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): May 13, 1999
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
2
This Amendment No. 1 supplements the Current Report on Form 8-K filed on May 28,
1999 (the "Form 8-K") by ARI Network Services, Inc. (the "Company") relating to
the acquisition of Network Dynamics, Inc. ("NDI"). At the time of filing the
Form 8-K, it was impracticable for the Company to provide the financial
statements of NDI and pro forma financial information required by Item 7(a) and
(b).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) 1) Audited Financial Statements of NDI as of and for the
year ended December 31, 1998 and
2) Unaudited Condensed Comparative Balance Sheets as of
March 31, 1999 and December 31, 1998 and Statements of
Operations and Cash Flows for the three months ended
March 31, 1999 and 1998 of NDI.
(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 as of April 30, 1999.
2) ARI Network Services, Inc. unaudited Pro Forma
Condensed Statements of Operations for the year
ended July 31, 1998 and the nine months ended
April 30, 1999.
3) ARI Network Services, Inc. unaudited Notes to Pro
Forma Condensed Financial Statements.
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3
ITEM 7 (a)(1)
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1998
3
4
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Table of Contents
Page
----
Independent Auditors' Report 2
EXHIBIT
A Consolidated Balance Sheet 3-4
B Consolidated Statement of Operations 5
C Consolidated Statement of Shareholders' Deficit 6
D Consolidated Statement of Cash Flows 7
Notes to Consolidated Financial Statements 8-16
4
5
INDEPENDENT AUDITOR'S REPORT
Network Dynamics, Inc.
Williamsburg, Virginia:
We have audited the accompanying consolidated balance sheet of Network
Dynamics, Inc. and subsidiary as of December 31, 1998, and the related
consolidated statements of operations, shareholders' deficit, and cash flows for
the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audit provides 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 Network
Dynamics, Inc. and subsidiary as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company incurred a net loss of $844,263
during the year ended December 31, 1998, and as of that date, had a working
capital deficiency of $2,909,810 and a net worth deficiency of $2,771,851. As
described more fully in notes 3 and 9 to the consolidated financial statements,
the Company is in default on its loan agreements with a bank and in arrears on
accounts with certain vendor creditors which, among other things cause the
balances to become due on demand. The Company is not aware of any alternate
sources of capital to meet such demands, if made. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Keiter, Stephens, Hurst, Gary & Shreaves, P.C.
March 31, 1999
(Report page 2)
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6
Exhibit A
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1998
Assets
------
Current assets:
Cash and cash equivalents $ 114 970
Restricted cash 86 369
Trade receivables 205 507
Other current assets 2 803
--------------
Total current assets 409 649
--------------
Property and equipment:
Computer equipment 337 676
Office furniture and equipment 118 713
--------------
456 389
Less accumulated depreciation and amortization ( 252 996)
--------------
Net property and equipment 203 393
--------------
Total assets $ 613 042
==============
See accompanying notes to consolidated financial statements.
(Report page 3)
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7
Exhibit A
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1998
Liabilities and Shareholders' Deficit
Current liabilities:
Notes payable $ 539 536
Current portion of notes payable to shareholders 44 500
Current portion of capital lease obligations 92 288
Due to related parties 118 296
Accounts payable 521 752
Deferred revenue 1 264 001
Accrued wages and commissions 264 077
Payroll taxes withheld and accrued 401 103
Other accrued expenses 73 906
---------------
Total current liabilities 3 319 459
Long-term liabilities:
Notes payable to shareholders, less current portion 28 377
Capital lease obligations, less current portion 37 057
---------------
Total liabilities 3 384 893
---------------
Commitments and contingencies
Shareholders' deficit:
Common stock, no par value per share, 25,000,000 shares
authorized, 13,342,280 shares issued and outstanding 216 814
Accumulated deficit ( 2 988 665)
---------------
Total shareholders' deficit ( 2 771 851)
---------------
Total liabilities and shareholders' deficit $ 613 042
===============
See accompanying notes to consolidated financial statements.
(Report page 4)
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8
Exhibit B
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Consolidated Statement of Operations
Year ended December 31, 1998
Revenues $ 2 751 057
Cost of revenues 1 113 295
---------------
Gross profit 1 637 762
Selling, general and administrative expenses 2 296 832
---------------
Loss from operations ( 659 070)
---------------
Other income (expense):
Receivable factoring fees ( 42 138)
Interest expense ( 161 302)
Interest income 3 556
Other income 14 691
---------------
Total other expense ( 185 193)
---------------
Net loss $( 844 263)
===============
See accompanying notes to consolidated financial statements.
