-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QkHyOpI+fDjIONYYoIuY4If8gG+Ek/RdmNeHnA4PRB6CwbNX+4iyBGZHsBVamn38 NKhN/PWTvGwnsLzInhtF4A== 0000930413-06-008039.txt : 20061116 0000930413-06-008039.hdr.sgml : 20061116 20061116154210 ACCESSION NUMBER: 0000930413-06-008039 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20061114 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20061116 DATE AS OF CHANGE: 20061116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INCENTRA SOLUTIONS, INC. CENTRAL INDEX KEY: 0001025707 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 860793960 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-32913 FILM NUMBER: 061223008 BUSINESS ADDRESS: STREET 1: 1140 PEARL STREET CITY: BOULDER STATE: CO ZIP: 80302 BUSINESS PHONE: 303-449-8279 MAIL ADDRESS: STREET 1: 1140 PEARL STREET CITY: BOULDER STATE: CO ZIP: 80302 FORMER COMPANY: FORMER CONFORMED NAME: FRONT PORCH DIGITAL INC DATE OF NAME CHANGE: 20000705 FORMER COMPANY: FORMER CONFORMED NAME: EMPIRE COMMUNICATIONS CORP DATE OF NAME CHANGE: 19980327 FORMER COMPANY: FORMER CONFORMED NAME: LITIGATION ECONOMICS INC DATE OF NAME CHANGE: 19961022 8-K 1 c45335_8k.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- DATE OF REPORT: NOVEMBER 14, 2006 (Date of earliest event reported) INCENTRA SOLUTIONS, INC. (Exact name of Registrant as specified in its charter) NEVADA (State or other jurisdiction of incorporation) 333-16031 86-0793960 (Commission File No.) (I.R.S. Employer Identification No.) 1140 PEARL STREET BOULDER, COLORADO 80302 (Address of principal executive offices; zip code) (303) 440-7930 (Registrant's telephone number, including area code) N/A (Former Name or Former Address, if changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (SEE General Instruction A.2. below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13-4(e) under the Exchange Act (17 CFR 240.13e-4(c)) SECTION 2 - FINANCIAL INFORMATION ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION (a) On November 14, 2006, we issued a press release announcing our financial results for the three- and nine-months ended September 30, 2006. A copy of the press release is attached hereto as Exhibit 99.1 and incorporated by reference herein. (b) At 11:30 a.m. New York City time, on November 15, 2006, we hosted an investor conference call, broadcast live on the Internet at our website, to discuss our results of operations for the three- and nine-months ended September 30, 2006. A transcript of the conference call is attached hereto as Exhibit 99.2 and incorporated by reference herein. SECTION 7 - REGULATION FD ITEM 7.01. REGULATION FD DISCLOSURE. The description of our press release and investor conference call in Item 2.02 above is incorporated herein by reference. SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits. Number Documents ------ --------- 99.1 Press Release issued November 14, 2006. 99.2 Transcript of November 15, 2006 conference call. The information included in this Current Report on Form 8-K shall not be deemed to be "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that Section, nor shall it be incorporated by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INCENTRA SOLUTIONS, INC. Date: November 16, 2006 By: /s/ THOMAS P. SWEENEY III --------------------------------- Thomas P. Sweeney III Chief Executive Officer EXHIBIT INDEX Number Documents ------ --------- 99.1 Press Release issued November 14, 2006. 99.2 Transcript of November 15, 2006 conference call. EX-99.1 2 c45335_ex99-1.txt INCENTRA --------------- SOLUTIONS, INC. 1140 PEARL STREET, BOULDER, COLORADO 80302 NEWS RELEASE FOR NOVEMBER 14, 2006 CONTACTS FOR INCENTRA SOLUTIONS: Allen & Caron Inc. Incentra Solutions, Inc. Jill Bertotti (investors) Paul McKnight jill@allencaron.com Chief Financial Officer Len Hall (financial media) pmcknight@incentrasolutions.com len@allencaron.com (303) 449-8279 (949) 474-4300 INCENTRA SOLUTIONS REPORTS 2006 THIRD QUARTER, NINE-MONTH RESULTS YEAR OVER YEAR SERVICES REVENUES GROW 27% AND 23%; TOTAL REVENUES UP MORE THAN 55% BOULDER, CO, NOVEMBER 14, 2006 - Incentra Solutions, Inc. (OTCBB: ICNS), a provider of complete IT and storage management solutions to enterprises and managed service providers in North America and Europe, today announced results for its third quarter and nine months ended September 30, 2006. Total revenues from continuing operations in the 2006 third quarter and first nine months increased year over year 56 percent and 57 percent, respectively, as services revenue grew by 27 percent and 23 percent. Total revenues for this year's third quarter increased to $16.1 million, from $10.3 million in the 2005 third quarter, and total revenues from continuing