1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
AMENDMENT NO. 1
(AMENDING ITEM 7 (a), (b) and (c))
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 15, 1998
ARI NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 0-19608 39-1388360
--------------- ------------ --------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
330 E. Kilbourn Avenue 53202
Milwaukee, Wisconsin ----------
--------------------------------------- (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (414) 278-7676
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This Amendment No. 1 supplements the Current Report on Form 8-K filed on
September 25, 1998 (the "Form 8-K") by ARI Network Services, Inc. (the
"Company"). At the time of filing the Form 8-K, it was impracticable for the
Company to provide the financial statements of the business acquired and pro
forma financial information required by Item 7(a) and (b).
Item 7. Financial Statements and Exhibits
(a) Audited Financial Statements as of June 28, 1998 of Business
Acquired.
(b) Pro Forma Financial Information.
Included in this Report are the following pro forma financial
statements of ARI Network Services, Inc.:
1. ARI Network Services, Inc. unaudited Pro
Forma Condensed Balance Sheet at July 31, 1998;
2. ARI Network Services, Inc. unaudited Pro
Forma Condensed Statement of Operations for the Year Ended
July 31, 1998
3. ARI Network Services, Inc. unaudited Notes to
Pro Forma Condensed Financial Statements.
(c) Exhibits
23.1 Consent of Arthur Andersen LLP
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ITEM 7 (a)
POWERCOM-2000, A DIVISION OF
BRIGGS & STRATTON CORPORATION
FINANCIAL STATEMENTS
AS OF JUNE 29, 1997 AND JUNE 28, 1998
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Briggs & Stratton Corporation:
We have audited the accompanying consolidated balance sheets of POWERCOM-2000
(a division of Briggs & Stratton Corporation -- Note 1) as of June 29, 1997 and
June 28, 1998, and the related consolidated statements of operations,
divisional deficit and cash flows for the fiscal years then ended. These
consolidated financial statements are the responsibility of the management of
Powercom-2000 and Briggs & Stratton Corporation. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Powercom-2000 (a division of
Briggs & Stratton Corporation) as of June 29, 1997 and June 28, 1998, and the
results of its operations and its cash flows for the fiscal years then ended,
in conformity with generally accepted accounting principles.
As described in Note 10 to the financial statements, effective September 15,
1998, substantially all of the Company's assets were sold to ARI Network
Services, Inc.
Denver, Colorado,
September 15, 1998.
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Page 1 of 2
POWERCOM-2000
(A Division of Briggs & Stratton Corporation -- Note 1)
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 1997 AND JUNE 28, 1998
ASSETS 1997 1998
------------ ------------
CURRENT ASSETS:
Cash $ 158,790 $ 262,927
Accounts receivable, net of allowance for 478,147 275,780
doubtful accounts of approximately $86,950 and
$49,173, respectively
Unbilled project revenue 138,522 238,421
Inventory 40,007 28,577
Prepaids and other 309,445 74,080
------------ ------------
Total current assets 1,124,911 879,785
PROPERTY AND EQUIPMENT, net of depreciation and amortization
of $365,312 and $614,179, respectively 1,398,664 756,750
SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization
of $149,724 and $445,250, respectively 703,491 513,191
------------ ------------
TOTAL ASSETS $ 3,227,066 $ 2,149,726
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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Page 2 of 2
POWERCOM-2000
(A Division of Briggs & Stratton Corporation -- Note 1)
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 1997 AND JUNE 28, 1998
1997 1998
------------- --------------
LIABILITIES AND DIVISIONAL DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 689,576 $ 451,516
Accrued liabilities 690,868 464,898
Deferred revenue 1,275,886 1,293,026
Provision for losses on contracts - 391,454
Lines of credit (Note 3) 411,083 476,555
Capital lease obligation, current portion (Note 3) 50,598 188,013
------------- --------------
Total current liabilities 3,118,011 3,265,462
CAPITAL LEASE OBLIGATION, net of current (Note 3) 190,955 -
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
DIVISIONAL DEFICIT:
Net investment by Briggs & Stratton (Note 7) 9,611,123 15,472,496
Cumulative translation adjustment 120,706 344,000
Accumulated deficit (9,813,729) (16,932,232)
------------- --------------
Total divisional deficit (81,900) (1,115,736)
------------- --------------
$ 3,227,066 $ 2,149,726
============= ==============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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POWERCOM-2000
