UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2006
Commission file number 000-27083
Aftersoft Group, Inc.
(Name of Small Business Issuer in its charter)
Delaware 84-1108035
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
Savannah House, 11-12 Charles II Street,
London, UK SW1Y 4QU (Address of
principal executive offices)
Registrant's telephone number, including area code: 011 44 207 451 2468
Securities registered under Section 12(b) or 12(g) of the Exchange Act None
Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes |_| No |X|
The issuer's revenues for the most recent fiscal year was $19,261,000.
The aggregate market value of the voting and non-voting common equity held by
non-affiliated based on the average bid and asked price of the issuer's common
equity as of September 30, 2006 was $2,485,400.
The issuer has 63,071,167 shares of common stock outstanding as of September 30,
2006.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format: Yes |_| No |X|
Table of Contents
Part I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4 Submission of Matters to a Vote of Securities Holders
Part II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
Item 6. Management Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 8A. Controls and Procedures
Item 8B. Other Information
Part III
Item 9. Directors and Executive Officers of the Registrant
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits
Item 14. Principal Accountant Fees and Services
PART I
Item 1. Description of Business
Unless the context indicates or requires otherwise, (i) the term "Aftersoft"
refers to Aftersoft Group, Inc. and its principal operating subsidiaries; (ii)
the term "MAM Software" refers to MAM Software Limited and its operating
subsidiaries; (iii) the term "AFS" refers to Aftersoft Network N.A., Inc. and
its operating subsidiaries;(iv) the term "EXP Dealer Software" refers to EXP
Dealer Software Limited and its operating subsidiaries; and (v) the terms "we,"
"our," "ours," "us" and the "Company" refer collectively to Aftersoft Group.
Our Company
Aftersoft Group, Inc. is a leading provider of software, information and
services to the automotive aftermarket in the U.S., UK and Canada. The
automotive aftermarket consists of businesses associated with the life cycle of
a motor vehicle--from when the original manufacturer's warranty expires to when
the vehicle is scrapped. The market includes the parts, tires and auto services
required to maintain and improve the performance or appeal of a vehicle
throughout its useful life.
The Company services the automotive aftermarket with business management
systems, information products and online services that its customers use to
manage their critical day-to-day business operations through automated
point-of-sale, inventory management, purchasing, general accounting and customer
relationship management.
Our customer base consists of wholesale parts and tire distributors, retailers,
franchisees, cooperatives, auto service chains and single location auto service
businesses with high customer service expectations and complex commercial
relationships.
The Company's revenues are derived from the following:
o Business management systems comprised of proprietary software
applications, implementation and training; and
o Subscription-based services, including software support and
maintenance, information (content) products and online services.
Background
Aftersoft was formed in December 2005 in a reverse acquisition by W3 Group, Inc.
("W3"). W3 was incorporated in February 1988 in Colorado and changed its state
of incorporation to Delaware in May 2003. On December 21, 2005, the Company
consummated an Acquisition Agreement (the "Agreement") among W3, Aftersoft and
Auto Data Network, Inc. ("ADN") in which W3 acquired all of the outstanding
shares of Aftersoft in exchange for issuing 32,500,000 shares of W3, par value
$0.0001 per share (the "Common Stock"), to ADN, the sole shareholder of the
Company. At the time of the acquisition, W3 had no business operations.
Concurrent with the acquisition, W3 changed its name to Aftersoft Group, Inc.
and replaced the Company's corporate officers. The Board of Directors of the
Company appointed three additional directors designated by ADN to serve until
the next annual election of directors. As a result of the acquisition, former W3
shareholders owned 1,601,167, or 4.7% of the 34,101,167 total outstanding shares
of Common Stock and ADN owned 32,500,000 or 95.3% of the Company's Common Stock.
On August 25, 2006 the Company's wholly owned subsidiary Aftersoft Dealer
Software Limited ("Aftersoft Dealer Software") acquired 100% of the outstanding
shares of EXP Dealer Software Limited ("EXP Dealer Software") from ADN in
exchange for issuing 28,000,000 shares of Common Stock to ADN. EXP Dealer
Software specializes in software systems and products designed for auto dealer
management systems in the UK market.
The Company conducts its business through its wholly owned subsidiaries: MAM
Software Limited ("MAM Software") in the UK and Aftersoft Network N.A., Inc.
("AFS") in the U.S.
MAM Software
MAM Software is the largest provider of software to the automotive aftermarket
in the UK. MAM Software specializes in providing reliable and competitive
business management solutions to the motor factoring (jobber), retailing, and
wholesale distribution sectors. It also develops applications for vehicle repair
management and provides solutions to the retail and wholesale tire industry. All
MAM Software programs are based on the Microsoft Windows family of operating
systems. Each program is fully compatible with the other applications in their
range, enabling them to be combined to create a fully integrated package. MAM
Software is comprised of three wholly owned subsidiaries based in Sheffield, UK:
MAM Autopart Limited, MAM AutoCat Limited and MAM Autowork Limited.
AFS
AFS develops open business automation and distribution channel eCommerce systems
for the automotive aftermarket supply chain. These systems are used by more than
3,000 leading aftermarket outlets, including tier one manufacturers, program
groups, warehouse distributors, tire and service chains and independent
installers. AFS products and services enable companies to generate new sales,
operate more cost efficiently, accelerate inventory turns and maintain stronger
relationships with suppliers and customers. AFS is comprised of three wholly
owned subsidiaries: AFS Warehouse Distribution Management, Inc. and AFS Tire
Management, Inc., which are both based in Dana Point, California, and AFS
Autoservice, Inc., which is based in Allentown, Pennsylvania. Together, these
three subsidiaries are the second-largest provider of software to the automotive
aftermarket in the U.S. AFS Tire Management, Inc. was formerly known as CarParts
Technologies, Inc.
Industry Overview
The Company aims to meet the business needs of customers who are involved in the
maintenance and repair of automobiles and light trucks in three key segments of
the automotive aftermarket, namely parts, tires and auto service.
In the U.S., the automotive aftermarket generated $267.6 billion in sales in
2005, an annualized growth rate of 5% over 2004 and the largest increase since
2000, according to the Automotive Aftermarket Industry Association (AAIA). In
the UK, it cost approximately $27 billion a year to maintain Britain's 30
million vehicles, according to a 2004 report by the UK Department of Trade and
Industry. Longer warranties defer the start of aftermarket revenue, except for
running spares and service parts, accident damage, and optional add-ons like
security, entertainment and customization. Sales of new vehicles in Britain
amount to $42 billion each year. Maintaining those 30 million vehicles, however,
gives rise to the annual $27 billion aftermarket, comprised of $25 billion in
spare parts and fitting charges and $2 billion in inspection revenues.
The Company believes that growth in the automotive aftermarket will continue to
be driven by the following factors: o gradual growth in the aggregate
number of vehicles in use;
o an increase in the average age of vehicles in operation;
o fewer new vehicles being purchased due to a slowdown in the economy;
o growth in the total number of miles driven per vehicle per year; and
o increased vehicle complexity.
Products and Services
Meeting the needs of the automotive aftermarket requires a combination of
business management systems, information products and online services that
combine to deliver benefits for all parties involved in the timely repair of a
vehicle. The Company provides systems and services that meet these needs and
help its customers to meet their customers' expectations. These products and
services include:
1. business management systems comprised of the Company's proprietary
software applications, implementation and training and third-party
hardware and peripherals;
2. information products such as an accessible catalog database related
to parts, tires, labor estimates, scheduled maintenance, repair
information, technical service bulletins, pricing and product
features and benefits that are used by the different participants in
the automotive aftermarket;
3. online services and products that provide online connectivity
between manufacturers, warehouse distributors, retailers and
automotive service providers. These products enable electronic data
interchange throughout the automotive aftermarket supply chain
between the different trading partners. They also enable procurement
and business services to be projected over the Web to an expanded
business audience; and
4. customer support and consulting services that provide phone and
online support, implementation and training.
1. Business Management Systems
AFS's business management systems meet the needs of warehouse distributors, part
stores and automotive service providers as follows:
Warehouse Distributors
o AFS Warehouse Distribution Management, Inc.: DirectStep. This product is
designed for and targeted at warehouse distributors that seek to manage multiple
locations and inventories on a single system. AFS Warehouse provides
distributors a complete business management system for inventory management,
customer maintenance, accounting, purchasing and business analytics. The
products enable online trading and services including price and product
information updating integrated with AFS Autoservice, Inc.'s Autopart and VAST
products, which are used by parts stores and automotive service providers.
Parts Stores
o AFS Autoservice, Inc.: Autopart. This product is designed for and targeted at
parts store chains that seek to manage multiple locations and inventories on a
single system for a regional area and are also suited to managing single
location franchisees or buying group members. The product provides
point-of-sale, inventory management, electronic purchasing capabilities and a
fully integrated accounting module. It also allows the parts stores to connect
with automotive service providers through AFS Autoservice's online services.
Automotive Service Providers
o AFS Autoservice, Inc.: VAST. This product is designed for and targeted at
large- to medium-size automotive service chains that seek to manage multiple
locations and inventories for a regional area is also suited to managing single
location stores that are part of a franchise or a buying group. VAST provides
point-of-sale, inventory management, electronic purchasing and customer
relationship management capabilities. It also allows the automotive service
providers to connect with parts and tires warehouse distributors and parts
stores through AFS's online services and products.
o AFS Autoservice, Inc.: Autowork. This product is designed for and targeted at
small single store automotive installers. The Autowork product provides
estimate, job card, parts procurement and invoice capabilities. It also allows
the automotive installer to connect with parts distributors through the
company's online services and products.
o AFS Autoservice, Inc.: Autopart. This product is designed for and targeted at
parts store chains that seek to manage multiple locations and inventories on a
single system for a regional area. It is also suited to managing single location
franchisees or buying group members. The product provides point-of-sale,
inventory management, electronic purchasing capabilities and a fully integrated
accounting module. An Autopart PDA module is also available to allow field sales
personnel to record sales activity in real time on handheld devices while on the
road. The PDA module also allows the sales representative to maintain their
stock and synchronize in real time while traveling or later locally with
Autopart directly. It also allows parts stores to connect with automotive
service providers through AFS Autoservice's online services.
In addition to the above principal products, AFS also services, maintains and
provides upgrades for, but does not actively sell, three additional products for
its aftermarket customers. These products--ASP, BDG and Tradera--track
inventory, perform accounting functions and execute point-of-sale operations
such as invoicing and billing.
2. Information Products
The Company provides product catalog and vehicle repair information required to
enable point-of-sale transactions. These proprietary database products and
services generate recurring revenues through monthly or annual subscription
fees.
MAM Software develops and maintains proprietary information products that
differentiate its products from those of the majority of its competitors in the
UK. In the U.S. and Canada, AFS develops and maintains a proprietary workflow
capability that integrates information products sourced from its suppliers to
its automotive parts and tire customers, including warehouse distributors, parts
stores and automotive service providers.
MAM AutoCat Limited: AutoCat. MAM Software's principal information service is
AutoCat, which provides access to a database of over 9 million unique automobile
vehicle applications for approximately 500,000 automotive parts product lines in
the UK market. Business systems software used by the warehouse distributor,
parts store and auto service provider enable the user to access information
about parts quickly and accurately. MAM Software charges an monthly or annual
subscription fee for its information products and provides customers with
periodic updates via compact discs. In the UK, there are approximately 1,300
aftermarket company subscribers to our information products.
In addition, information products developed or resold by AFS include Interchange
Catalog, a database that provides cross references of original equipment
manufacturer part numbers to aftermarket manufacturer part numbers; Price
Updating, a service that provides electronic price updates following a price
change by the part manufacturer; Labor Guide, a database used by automotive
service providers to estimate labor hours for purposes of providing written
estimates of repair costs to customers; Scheduled Service Intervals, a database
of maintenance intervals; and Tire Sizing, a database that cross-references
various tire products and applications.
3. Online Services
Both AFS and MAM Software offer online e-commerce services in the form of
system-to-system and web browser implementations. These online services connect
the automotive aftermarket from manufacturers through warehouse distributors and
parts stores to automotive service providers for the purpose of purchasing parts
and tires, fleet and national account transaction processing and online product
price information.
OpenWebs(TM) e-Commerce Gateway Services. In the U.S. and Canada, AFS's
e-Commerce gateway services use automotive industry standard messaging
specifications to deliver online services that connect the automotive
aftermarket supply chain for the purpose of purchasing parts and tires, fleet
and national account transaction processing, online product and price updating
for parts and tires.
OpenWebs(TM) e-Commerce Browser Services. In the U.S. and Canada, AFS's
e-Commerce browser services enable warehouse distributors and parts stores to
provide an online service to automotive service providers for the purpose of
purchasing ofparts and tires, accessing account information and other
browser-based channel management services.