operations for this year's first nine months increased to $42.5 million, up from $27.0 million in the comparable prior year period. Results from continuing operations for all periods exclude the operating results of the Company's former Front Porch Digital Broadcast and Media business, which was sold in August. During the quarter the Company achieved a significant milestone with the successful sale of the Front Porch Digital business in an all-cash transaction valued at $38 million. The Company recognized a gain of $15.6 million, net of tax, on the sale in this year's third quarter. Excluded from this gain is $5 million of the sale price, which will be recognized in the future as it is earned. This transaction enabled the Company to make significant improvements on its balance sheet, including the repayment of most of its secured indebtedness. Incentra is now completely focused on the continued development and expansion of its enterprise IT and storage business. In support of that expansion, the Company acquired Portland, OR-based Tactix, Inc., a leading solutions provider in the northwest during the quarter. Tactix revenues for 2005 were approximately $12 million. The addition of Tactix, combined with the existing northwest presence, positions Incentra as a dominant solutions provider in that region. In addition, Incentra expanded its mid-west presence with an office in Detroit whose principal customer is a large automotive company in the area. Chairman and CEO Thomas P. Sweeney said that in addition to substantial increases in third-party product sales, the Company continued to generate increased service revenues by selling managed services, professional services, First Call and Enhanced First Call maintenance offerings. "Our strategy is to build a North American and European sales organization with an established and growing base of enterprise customers that will, first, provide a channel for the distribution of third party IT products, but second and perhaps more importantly, generate sales for our higher margin service offerings," Sweeney said. "Based upon our third quarter results and expectations for the fourth quarter, we are on track with our previously disclosed guidance of revenue between $35 million and $40 million for the second half of 2006. I believe our year-over-year growth in 2006 clearly demonstrates that our approach is proving to be successful." Net income applicable to common shareholders for the 2006 third quarter was $8.1 million, or $0.60 per basic and diluted share, and the net loss for the nine months ended September 30, 2006 was $1.0 million, or a loss of $0.07 per basic and diluted share. Net income applicable to common shareholders for the third quarter and nine months ended September 30, 2006 included the $15.6 million gain on the sale of Front Porch Digital. The Company reported an EBITDA(1) loss, as adjusted, for the third quarter and first nine months ended September 30, 2006, of approximately $3.1 million and $6.5 million respectively. The loss in the third quarter and nine months ended September 30, 2006 included significantly higher non-cash stock based compensation expense from the adoption of SFAS 123R, increased sales and marketing expenses, a reserve against a non-trade receivable and higher professional fees related to audit and legal activities. - -------------------------------------------------------------------------------- 1. Although EBITDA is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles (GAAP), the Company believes the use of the non-GAAP financial measure EBITDA enhances an overall understanding of the Company's past financial performance and is a widely used measure of operating performance in practice. In addition, the Company believes the use of EBITDA provides useful information to the investor because EBITDA excludes significant non-cash interest and amortization charges related to past financings by the Company that, when excluded, the Company believes produces more meaningful operating information. EBITDA also excludes depreciation and amortization expenses, which are significant when compared to such levels prior to the acquisition of MSI. However, investors should not consider this measure in isolation or as a substitute for net income, operating income, cash flows from operating activities or any other measure for determining the Company's operating performance or liquidity that are calculated in accordance with GAAP, and this measure may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of EBITDA to the most comparable GAAP financial measure net loss before deemed dividends and accretion on preferred stock is set forth below.
