanley and ENHERENT CORP.
10.6* Employment Agreement dated April 1, 2005 between Roger DiPiano and ENHERENT CORP.
10.7* Employment Agreement dated April 1, 2005 between David Green and ENHERENT CORP.
23.1 Consent of Cornick, Garber & Sandler, LLP (filed herewith)
99.1* Press Release dated April 1, 2005.
* Previously filed.
E-1