MAM Autowork, Limited: Autonet. In the UK, MAM Software's Autonet online
services connect manufacturers, warehouse distributors, parts stores and
automotive service providers for the purpose of purchasing of parts and tires,
fleet and national account transaction processing and product information and
price distribution.
MAM AutoCat, Limited: AutoCat+. MAM Software's UK product information database
is available for access and distribution as a Web-driven service called AutoCat+
in which the database and access software have been enhanced to enable service
professionals to look up automotive products for themselves, view diagrams and
select the parts for their vehicle. This enhanced version of the AutoCat product
is used by parts stores and the professional installer segments of the
automotive parts aftermarket in the UK. AFS resells a similar online service in
the U.S. and Canada called VAST.
4. Customer Support, Consulting and Training
We provide comprehensive support, consulting and training to our customers to
ensure the successful use of our products and services. We believe this extra
level of commitment and service builds customer relationships, enhances customer
satisfaction and maximizes customer retention. These services consist of the
following:
o Phone and online support. Customers can call dedicated support lines to speak
with knowledgeable personnel who provide support and perform on-line problem
solving as required.
o Implementation, education and training consulting. Our consulting and training
teams work together to minimize the disruption to a customer's business during
the implementation process of a new system and to maximize the customer's
benefit from the use of the system through training.
AFS and MAM Software companies also provide a customer-only section on their
intranet sites that allows customers direct access to newsgroups, on-line
documentation and information related to products and services. New customers
enter into support agreements, and most retain such service agreements for as
long as they own the system. Monthly fees vary with the number of locations and
the software modules, information products and online services subscribed to.
The agreements are generally month-to-month agreements. We offer training at
both AFS and MAM Software's facilities, the customer's facilities and online for
product updates or to introduce specific new capabilities.
The MAM Software's UK catalog information product and other information services
are delivered by its AutoCat team. The AutoCat team sources, standardizes and
formats data collected in an electronic format from over 130 automotive parts
manufacturers. MAM Software provides this data to its customers in a variety of
formats. MAM Software previously produced catalog updates on compact discs
approximately four times a year from its facilities in Wareham, England, but has
recently updated the system to AutoCat+, which allows customers to subscribe to
receive online updates via the Internet.
Distribution
There are two primary vertical distribution channels for aftermarket parts and
tire distribution: the traditional wholesale channel and the retail channel.
Automotive Aftermarket Distribution Channels
o Traditional Wholesale Channel. The wholesale channel is the
predominant distribution channel in the automotive aftermarket. It
is characterized by the distribution of parts from the manufacturer
to a warehouse distributor, to parts stores and then to automotive
service providers. Warehouse distributors sell to automotive service
providers through parts stores, which are positioned geographically
near the automotive service providers they serve. This distribution
method provides for the rapid distribution of parts. The Company has
products and services that meet the needs of the warehouse
distributors, parts stores and the automotive service providers.
o Retail Channel. The retail channel is comprised of large specialty
retailers, small independent parts stores and regional chains that
sell to "do-it-yourself" customers. Larger specialty retailers, such
as Advance Discount Auto Parts, AutoZone, Inc., O'Reilly Automotive,
Inc. and CSK Auto Corporation carry a greater number of parts and
accessories at more attractive prices than smaller retail outlets
and are gaining market share. The business management systems used
in this channel are custom developed by the large specialty
retailers and for the small to medium businesses purchased from
business systems providers. The Company has products and services
that support the retail channel.
In addition to these two primary channels, some aftermarket parts and tires end
up being distributed to new car dealers. The business management systems used in
this channel have unique functionality specific to new car dealerships. The
Company sells a small number of products into the auto service provider side of
car dealerships. Aftermarket wholesalers of parts and tires provide online
purchasing capabilities to some new car dealerships.
Product Development
Our goal is to add value to our customers' businesses through products and
services designed to create optimal efficiency. To accomplish our goal, our
product development strategy consists of the following three key components:
o Integrating all of our products so that our software solutions work
together seamlessly, thereby eliminating the need to switch between
applications;
o Enhancing our current products and services to support our changing
customer needs; and
o Providing a migration path to our business management systems,
reducing a fear that many customers have that changing systems will
disrupt businesses.
Sales and Marketing
The Company's sales and marketing strategy is to acquire customers and retain
them, to cross sell and up-sell to its customers a range of commercially
compelling business management systems, information products and online
services.
Within the parts, tire and auto service provider segments, each division sells
and markets through a combination of field sales, inside sales, and independent
representatives. The Company seeks to partner with large customers or buying
groups and leverage their relationships with their customers or members.
Incentive pay is a significant portion of the total compensation package for all
sales representatives and sales managers. Outside sales representatives focus
primarily on identifying and selling to new customers complemented by an inside
sales focus on selling upgrades and new software applications to its installed
customer base.
The Company's marketing approach aims to leverage its reputation for customer
satisfaction and for delivering systems, information and services that improve a
customer's commercial results. The goal of these initiatives is to maximize
customer retention and recurring revenues, to enhance the productivity of the
field sales team, and to create the cross-selling and up-selling opportunities
for its systems, information products and online services.
AFS also has agreements with eight software distributors in North America to
sell its products. We pay distributors a percentage for each software package
they sell. The client pays the distributor directly for any professional
services rendered to deploy the software. This is becoming a less important part
of AFS's sales strategy as our in-house sales representatives generate most of
our sales.
Research and Development
The Company spent approximately $3.09 million in fiscal 2006 on research and
development, with approximately $1.96 million spent by AFS and $1.13 million by
MAM Software. In fiscal 2005, the Company spent approximately $2.67 million on
research and development, with $2.09 million spent by AFS and $580,000 by MAM
Software.
Patent and Trademark
MAM Software holds a UK trademark for its Autonet product.
Customers
For its fiscal year ended June 30, 2006, no single customer accounted for more
than 10% of the Company's total revenues. Our top ten customers accounted for
20% of total revenues. Some of the AFS's top customers in North America include
Autopart International, Monro Muffler Brake, Fountain Tire and U.S. Tire and
Exhaust. In the UK market, MAM Software's top customers include Unipart
Automotive, Motoserv, Sutton Autofactors, Euro Car Parts and Auto Battery
Service.
Competition
In the U.S. and Canada, AFS competes primarily with Activant, Inc. and several
smaller software companies, including iCarz, Autologue and Wrenchead, Inc. that
provide similar products and services to the U.S. automotive aftermarket.
Additionally, an ongoing competitive threat to the Company is custom developed
in-house systems, information products and online services. For example,
AutoZone, Inc. and Genuine Parts Company's NAPA Parts Group both developed their
own business management systems and electronic automotive parts catalogs for
their stores and members.
Several large enterprise resource planning and software companies, including
Microsoft Corporation, Oracle Corporation and SAP AG have made public
announcements regarding the attractiveness of various small and medium
enterprise vertical markets and have established new accounts in non-automotive
markets. The Company has not competed with any of these larger software and
service companies directly to date, however there can be no assurance that those
companies will not develop or acquire a competitive product or service in the
future.
In the UK, MAM Software competes primarily with Activant, Inc. and several other
smaller software companies including EGO and RAMDATA.
Employees
Aftersoft has 171 full-time employees--54 at AFS and 117 at MAM Software--of
which 16 are management employees and 155 are in sales, administrative,
development or support staff positions.
Of the 54 employees based in the U.S, 16 work in our offices in Dana Point,
California (formerly San Juan Capistrano, California); 33 in our offices in
Allentown, Pennsylvania; and 5 in-house sales representatives work offsite in
other states. MAM Software has 117 employees in the UK comprised of 7 in
management and 110 in sales, administrative, development or support positions.
Of these employees, 98 work in our offices in Deepcar, Sheffield, including 5
in-house sales representatives; 7 in-house sales representatives 7 in our
Northampton office and 6 in our Wareham office as well as an additional 6
in-house sales representatives work offsite in designated regions.
All of our employees have executed customary confidentiality and restrictive
covenant agreements.
Item 2. Description of Property
Our corporate headquarters are Savannah House, 11 Charles II Street, London SW1Y
4QU, UK. Our phone number is 44 207 451 2468. The Company also has offices at
712 Fifth Avenue 19th Floor, New York, New York 10019. The phone number is 646
723 8968. The Company leases approximately 600 square feet at its corporate
headquarters and approximately 300 square feet in the New York office.
AFS has headquarters at 34052 La Plaza Drive, Suite 201, Dana Point, California
92675. The phone number is 949 488 8860. It also has an engineering office at
7310 Tilghman Street, Allentown, Pennsylvania 18106. The phone number is 800 803
9762. AFS leases approximately 3,400 square feet at its headquarters at a
monthly cost of $7,672 and leases approximately 8,735 square feet at its
engineering office at a monthly cost of $9,463.
MAM Software makes use of three offices. It has headquarters at 1 Station Road,
Deepcar, Sheffield, S36 2SQ, UK. The phone number is 44 114 283 7135. It also
has a regional office at 15 Duncan Close, Red House Square, Moulton Park,
Northampton, NN3 6WL, UK. The phone number is 44 160 449 4001. It has another
regional office at Leanne Business Centre, Sandford Lane, Wareham, Dorset, BH20
4DY, UK. The phone number is 44 192 955 0922. MAM Software leases approximately
17,970 square feet at its headquarters at a monthly cost of $13,884;
approximately 1,223 square feet at its Northampton office at a monthly cost of
$1,943; and approximately 2,400 square feet at its Wareham office at a monthly
cost of $2,558.
Item 3. Legal Proceedings
From time to time, the Company is subject to various legal claims and
proceedings arising in the ordinary course of business. The ultimate disposition
of these proceedings could have a materially adverse effect on the consolidated
financial position or results of operations of the Company.
A judgment in the principal amount of $3,555,000 was entered against CarParts
Technologies, Inc. ("CarParts") in the Court of Common Pleas of Allegheny
County, Pennsylvania in the matter of Aidan McKenna v. CarParts Technologies,
Inc. CarParts is now known as AFS Tire Management, Inc. ("AFS Tire"). AFS Tire
is a wholly owned subsidiary of Aftersoft Network N.A, Inc., which, in turn, is
a wholly owned subsidiary of the Company.
In September 2006, Mr. McKenna filed another action in the Court of Common Pleas
of Allegheny County, Pennsylvania. This new action seeks to enforce Mr.
McKenna's previously described judgment against CarParts against several new
entities, including AFS Tire Management, Inc., AFS Warehouse Distribution
Management, Inc., AFS Autoservice, Inc., Auto Data Network, Inc. and the
Company. This new action alleges that all of these entities are liable for
payment of the CarParts judgment obtained by Mr. McKenna. The Company denies any
such liability and claims, and intends to vigorously defend this new action.
Homann Tire LTD filed a complaint against the Company's subsidiary AFS Tire
Management, Inc. (f/k/a CarParts Technologies, Inc.) in California District
Court on August 11, 2005 regarding the Company's obligations pursuant to a
software license agreement that it entered into with Homann on October 18, 2002.
Homann alleges breach of contract, breach of warranty and intentional and
negligent misrepresentation. The Company maintains the complaint is without
merit. There are scheduled depositions and mediation talks in October and a
trial date is set for April 30, 2007.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to the Company's securities holders in the fourth
quarter of fiscal 2006.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our Common Stock is traded on the Over-The-Counter Bulletin Board under the
symbol "ASFG.OB". As of September 30, 2006, there were 412 shareholders of
record and 63,071,167 shares of Common Stock outstanding, according to
information provided by our transfer agent.
The following table shows the range of high and low bids per share of
Aftersoft's common stock as reported by the OTCBB for the fiscal year periods
indicated. Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
2006 2005
-------------------------- --------------------------
High Low High Low
------------ ------------ ------------ ------------
1st Quarter ended September 30 $ 2.06 $ .35 $ .04 $ .03
2nd Quarter December 31 $ 1.70 $ 1.05 $ .06 $ .03
3rd Quarter ended March 31 $ 1.35 $ .65 $ .35 $ .04
4th Quarter ended June 30 $ 1.15 $ .65 $ .75 $ .03
Prior to December 22, 2005 the Company traded as W3 Group, Inc. under the symbol
"WWWT.OB". On May 9, 2005, W3 Group split its stock 1 for 15.
Dividends
The Company has not declared any cash dividends in the last two fiscal years. We
do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
The Company issued 470,000 shares of Common Stock to Brockington Securities in
2006 valued at $499,000 as consideration for consultation services in connection
the Company's reorganization. The issuance of shares was exempt from the
registration in accordance with Section 4(2) of the Securities Act of 1933, as
amended, as a transaction by the Company not involving any public offering.