----------------------------- -------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- -------------------------------- 9/30/2006 9/30/2005 9/30/2006 9/30/2005 EBITDA RECONCILIATION --------- --------- --------- --------- (all amounts in 000's) Loss from continuing operations before deemed dividends and accretion on preferred stock ($6,791) ($2,334) ($14,976) ($6,370) Depreciation and amortization 724 605 1,772 2,003 Non-cash Interest 224 198 1,125 384 Cash Interest 457 407 1,225 1,366 ----------------------------- -------------------------------- EBITDA FROM CONTINUING OPERATIONS ($5,386) ($1,124) ($10,854) ($2,617) ============================= ================================ Loss on early extinguishment of debt 1,724 0 2,957 0 Referral Fees 72 Stock-based Compensation 523 103 1,359 315 ----------------------------- -------------------------------- EBITDA, AS ADJUSTED ($3,139) ($1,021) ($6,539) ($2,230) ============================= ================================
CONFERENCE CALL INFORMATION As previously announced, management will host a conference call to be broadcast live on the Internet at 11:30 a.m. (Eastern time) on Wednesday, November 15, 2006. The dial-in number for the call from locations in North America is 1-888-694-4702, and for callers outside North America, the dial-in number for the call is 1-973-582-2741. You may also access the live webcast on the Company/Investors section of the Company's website, www.incentrasolutions.com, under "Conference Call and Webcasts." Additionally, an archive of the conference call will be available on this site. ABOUT INCENTRA SOLUTIONS, INC. Incentra Solutions, Inc. (www.incentrasolutions.com) (OTCBB:ICNS) is a provider of complete IT & storage management solutions to enterprises and managed service providers in North America and Europe. Incentra's complete solution includes managed services, professional services, hardware and software products with the Company's First Call and Enhanced First Call support services, IT outsourcing solutions and financing options. INCENTRA SOLUTIONS FORWARD LOOKING STATEMENTS CERTAIN INFORMATION DISCUSSED IN THIS PRESS RELEASE MAY CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE FEDERAL SECURITIES LAWS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED UPON REASONABLE ASSUMPTIONS AT THE TIME MADE, IT CAN GIVE NO ASSURANCE THAT ITS EXPECTATIONS WILL BE ACHIEVED. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO UNPREDICTABLE AND UNANTICIPATED RISKS, TRENDS AND UNCERTAINTIES SUCH AS THE COMPANY'S INABILITY TO ACCURATELY FORECAST ITS OPERATING RESULTS; THE COMPANY'S POTENTIAL INABILITY TO ACHIEVE PROFITABILITY OR GENERATE POSITIVE CASH FLOW; THE AVAILABILITY OF FINANCING; AND OTHER RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS. FOR FURTHER INFORMATION ON FACTORS WHICH COULD IMPACT THE COMPANY AND THE STATEMENTS CONTAINED HEREIN, REFERENCE SHOULD BE MADE TO THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING ANNUAL REPORTS ON FORM 10-KSB, QUARTERLY REPORTS ON FORM 10-QSB AND CURRENT REPORTS ON FORM 8-K. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE OR SUPPLEMENT FORWARD-LOOKING STATEMENTS THAT BECOME UNTRUE BECAUSE OF SUBSEQUENT EVENTS. TABLE FOLLOWS INCENTRA SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------- ----------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------------- ----------------------------------------- SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 ------------------ ------------------ ------------------ ------------------ all amounts in (000's) Revenues $ 16,088 $ 10,305 $ 42,549 $ 27,027 --------- --------- --------- --------- Cost of Revenue 12,796 8,175 34,090 21,270 --------- --------- --------- --------- Gross Margin 3,292 2,130 8,459 5,757 --------- --------- --------- --------- Total Operating Expenses 7,744 3,854 18,246 10,693 --------- --------- --------- --------- Operating Loss from Continuing Operations (4,452) (1,724) (9,787) (4,936) --------- --------- --------- --------- Net Loss From Continuing Operations (6,791) (2,334) (14,976) (6,370) --------- --------- --------- --------- Income (loss) from discontinued operations 15,576 (877) 15,975 (1,545) --------- --------- --------- --------- Net Income (Loss) 8,785 (3,210) 999 (7,915) --------- --------- --------- --------- Net Income (Loss) Applicable to Common Stockholders $ 8,130 $ (3,864) $ (964) $ (9,878) ========= ========= ========= ========= Basic and diluted net loss per share applicable to common shareholders: Loss From Continuing Operations $ (0.54) $ (0.23) $ (1.23) $ (0.68) Income (Loss) From Discontinued Operations 1.14 (0.07) 1.16 (0.12) --------- --------- --------- --------- Net Loss Per Share--Basic and Diluted $ 0.60 $ (0.30) $ (0.07) $ (0.80) ========= ========= ========= =========