(A Division of Briggs & Stratton Corporation -- Note 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 29, 1997 AND JUNE 28, 1998
1997 1998
------------- --------------
REVENUE:
Initial license and usage fees $ 1,458,570 $ 1,839,065
Recurring license and usage fees 509,000 592,217
Services 1,059,692 1,129,975
------------- --------------
Total revenue 3,027,262 3,561,257
------------- --------------
COST OF REVENUE:
Cost of license fees 457,377 1,071,846
Cost of services 1,210,365 1,331,656
Loss on contracts - 391,454
------------- --------------
Total cost of revenue 1,667,742 2,794,956
------------- --------------
GROSS PROFIT 1,359,520 766,301
------------- --------------
OPERATING EXPENSES:
General and administrative 5,898,452 8,669,438
Sales and marketing 2,150,313 2,749,593
------------- --------------
Total operating expenses 8,048,765 11,419,031
------------- --------------
Operating loss (6,689,245) (10,652,730)
INTEREST EXPENSE (Notes 3 and 7) 374,242 713,990
------------- --------------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (7,063,487) (11,366,720)
INCOME TAX BENEFIT (Note 4) (2,610,947) (4,248,217)
------------- --------------
NET LOSS $ (4,452,540) $ (7,118,503)
============= ==============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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POWERCOM-2000
(A Division of Briggs & Stratton Corporation -- Note 1)
CONSOLIDATED STATEMENTS OF DIVISIONAL DEFICIT
FOR THE YEARS ENDED JUNE 29, 1997 AND JUNE 28, 1998
Net Total
Investment Cumulative Divisional
by Briggs Translation Accumulated Equity
& Stratton Adjustment Deficit (Deficit)
------------- ----------- -------------- -------------
BALANCES, at June 30, 1996 $ 6,016,524 $ - $ (5,361,189) $ 655,335
Net loss - - (4,452,540) (4,452,540)
Investment by Briggs
& Stratton 3,594,599 - - 3,594,599
Cumulative translation
adjustment - 120,706 - 120,706
------------- ---------- -------------- -------------
BALANCES, at June 29, 1997 9,611,123 120,706 (9,813,729) (81,900)
Net loss - - (7,118,503) (7,118,503)
Investment by Briggs
& Stratton 5,861,373 - - 5,861,373
Cumulative translation
adjustment - 223,294 - 223,294
------------- ---------- -------------- -------------
BALANCES, at June 28, 1998 $ 15,472,496 $ 344,000 $ (16,932,232) $ (1,115,736)
============= ========== ============== =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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Page 1 of 2
POWERCOM-2000
(A Division of Briggs & Stratton Corporation -- Note 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 29, 1997 AND JUNE 28, 1998
1997 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,452,540) $ (7,118,503)
Adjustments to reconcile net loss to net
cash used in operating activities-
Amortization and depreciation 478,932 712,719
Loss on disposal of assets 1,171 4,750
Provision for losses on contracts - 391,454
Write down of assets - 334,552
Change in-
Accounts receivable (217,154) 193,830
Unbilled project revenue (36,933) (99,899)
Inventory (40,007) 11,430
Prepaids and other (310,879) 230,975
Accounts payable 226,254 (227,339)
Accrued liabilities 562,382 (199,055)
Deferred revenue 931,807 17,140
------------- -------------
Net cash used in operating activities (2,856,967) (5,747,946)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (832,781) (175,438)
Proceeds from sale of property and equipment 9,258 19,981
Capitalized software development costs (737,042) (105,226)
------------- -------------
Net cash used in investing activities (1,560,565) (260,683)
------------- -------------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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Page 2 of 2
POWERCOM-2000
(A Division of Briggs & Stratton Corporation -- Note 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 29, 1997 AND JUNE 28, 1998
1997 1998
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net investment by Briggs & Stratton $ 3,693,047 $ 6,076,841
Proceeds from lines of credit 427,092 254,175
Payments of lines of credit - (167,971)
Payments of capital lease obligations - (35,381)
------------ ------------
Net cash provided by financing activities 4,120,139 6,127,664
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,066) (14,898)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (298,459) 104,137
CASH AND CASH EQUIVALENTS, beginning of year 457,249 158,790
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 158,790 $ 262,927
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 374,242 $ 713,990
============ ============
Cash paid (received) during the year for taxes $ - $ -
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING AND INVESTING ACTIVITIES:
During fiscal year 1997, the Company entered into a capital lease in the amount
of $222,294.