The Company issued 500,000 shares of Common Stock to Euro Software Services
Limited ("Euro Software") in 2006 valued at $530,000 in consideration for 100%
of the issued and outstanding shares of Euro Software. The issuance of shares
was exempt from registration in accordance with Section 4(2) of the Securities
Act of 1933, as amended, as a transaction by the Company not involving any
public offering.
Item 6. Management Discussion and Analysis or Plan of Operation
Some of the statements contained in this Annual Report on Form 10-KSB, which are
not purely historical, are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, but not limited to, statements regarding the
Company's objectives, expectations, hopes, beliefs, intentions or strategies
regarding the future. In some cases, you can identify forward-looking statements
by the use of the words "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of those terms or other comparable terminology. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, our actual results could differ materially from those disclosed in
these statements due to various risk factors and uncertainties affecting our
business, including those detailed in the "Risk Factors" section. We caution you
not to place undue reliance on these forward-looking statements. We do not
assume responsibility for the accuracy and completeness of the forward-looking
statements and we do not intend to update any of the forward-looking statements
after the date of this report to conform them to actual results. You should read
the following discussion in conjunction with our financial statements and
related notes included elsewhere in this report.
Overview
Critical Accounting Policies
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies, among others,
affect the Company's more significant judgments and estimates used in the
preparation of the Company's financial statements:
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company's best estimate of the
likelihood of potential loss, taking into account such factors as the financial
condition and payment history of major customers. The Company evaluates the
collectibility of the Company's receivables at least quarterly. The allowance
for doubtful accounts is subject to estimates based on the historical actual
costs of bad debt experienced, total accounts receivable amounts, age of
accounts receivable and any knowledge of the customers' ability or inability to
pay outstanding balances. If the financial condition of the Company's customers
were to deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required. The differences could be material and
could significantly impact cash flows from operating activities.
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise
marketed are charged to expense until technological feasibility of the product
has been established. Once technological feasibility has been established,
computer software development costs (consisting primarily of internal labor
costs) are capitalized and reported at the lower of amortized cost or estimated
realizable value. Purchased software development is recorded at its estimated
fair market value. When a product is ready for general release, its capitalized
costs are amortized using the straight-line method over a period of three years.
If the future market viability of a software product is less than anticipated,
impairment of the related unamortized development costs could occur, which could
significantly impact the recorded net income/loss of the Company.
Goodwill
SFAS 142, Goodwill and Other Intangible Assets, addresses how intangible assets
that are acquired individually or with a group of other assets should be
accounted for in the financial statements upon their acquisition and after they
have been initially recognized in the financial statements. SFAS 142 requires
that goodwill and intangible assets that have indefinite useful lives not be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives. In
addition, SFAS 142 expands the disclosure requirements about goodwill and other
intangible assets in the years subsequent to their acquisition. SFAS 142
provides specific guidance for testing goodwill and intangible assets that will
not be amortized for impairment. Goodwill will be subject to impairment reviews
by applying a fair-value-based test at the reporting unit level, which generally
represents operations one level below the segments reported by the Company. An
impairment loss will be recorded for any goodwill that is determined to be
impaired. The Company performs impairment testing on all existing goodwill at
least annually. If the actual fair value of the reporting unit is less than
estimated, impairment of the related goodwill could occur, which could
significantly impact the recorded net income/loss of the Company.
Long-Lived Assets
The Company's management assesses the recoverability of long-lived assets by
determining whether the depreciation and amortization of long-lived assets over
their remaining lives can be recovered through projected undiscounted future
cash flows. The amount of long-lived asset impairment, if any, is measured based
on fair value and is charged to operations in the period in which long-lived
asset impairment is determined by management. If the actual fair value of the
long-lived assets are less than estimated, impairment of the related asset could
occur, which could significantly impact the recorded net income/loss of the
Company.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. Accordingly, software
license revenue is recognized when persuasive evidence of an arrangement exists,
delivery of the product component has occurred, the fee is fixed and
determinable, and collectibility is probable. If any of these criteria are not
met, revenue recognition is deferred until such time as all of the criteria are
met. In accordance with SOP 98-9, the Company accounts for delivered elements in
accordance with the residual method when arrangements include multiple product
components or other elements and vendor-specific objective evidence exists for
the value of all undelivered elements. Revenues on undelivered elements are
recognized once delivery is complete.
In those instances where arrangements include significant customization,
contractual milestones, acceptance criteria or other contingencies (which
represents the majority of the Company's arrangements), the Company accounts for
the arrangements using contract accounting, as follows:
1) When customer acceptance can be estimated, expenditures are capitalized as
work in process and deferred until completion of the contract at which time the
costs and revenues are recognized.
2) When customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion of
the contract when customer acceptance is obtained.
The Company records amounts billed to customers in excess of recognizable
revenue as customer advances and deferred revenue in the accompanying
consolidated balance sheets.
Revenues for maintenance agreements are recognized ratably over the terms of the
service agreement.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period the enactment occurs. Deferred
taxation is provided in full in respect of taxation deferred by timing
differences between the treatment of certain items for taxation and accounting
purposes.
Aftersoft develops and markets business and supply chain management software
solutions to small and medium-size firms in the automotive aftermarket in the
U.S and UK. The Company aims to meet the business needs of customers who are
involved in the maintenance and repair of automobiles and light trucks in three
key segments of the automotive aftermarket, namely parts, tires and auto
service. Our customers include parts manufacturers, retailers, tire and service
chains, independent installers and wholesale distributors. We are currently
number two in the U.S. market, which represents a $68 billion market opportunity
with approximately 20,000 potential clients. We are the market leader in the UK
market, which is an estimated $27 billion market opportunity with approximately
30 million vehicles in circulation.
The Company operates through its subsidiaries: MAM Software Ltd ("MAM Software")
and EXP Dealer Software Limited ("EXP Dealer Software") in the UK and Aftersoft
Network N.A., Inc. ("AFS") in the U.S. Our companies offer products and services
to meet the needs of businesses that manage large and diverse inventories amid
complex supply chains and distribution environments, all of which require
specialized and sophisticated software services to operate efficiently.
MAM Software is the largest provider of software to the automotive aftermarket
in the UK. MAM Software specializes in fully integrated business management
solutions for the motor factoring (jobber), retailing, and wholesale
distribution sectors. MAM also develops applications for vehicle repair
management and provides solutions to the retail and wholesale tire industry. MAM
is comprised of three subsidiaries based in Sheffield, UK: MAM Autopart Limited,
MAM AutoCat Limited and MAM Autowork Limited.
AFS develops open business automation and distribution channel eCommerce systems
for the automotive aftermarket supply chain in the U.S. and Canada. More than
3,000 leading aftermarket outlets in the U.S. use these systems, including tier
one manufacturers, program groups, warehouse distributors, tire and service
chains and independent installers. AFS is comprised of three subsidiaries: AFS
Warehouse Distribution Management, Inc., AFS Autoservice, Inc. and AFS Tire
Management, Inc. AFS Tire Management, Inc. was formerly known as CarParts
Technologies, Inc.
Results of Operations
The Company's results of operations for the year ended June 30, 2006 compared
with the year ended June 30, 2005 were as follows:
This year, the Company reported revenues of $19,261,000, which is a decrease of
12.7% from $22,062,000 generated in the previous year.
Our gross profit decrease 12,837,000 to 9,515,000, the company forcast this to
reverse in 2007 due to the refocusing of its sales operations.
Our research and development expenses increased to $3,089,000 from $2,665,000 in
the previous year, due primarily to increased activity developing new products
and supporting existing ones.
Sales and marketing expenses decreased to $1,904,000 from $1,970,000 in the
previous year. These expenses decreased 3% as a result of employees who left the
Company.
General and administrative expenses increased to $4,489,000 from $4,389,000 in
the previous year. This year, the Company incurred $1,049,000 in expenses
related to reorganization. Without that expense, the Company's general and
administrative expenses decreased 32% in fiscal 2006. We expect substantially
less expense related to reorganization in fiscal 2007.
Depreciation and amortization expenses decreased to $1,275,000 from $1,421,000
in the previous year as a result of surplus fixed assets that we disposed of
this year.
The Company had a loss of $972,000 this year compared with a profit of
$1,938,000 in the previous year, mainly because of a drop in revenue at our AFS
subsidiary. We attribute this decrease in revenue in large part to a lack of
focus by senior members of the management team, who no longer work for the
Company. After taking into account the costs associated with reorganization
incurred during the year, the Company's net income for the year would be
$77,000.
Our stockholders' equity has decreased slightyly $22,758,000 in fiscal 2006 from
$22,787,000 in the previous year.
Current Products and Services
Meeting the needs of the automotive aftermarket requires a combination of
business management systems, information products and online services that
combine to deliver benefits for all parties involved in the timely repair of a
vehicle. Our products and services include:
o Business management systems comprised of our proprietary software
applications, implementation and training and third-party hardware
and peripherals;
o Information products such as an accessible catalog database related
to parts, tires, labor estimates, scheduled maintenance, repair
information, technical service bulletins, pricing and product
features and benefits, which are used by the different participants
in the automotive aftermarket;
o Online services and products that connect manufacturers, warehouse
distributors, retailers and automotive service providers via the
internet. These products enable electronic data interchange
throughout the automotive aftermarket supply chain among the
different trading partners. They also enable procurement and
business services to be projected over the internet to an expanded
business audience. Some UK clients use our information products on
their own websites and intranets; some clients in North America and
the UK use our systems and branded software to obtain relevant and
up-to-date information via the internet; and
o Customer support and consulting services that provide phone and
online support, implementation and training.
Need for Technology Solutions
A variety of factors drive the automotive market's need for sophisticated
technology solutions, including the following:
Inventory Management. Industry sources suggest that approximately 35% of parts
produced are never sold and 30% of parts stocked are never sold. Approximately
25% of parts sold are eventually returned due to insufficient knowledge or
capability by either the parts supplier counterman or the auto service provider
installer. Clearly, there is substantial inefficiency in the automotive
aftermarket supply chain. This inefficiency results in excess inventory carrying
costs, logistical costs and the over-production of parts and tires at the
manufacturer level. Overcoming these challenges requires the combination of
business systems software, information products, and connectivity services we
offer.
Competition. In the U.S., the need for technology solutions has been accelerated
by the expansion of large specialty parts retailers such as Advance Auto Parts
Inc. and large auto service chains like Monro Muffler and Brake Inc. This
expansion has driven smaller competitors to computerize or upgrade their
existing systems with more modern business management solutions enabled for
information products and online services. Many of the systems used by smaller
competitors today are older, character-based or systems developed in-house that
have a limited ability to integrate current information products and online
services.
Volume and Complexity of Information. Businesses in the automotive aftermarket
manage large volumes of information from numerous sources with complex
inter-relationships. There are over 4.5 million different stock-keeping units
(SKUs) available to parts sellers in the product catalogs used by the U.S.
automotive aftermarket. The numbers of SKUs increase in the order of some 5%
each year. Moreover, manufacturers update product information and product prices
with increasing frequency as they improve their internal processing and try to
keep pace with consumer trends. As a result, most automotive aftermarket
businesses require sophisticated inventory management systems, accurate and
timely information on parts, tires, and repair delivered through online services
to communicate, manage and present this volume of data effectively.
Customer Service Requirements. Consumer demand for same-day repair service and
the need to optimize thru-put of repair bays forces automotive service providers
to demand prompt and accurate delivery of specific parts and tires from their
suppliers. Getting the required product promptly depends on all the parties
having access to timely information about product price and availability. To
meet these demanding customer service requirements successfully, automotive
aftermarket participants need business management systems, product information
and online services that enable workers to reliably and accurately transact
their business between warehouse distributors, parts stores and automotive
service providers.
Regional Efficiencies. The use and availability of a combination of business
management systems, information products and online services has resulted in the
development of regional trading networks among auto service provider chains,
stores and warehouse distributors of parts and tires. This enables participants
to achieve the efficiencies and customer service levels that are critical to
being competitive and successful against the larger retail and service chains in
the automotive aftermarket.
Areas of Growth
We believe that there is a clear need for our services and products in the
aftermarket segment, which in 2005 grew at an annualized rate of 5% over 2004.
We believe that similar levels of demand may be expected in the coming year.
We expect growth in the automotive aftermarket will continue to be driven by:
o gradual growth in the aggregate number of vehicles in use;
o an increase in the average age of vehicles in operation;
o fewer new vehicles being purchased due to a slow down in the
economy;
o growth in the total number of miles driven per vehicle per year; and
o increased vehicle complexity.