# # # # EX-99.2 3 c45335_ex99-2.txt Exhibit 99.2 INCENTRA SOLUTIONS, INC. THIRD QUARTER 2006 & NINE MONTH RESULTS CONFERENCE CALL NOVEMBER 15, 2006 OPERATOR: Good morning, my name is Denise and I will be your conference operator today. At this time, I'd like to welcome everyone to the Incentra Solutions Third Quarter 2006 and Nine-Month Results conference call. All lines have been placed on mute to prevent any background noise and after the speakers' remarks there will be a question and answer session. If you would like to ask a question, simply press the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you. It is now my pleasure to turn the floor over to your host Mr. Rene Caron of Allen & Caron. Sir, the floor is yours. RENE CARON: Thank you very much. Good morning everyone. And I, too, would like to thank you for joining us for Incentra Solutions' third quarter and nine-month results conference call. Before we start today's call there are a few items that I would like to cover with you. First, the news release announcing the company's financial results for the third quarter and nine months ended September 30th, 2006, was disseminated over the news wire yesterday after the close of the market and is currently available for download from either the Incentra Solutions website at WWW.INCENTRASOLUTIONS.COM or the Allen & Caron website at WWW.ALLENCARON.COM. Additionally, a replay of the conference call will be available under "Conference Calls and Webcasts" on the company's Investor section of the Incentra Solutions website. Finally, I've also been asked to make the following statement. Certain information discussed on this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Federal securities laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, it can give no assurance that its expectations will be achieved. Listeners are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements are inherently subject to unpredictable and unanticipated risks, trends and uncertainties, such as the company's inability to accurately forecast its operating results, the company's potential inability to achieve profitability or generate positive cash flow, the availability of financing and other risks associated with the company's business. For further information on factors which could impact the company and the statements contained herein, reference should be made to the company's filings with the Securities and Exchange Commission including Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. On the call today from Incentra Solutions, we have Tom Sweeney, Chairman and CEO; Shawn O'Grady, President and COO, and Paul McKnight, Chief Financial Officer. Management will provide a review of results after which there will be a question and answer period. For those participating on the call over the internet and who wish to submit a question to be considered for the question and answer period, you can do so by clicking on the "Ask a Question" button provided on the left side of your screen. Please submit your questions as early in the call as possible. If questions sent in via e-mail or over the Internet have not been previously answered in response to an earlier question during this morning's call, they will be asked of management as time permits. I'd now like to turn the call over to Tom Sweeney. Good morning, Tom. TOM SWEENEY: Thanks Rene. Welcome and thank you for joining us. As usual, we've had a lot going on during this latest quarter. First, the company sold its broadcast division, Front Porch Digital, to Genuity Partners for $38 million in cash on August 2nd. We received $33 million in closing and will receive 5% of software sold for the three years 2006, 2007 and 2008. As you would expect, the company used the proceeds from the sale to clean up its balance sheet. Paul will discuss this in greater detail in the finance section of the call. Second, in September we purchased Tactix, headquartered in Portland, a well-established solutions provider focused on storage, networking and security. We used a portion of the proceeds from the broadcast sale to purchase Tactix in an all-cash transaction. Shawn will discuss this in more detail in his operations update. Third and most importantly, we continue to see dramatic results from our acquisitions with increases in service of sale to the acquired customer bases. Our integration process was fully developed at this point and we are seeing integration synergies occurring much sooner after an acquisition than we have in the past. Finally, we were able to successfully resolve our dispute with the prior owner, Star Solutions, thereby adjusting the price downward for the