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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POWERCOM-2000
(A Division of Briggs & Stratton Corporation -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 1997 AND JUNE 28, 1998
(1) ORGANIZATION AND BUSINESS
Powercom-2000 is a division of Briggs & Stratton Corporation ("Briggs &
Stratton"). The divisional headquarters of Powercom-2000 is located in
Colorado Springs, Colorado. This division is comprised of the domestic
operations and several wholly-owned foreign subsidiaries of Briggs & Stratton
as listed below (collectively the "Company"). Prior to June 19, 1998, the
Company was comprised of Powercom-2000, Inc., as a wholly-owned subsidiary of
Briggs & Stratton, and each of the foreign subsidiaries listed below were
wholly-owned subsidiaries of Powercom-2000, Inc. The Company provides
manufacturers and their distribution networks with CD-Rom based electronic
catalogs, EDI networks and business management software. Subsequent to system
installation, the Company provides its customers with customized electronic
catalog consultation, training, technical support, product enhancements and
maintenance.
The following is a listing of the wholly-owned subsidiaries relating to the
Company (the "Foreign Subsidiaries"):
Entity Location
-------------- ------------------
Powercom-2000 Pty Ltd. Australia (Hallam, Victoria)
Powercom-2000, Inc. Canada (Mississauga, Ontario)
Powercom-2000, Ltd. Ireland (Dublin)
Powercom-2000, GmbH. Germany (Wieslochand and Koln)
Powercom-2000, Ltd. United Kingdom (Stansted, Essex)
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The accompanying consolidated financial statements include the accounts of
Powercom-2000 and the Foreign Subsidiaries since their respective dates of
incorporation. All material intercompany transactions and revenues have been
eliminated in consolidation.
As of June 19, 1998, Powercom-2000, Inc. was liquidated by Briggs & Stratton
and the Foreign Subsidiaries became wholly owned subsidiaries of Briggs &
Stratton. This transaction has been treated as a reorganization of entities
under common control. Accordingly, the accompanying consolidated financial
statements have been prepared to present the business conducted by
Powercom-2000 and its former subsidiaries for all periods presented, without
regard to legal structure.
From its inception, the Company has consistently incurred significant operating
losses. The Company was a wholly owned subsidiary of Briggs & Stratton until
June 1998, when it was reorganized into a division of Briggs & Stratton. Briggs
& Stratton had historically funded the significant operating losses of the
Company. On September 15, 1998, substantially all of the assets of the Company
were sold to ARI Network Services, Inc. ("ARI")(see Note 10). Due to the
acquisition by ARI and the change in management that occurred at the time of the
acquisition, the Company's business structure is expected to change
significantly and may not be recognizable in future periods. ARI's management
does not intend to operate the Company's business as a separate entity or
division, but rather to fully integrate it into ARI's business. In this
connection, ARI's management intends to significantly reduce the Company's
operating costs by effecting an additional reduction in the number of employees
and by discontinuing all direct foreign operations and replacing them with a
network of international value added resellers. Accordingly, the Company does
not exist as a distinct business subsequent to September 15, 1998.