(Report page 5)
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9
Exhibit C
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Consolidated Statement of Shareholders' Deficit
Year ended December 31, 1998
Common Stock Accumulated Unearned
Shares Amount Deficit Compensation Total
------- ------- -------- ------------- -----
December 31, 1997 13 337 280 $ 211 814 $( 2 144 402) $( 10 000) $( 1 942 588)
Common stock issued 5 000 5 000 - - 5 000
Amortization of unearned
compensation - - - 10 000 10 000
Net loss - - ( 844 263) - ( 844 263)
---------- --------- ------------ --------- ------------
December 31, 1998 13 342 280 $ 216 814 $( 2 988 665) $ - $( 2 771 851)
========== ========= ============ ========= ============
See accompanying notes to consolidated financial statements.
(Report page 6)
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10
Exhibit D
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year ended December 31, 1998
Operating activities:
Net loss $( 844 263)
----------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 117 995
Increase (decrease) in cash from:
Accounts receivable ( 181 610)
Other current assets ( 2 803)
Accounts payable and accrued expenses 707 138
Deferred revenue 423 007
----------------
Total adjustments 1 063 727
----------------
Net cash provided by operating activities 219 464
----------------
Investing activities:
Acquisition of property and equipment ( 30 856)
Proceeds from shareholders' loans - net 877
----------------
Net cash used in investing activities ( 29 979)
----------------
Financing activities:
Proceeds from notes payable 50 733
Principal payments on notes payable ( 154 914)
Principal payments on capital lease obligations ( 95 575)
Proceeds from sale of common stock 5 000
----------------
Net cash used in financing activities ( 194 756)
----------------
Net decrease in cash and cash equivalents ( 5 271)
Cash and cash equivalents, beginning of year 206 610
----------------
Cash and cash equivalents, end of year $ 201 339
================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 113 061
================
See accompanying notes to consolidated financial statements.
(Report page 7)
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11
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Description of business and significant accounting policies:
(a) Organization:
Network Dynamics, Inc. and Subsidiary ("the Company") is in
the business of providing electronic catalog creation and
viewing software and services to several vertical markets
within the United States and European manufactured equipment
industry ("the Equipment Industry"). The Company is located in
Williamsburg, Virginia and substantially all of its sales are
to nationally- and internationally-based concerns in the
Equipment Industry.
(b) Consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Part
Smart Europe BV. All material intercompany transactions have
been eliminated in consolidation.
(c) Cash and cash equivalents:
For purposes of the consolidated statement of cash flows, the
Company considers all instruments with an original maturity of
three months or less to be cash equivalents.
(d) Revenue recognition:
Dealer subscriptions revenue is recognized over the period of
the subscription. Revenue from bulk licensing arrangements is
recognized immediately except for the portion determined to be
for post contract support, which is recognized over the period
of the license agreement. Each bulk license agreement is
evaluated for the amount of post contract support that is
estimated to be required over the period of the license and a
portion of the revenue from the license is deferred based on
this estimate.
Revenue from data conversion projects is recognized on the
percentage-of-completion method in accordance with ARB No. 45
using the relevant guidance in Statement of Position 81-1.
(Report page 8)
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12
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of business and significant accounting policies, continued:
(d) Revenue recognition, continued:
Revenue from annual or periodic maintenance fees is recognized
over the period the maintenance is provided.
(e) Accounts receivable:
The Company uses the reserve method of accounting for bad
debts for financial statement purposes.
Pursuant to a factoring agreement, the Company factors a
portion of its receivables, which are assigned on a
pre-approved, recourse basis to a bank. The factoring charge
amounts to 3.4% of the receivables assigned. The Company's
obligations to the bank are collateralized by the factored
accounts receivable and personal endorsement of one of the
majority shareholders. The bank reserves a portion of the
factored receivables and holds it in an interest bearing
account. The cash reserve amounted to $86,369 at December 31,
1998.
(f) Property and equipment:
Property and equipment is stated at cost. Depreciation and
amortization are computed under the straight-line method for
financial reporting purposes and under accelerated methods for
income tax purposes. Depreciation and amortization have been
provided over the estimated useful lives of the assets as
follows:
Years
-----
Computer equipment 3
Office furniture and equipment 5-7
(g) Income taxes:
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 (SFAS No.