business we acquired and gaining a complete release of claims against the company. In addition, we recovered approximately 8% of the shares outstanding, or slightly more than 1.1 million, which have been retired. I'd like Paul McKnight to provide an update on financial operations of the business and the impact of the sale of the broadcast division on our balance sheet. Paul. PAUL MCKNIGHT: Thank you, Tom. Good morning. I will now highlight the financial performance for the three- and nine-months ending September of 2006. Revenues for the quarter grew 56% to $16.1 million. That's up from $10.3 million for the prior period. The majority of the increase can be attributed to our acquisitions. Gross margin dollars for the three months was $3.3 million, up 55% from the prior year of $2.1 million. The increase is due to the higher revenue volume from both products and services. Gross margins, as a percent of revenue, was 20% in 2006, down slightly from 21% for the prior year period. The slight decrease in margin percentage is due to a higher mix of product revenue during the 2006 period. Operating expenses were $7.7 million compared to $3.9 million for the prior year. The increase is due to the inclusion of the acquisition, increased legal and audit expenses, increased investment in sales and marketing head count, and the adoption of FSAS 123-R in 2006. Our loss from continuing operations was $6.8 million for the quarter. Based on the sale and performance of the broadcast division, we recorded net income from discontinued operations of $15.6 million in the period. Incentra recorded net income for the quarter of $8.8 million. Revenues for the nine months grew 57% to $42.5 million, up from $27 million for the prior period. The increase can be attributed to our acquisitions and organic growth in our services being delivered. Gross margin dollars for the nine months was $8.5 million, up 47% from the prior year of $5.8 million. This was driven by a higher revenue volume from both products and services. Gross margin as a percent of revenue was 20% in 2006, down slightly from 21% in the previous year. The slight decrease in margin again is due to a higher mix of product revenue in 2006. Operating expenses were $18.2 million compared to $10.7 million for the prior year. Again, the increase is due to the inclusion of acquisitions, increased legal and audit expenses, an increase in sales and marketing, head count and the adoption of FSAS 123R. Our loss in continuing operations was $15 million for the period, but the broadcast division net income from discontinued operations was $16 million for the period. Accordingly, Incentra recorded net income for the period of $1 million. Now with the proceeds from the sale of the broadcast division, the company was able to pay off substantially all its outstanding debts. The only debt that remains is the following: a $1.1 million unsecured note with an interest rate of 0.5% open to the prior owner of NST. We have $2.8 million in convertible debt, which has the potential of converting to common stock at a $1.40 price. We didn't feel it was in the company's best interest to pay these early. In addition, the company maintains a $10 million revolving line of credit to support our working capital needs. We ended the period with $1.4 million in cash, which excludes the $2.5 million that's in escrow, which is due to be received within nine months, and this clearly leaves the company in a stronger financial position to continue to execute on business plans. Now, I'd like to turn the call back over to Tom. TOM SWEENEY: Thanks, Paul. Shawn, I'd like for you to go ahead and provide an update on the results for the third quarter and a brief description on services that we provide to our customers. SHAWN O'GRADY: Yes, certainly. Good morning, everybody. Before I do cover the operation, let me quickly review what our service portfolio looks like and how we make money in this business. First, we provide professional consulting services. These focus on technology (inaudible) design and integration functions. These services allow our clients to take advantage of our technical and operational knowledge to deal with the increasing complexity of their IT infrastructure, and this is knowledge that they typically aren't going to have in-house. Next, we provide FirstCall maintenance services, where we become the first line of contact for our customers when they're having a problem with their technology products. Third, we provide remote monitoring announcement services, which allow our customers to outsource the operation of their IT and storage infrastructure regardless of where that infrastructure resides. It can be in their data centre or