(2) SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include highly
liquid investments with original maturities of 90 days or less.
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Concentration of Credit Risk
The Company has no significant off-balance sheet concentration of credit risk
such as foreign exchange contracts, options contracts or other foreign currency
hedging arrangements. Financial instruments that potentially subject the
Company to a concentration of credit risk principally consist of trade accounts
receivable. The Company's customers consist primarily of large, established
original equipment manufacturers ("OEM") and their respective dealers. The
Company continually evaluates the credit worthiness of its customers' financial
condition, generally does not require collateral and maintains reserves for
potential credit losses.
Fair Value of Financial Investments
The Company's financial instruments consist of cash, short-term trade
receivables and payables and notes payable. The carrying values of these
instruments approximate their fair values.
Property and Equipment
Depreciation of property and equipment is computed using the straight-line
method over estimated useful lives of three to five years for computer hardware
and equipment, five years for furniture and fixtures and the life of the lease
for leasehold improvements. The costs of repairs and maintenance are expensed
while enhancements to existing assets are capitalized.
Property and equipment consists of the following:
June 29, June 28,
1997 1998
------------ ------------
Computer hardware and equipment $ 1,015,509 $ 745,205
Furniture and fixtures 748,467 625,724
------------ ------------
1,763,976 1,370,929
Less: accumulated depreciation
and amortization (365,312) (614,179)
------------ ------------
$ 1,398,664 $ 756,750
============ ============
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Depreciation expense for the fiscal years ended June 29, 1997 and June 28,
1998 was $333,155 and $417,193, respectively.
Software Development Costs
The Company expenses the costs of developing computer software until
technological feasibility is established and capitalizes all qualifying costs
incurred from that time until the software is available for general customer
release. Technological feasibility for the Company's computer software
products is based upon the earlier of the achievement of (a) a detail program
design free of high-risk development issues or (b) completion of a working
model. Costs of major enhancements to existing products with a wide market are
capitalized while routine maintenance of existing products is charged to
expense as incurred. The establishment of technological feasibility and the
ongoing assessment of the recoverability of capitalized computer software
development costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technology.
Capitalized software costs are amortized on a product-by-product basis.
Capitalized software is amortized using the greater of the straight-line method
over three years, or the ratio that current year revenue bears to the total of
current and future years' projected revenue. Accumulated amortization of
capitalized software costs totaled $149,724 and $445,250, respectively at June
29, 1997 and June 28, 1998, and amortization expense, which is included in the
consolidated statements of operations as a component of cost of revenue,
totaled $145,777 and $295,526 for the years ended June 29, 1997 and June 28,
1998, respectively.
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Revenue Recognition
The Company's revenue is derived from OEM usage fees, business management
software license fees, electronic catalog license fees, EDI network fees and
customization and conversion services that the Company provides to dealers and
OEM's.
Revenue from initial dealer license fees are recognized when the licensed
software has been delivered and the license fee is fixed and determinable and
deemed collectible. Revenue from annual dealer license fees and annual OEM
usage fees is recognized ratably over the related contract period on a
straight-line basis. Revenue from initial OEM usage fees is recognized ratably
over the period that the OEM is expected to be an active customer of the
Company. Costs related to customer support revenue are included in cost of
license fees in the accompanying consolidated statements of operations.
Revenue related to customization and conversion is included in service revenue
and is recognized using the percentage-of-completion method. Such contracts
include a separately stated license fee for the use of the Company's software
and service fees for the installation and customization of the software. The
Company's costs to install its software include direct labor and related
expenses. Such costs are included in cost of services.