109), "Accounting for Income Taxes". SFAS No. 109 is an asset
and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future
tax consequences attributable to differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and their respective tax bases, and for
operating loss and tax credit carryforwards. In estimating
future tax consequences, SFAS No. 109 generally considers all
expected future events other than the enactment of changes in
tax laws or rates. A valuation allowance is recorded if it is
"more likely than not" that some portion or all of a deferred
tax asset will not be realized.
(Report page 9)
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13
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of business and significant accounting policies,
continued:
(h) Use of estimates:
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
(i) Credit risks:
The Company maintains its cash in several financial
institutions. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At December 31, 1998,
cash in one financial institution exceeded this amount.
Concentration of credit risk with respect to accounts
receivable is limited due to the number and diversity of
customers comprising the Company's customer base. During 1998,
one customer comprised approximately 19.8% of the Company's
sales. The Company maintains reserves for potential credit
losses. Historically, such losses, in the aggregate, have not
exceeded the reserve.
(j) Software development costs:
Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed", requires the capitalization of
certain software development costs incurred subsequent to the
date technological feasibility is established and prior to the
date the product is generally available for sale. The
capitalized cost is then amortized over the estimated product
life. The Company defines technological feasibility as being
attained at the time a working model is completed. To date,
the period between achieving technological feasibility and the
general availability of such software has been short and
software development costs qualifying for capitalization have
been insignificant. Accordingly, the Company has not
capitalized any software development costs.
(k) Advertising costs:
Advertising costs are expensed as incurred and included in
operating expenses. Advertising costs amounted to
approximately $13,000 for the year ended December 31, 1998.
(Report page 10)
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14
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of business and significant accounting policies,
continued:
(l) Foreign currency translation:
Financial statements of Part Smart Europe BV are translated
into U.S. dollars using the exchange rate at each balance
sheet date for assets and liabilities and a weighted average
exchange rate for each period for revenues, expenses, gains
and losses. Where the local currency is the functional
currency, translation adjustments are recorded as a separate
component of shareholders' equity (deficit). During 1998,
foreign currency translation adjustments were not material.
(m) Stock-based compensation:
The Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" in October 1995.
SFAS 123 encourages companies to adopt a fair value approach
to valuing stock options that would require compensation cost
to be recognized based on the fair value of stock options
granted. The Company has elected, as permitted by the
standard, to follow its intrinsic value-based method of
accounting for stock options consistent with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock
issued to Employees." Under the intrinsic method, compensation
cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the
measurement date over the exercise price.
(2) Accounts receivable:
Accounts receivable consists of the following at December 31, 1998:
Receivables $ 578 653
Receivables factored ( 338 146)
Allowance for doubtful accounts ( 35 000)
-------------
$ 205 507
=============
(3) Notes payable:
Notes payable at December 31, 1998 consist of term loans and a demand
note payable to a bank in the aggregate amount of $539,536. The
interest rate for all loans is 9.75%, and they are secured by
substantially all assets of the Company, the pledge of the two majority
shareholders' stock in the Company and personal endorsement of the two
majority shareholders.
(Report page 11)
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15
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Notes payable, continued:
During 1998, the Company defaulted on the terms of these loan
agreements. On November 13, 1998, the Company negotiated a new loan
modification and security agreement. Under the terms of the new
agreement, no payments on the loans shall be due for 150 days from the
execution of the agreement. At the end of the 150 day period, the loans
shall be repaid in full. In the event that the Company is unable to
repay the loans in full within the 150 day period, the Company is to
begin making payments of interest only for a period of 150 days. At any
time, the bank may call one or more of the loans and, as such, the
loans have been classified as a current liability in the accompanying
consolidated balance sheet (Note 9).
Interest expense for 1998 amounted to $161,302, of which $61,533
related to bank debt, $40,138 related to capitalized lease obligations,
$41,071 related to notes payable from related parties and $18,560
related to vendor and payroll tax payables.