Plans for Growth
We see opportunities to expand the breadth of our client base within the
automotive industry and diversify into new industries with similarly complex
needs. We plan to offer tailored business management and distribution software
to the wholesale distributor market and the auto dealer management sector of the
automotive industry. We also plan to expand and diversify our client and product
mix in the UK to serve the lumber and hardware industries, which we believe have
an unmet need for the efficiency offered by our suite of business software
solutions and services. Our growth plans include adapting and updating our
software products to serve other vertical markets as well as through potential
acquisitions.
Acquisitions: Automotive Dealer Management Services ("DMS")
Management software and services tailored to automotive dealers represents a
potential market of $15 billion worldwide with the top 5 suppliers representing
less than 15% of this total. As part of the strategy to serve that market, the
Company acquired ADN's dealer management business, EXP Dealer Software, as
previously announced. On August 25, 2006, the Company's wholly owned subsidiary,
Aftersoft Dealer Software acquired 100% of the outstanding shares of EXP Dealer
Software from ADN in exchange for the Company issuing 28 million shares of
Common Stock to ADN.
EXP Dealer Software is a group of UK-based businesses working within the
dealership sector of the automotive market. EXP Dealer Software is based in
London and is comprised of three subsidiaries: MMI Automotive, Anka Design and
Distal Enterprises. MMI Automotive, which is based in Swindon, provides
proprietary software and professional services to dealerships to help increase
business efficiency and profitability within these low margin businesses. It
presently serves clients such as Ford UK, Honda, Mitsubishi UK and Vauxhall
(General Motors). Chester-based Anka Design is a `below the line' advertising
and design business serving the automotive and technology sectors. Distal
Enterprises is the holding company for MMI Automotive, which contributes the
bulk of revenue and profit at this stage. We believe the acquisition of EXP
Dealer Software will benefit the Company as it immediately opens up
opportunities to cross sell products between MMI Automotive and our existing
client base. It also gives us direct access to a dedicated team of advertising
and design professionals to support our UK and European marketing efforts.
The Company is considering making additional acquisitions to develop its
customer base in other areas, particularly the wholesale distributor
marketplace.
New Market Opportunities: the Lumber and Hardware Market and Additional
Territories
We have identified the lumber and hardware as industries that could benefit from
the business management and distribution systems developed by MAM Software for
its customers in the automotive aftermarket. The market consists of independent
lumber and building materials yards, independent hardware retailers, home
improvement centers, retail nurseries and garden centers. In the U.S., there are
approximately 31,500 small and medium-size businesses that generated $105
billion in revenue in 2005, according to the 2005 annual report by the North
American Retail Hardware Association ("NRHA"). The NRHA forecasts compounded
annualized growth rate of about 5.75% for the period 2004 through 2009.
We believe that there are many opportunities in other parts of the world where
we could sell our technologies and services. We are considering expanding into
markets such as South Africa, Australia and India, and may wish to establish
operations in partnership with regional businesses to assist us in both the
sales and administrative aspects of building a global business.
Product Development: Wholesale Distributor Markets
MAM Software has recently modified its Autopart product to enable it to serve
wholesale distributors of products, including electrical supplies, medical
supplies, plumbing, heating and air conditioning, brick, stone and related
materials, and industrial supplies, services, machinery and equipment. We aim to
tap into a market opportunity in the U.S. created by 31,000 small and medium
sized businesses that generate approximately $263 billion in sales annually. In
the UK, a similar number of businesses generated revenue of $35.8 billion in
2005.
Strategic Goals
We hope to increase our share of the North American market by (i) expanding our
OpenWebs(TM) sales team (ii) increasing the sales and marketing presence of our
Autopart product and (iii) focusing on the service station element of the
market. In the UK and Europe we expect to continue to grow our market share
through (i) an increased marketing presence, (ii) alliances with major
manufacturers and national retail chains within the automotive aftermarket while
moving our supply chain management software into additional vertical markets. We
believe that our successful experience within the automotive market will
translate well into other vertical markets that have similarly complex supply
chains. By developing specific sales teams with relevant market experience and
supporting with them suitable marketing collateral, we believe that within two
years these teams will generate significant revenue and earnings.
Development Costs
Our plan of operation in the next twelve months includes a strategy for growth
within our existing subsidiaries, integrating the DMS business acquired from ADN
in August, expanding into the lumber and hardware industries and potential new
territories and adapting existing products to serve the wholesale distributor
marketplace in other industries. We estimate that the operational and strategic
development plans we've identified will require approximately $10,000,000, which
is an increase of approximately 5% over the 2006 fiscal year, excluding
depreciation and amortization. We expect to spend approximately $3,000,000 on
research and development, $4,600,000 in general and administrative expenses and
$2,400,000 on sales and marketing in our growth plan.
Liquidity and Capital Resources
To date, all of our profits have been generated in Europe, but with the
introduction of new products and efforts to streamline U.S. operations, we
expect to see an increase in overall revenues with a contribution from U.S.
operations in fiscal 2007. If internal revenues prove not to be sufficient to
support our growth plans, we may consider raising additional funds through debt
or equity financing. There can be no assurance that such funding will be
available on acceptable terms, in timely fashion or even available at all.
Should new funds be delayed, we plan to reduce the burden on our current funding
to a sustainable level and to tailor our development programs accordingly.
Employees
We anticipate recruiting additional sales teams and professional services
personnel at AFS gradually over the next fiscal year as needed. Our projection
is based on the availability of revenues to support new hires.
Summary
We have identified a number of opportunities to widen our client base within the
automotive industry and beyond to other vertical markets that struggle to manage
similarly complex businesses. We are integrating our newly acquired auto
dealership management unit, EXP Dealer Software. We plan to expand into the UK's
lumber and hardware market, which have an unmet need for solutions to manage
their relationships and inventory with greater efficiency. We have entered the
wholesale distributor marketplace, which we believe will be well served by our
inventory and tracking products and services. We plan to explore potential
acquisitions to increase our customer base in that area.
In the next 12 months, we believe we can maximize customer retention by
continuing to develop products that streamline and simplify their operations,
thereby increasing their profit margin. By supporting our customer's recurring
revenues, we expect to continue to build our own revenue stream. While we
believe our revenue will support the current business going forward, our plans
for growth in the next 12 months will require additional capital to hire sales
staff to target new markets effectively and to support expanding operations
overall as well as make acquisitions possible.
We believe our plan will strengthen our relationships with our existing
customers and provide new income streams by targeting new markets and
introducing new products. Taken together, we anticipate these plans will return
value to our shareholders.
RISK FACTORS
Our business, financial condition and operating results are subject to a number
of risk factors, both those that are known to us and identified below and others
that may arise from time to time. These risk factors could cause our actual
results to differ materially from those suggested by forward-looking statements
in this document and elsewhere, and may adversely affect our business, financial
condition or operating results. If any of those risk factors should occur,
moreover, the trading price of our securities could decline, and investors in
our securities could lose all or part of their investment in our securities.
These risk factors should be carefully considered in evaluating the Company's
prospects. The material below summarizes certain risks and is not intended to be
exhaustive.
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS AND TO PREDICT OUR FUTURE OPERATING RESULTS.
We were organized in a reverse acquisition of W3 Group, Inc. in December 2005,
and therefore have limited historical operations. Our two main subsidiaries, MAM
UK Limited and Aftersoft Network N.A., Inc. ("AFS" f/k/a CarParts Technologies,
Inc.) have operated since 1984 and 1997, respectively as independent companies
under different management until our parent, ADN, acquired MAM Software in April
2003 and AFS in August 2004. We are now integrating a third subsidiary as a
result of the recent acquisition of EXP Dealer Software in August 2006. Since
our inception, we have been primarily engaged in organizational activities,
including developing a strategic operating plan, entering into various
collaborative agreements for the development of products and technologies and
developing and testing our products.
WE MAY FAIL TO ADDRESS RISKS WE FACE AS A DEVELOPING BUSINESS WHICH COULD
ADVERSELY AFFECT THE IMPLEMENTATION OF OUR BUSINESS PLAN.
We are prone to all of the risks inherent in the establishment of any new
business venture. You should consider the likelihood of our future success to be
highly speculative in light of our limited operating history, as well as the
limited resources, problems, expenses, risks and complications frequently
encountered by entities at our current stage of development.
To address these risks, we must, among other things,
o implement and successfully execute our business and marketing
strategy;
o continue to develop new products and upgrade our existing products;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
WE MAY NOT BE SUCCESSFUL IN ADDRESSING THESE RISKS. IF WE ARE UNABLE TO DO SO,
OUR BUSINESS PROSPECTS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD BE
MATERIALLY ADVERSELY AFFECTED.
To achieve profitable operations, we, along with our subsidiaries, must
successfully develop, market and sell our products. Our product development
efforts may not be successful. The development of new software products is
highly uncertain and subject to a number of significant risks. The development
cycle--from inception to installing the software for customers--can be lengthy
and uncertain. The ability to market the product is unpredictable and may cause
delays. Potential products may appear promising at early stages of development,
and yet may not reach the market for a number of reasons.
To date, our resources have been substantially dedicated to sales and marketing
in addition to ongoing research and development of new and existing products.
An increase in competition from other software manufacturers could have a
material adverse effect on our ability to generate revenue and cash flow or
continue our market-leading position.
Competition in our industry is intense. Potential competitors in the U.S. and
Europe are numerous. Most have substantially greater capital resources,
marketing experience, research and development staffs and facilities than us.
Our competitors may be able to develop products before us or develop more
effective products or market them more effectively which would limit our ability
to generate revenue and cash flow. Although currently we have the largest share
of the UK market and have the second largest share within the U.S. and North
American market, we can make no assurances that we will maintain our position in
these markets.
IF WE FAIL TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, OUR TECHNOLOGIES AND
PRODUCTS COULD BECOME LESS COMPETITIVE OR OBSOLETE.
The software industry is characterized by rapid and significant technological
change. We expect that automotive technology will continue to develop rapidly,
and our future success will depend on our ability to develop and maintain a
competitive position through technological development
WE DEPEND ON PATENT AND PROPRIETARY RIGHTS TO DEVELOP AND PROTECT OUR
TECHNOLOGIES AND PRODUCTS, WHICH RIGHTS MAY NOT OFFER US SUFFICIENT PROTECTION.
The software industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Our
success will depend on our ability to obtain and enforce protection for products
that we develop under U.S. and foreign patent laws and other intellectual
property laws, preserve the confidentiality of our trade secrets and operate
without infringing the proprietary rights of third parties.
We also rely upon trade secret protection for our confidential and proprietary
information. Others may independently develop substantially equivalent
proprietary information and techniques or gain access to our trade secrets or
disclose our technology. We may not be able to meaningfully protect our trade
secrets which could limit our ability to exclusively produce products.
We require our employees, consultants, and parties to collaborative agreements
to execute confidentiality agreements upon the commencement of employment or
consulting relationships or collaboration with us. These agreements may not
provide meaningful protection of our trade secrets or adequate remedies in the
event of unauthorized use or disclosure of confidential and proprietary
information.
IF WE BECOME SUBJECT TO ADVERSE CLAIMS ALLEGING INFRINGEMENT OF THIRD-PARTY
PROPRIETARY RIGHTS, WE MAY INCUR UNANTICIPATED COSTS AND OUR COMPETITIVE
POSITION MAY SUFFER.
We are subject to the risk that we are infringing on the proprietary rights of
third parties. Although we are not aware of any infringement by our technology
on the proprietary rights of others and are not currently subject to any legal
proceedings involving claimed infringements, we cannot assure you that we will
not be subject to such third-party claims, litigation or indemnity demands and
that these claims will not be successful. If a claim or indemnity demand were to
be brought against us, it could result in costly litigation or product shipment
delays or force us to stop selling such product or providing such services or to
enter into royalty or license agreements.
OUR SOFTWARE AND INFORMATION SERVICES COULD CONTAIN DESIGN DEFECTS OR ERRORS
WHICH COULD AFFECT OUR REPUTATION, RESULT IN SIGNIFICANT COSTS TO US AND IMPAIR
OUR ABILITY TO SELL OUR PRODUCTS
Our software and information services are highly complex and sophisticated and
could, from time to time, contain design defects or errors. We cannot assure you
that these defects or errors will not delay the release or shipment of our
products or, if the defect or error is discovered only after customers have
received the products, that these defects or errors will not result in increased
costs, litigation, customer attrition, reduced market acceptance of our systems
and services or damage to our reputation.
IN THE EVENT OF A FAILURE IN A CUSTOMER'S COMPUTER SYSTEM INSTALLED BY US, A
CLAIM FOR DAMAGES MAY BE MADE AGAINST US REGARDLESS OF OUR RESPONSIBILITY FOR
THE FAILURE, WHICH COULD EXPOSE US TO LIABILITY.