In applying the percentage-of-completion method, revenue is recognized based on
the percentage that labor hours incurred to date bear to total estimated labor
hours. Revenue recognized in excess of amounts billed is reflected as unbilled
project revenue and amounts billed in excess of revenue recognized are
reflected as deferred revenue in the accompanying consolidated balance sheets.
To the extent the estimated hours prove to be inaccurate, the revenue and gross
profits, if any, reported for the period during which work on the contract is
ongoing may not accurately reflect the final results of the contract, which can
only be determined upon contract completion. Provisions for estimated losses
on uncompleted contracts, to the full extent of the estimated loss, are made
during the period in which the Company first becomes aware that a loss on the
contract is probable. At June 28, 1998, the Company determined that losses
totaling $391,454 would be incurred on contracts currently in process.
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Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the excess, if any, of the carrying value over the fair value of
the long-lived assets.
The company wrote down property and equipment by $334,552 due to the closing of
certain Foreign Subsidiaries and the sale of the respective assets subsequent
to year end (see Note 10). At June 28, 1998, the carrying amount of the
property held for sale was $43,863. The writedown is included in general and
administrative expense in the accompanying consolidated statements of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which is required to be adopted for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income to be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company expects to
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adopt SFAS 130 in the first quarter of fiscal year 1999, and the Company
believes that the only significant difference between net income and
comprehensive income is the periodic change in the cumulative translation
adjustment.
Also in June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." This statement, effective for financial statements for periods
beginning after December 15, 1997, requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. Generally, financial information is required to be reported on the
basis that it is used internally for evaluation of segment performance and
deciding how to allocate resources to segments. The adoption of SFAS 131 is
not expected to have a material impact on the Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS 133 requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133 is effective for fiscal years beginning after June
15, 1999. A company may also implement SFAS 133 as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be
applied to derivative instruments and certain derivative instruments embedded
in hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1, 1998).
Because the Company has not historically entered into such arrangements,
management believes that the impact of SFAS 133 will not significantly affect
its financial reporting.
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In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting For the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. SOP 98-1 identifies the characteristics of internal-use software and
provides examples to assist in determining when computer software is for
internal use. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. Management believes that the adoption of SOP
98-1 will not have a material adverse impact on the Company's financial
statements.
In March 1998 the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This statement is effective for financial statements for fiscal
years beginning after December 15, 1998. In general, SOP 98-5 requires costs
of start-up activities and organization costs to be expensed as incurred.
Initial application of SOP 98-5 should be reported as the cumulative effect of
a change in accounting principle. Management believes that the adoption of SOP
98-5 will not have a material impact on the Company's financial statements.
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(3) LINES OF CREDIT AND CAPITAL LEASE OBLIGATION
The Company entered into three lines of credit. The lines of credit are
denominated in the Foreign Subsidiaries' local currency and have maximum
borrowing amounts, at June 28, 1998 of DEM 200,000, IEP 100,000 and GBP 150,000
and have interest rates of 4.00%, 6.97% and 8.19%, respectively. These lines
of credit were terminated when certain Foreign Subsidiaries were closed (see
Note 10).
During fiscal year 1996 the Company entered into a capital lease with quarterly
payments of IEP 8,673 (approximately $12,000) through February 2001. However,
due to the closing of the Ireland office subsequent to year end (see Note 10)
the entire remaining balance was paid subsequent to year end. The total amount
of the obligation is classified as current at June 28, 1998.
(4) INCOME TAXES
The Company has entered into a tax-sharing arrangement with Briggs & Stratton,
whereby Briggs & Stratton and its consolidated subsidiaries, including the
Company, file a consolidated tax return. The Company receives a tax benefit
from Briggs & Stratton, calculated as 38% of Powercom-2000's net loss and 35%
of the Foreign Subsidiaries' net loss. The income tax benefit shown in the
accompanying consolidated statements of operations represents the amount of
benefit transferred to Briggs & Stratton during each year under this agreement.