in a public data center; literally anywhere in the world. In fact, today we're managing infrastructure in 43 data centers on three continents. Lastly, we sell technology products to major manufacturers like Hewlett Packard, Sun, Cisco, Network Appliance, but when we combine this product with our engineering, design and support services, we're able to create even more value for our customers. As you would expect, our margin improves as the service mix goes up. So, with most (inaudible) we've seen about our third quarter performance is that our recurring service revenue grew 21% over the previous quarter. This growth is all organic and is really a validation of the value proposition that we take to the market place. Industry experts continue to pay data storage growth rates in the 50% plus range, and a recent Gardener Group report on the market identifies that the number one concern of IT managers is how they're going to keep up with this growth. Our managed services, which leverage our proprietary GridWorks platform, give our customers a cost-effective solution to addressing this increasing complexity. Also in the third quarter, we began the integration of the Tactix business, which was acquired in September. This has gone extremely well. We've successfully combined our offices in Seattle and Portland, implemented a new management structure, and began transacting with the Tactix customers under the Incentra brand. All of the back office systems will be completely integrated by the end of November. To date we've sold over $1 million in Incentra services to the Legacy customer base, which of course was the primary synergy objective of all of our acquisitions. In addition, we're seeing an increase in product volumes, as we're able to offer those clients access to products that they were not able to purchase through Tactix but we're also seeing an increase in product margins as they gain access to Incentra's improved purchasing position. We are more than pleased with how quickly we have realized return on the Tactix acquisition; in fact, we're now getting the expected synergies out of all of our acquisitions. We've seen a similar rapid return on the NST business, which was acquired in April. We've seen substantial growth in the professional service revenue from that organization and we added FirstCall and Managed Services to our client base much faster than we would have expected. As Tom said, we now feel that we have an integration process that can be readily repeated if the right opportunity arises to do so in the future. In addition, driving the synergies in our positions, we do continue to invest in the further organic growth of the business, funding expansion in Europe and California, as well our new offices in Dallas and Detroit. Today we have over 45 sales people and 65 engineers in the organization and believe we are invested in a level that will generate 15% organic growth as we move into 2007. We also believe that we will continue to see services revenue grow of at least two to three times its overall growth rate, and of course, we can expect that to increase the overall margin of the business will accomplish that. So, on that final note I'll turn the call back to you, Tom. TOM SWEENEY: Thanks, Shawn. In closing, I'd like to summarize where the company stands. First, we have successfully sold the broadcast business, focusing the management team exclusively on the multi-billion dollar enterprise (inaudible) services market place. This mirrored focus will make it easier for the company to apply its resources to the largest opportunity we face. Today, Incentra is one of only a handful of company's capable of providing complete solutions to its customers; having (inaudible) able to provide professional services, hardware and software, financing solutions, and most importantly, remote monitoring and management of IT infrastructures. This complete solutions approach is the key that differentiates us from our competitors and it adds significant value to the services we provide to our customers, yielding higher gross margins for the company. Phase one of our business plan was to get the company to the $100 million run rate as quickly as possible. We've accomplished this both by acquiring businesses that are synergistic into heavy investment in organic growth. The $100 million run rate is important as it allows the company to operate at cash flow positive while maintaining its heavy investment in growing services revenues. We're now entering phase two of our plans to grow our services revenues at a significantly faster pace than the business overall. This will provide increased gross margins and increased cash flows as we go forward. Gross services