We provide business management solutions that we believe are critical to the
operations of our customers' businesses and provide benefits that may be
difficult to quantify. Any failure of a customer's system installed by us could
result in a claim for substantial damages against us, regardless of our
responsibility for the failure. Although we attempt to limit our contractual
liability for damages resulting from negligent acts, errors, mistakes or
omissions in rendering our services, we cannot assure you that the limitations
on liability we include in our agreements will be enforceable in all cases, or
that those limitations on liability will otherwise protect us from liability for
damages. Furthermore, there can be no assurance that our insurance coverage will
be adequate or that coverage will remain available at acceptable costs.
Successful claims brought against us in excess of our insurance coverage could
seriously harm our business, prospects, financial condition and results of
operations. Even if not successful, large claims against us could result in
significant legal and other costs and may be a distraction to our senior
management.
THE COMPANY IS A DEFENDANT IN A SUIT IN WHICH THE PLAINTIFF IS SEEKING
APPROXIMATELY $3.5 MILLION PLUS INTEREST.
The Company is a defendant in a lawsuit by Mr. Aidan McKenna in which he is
seeking to enforce a claim for approximately $3.5 million plus interest. Mr.
McKenna has also named a number of the Company's subsidiaries as defendants. The
Company is contesting the lawsuit. A judgment adverse to the Company or its
subsidiaries could have a material adverse effect on the Company.
IF WE LOSE KEY MANAGEMENT OR OTHER PERSONNEL OUR BUSINESS WILL SUFFER.
We are highly dependent on the principal members of our management staff. We
also rely on consultants and advisors to assist us in formulating our
development strategy. Our success also depends upon retaining key management and
technical personnel, as well as our ability to continue to attract and retain
additional highly-qualified personnel. We may not be successful in retaining our
current personnel or hiring and retaining qualified personnel in the future. If
we lose the services of any of our management staff or key technical personnel,
or if we fail to continue to attract qualified personnel, our ability to
acquire, develop or sell products would be adversely affected.
OUR MANAGEMENT AND INTERNAL SYSTEMS MIGHT BE INADEQUATE TO HANDLE OUR POTENTIAL
GROWTH.
Our success will depend in significant part on the expansion of our operations
and the effective management of growth. This growth will place a significant
strain on our management and information systems and resources and operational
and financial systems and resources. To manage future growth, our management
must continue to improve our operational and financial systems and expand,
train, retain and manage our employee base. Our management may not be able to
manage our growth effectively. If our systems, procedures, controls, and
resources are inadequate to support our operations, our expansion would be
halted and we could lose our opportunity to gain significant market share. Any
inability to manage growth effectively may harm our ability to institute our
business plan.
BECAUSE WE HAVE INTERNATIONAL OPERATIONS, WE WILL BE SUBJECT TO RISKS OF
CONDUCTING BUSINESS IN FOREIGN COUNTRIES.
International operations constitute a significant part of our business, and we
are subject to the risks of conducting business in foreign countries, including:
o difficulty in establishing or managing distribution relationships;
o different standards for the development, use, packaging and
marketing of our products and technologies;
o our inability to locate qualified local employees, partners,
distributors and suppliers;
o the potential burden of complying with a variety of foreign laws and
trade standards; and
o general geopolitical risks, such as political and economic
instability, changes in diplomatic and trade relations, and foreign
currency risks and fluctuations.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING, WHICH COULD AFFECT OUR ABILITY TO OPERATE AS A GOING
CONCERN.
If adequate financing is not available, we may be required to delay, scale back
or eliminate some of our research and development programs. Any inability to
obtain additional financing, if required, would have a material adverse effect
on our ability to continue our operations and implement our plan to expand our
business.
WE MAY ENGAGE IN CAPITAL-RAISING ACTIVITIES AND ACQUISITIONS, WHICH WOULD DILUTE
YOUR STOCK OWNERSHIP AND COULD AFFECT OUR STOCK PRICE.
Aftersoft may seek to raise capital through a private placement for
acquisitions. If such a sale took place, it would have a dilutive effect on
current ownership of Aftersoft stock. The market price of our Common Stock could
fall in response to the sale of a large number of shares, or the perception that
sales of a large number of shares could occur. We may pursue acquisitions that
could include issuing equity, which would also have a dilutive effect. No
definitive understandings have been reached for capital raising or acquisitions,
however, and the Company is not able to determine when or whether such
agreements will be reached.
Our Certificate of Incorporation authorizes the issuance of an aggregate of
100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, on
such terms and at such prices as the Board of Directors of the Company may
determine. As of September 30, 2006, the Company had 63,071,167 shares of Common
Stock issued and outstanding and no Preferred Shares issued. The Company has
36,928,833 shares of Common Stock and 10 million shares of Preferred Stock
available to be issued to raise capital or for acquisitions.
THE MARKET FOR OUR COMMON STOCK IS LIMITED AND YOU MAY NOT BE ABLE TO SELL YOUR
COMMON STOCK.
Our Common Stock is currently traded on the Over-The-Counter Bulletin Board, not
on a national securities exchange. The market for purchases and sales of the
Company's Common Stock is limited and therefore the sale of a relatively small
number of shares could cause the price to fall sharply. Accordingly, it may be
difficult to sell shares quickly without significantly depressing the value of
the stock. Unless we are successful in developing continued investor interest in
our stock, sales of our stock could continue to result in major fluctuations in
the price of the stock.
THE PRICES WE CHARGE FOR OUR PRODUCTS MAY DECREASE AS A RESULT OF COMPETITION
AND OUR REVENUES COULD DECREASE AS A RESULT.
While we hold market-leading positions in the U.S. and the UK among small and
medium sized businesses, we face potential competition from very large software
companies, including Oracle, Microsoft and SAP if they decide to move into our
target market with Enterprise Resource Planning (ERP) and Supply Chain
Management (SCM) products. Our business would be dramatically affected by price
pressure if these larger software companies attempted to gain market share
through the use of highly discounted sales and extensive marketing campaigns.
WE MAY ENCOUNTER SIGNIFICANT FINANCIAL AND OPERATING RISKS IF WE GROW OUR
BUSINESS THROUGH ACQUISITIONS.
As part of our growth strategy, we may seek to acquire or invest in
complementary or competitive businesses, products or technologies. The process
of integrating acquired assets into our operations may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of our
business. We may allocate a significant portion of our available working capital
to finance all or a portion of the purchase price relating to possible
acquisitions although we have no immediate plans to do so. Any future
acquisition or investment opportunity may require us to obtain additional
financing to complete the transaction. The anticipated benefits of any
acquisitions may not be realized. In addition, future acquisitions by us could
result in potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, any of which could materially adversely affect our
operating results and financial position. Acquisitions also involve other risks,
including entering markets in which we have no or limited prior experience.
THE PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE AND SUBJECT TO WIDE
FLUCTUATIONS.
The market price of the securities of software companies has been especially
volatile. Thus, the market price of our common stock is likely to be subject to
wide fluctuations. If our revenues do not grow or grow more slowly than we
anticipate, or, if operating or capital expenditures exceed our expectations and
cannot be adjusted accordingly, or if some other event adversely affects us, the
market price of our common stock could decline. If the stock market in general
experiences a loss in investor confidence or otherwise fails, the market price
of our common stock could fall for reasons unrelated to our business, results of
operations and financial condition. The market price of our stock also might
decline in reaction to events that affect other companies in our industry even
if these events do not directly affect us.
Item 7. Financial Statements
The following financial statements, notes to the financial statements and report
of the Company's independent registered accountant required to be filed in
response to this Item 7 begin on page F-1.
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
The Board of Directors approved the appointment of Corbin & Company LLP
("Corbin") as its independent registered public accounting firm upon the
resignation on February 14, 2006 of its previous independent accountants,
Donahue Associates, LLC ("Donahue"). Donahue prepared a report dated March 25,
2005 on the Company's financial statements for the fiscal year ended December
31, 2004 and 2003. The report did not contain an adverse opinion or disclaimer
of opinion and was not modified as to audit scope or accounting principles. The
report did contain an uncertainty about the Company's ability to continue as a
going concern without obtaining additional funding. There were no disagreements
with Donahue on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
Donahue's satisfaction, would have caused it to make reference to the subject
matter of the disagreement in connection with its report.
Through the two most recent fiscal years and through December 20, 2005, the
Company had not consulted with Corbin regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements, and neither a written report was provided to the Company nor oral
advice was provided that Corbin concluded was an important factor considered by
the Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a
disagreement or a reportable event.
Item 8A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15 (e) and
15d-15 (e) under the Securities Exchange Act of 1934, as amended). Based on this
evaluation, the Company's Chief Executive Officer and Financial Officer
concluded that the Company's disclosure controls and procedures were effective
in ensuring that (i) information required to be disclosed in the reports that
the Company files or submits under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and (ii) information required to be disclosed in the reports the
Company files or submits under the Securities Exchange Act of 1934, as amended,
is accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Controls Over Financial Reporting
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934
as amended (the "Exchange Act"). In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives. In addition, the design of
disclosure controls and procedures must reflect the fact that there are resource
constraints and that we are required to apply our judgment in evaluating the
benefits of possible controls and procedures relative to our costs.
Based on that evaluation, our chief executive officer and chief financial
officer concluded that, as of June 30, 2006, our disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act (i) is accumulated and communicated to our management, including
our chief executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure, and (ii) is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms.
(b) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting
that occurred during the period covered by this Annual Report on Form 10-KSB
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
(c) Management's report on internal control over financial reporting.
Item 8B. Other Information
None
Part III
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth information regarding our directors and
executive officers:
Name Age Position
---------------------------------------------------------------------------------------------------------------------------
Ian Warwick 46 Chief Executive Officer and Chairman of Aftersoft Group
Michael O'Driscoll 54 Chief Financial Officer and Director of Aftersoft Group
Michael Jamieson 39 Chief Operating Officer and Director of Aftersoft Group; Chief
Executive Officer of MAM Software
Simon Chadwick 38 Vice President of Strategy and Technology, Aftersoft Group
Ian Warwick has served as Chief Executive Officer and Chairman of the Board
since December 2005. Since 1994, Mr. Warwick has built early-stage technology
companies, some of which have culminated in stock market listings. Mr. Warwick
has extensive experience of corporate finance, particularly linked to
fundraising and private equity placements. Mr. Warwick is also Chief Executive
Office, President and Chairman of Auto Data Network, Inc. ADNW.PK, which is the
largest shareholder of the Company.
Michael O'Driscoll has served as Chief Financial Officer and been a director of
Aftersoft Group since December 2005. From 1995 to December 2005, Mr. O'Driscoll
served as a Non-Executive Chairman of QV Foods Limited, a large produce supplier
to Marks & Spencer, Sainsbury, Tesco and the UK wholesale market. QV Foods is a
private company with annual revenue of (pound)45 million. Previously Mr.
O'Driscoll served as Financial Director and Secretary of Merrydown plc where he
oversaw the float on the Unlisted Securities Market of London Stock Exchange as
Chief Financial Officer, ultimately taking it to full listing at (pound)60
million market capitalization. He is also a non-executive director of its
holding company A.H.Worth Limited.
Michael Jamieson has served as Chief Operating Officer and a director of
Aftersoft since December 2005. Mr. Jamieson has served as Chief Executive
Officer of Aftersoft's subsidiary MAM Software Limited since 2004. Mr. Jamieson
joined MAM in 1991 in its installation and configuration department and has held
a number of positions within MAM's implementation and support departments until
his appointment as Department Manager for Workshop and Bodyshop Systems in 1995.
Mr. Jamieson was promoted to the position of Associate Director of Workshop and
Bodyshop Systems in 2002 before taking his current role as CEO in 2004.
Simon Chadwick has served as Vice President of Strategy and Technology since
December 2005. Mr. Chadwick has spent the last nine years managing and directing
early-stage technology companies, a number of which have culminated in stock
market listings. Mr. Chadwick also has extensive experience of strategic
planning and technology solutions, having served as Chief Technology Officer in
a number of businesses. Mr. Chadwick has previously served as a consultant to
the advertising industry whilst spending several years as operations director at
an advertising agency.
Our Board of Directors
Our directors receive no cash compensation for serving on the board except for
reimbursement of reasonable expenses incurred to attend meeting.
The Company does not have a separate audit committee currently, but intends to
form one at the next board meeting. The board of directors has determined that
Michael O'Driscoll is a financial expert as defined in Regulation S-B
promulgated under the Securities Act. Mr. O'Driscoll is not independent as that
term is used in Schedule 14A of the Exchange Act. The Company also intends to
establish a compensation committee and corporate governance and nominating
committees.
We have not yet adopted a Code of Ethics that applies to our Chief Executive
Officer, Chief Financial Officer and all financial managers and executives.