No current or deferred income tax assets or liabilities are recorded in the
accompanying consolidated balance sheets, as the rights to these assets and
liabilities are transferred to Briggs & Stratton. The tax-related balance due
from Briggs & Stratton represents a component of the net investment of Briggs &
Stratton. During fiscal years 1997 and 1998 $2,610,947 and $4,248,217,
respectively, of income tax benefit reduced the net investments of Briggs &
Stratton.
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On a standalone basis, the temporary differences creating deferred tax assets
and liabilities would include net operating losses, allowance for bad debts,
vacation accruals, deferred revenue, unbilled project revenue and provision for
losses on contracts. If the Company had calculated the tax provision on a
standalone basis, the Company would not have recorded any income tax benefit or
deferred tax asset for either period presented, as the net operating loss
realization criteria of Statement of Financial Accounting Standard No. 109 have
not been met. Accordingly, the following would be the pro forma results of
the income tax benefit and the net loss on a standalone basis.
1997 1998
---------- ----------
Income tax benefit (as reported) $2,610,947 $4,248,217
Income tax benefit (as adjusted) - -
Net loss (as reported) 4,452,540 7,118,503
Net loss (as adjusted) 7,063,487 11,366,720
(5) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office and research facilities and certain equipment
under operating lease agreements which expire through 2003. Rent expense for
the years ended June 29, 1997 and June 28, 1998, was approximately $112,945 and
$264,893, respectively. Future minimum lease obligations under these agreements
(excluding agreements cancelled after year end) are as follows:
1999 $321,178
2000 298,553
2001 119,797
2002 8,674
2003 3,614
--------
Total $751,816
========
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Legal Matters
The Company may be exposed to asserted and unasserted legal claims encountered
in the normal course of business. Management believes that the ultimate
resolutions of these matters will not have a material adverse effect on the
operating results or the financial position of the Company.
(6) EMPLOYEE BENEFIT PLAN
The Company has a savings and investment plan (the "Plan") under which eligible
employees may defer up to 12% of their compensation. The Company may make
matching contributions up to a maximum of 3% of the employees' gross salaries.
Matching contributions are used to purchase Briggs & Stratton common stock.
For fiscal years 1997 and 1998, matching contributions of $59,277 and $71,001,
respectively, were made to the Plan.
(7) RELATED PARTY TRANSACTIONS
As the Company has incurred significant losses since its inception, a
significant amount of the Company's operations were funded by Briggs &
Stratton. Briggs & Stratton has funded operations through interest bearing
notes and investment transactions which are reflected as a net investment by
Briggs & Stratton in the accompanying financial statements. Powercom incurred
interest on these note payable amounts in the amount of $317,432 and $639,753
in 1997 and 1998, respectively. Revenues in the amounts of $303,169 and
$360,499 in fiscal years 1997 and 1998, respectively, were earned from Briggs &
Stratton. In addition, the Company reimbursed Briggs & Stratton for certain
services performed and costs paid by Briggs & Stratton. In fiscal years 1997
and 1998, the Company incurred $3,558,748 and $4,405,478, respectively, for
such costs and services.
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(8) MAJOR CUSTOMERS
A majority of the Company's revenue are from large contracts with significant
customers. In fiscal years 1997 and 1998, the Company had the following
customers that comprised more than 10% of its revenue:
1997 1998
---- ----
Customer 1 (a related party) 10% 7%
Customer 2 3% 10%
(9) GEOGRAPHIC SEGMENT REPORTING
The Company operates in offices worldwide. These operations are conducted in
the United States, Ireland, Australia, Canada, Germany and the United Kingdom.