revenue is the key to creating a company profile which will attract investor and create shareholder returns which are above market range. Our expectations for the fourth quarter are as follows: Revenues will increase substantially to between 24 and 26 million for the fourth quarter, reaching the upper end of our guidance. Gross profits will continue to increase as we extract affinities from our newly acquired businesses, NST and Tactix. Cash flow from operations will remain slightly negative for the fourth quarter. However, as we exit 2006, Incentra should be running at the $100 million mark and that means as we add revenue, we'll see positive cash flow from operations. We expect to see our services continue to grow at double-digit rates through the fourth quarter and into 2007. For the full year of 2007, we're expecting revenues to be in the range of $110 to $120 million with positive cash flow from operations for the year. Lastly, I'd like to give an update on our public relations and investor relations programs begun this quarter. From a public relations perspective, we've seen coverage of the company in industry and business publications across the country. We have also been named in the prestigious Deloitte & Touche Fast 500 list, being listed as the 55th fastest growing company in North America for the past five years. We were named "Top New Revenue Generator" by Barr Business, and we were named the second fastest growing company in Colorado by Deloitte & Touche. Our business strategies and services are being written about regularly and we are expecting to be the focus of a number of trade publications in the coming weeks and months. Our Investor Relations Program began approximately three weeks ago with meetings in London and continued with meetings in Chicago and Minneapolis. We have met with 18 funds to date and, if I were to summarize, I would say the meetings were positive. Our story is straightforward, our services advantage is real, and the market is large and underserved. More importantly, we have seen increased volume in our shares traded per day. We will continue to be meeting with potential investors throughout the fourth quarter and continue to tell the Incentra story. That's all of our comments, Rene. Thank you for joining the call, we'll now open it up for questions. OPERATOR: Thank you. At this time, I would like to remind everyone, if you would like to ask a question, please press star, one now on your telephone keypad, and we'll pause for just a moment as we compile the Q&A roster. And once again, that is star, one if you'd like to ask a question. And one final reminder - - gentlemen, there appear to be no questions. TOM SWEENEY: Rene, I know you had a number of questions that were sent in from people prior to the call, do you have those? RENE CARON: Can you hear me, Tom? TOM SWEENEY: Yes, I can hear you now. RENE CARON: As we said, we do have a number of questions that were submitted by e-mail, either before the call, and some during the call, so Tom I'd like to pose a couple of those questions for you now. The fist question has to do with the COLT contract that was signed earlier this year. The question is, they would like an update on the status of that particular contract and what is going on with the rollout of your services with COLT? TOM SWEENEY: Okay. Shawn, I'm going to go ahead and have you answer the question, but I'll just point out the person who is asking it. We, of course, don't disclose the actual revenues we're building through our customers and Shawn can give you a pretty detailed view as to what's happening operationally. SHAWN O'GRADY: That's going exactly the way we had hoped it would go. We're very pleased with how that's working out. We have installed our infrastructure in data centers in Frankfurt, Berlin, Paris, Milan and London as we speak today. We have two other data centers that are in progress of being installed. Without disclosing where exactly we'll be on revenue, I can tell you that as we exit this year, COLT will become at least our third, possibly our second largest managed service customer in terms of the monthly billings that we do. So, that's going extremely well and, as I said, it's all happening exactly the way that we had hoped. RENE CARON: Okay, thank you, Shawn. Another question has to do with the company's acquisition strategy. Do you expect to close any additional acquisitions in the next couple of quarters and, if so, where do you expect they may be? Would they be North America, or Europe, and will they be focused on being accretive acquisitions? TOM SWEENEY: Okay, so the most direct answer is that the company does not have any charge sheets out or acquisitions that are