Item 10. Executive Compensation
The following table sets forth information relating to the compensation awarded
to, earned by or paid to our Chief Executive Officer and each of the four other
most highly compensated executive officers whose individual compensation
exceeded $100,000 during fiscal 2006, 2005 and 2004 for services rendered to us.
Annual Compensation
--------------------------------------------------------
Other Annual
Fiscal Compensation All Other
Name and Principal Position Year Salary($) Bonus($) ($) (1) Compensation
------------------------------------ -------- ------------ ---------- ------------------ ---------------
Dc Current
Ian Warwick 2006 -- -- -- --
Chief Executive Officer, 2005 -- -- -- --
President and Director 2004 -- -- -- --
Michael O'Driscoll 2006 -- -- -- --
Chief Financial Officer 2005 -- -- -- --
and Director 2004 -- -- -- --
Michael Jamieson 2006 -- -- -- --
Chief Operating Officer 2005 -- -- -- --
and Director 2004 -- -- -- --
Michael Jamieson 2006 148,965 (1) -- --
Chief Executive Officer of 2005 105,000 8,750 -- --
MAM Software Ltd 2004 77,974 -- --
A Simon Chadwick 2006 -- -- -- --
Vice President of Strategy and 2005 -- -- -- --
Technology 2004 -- -- -- --
Fo Former
Paul Van Den Berg 2005 153,040 -- -- --
Former President of AFS 2005 -- -- --
Tire Management, Inc. 2004 -- -- -- --
(fka CarParts Technologies,
Inc.)
(1) Calculated salary of (pound)79,618 based on the October 6 currency
conversion rate of (pound)1 = $1.87.
The Company has no stock option, retirement, pension, or profit-sharing programs
for the benefit of directors, officers or other employees. The Board of
Directors may recommend adoption of one or more such programs in the future.
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The following table sets forth the number and percentage of the outstanding
shares of common stock of the Company beneficially owned by (1) each executive
officer named in the Executive Compensation table above (the "named executive
officers") and each director of the Company individually, (2) all executive
officers and directors as a group and (3) the stockholders of the Company known
to us to be the beneficial owner of more than 5% of Aftersoft Common Stock as of
September 30, 2006. Except as noted below, the address of each principal
stockholder of Aftersoft Group is c/o Aftersoft Group, Inc., Savannah House,
11-12 Charles II Street, London UK SW1Y 4QU.
The Company had 63,071,167 shares of Common Stock issued and outstanding as of
September 30, 2006. In accordance with SEC rules, each person's percentage
interest is calculated by dividing the number of shares that person beneficially
owns by the sum of (a) the total number of shares outstanding on September 30,
2006 plus (b) the number of shares such person has the right to acquire within
60 days of September 30, 2006. Unless otherwise indicated, each of the
shareholders has sole voting and investment power with respect to the shares
owned (subject to community property laws, where applicable), and is beneficial
owner of them.
Amount and Nature Percent of class of
Name and address of beneficial owner of Beneficial Ownership Common Stock
-------------------------------------------------------------- ------------------------
Auto Data Network, Inc. 60,500,000 95.9%
712 Fifth Avenue 19th Floor
New York, NY 10019
Ian Warwick (1) -- --
Michael O'Driscoll -- --
Michael Jamieson -- --
Simon Chadwick -- --
Executive Officers and Directors as a group (4 persons) -- --
(1) Mr. Warwick, as the Chairman of the Board of ADN, has power to vote
and dispose of Common Stock owned by ADN. Mr. Warwick disclaims
beneficial ownership of the 60,500,000 shares of Common Stock held
by ADN.
The Company does not have an equity compensation plan and no securities have
been issued for such a purpose
Item 12. Certain Relationships and Related Transactions
Mr. Warwick is also Chief Executive Officer and Chairman of ADN, which is the
largest shareholder of the Company.
During the year the Company had the following transactions with Aftersoft's
parent company, ADN:
From time to time ADN advances funds to the Company. Such advances, totaling
$14,000 at June 30, 2006, are non-interest bearing and currently have no
specific due date. During the year payments totaling $617,000 were advanced to
the Aftersoft Group with repayments of $219,000, giving a net effect of
$398,000. The Company transferred its note receivable with a related party known
as MAM North America, Inc. ("MAM North America") in the amount of $510,000, to
ADN. ADN agreed to accept the assignment for all the issued shares of MAM North
America, Inc. from the Company and repaid the $510,000 note receivable on
October 1, 2005 by allowing the Company to reduce its balance of loans due to
ADN. Furthermore MAM North America has indemnified MAM UK against all past or
current liabilities. In fiscal 2006, the Company sold property and equipment to
ADN for a $308,000 reduction in advances due to the parent company, resulting in
a gain on sale of $308,000. On June 10, 2006, the Company sold 100% of the
outstanding common stock of Euro Soft (which by then had its own operations) to
a third party for $450,000. The proceeds from the sale of Euro Soft were offset
against amounts due to the parent company.
Item 13. Exhibits
INDEX TO EXHIBITS
Exhibit
Number Description
---------------- ------------------------------------------------------------------------------------------------------
3(i) Amended Certificate of Incorporation of Aftersoft Group, Inc. Exhibit 3.1 to Aftersoft Group, Inc.'s
Form TK)
3 (ii) By-Laws of Aftersoft Group, Inc.
10.1 * Acquisition Agreement dated July 19, 2005 by and between W3 Group, Inc., Aftersoft Group, Inc. and
Auto Data Network, Inc. (incorporated by reference to Exhibit 10.1 to Aftersoft Group, Inc.'s
Current Report on Form 8-K filed on July 22, 2005).
10.2 * Share Sale Agreement relating to EXP Dealer Software Limited dated August 4, 2006 among Auto Data
Network, Inc., Aftersoft Group, Inc. and Aftersoft Dealer Software Limited (incorporated by
reference to Exhibit 10.1 to Aftersoft Group, Inc.'s Current Report on Form 8-K filed on August 31,
2006).
21 List of Subsidiaries
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Previously provided or incorporated by reference.
Item 14. Principal Accountant Fees and Services
The following table presents aggregate fees for professional services rendered
by our principal accounting firm, Corbin & Co., for the audit of our annual
consolidated financial statements for the fiscal year ended June 30, 2005 and
2006.
For the Year Ended June 30
-------------------------------
2005 2006
-------------- --------------
(In thousands)
Audit fees (1) $ -- $ 90,000
Audit-related fees (2) 170,000 --
Tax fees (3) -- --
All other fees -- --
-------------- --------------
Total fees $ 170,000 $ 90,000
============== ==============
(1) Audit fees are comprised of annual audit fees, quarterly review fees,
comfort letter fees, consent fees and consultation fees on accounting
issues.
(2) Audit-related fees for fiscal year 2005 relate to the issuance of a
separate audit report on the consolidated financial statements of
Aftersoft Group, Inc. for the years ended June 30, 2005 and 2004 in
connection with the reverse acquisition.
(3) Tax fees are comprised of tax compliance and consultation fees.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Aftersoft Group, Inc.
Date: October 13, 2006 By: /s/ Ian Warwick
------------------------------------
Ian Warwick
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael O'Driscoll
------------------------------------
Michael O'Driscoll
Chief Financial Officer
(Principal Financial Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: October 13, 2006 By: /s/ Ian Warwick
------------------------------------
Ian Warwick
Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Michael O'Driscoll
------------------------------------
Michael O'Driscoll
Chief Financial Officer and Director
(Principal Financial Officer)
Date: October 13, 2006 By: /s/ Michael Jamieson
------------------------------------
Michael Jamieson
Chief Operating Officer and Director
AFTERSOFT GROUP INC
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet as of June 30, 2006 F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended F-4
June 30, 2006 and 2005
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2006 and 2005 F-6
Notes to Consolidated Financial
Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Managers and
Members Aftersoft Group, Inc.
We have audited the accompanying consolidated balance sheet of Aftersoft Group,
Inc. (a Delaware corporation) and subsidiaries (the "Company") as of June 30,
2006, and the related consolidated statements of operations and comprehensive
income (loss), stockholders' equity and cash flows for each of the years in the
two-year period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit on its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aftersoft Group,
Inc. and subsidiaries as of June 30, 2006, and the results of their operations
and their cash flows for each of the years in the two-year period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
CORBIN & COMPANY, LLP
Irvine, California
October 13, 2006
F-2
Aftersoft Group, Inc.
Consolidated Balance Sheet
(In thousands, except share data)
As of
June 30, 2006
---------------
ASSETS
Current Assets
Cash $ 423
Accounts receivable, net of allowance of $332 3,409
Note receivable 950
Inventories 246
Other 231
---------------
Total Current Assets 5,259
---------------
Property and Equipment, Net 155
---------------
Other Assets
Goodwill 22,061
Amortizable intangible assets, net 5,644
Software development costs, net 1,256
Other long-term assets 46
---------------
Total Other Assets 29,007
---------------
Total Assets $ 34,421
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,707
Accrued expenses 1,396
Accrued consulting fees 550
Accrued legal expenses 1,970
Payroll and other taxes 655
Amounts due to parent company 14
Current portion of long-term debt 898
Deferred revenue 1,216
Taxes payable 807
---------------
Total Current Liabilities 9,213
Long-Term Liabilities
Deferred revenue 1,073
Deferred income taxes 880
Long-term debt 10
Other 487
---------------
Total Liabilities 11,663
---------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock
Par value $0.0001 per share; 10,000,000 shares authorized,
none issued and outstanding --
Common stock
Par value $0.0001 per share; 100,000,000 shares authorized,
35,071,167 shares issued and outstanding 4
Additional paid-in capital 21,962
Accumulated other comprehensive loss (388)
Retained earnings 1,180
---------------
Total Stockholders' Equity 22,758
---------------
Total Liabilities and Stockholders' Equity $ 34,421
===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Aftersoft Group, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except share data)
For the year For the year
ended ended
June 30, June 30,
2006 2005
------------ ------------
Revenues $ 19,261 $ 22,062
Cost of revenues 9,746 9,225
------------ ------------
Gross Profit 9,515 12,837
------------ ------------
Operating Expenses
Research and development 3,089 2,665
Sales and marketing 1,904 1,970
General and administrative 4,489 4,389
Depreciation and amortization 1,275 1,421
------------ ------------
Total Operating Expenses 10,757 10,445
------------ ------------
Operating Income (Loss) (1,242) 2,392
------------ ------------
Other Income (Expense)
Interest expense (130) (105)
Gain on sale of property and equipment 224 --
Other, net 20 (12)
------------ ------------
Total other income (expense), net 114 (117)
------------ ------------
Pre-tax income (loss) from continuing operations (1,128) 2,275
Provision for income taxes 714 337
------------ ------------
Income (loss) from continuing operations (1,842) 1,938
Income from discontinued operations, net of tax 448 --
Gain on sale of discontinued operations 422 --
------------ ------------
Net Income (Loss) (972) 1,938
Foreign currency translation gain (86) 32
------------ ------------
Total Comprehensive Income (Loss) $ (1,058) $ 1,970
============ ============
Earnings (loss) per share attributed to common stockholders -
basic and diluted
Net income (loss) from continuing operations $ (0.05) $ 0.06
Discontinued operations 0.02 --
------------ ------------
Net income (loss) $ (0.03) $ 0.06
============ ============
Weighted average number of shares of common stock outstanding - basic and
diluted 33,651,233 30,701,671
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Aftersoft Group, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
Common Stock
Other
Additional Comprehensive Retained
Shares Amount Paid-in-Capital Income (Loss) Earnings Total
Balance as of July 1, 2004 14,321,667 $ 1 $ 9,062 $ (334) $ 214 $ 8,943
Acquisition of Car Parts Technologies 18,178,333 2 11,872 - - 11,874
Foreign currency translation - - - 32 - 32
adjustments
Net income - - - - 1,938 1,938
-------------------- --------------- ----------------- -------------- ------------
Balance as of June 30, 2005 32,500,000 3 20,934 (302) 2,152 22,787
Shares issued in connection with 1,601,167 1 (1) - - -
merger with W3 Group, Inc.