Information concerning geographic areas are as follows:
For the Years Ended
-------------------
June 29, 1997 June 28, 1998
------------- -------------
Revenues:
United States $ 2,058,707 $ 2,496,141
Europe 600,759 612,131
Australia 124,190 217,802
Canada 243,606 235,183
------------ ------------
Total $ 3,027,262 $ 3,561,257
============ ============
Operating Loss:
United States $ (4,360,549) $ (8,373,776)
Europe (2,110,978) (1,914,322)
Australia (166,139) (353,698)
Canada (51,579) (10,934)
------------ ------------
Total $ (6,689,245) $(10,652,730)
============ ============
Identifiable Assets:
United States $ 2,322,740 $ 1,746,942
Europe 667,966 246,862
Australia 93,236 132,347
Canada 143,124 23,575
------------ ------------
Total $ 3,227,066 $ 2,149,726
============ ============
23
(10) SUBSEQUENT EVENTS
On September 15, 1998, an asset purchase agreement was entered into by Briggs &
Stratton and ARI whereby ARI issued 840,000 shares to Briggs & Stratton to
acquire the business conducted by the Company. ARI will receive certain assets
owned by the Company and will assume certain Company liabilities, as defined in
the purchase agreement. In addition, Briggs & Stratton agreed to become an ARI
customer for EDI and electronic cataloging.
In connection with the asset purchase agreement, the activities of the Foreign
Subsidiaries, with the exception of Powercom-2000 Pty Ltd., were terminated and
these operations were closed.
24
ITEM 7(b)
ARI NETWORK SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma financial information relates to the
Company's September 15, 1998 acquisition of substantially all of the assets and
the assumption of specified liabilities of Powercom 2000, a division of Briggs
& Stratton Corporation ("Powercom"). The transaction will be accounted for as
a purchase business combination. The pro forma amounts have been prepared
based on certain purchase accounting and other pro forma adjustments (as
described in the accompanying notes) to the historical financial statements of
the Company and Powercom.
The unaudited pro forma condensed balance sheet at July 31, 1998 reflects
the historical financial position of the Company at July 31, 1998 and Powercom
at June 28, 1998, with pro forma adjustments as if the acquisition had occurred
on July 31, 1998. The unaudited pro forma condensed statement of operations
for the year ended July 31, 1998 reflects the historical results of operations
of both companies with pro forma acquisition adjustments as if the acquisition
had occurred on August 1, 1997. The pro forma adjustments are described in the
accompanying notes and give effect to events that are (a) directly attributable
to the acquisition, (b) factually supportable, and (c) in the case of certain
statement of operations adjustments, expected to have a continuing impact.
The unaudited pro forma condensed financial statements should be read in
connection with the Company's and Powercom's historical financial statements
and related footnotes.
The unaudited pro forma financial information presented is for information
purposes only and does not purport to represent what the Company's and
Powercom's financial position or results of operations as of the dates
presented would have been had the acquisition in fact occurred on such date or
at the beginning of the period indicated or to project the Company's and
Powercom's financial position or results of operations for any future date or
period.
25
Item 7 (b)
ARI NETWORK SERVICES, INC.
PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
(Dollars in thousands, except per share data)
PRO FORMA PRO FORMA
ARI POWERCOM --------- ---------
JULY 31, 1998 JUNE 28, 1998 ADJUSTMENTS COMBINATION
-------------------- ---------------------- --------------- -------------
ASSETS
Current assets:
Cash $ 194 $ 263 $ 457
Trade receivables 2,643 514 3,157
Inventory - 29 29
Other 118 74 192
-------- -------- -------- --------
Total current assets 2,955 880 3,835
Net equipment & leasehold improvements 395 757 1,152
Other assets 336 - 2,900 a 3,236
Net network system 9,122 513 0 9,635
-------- -------- -------- --------
Total assets $ 12,808 $ 2,150 $ 2,900 $ 17,858
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts Payable $ 581 $ 451 $ 1,032
Unearned income 776 1,293 500 a 2,569
Accrued expenses 778 465 1,243
Other current liabilities - 391 391
Current portion of debt obligations 58 665 (500)a 723
-------- -------- -------- --------
Total current liabilities 2,193 3,265 0 5,458
Long term debt 1,653 - 1,653
Shareholders' equity:
Preferred stock - - -
Common stock 4 - 1 a 5
Additional paid-in-capital 85,028 - 1,784 a 86,812
Investment in subsidiary 15,473 (15,473)a
Accumulated deficit (76,070) (16,588) 16,588 a (76,070)
-------- -------- -------- --------
Total shareholders' equity 8,962 (1,115) 2,900 10,747
-------- -------- -------- --------
Total liabilities & shareholders' equity $ 12,808 $ 2,150 $ 2,900 $ 17,858
======== ======== ======== ========
26
ARI NETWORK SERVICES, INC.
PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
ARI POWERCOM PRO FORMA PRO FORMA
JULY 31, 1998 JUNE 28, 1998 ADJUSTMENTS COMBINATION
------------------- ------------------- ---------------- -----------------
Revenues $ 7,964 $ 3,561 $ (712)b $10,813
Operating expenses:
Variable costs of products and services sold 1,946 2,795 (2,049)c 2,692
Depreciation and amortization 2,142 713 628 d 3,483
Network operations 708 616 (376)f 948
Selling, general and administrative 4,586 5,018 (3,138)e 6,466
Network construction and expansion 2,198 5,072 (4,454)f 2,816
-------- -------- ------- -------
11,580 14,214 (9,389) 14,405
Less capitalized portion (1,546) 0 (286)f (1,832)
-------- -------- ------- -------
Total operating expenses 10,034 14,214 (9,675) 14,573
-------- -------- ------- -------
Operating loss (2,070) (10,653) 8,963 (3,760)
Other income (expense) (70) (714) 681 g (103)
-------- -------- ------- -------
Loss before benefit for income taxes (2,140) (11,367) 9,644 (3,863)
Benefit for income taxes 0 4,248 (4,248)h 0
-------- -------- ------- -------
Net loss $ (2,140) $ (7,119) $ 5,396 $(3,863)
======== ======== ======= =======
Average common shares outstanding 4,119 840 i 4,959
Net loss per share $ (0.52) $ (0.78)
11/30/98 11:14 AM
27
ARI NETWORK SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS
a) To record the September 15, 1998 acquisition of Powercom. Purchase
accounting adjustments include: (i) the issuance of 840,000 shares of ARI
common stock at $2.125 per share as part of the acquisition price; (ii)
the payment of certain long term debt by Briggs & Stratton Corporation
prior to the closing in exchange for future software and services; (iii)
the elimination of Powercom's equity prior to the acquisition including
investment in subsidiary of $15,473,000 and accumulated deficit of
$16,588,000; and (iv) the recognition of $2,900,000 of intangibles.
b) To eliminate revenues by 20% for estimated overlap in the companies'
customers.
c) To eliminate cost of goods sold for reallocation of commissions to
selling general and administrative and the reductions in force implemented
at closing.
d) To record the increase in amortization of intangibles of $2,900,000
(amortized over 5 years) and capitalized software amortization of $286,000
(amortized over 3 years).
e) To (i) eliminate selling, general and administrative expense to reflect
the reductions in force and office closures and related expenses in
Germany, United Kingdom, Ireland, Australia and Canada implemented at
closing and (ii) reallocate commissions from cost of goods sold.
f) To eliminate network operations, construction and expansion to reflect the
reductions in force and office closures implemented at closing and to
record related capitalized portions.
g) To eliminate interest expense related to the investment of Briggs &
Stratton Corporation in its Powercom division calculated at 10.5% on one
half of the year's operating loss less depreciation and amortization plus
capitalized network construction and expansion.
h) To eliminate the benefit for income taxes that would not be received by
the combined entity.
i) The weighted average number of shares of Common Stock outstanding are
adjusted for the issuance of the 840,000 shares of ARI Common Stock for
the acquisition of Powercom.
28
ITEM 7 (c)
EXHIBITS
23.1 Consent of Arthur Andersen LLP
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 30, 1998 ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
-----------------------------
Brian E. Dearing, President,
CEO and Acting CFO