under way at this time. We are certainly looking at a number of different companies as we do have an active process under way to try and find companies that we believe could be acquired at the right price and, of course, any acquisitions that we would do, we would generally look to expand our geographic footprint, which would mean we want to expand in the mid-west, the south, the northeast, and the southeast of the US. There could be benefits to considering an acquisition on a company that had a presence in the UK, Germany, and France because of our expanding operations there with COLT and our other customers. And in terms of expectations from a longer term perspective, I would suggest that the company will find some companies that would be attractive, and if we can actually get them to agree to terms that make sense, then we would want to do an acquisition. All of them would be accretive, just from the nature of how we do the transactions. RENE CARON: Okay, thank you. Another question has to do with gross margin. What was the gross margin percentage on services revenue for the third quarter and nine months of this year and do you expect that that will increase going forward? TOM SWEENEY: So Paul, why don't you go ahead and tell us what the gross margins were for services. Do you have that? PAUL MCKNIGHT: Yes, I do. For the three months for the quarter the services margin was 30% and for the nine months it was 29%. So, the answer is 30% for the three month period and 29% for the nine month period and yes, we would expect our services margins to go up for a couple of reasons. One, the total volume of managed services that we're delivering is increasing very quickly right now, and that means we're overcoming the fixed costs we have to run our network operations center and the ensuing support organization that's a part of that. Two, we are seeing a fairly substantial growth in the amount of professional services we're delivering. That typically comes in the 36% range, so we would expect to see gross margins on services going up as we go forward on a quarterly basis. RENE CARON: Okay and we have a related question. Could you give us a breakdown, from a revenue point of view, of what percentage comes from services versus the other products that you sell? TOM SWEENEY: Yes. Paul, what was the split between product and services for the third quarter? PAUL MCKNIGHT: The split was 78% product and 22% services. TOM SWEENEY: Okay. PAUL MCKNIGHT: So, we're seeing 22% of the revenue in the third quarter come from services and 78% come from products. For the fourth quarter of this year, our expectation would be that products would represent approximately 85% of total revenues, and that's really driven by the fact that we've just finished acquiring Tactix in September and they are very heavily focused products solutions (inaudible), but of course as we go forward, we'll see our services mix climb back up again as we extract the synergies out of the businesses and sell them to customers on a broader basis. RENE CARON: Okay, and it looks like we have at least one more question that just came in. One is, in terms of your outlook for '07 that you gave a bit ago, how much of that do you think will be coming from organic growth versus how much will be coming from acquired growth, and do you need to do acquisitions to meet the numbers you talked about? TOM SWEENEY: Yeah, so what we had said was that we would expect 2007 revenues to be in the $110 to $120 million range, with positive cash flow from operations for the year. That is an organic view of the business. That does not include any acquisitions, so no acquisitions are necessary for us to achieve those revenues for the cash flow. Any acquisitions that we would complete would be added to that. RENE CARON: Okay, thank you. I think that covers all of the e-mail questions that we've received, Tom. I would like to ask the Operator if anyone has queued up for a telephone question, and if not then I will turn the call back to Tom. OPERATOR: No sir, no one has queued up for a telephone question. RENE CARON: Okay, fine. Tom? TOM SWEENEY: Okay. Well, thank you again for joining us on the call. We certainly appreciate your time. We feel very good about where the business is today both financially and from an operational standpoint, and we are looking forward to having a record fourth quarter and getting ourselves into a position where we can generate in excess of $110 to $120 million next year in revenue. So, appreciate your time. Thank you. OPERATOR: Thank you. This does conclude today's Incentra Solutions conference call. You may now disconnect your lines and have a wonderful day. -----END PRIVACY-ENHANCED MESSAGE-----