Common stock issued to a consultant 470,000 - 499 - - 499
for services performed
Common stock issued for the 500,000 - 530 - - 530
acquisition of software licenses
Foreign currency translation - - - (86) - (86)
adjustments
Net loss - - - - (972) (972)
-------------------- --------------- ----------------- -------------- ------------
Balance as of June 30, 2006 35,071,167 $ 4 $ 21,962 $ (388) $ 1,180 $ 22,758
==================== =============== ================= ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Aftersoft Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
For the year For the year
ended ended
June 30, June 30,
2006 2005
----------- -----------
Cash Flows from operating activities :
Net income (loss) $ (972) $ 1,938
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities :
Depreciation and amortization 1,275 1,421
Deferred income taxes -- 118
Gain on sale of property and equipment (224) --
Gain on sale of discontinued operations (422) --
Common stock issued for consulting services 499 --
Changes in assets and liabilities (net of the effect of acquisition and
divestiture) :
Trade accounts receivable (752) 194
Inventories 112 107
Prepaid expenses and other assets (126) 155
Accounts payable 18 542
Taxes payable 780 219
Deferred revenue (305) (4,497)
Accrued expenses and other liabilities 1,587 386
----------- -----------
Net cash provided by (used in) operating activities 1,470 (189)
----------- -----------
Cash Flows from investing activities :
Cash acquired in acquisition -- 490
Purchase of property and equipment (62) (311)
Proceeds from the sale of property and equipment 103 --
Capitalized software development costs (551) (285)
----------- -----------
Net cash used in investing activities (510) (106)
----------- -----------
Cash Flows from financing activities :
Proceeds from related party advances 617 349
Proceeds from long-term debt -- 256
Payment on long-term debt (1,043) (155)
Payments on related party advances (219) --
----------- -----------
Net cash (used in) provided by financing activities (645) 450
----------- -----------
Effect of exchange rate changes (86) 32
----------- -----------
Net increase in cash 229 187
Cash at beginning of year 194 7
----------- -----------
Cash at end of year $ 423 $ 194
=========== ===========
Continued
F-6
Aftersoft Group, Inc.
Consolidated Statements of Cash Flows (Continued)
(In thousands)
For the year For the year
ended ended
June 30, June 30,
2006 2005
------------ ------------
Supplemental disclosures of cash flow information
Cash paid during the year for :
Interest $ 130 $ 105
Income taxes $ 182 $ 15
Non-cash investing and financing transactions during the year for :
Settlement of note receivable by offsetting against amounts due
to parent company $ 510
Shares issued for acquisition of software licenses $ 530
Proceeds from sale of office equipment offset against
amounts due to parent company $ 308
Proceeds from sale of Euro Soft offset against amounts due to
parent company $ 450
Euro Software Services Limited divestiture :
Accounts receivable $ 880
Software licenses 530
Accounts payable (240)
Income taxes payable (192)
Gain on sale 422
------------
$ 1,400
============
Shares issued for Car Parts Technologies, Inc. acquisition :
Cash $ 490
Other current assets 1,132
Property and equipment 140
Other long-term assets 37
Other current liabilities (3,264)
Deferred income (4,872)
Long-term debt (1,151)
Other long-term liabilities (487)
Goodwill 14,549
Amortizable intangibles 5,300
------------
$ 11,874
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
AFTERSOFT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 1. Summary of Significant Accounting Policies
Basis of Presentation
Aftersoft Group, Inc. (the "Company") is a subsidiary of Auto Data Network, Inc.
("ADN, Inc."), which owns approximately 93% of the outstanding common stock.
Subsequent to year end, ADN, Inc. is in the process of distributing to its
stockholders the shares it holds in the Company.
Aftersoft Group is a leading provider of business and supply chain management
solutions primarily to automotive parts manufacturers, retailers, tire and
service chains, independent installers and wholesale distributors in the
automotive aftermarket. The Company conducts its businesses through wholly owned
subsidiaries with operations in Europe and North America. MAM Software Limited
("MAM UK") is based in Sheffield, UK. Aftersoft Network N.A., Inc. is comprised
of AFS Warehouse Distribution Management, Inc. and AFS Tire Management Inc.,
which are based in San Juan Capistrano, California and AFS Autoservice, Inc.,
which is based in Allentown, Pennsylvania.
On December 21, 2005, W3 Group, Inc. ("W3") consummated an Acquisition Agreement
("Agreement") to acquire all 1,500 of the outstanding shares of common stock of
Old Aftersoft Group, Inc. ("Oldco") owned by ADN, Inc. in exchange for the
issuance of 32,500,000 newly issued shares of W3, par value $0.0001 per share
(the "Common Stock").
Pursuant to the Agreement and as a result of consummation of the Agreement, the
existing shareholders of W3 owned 1,601,167 shares, or approximately 4.7% of the
34,101,167 total outstanding shares of the Common Stock and ADN, Inc. owned
32,500,000 shares or approximately 95.3% of the total outstanding shares.
Concurrent with the closing of the transaction, the Board of Directors of W3
appointed three additional directors designated by ADN to serve until the next
annual election of directors. In addition, concurrent with the close of the
transaction, W3 (1) changed its corporate name from W3 Group, Inc. to Aftersoft
Group, Inc., (2) changed its corporate address to California, and replaced the
corporate officers. The acquisition was recorded as a reverse acquisition,
whereby the assets and liabilities and 32,500,000 outstanding shares of common
stock of Oldco (reported as a 21,667:1 stock split and reflected retroactively
for all periods presented) were reported at their historical cost and the
1,601,167 shares of W3 reflected as being issued by the Company on December 21,
2005 as a corporate reorganization. In addition, the results of Oldco for all
periods presented prior to the reverse acquisition are reported as the results
of the Company.
The Company operates on a June 30 fiscal year end.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in the consolidated financial
statements.
F-8
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentrations of credit risk
such as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
Cash
The Company maintains cash balances at financial institutions that are insured
by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At June
30, 2006, the Company had $15,000 of balances in these accounts in excess of the
FDIC insurance limits. For banks outside of the United States, the Company
maintains its cash accounts at credit worthy financial institutions.
Customers
The Company performs periodic evaluations of its customers and maintains
allowances for potential credit losses as deemed necessary. The Company
generally does not require collateral to secure its accounts receivable. Credit
risk is managed by discontinuing sales to customers who are delinquent. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company expects
to collect amounts due, actual collections may differ from the estimated
amounts.
No customer accounted for more than 10% of the Company's revenues during the
years ended June 30, 2006 and 2005.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires public companies to report selected segment information
in their quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company believes it operates in only one segment and as such has
not presented additional segment disclosures.
Geographic Concentrations
The Company conducts business in the United States, Canada and the United
Kingdom ("UK"). From customers' headquartered in their respective countries, the
Company derives 1% of its revenues from Canada, 31% of its revenues from the
United States, and 68% from its UK operations during the year ended June 30,
2006 compared to 1% from Canada, 42% from the United States and 57% from the UK
for the year ended June 30, 2005. At June 30, 2006, the Company maintains 98% of
its net property and equipment in the UK with the remaining 2% in North America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by the Company's
management include, but are not limited to, the collectibility of accounts
receivable, the recoverability of long-lived assets and valuation of deferred
tax assets. Actual results could materially differ from those estimates.
F-9
Fair Value of Financial Instruments
The Company's consolidated financial instruments consist of cash, accounts
receivable, related party loans, long-term debt, accounts payable and accrued
expenses. The carrying values of such instruments classified as current,
approximate their fair values as of June 30, 2006 due to their short-term
maturities. The difference between the fair value and recorded values of the
related party loans and long-term debt are not significant due to the lack of
significant differential between current prevailing rates of similar instruments
and the rates of the Company's non-current instruments.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Inventories
Inventories are stated at the lower of cost or current estimated market value.
Cost is determined using the first-in, first-out method. Inventories consist
primarily of hardware that will be sold to customers. The Company periodically
reviews its inventories and records a provision for excess and obsolete
inventories based primarily on the Company's estimated forecast of product
demand and production requirements. Once established, write-downs of inventories
are considered permanent adjustments to the cost basis of the obsolete or excess
inventories.
Property and Equipment
Property and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the assets
or the related lease terms. Equipment under capital lease obligations is
depreciated over the shorter of the estimated useful lives of the related assets
or the term of the lease. Maintenance and routine repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. At the time
of retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in the statement of operations.
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise
marketed are charged to expense until technological feasibility of the product
has been established. Once technological feasibility has been established,
computer software development costs (consisting primarily of internal labor
costs) are capitalized and reported at the lower of amortized cost or estimated
realizable value. Purchased software development cost is recorded at its
estimated fair market value. When a product is ready for general release, its
capitalized costs are amortized using the straight-line method over a period of
three years. If the future market viability of a software product is less than
anticipated, impairment of the related unamortized development costs could
occur, which could significantly impact the recorded net income (loss) of the
Company.
Goodwill
Statement of Financial Accounting Standards No. 142, ("SFAS 142"), "Goodwill and
Other Intangible Assets," addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in the
financial statements upon their acquisition and after they have been initially
recognized in the financial statements.
F-10
SFAS 142 requires that goodwill and intangible assets that have indefinite
useful lives not be amortized but rather be tested at least annually for
impairment, and intangible assets that have finite useful lives be amortized
over their useful lives. In addition, SFAS 142 expands the disclosure
requirements about goodwill and other intangible assets in the years subsequent
to their acquisition.
SFAS 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. Goodwill will be subject to
impairment reviews by applying a fair-value-based test at the reporting unit
level, which generally represents operations one level below the segments
reported by the Company. An impairment loss will be recorded for any goodwill
that is determined to be impaired. The Company performs impairment testing on
all existing goodwill at least annually. Based on its analysis, the Company's
management believes that no impairment of the carrying value of its goodwill
existed at June 30, 2006. There can be no assurance however, that market
conditions will not change or demand for the Company's products and services
will continue which could result in impairment of goodwill in the future.
Long-Lived Assets
The Company's management assesses the recoverability of other long-lived assets
by determining whether the depreciation and amortization of long-lived assets
over their remaining lives can be recovered through projected undiscounted
future cash flows. The amount of long-lived asset impairment, if any, is
measured based on fair value and is charged to operations in the period in which
long-lived asset impairment is determined by management. At June 30, 2006, the
Company's management believes there is no impairment of its long-lived assets.
There can be no assurance, however, that market conditions will not change or
demand for the Company's products and services will continue, which could result
in impairment of long-lived assets in the future.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions."
Accordingly, software license revenue is recognized when persuasive evidence of
an arrangement exists, delivery of the product component has occurred, the fee
is fixed and determinable, and collectibility is probable.
If any of these criteria are not met, revenue recognition is deferred until such
time as all of the criteria are met. In accordance with SOP 98-9, the Company
accounts for delivered elements in accordance with the residual method when
arrangements include multiple product components or other elements and
vendor-specific objective evidence exists for the value of all undelivered
elements. Revenues on undelivered elements are recognized once delivery is
complete.
In those instances where arrangements include significant customization,
contractual milestones, acceptance criteria or other contingencies (which
represents the majority of the Company's arrangements), the Company accounts for
the arrangements using contract accounting, as follows :
1) When customer acceptance can be estimated, expenditures are capitalized as
work in process and deferred until completion of the contract at which
time the costs and revenues are recognized.
2) When customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion
of the contract when customer acceptance is obtained.
F-11
The Company records amounts billed to customers in excess of recognizable
revenue as deferred revenue in the accompanying consolidated balance sheets.
Revenues for maintenance agreements are recognized ratably over the terms of the
service agreement.
Advertising Expense
The Company expenses advertising costs as incurred. For the years ended June 30,
2006 and 2005, advertising expense totaled $48,000 and $40,000, respectively.
Reorganization Expenses
During fiscal 2006, the Company incurred $999,000 of expenses related to the
reverse merger and other related costs. These one-time expenses have been
included within general and administration expenses in the consolidated
statement of operations.
Foreign Currency
Management has determined that the functional currency of its subsidiaries is
the local currency. Assets and liabilities of the UK subsidiary are translated
into U.S. dollars at the year-end exchange rates. Income and expenses are
translated at an average exchange rate for the year and the resulting
translation gain (loss) adjustments are accumulated as a separate component of
stockholders' equity, which totaled ($86,000) and $32,000 for the years ended
June 30, 2006 and 2005, respectively.
Foreign currency gains and losses from transactions denominated in other than
respective local currencies are included in income. The Company had no foreign
currency gains (losses) for all periods presented.
Comprehensive Income
Comprehensive income includes all changes in equity (net assets) during a period
from non-owner sources. For the years ended June 30, 2006 and 2005, the
components of comprehensive income (loss) consist of foreign currency
translation gains (losses).
Income Taxes
The Company accounts for domestic and foreign income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes."
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. Deferred taxation is provided in full in respect of taxation
deferred by timing differences between the treatment of certain items for
taxation and accounting purposes.
F-12
Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per common share are computed based on the weighted
average number of shares outstanding for the year. Diluted earnings (loss) per
share are computed by dividing net income (loss) by the weighted average shares
outstanding assuming all potential dilutive common shares were issued. Basic and
diluted earnings (loss) per share are the same for the periods presented, as the
Company has no dilutive securities.
The following is a reconciliation of the numerator and denominators of the basic
and diluted earnings (loss) per share computation for the years ending June 30 :
2006 2005
------------ ------------
Numerator for basic and diluted income (loss) per share :
Net income (loss) available to common stockholders $ (972,000) $ 1,938,000
Denominator for basic and diluted
income (loss) per common share :
Weighted average number of shares of
common stock outstanding 33,651,233 30,701,671
Net income (loss) per common share
available to common stockholders $ (0.03) $ 0.06
============ ============
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-based Payment" ("Statement 123(R)") to provide
investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial statements.
The cost will be measured based on the fair value of the equity or liability
instrument used. Statement 123 (R) covers a wide range of share based
compensation arrangements including share options, restricted share plans,
performance based awards, share appreciation rights, and employee share purchase
plans. Statement 123(R) replaces SFAS No. 123 and supersedes APB25. The Company
will be required to apply Statement 123(R) beginning July 1, 2006. The Company
does not believe the adoption of Statement 123(R) will have a significant impact
on its overall results of operations or financial position as it has no
stock-based compensation arrangements as of June 30, 2006.
NOTE 2. Acquisitions and Divestitures
Aftersoft Network N.A. Inc (Formerly CarParts Technologies Inc)
The accompanying consolidated statements of operations include the results of
operations of the acquired entity from the date of acquisition.
On August 6, 2004, 100% of the stock of CarParts Technologies was acquired for
stock of the Company valued at $11,874,262.
F-13
The purchase price was allocated to the fair value of the assets acquired, as
follows :
Cash $ 490,000
Current assets 1,132,000
Property and equipment 140,000
Other long-term assets 37,000
Other current liabilities (3,264,000)
Deferred income (4,872,000)
Long-term debt (1,151,000)
Other long-term liabilities (487,000)
------------
Estimated fair value of tangible net liabilities assumed (7,975,000)
Goodwill 14,549,000
Amortizable intangibles 5,300,000
------------
$ 11,874,000
============
Euro Software Services Limited
On January 17, 2006, the Company acquired 100% of the outstanding common stock
of Euro Software Services Limited ("Euro Soft") from a third party for 500,000
shares of its unregistered common stock valued at $1.06 per share (based on the
closing price at the date of the transaction). As Euro Soft had no operations,
customers, accounts receivable or accounts payable at that date, the Company
considered the transaction an acquisition of software licenses.
On June 10, 2006, the Company sold 100% of the outstanding common stock of Euro
Soft (which by then had its own operations) to a third party for $450,000 in
cash and $950,000 and a non-interest bearing note due in installments of cash or
publicly traded buyer stock of $450,000 in December 2006 and $500,000 in June
2007. The initial $450,000 cash payment was paid by the third party directly to
ADN, Inc. in satisfaction of advances to the Company from ADN, Inc.
The operations of Euro Soft and its subsequent sale are considered discontinued
operations.
The sale of Euro Soft resulted in a gain on the sale of discontinued operations
as follows :
Accounts receivable sold $ 880,000
Software licenses sold 530,000
Accounts payable assumed (240,000)
Income taxes payable assumed (192,000)
-----------
Net assets sold 979,000
Consideration received 1,400,000
-----------
Gain on sale of discontinued operations $ 422,000
===========
F-14
Included in discontinued operations of the Company are the following
results of Euro Soft between January 17, 2006 and June 10, 2006 :
Revenues $ 880,000
Cost of sales 240,000
-----------
Income from operations 640,000
Income taxes 192,000
-----------
Income from discontinued operations, net of tax $ 448,000
===========
NOTE 3. Transactions with Parent Company
The Company transferred its note receivable with a related party known as MAM
North America, Inc. ("MAM North America") in the amount of $510,000, to ADN,
Inc. ADN, Inc. agreed to accept the assignment for all the issued shares of MAM
North America, Inc. from the Company and repaid the $510,000 note receivable on
October 1, 2005 by allowing the Company to reduce its balance of loans due to
ADN, Inc. Furthermore MAM North America has indemnified MAM UK against all past
or current liabilities.
In fiscal 2006, the Company sold property and equipment to ADN, Inc. for a
$308,000 reduction in advances due to the parent company, resulting in a gain on
sale of $308,000.
From time to time ADN, Inc. advances funds to the Company. Such advances,
totaling $14,000 at June 30, 2006, are non-interest bearing and currently have
no specific due date.
NOTE 4. Property and Equipment
Property and equipment consist of the following as of June 30, 2006 :
Leasehold improvements $ 120,000
Computer and office equipment 23,000
Equipment under capital leases 128,000
Furniture and equipment 269,000
-----------
540,000
Less : Accumulated depreciation (385,000)
-----------
$ 155,000
===========
Depreciation expense on fixed assets for the years ended June 30, 2006 and 2005
was $241,000 and $254,000, respectively.
F-15
NOTE 5. Intangible Assets
Intangible assets consist of the following as of June 30, 2006 :
Assets not subject to amortization :
Goodwill $ 22,061,000
------------
Assets subject to amortization :
Completed software technology (9-10 years useful life) $ 3,213,000 Customer
contracts / relationships (10 years useful life) 3,750,000 Automotive data
services (20 years useful life) 346,000
------------
7,309,000
Less : Accumulated amortization (1,665,000)
------------
Amortizable intangible assets, net $ 5,644,000
============
Software development costs $ 1,664,000
Less : Accumulated amortization (408,000)
------------
Software development costs, net $ 1,256,000
============
For the years ended June 30, 2006 and 2005, the Company recognized amortization
expense on its software development and goodwill costs of $1,034,000 and
$1,167,000, respectively.
Estimated future amortization of intangibles is as follows :
Years Ending June 30,
-------------------
2007 $ 1,308,000
2008 1,308,000
2009 899,000
2010 753,000
2011 753,000
Thereafter 1,879,000
------------
Total $ 6,900,000
============
F-16
NOTE 6. Long-Term Debt
Long-term debt consists of the following as of June 30, 2006 :
Notes payable to former owners of acquired businesses, bearing interest at 8%
per annum; payable in monthly installments of interest of $11,098 and increasing
periodically to $20,905 through May 2007, at which time the remaining balance
is due, secured by certain assets of the Company $ 687,000
Note payable to former owners of acquired businesses, bearing interest at 9% per
annum; payable in monthly installments of principal and interest of $13,177
through May 2007, secured by certain assets of the Company 186,000
Capital lease obligations, with various interest rates ranging from 12% to 18%,
secured by related equipment, payable in installments through December 2009 31,000
Other 4,000
------------
908,000
Less : Current maturities (898,000)
------------
$ 10,000
============
Future maturities of long-term obligations at June 30, 2006 are as follows :
Years Ending June 30,
--------------
2007 $ 898,000
2008 8,000
2009 1,000
2010 1,000
--------------
Total $ 908,000
==============
NOTE 7. Income Taxes
The Company has United States federal and state tax net operating loss
carryforwards available for future periods of approximately $50 million at June
30, 2006, expiring through 2025. As a result of the changes in the ownership of
the Company, as defined in Section 382 of the Internal Revenue Code, there may
be limitations on the amount of net operating loss carry-forwards that may be
utilized in the future, estimated at $11 million.
The provision for income taxes consists of the following for the years ended
June 30, 2006 and 2005 :
2006
=============================================================
USA Federal USA State UK Corporate Total
------------- ------------- ------------- -------------
Current $ -- $ -- $ 714,000 $ 714,000
Deferred -- -- -- --
------------- ------------- ------------- -------------
Total $ -- $ -- $ 714,000 $ 714,000
============= ============= ============= =============
F-17
2005
=============================================================
USA Federal USA State UK Corporate Total
------------- ------------- ------------- -------------
Current $ -- $ 2,000 $ 217,000 $ 219,000
Deferred -- -- 118,000 118,000
------------- ------------- ------------- -------------
Total $ -- $ 2,000 $ 335,000 $ 337,000
============= ============= ============= =============
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets consist of the following at June 30,
2006 :
Deferred tax assets :
Net operating loss carryforwards $ 6,416,000
Deferred revenue 604,000
Long-term liabilities 209,000
Reserves and accruals 150,000
-----------
Total deferred tax assets 7,379,000
-----------
Deferred tax liabilities :
Other acquired amortizable intangibles (2,190,000)
Software development costs (394,000)
Depreciation and amortization (319,000)
State taxes (351,000)
-----------
Total deferred tax liabilities (3,256,000)
-----------
Valuation allowance (5,003,000)
-----------
Net deferred tax liabilities $ (880,000)
===========
The Company believes that uncertainty exists with respect to future realization
of the U.S. deferred tax assets and has established a valuation allowance for
the full amount as of June 30, 2006. The Company established an allowance of
approximately $4.5 million when it purchased CarParts Technologies.
The provision (benefit) for income taxes for the years ended June 30, 2006 and
2005 differs from the amount computed by applying the U.S. Federal income tax
rates to net income (loss) from continuing operations before taxes as a result
of the following :
June 30, June 30,
2006 2005
----------- -----------
Taxes at statutory rates applied to income (loss) from
continuing operations before taxes $ (384,000) $ 773,000
----------- -----------
State taxes, net of federal effect (68,000) 71,000
Non-deductible expenses 30,000 37,000
Research and development relief (UK) -- (51,000)
Differential in UK corporate tax rate 113,000 (5,000)
Change in valuation allowance 1,023,000 (488,000)
----------- -----------
Total adjustments 1,098,000 (436,000)
----------- -----------
Provision for income taxes $ 714,000 $ 337,000
=========== ===========
F-18
NOTE 8. Commitments and Contingencies
Legal Matters
From time to time, the Company is subject to various legal claims and
proceedings arising in the ordinary course of business. The ultimate disposition
of these proceedings could have a materially adverse effect on the financial
position or results of operations of the Company.
The Company has been informed of a verdict against it in a litigation in the
Court of Common Please of Allegheny County, Pennsylvania, in favor of Aidan
McKenna totaling $3,555,000, which it intends to vigorously appeal. The Company
filed a claim against McKenna for $1,000,000 for breach of contract alleging
that McKenna continued to conduct business in the Open Webs Corporation in
violation of the asset purchase agreement. The Company has made a provision of
$1,650,000 in its legal expense accrual account to cover the cost of any final
settlement with respect to this litigation as of June 30, 2006.
Homann Tire Ltd. filed a complaint against CarParts Technologies, Inc in
California District Court on August 11, 2005. The complaint seeks $271,048 in
damages and alleges breach of contract, breach of warranty and intentional and
negligent misrepresentative. The Company maintains the complaint is without
merit.
Indemnities and Guarantees
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party, in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Delaware. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. In
connection with its customers' contracts, the Company indemnifies its customers
in case the software sold violates any US patent. The duration of the guarantees
and indemnities varies, and is generally tied to the life of the agreement.
These guarantees and indemnities do not provide for any limitation of the
maximum potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance sheet.
Operating Leases
The Company leases its facilities and certain equipment pursuant to
month-to-month and non-cancelable operating lease agreements that expire on
various dates through August 2011. Terms of the leases provide for monthly
payments ranging from $500 to $13,500. For the years ended June 30, 2006 and
2005, the Company incurred rent expense totaling approximately $600,000 and
$643,000, respectively. Future annual minimum payments under non-cancelable
operating leases are as follows :
Years Ending June 30,
-------------------
2007 $ 363,000
2008 236,000
2009 94,000
2010 98,000
2011 100,000
Thereafter 17,000
---------------
$ 908,000
===============
F-19
NOTE 9. Stockholders' Equity
During the year ended June 30, 2006, the Company issued 1,601,167 shares in the
W3 reorganization (see Note 1).
In 2006, 470,000 shares of common stock were issued to a consultant valued at
$1.06 per share, for services relating to the W3 Group reverse merger and
reported in general and administrative expenses.
The Company acquired software licenses in its transaction with Euro Soft during
the year. The consideration was satisfied by the issuance of 500,000 common
stock of the Company, valued at $1.06 per share (see Note 2).
NOTE 10. Subsequent Events (unaudited)
On August 25, 2006, the Company, through a wholly owned subsidiary, Aftersoft
Dealer Software Limited ("Aftersoft Dealer Software"), completed the acquisition
(the "Acquisition") of EXP Dealer Software Limited ("EXP Dealer Software") from
ADN, Inc. EXP Dealer Software owns and operates ADN, Inc's dealer management
("DMS") business. Pursuant to the terms of a Share Sale Agreement (the
"Agreement") dated August 4, 2006 among the Company, Aftersoft Dealer Software
and ADN, Inc., Aftersoft Dealer Software acquired 100% of the outstanding shares
of EXP Dealer Software from ADN, Inc. in exchange for 28,000,000 shares of the
Company's common stock. As the transaction is with the Company's majority
shareholder, the net assets acquired will be recorded in the Company's books at
their historical net book value, totaling a net deficit of approximately
$500,000.
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