(4) Capital and operating leases:
Property held under capital leases, included with owned property on the
consolidated balance sheet at December 31, consists of the following:
Computer equipment $ 260 600
Office furniture and equipment 118 713
-------------
379 313
Less: accumulated amortization ( 226 187)
-------------
Computer and office equipment under capital leases, net $ 153 126
=============
Capital lease obligations at December 31, consist of the following:
Non-cancelable equipment leases expiring through December,
2000, payable in monthly installments aggregating $10,340
including imputed interest at various rates ranging from
12.70% to 30.47%, secured by certain computer and office
equipment. $ 129 345
Less: current portion of capital lease obligations
( 92 288)
-------------
Long-term capital lease obligations, net
$ 37 057
=============
The Company leases office space for its two locations in Williamsburg,
Virginia. One lease is on a month-to-month basis and amounts to $2,250
per month. The other lease is a non-cancelable operating lease. The
Company also leases office space and equipment for its Netherlands
location on a month-to-month basis. Total rental expense for the
operating leases was $113,626 in 1998.
(Report page 12)
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NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Capital and operating leases, continued:
Minimum lease payments under remaining non-cancelable capital and
operating leases are as follows:
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------ ------
1999 $ 112 234 $ 37 162
2000 39 164 38 647
2001 - 40 194
2002 - 38 190
------------ --------------
Total minimum lease payments 151 398 $ 154 193
==============
Less: interest imputed at various rates ( 22 053)
------------
Present value of minimum
capital lease payments $ 129 345
============
(5) Related party transactions:
As of December 31, 1998, the Company has notes and accounts payable to
various officers and an employee of the Company who are also
shareholders of the Company. These payables are primarily for
reimbursement of Company expenses and commissions earned. The notes
payable to shareholders are generally interest bearing at rates ranging
from 10% to 12.5%. The following is a summary of the related party
transactions and balances.
Related party balances:
Notes payable $ 72 877
Accrued interest expense 3 206
Due to related parties 118 296
Related party transactions:
Interest expense 41 071
Commissions expense 42 907
(Report page 13)
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NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Shareholders' equity:
Stock incentive plan:
During 1997, the Company adopted a stock incentive plan in which
various types of incentives may be granted. These incentives include
stock awards, stock options, and stock appreciation rights. At the sole
discretion of the Stock Option Committee, which is appointed by the
Board of Directors, stock incentives may be granted to any employee,
director, officer, consultant, agent, advisor or independent contractor
of the Company; provided that only employees of the Company are
eligible for stock options. The Stock Option Committee also determines
when an incentive vests and expires. 571,428 shares of common stock
have been reserved for the plan.
Stock options may be Incentive Stock Options ("ISO") or Non-statutory
Stock Options. The exercise price of Incentive Stock Options shall be
the fair market value of such shares on the date of grant provided that
if an ISO is granted to a participant who, at the time of the grant, is
a ten percent shareholder, then the exercise price shall not be less
than 110% of the fair market value of such shares on the date of the
grant. The exercise price of shares covered by a Non-statutory Stock
Option shall not be less than 85% of the fair market value of such
shares on the date of the grant.
During 1997, an employee was granted a $25,000 stock option as a
performance bonus. The stock option vested $15,000 as of the date of
the agreement and $10,000 in May, 1998 and has not been exercised as of
December 31, 1998. The stock option was granted at the price of $.50
per share. There were no other stock incentive transactions as of
December 31, 1998.
Mandatorily redeemable preferred stock:
The Company is authorized to issue 5,000,000 shares of preferred stock
with no par value and no voting rights. At December 31, 1998, 200,000
shares of the preferred stock have been designated Series A Convertible
Preferred Stock and 150,000 shares have been designated Series B
Convertible Preferred Stock. The remaining shares may be designated at
a future date. At December 31, 1998, no shares are issued and
outstanding.
Series A Preferred Stock holders are not eligible to receive dividends.
Series B Preferred Stock holders are entitled to annual, cumulative
dividends at the rate per annum of $.12 per share. Upon liquidation,
holders of the Series A and Series B Preferred Stock are entitled to
receive $.50 and $1.00 per share plus accrued dividends, respectively.
(Report page 14)
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NETWORK DYNAMICS, INC.
----------------------
AND SUBSIDIARY
--------------
Notes to Consolidated Financial Statements, Continued
(6) Shareholders' equity, continued:
Holders of Series A and Series B Preferred Stock may convert each of
their shares of stock into an equal number of Common Stock during the
conversion period (February 15, 1999 to February 15, 2003). At the end
of business on February 15, 2003, all outstanding shares of Series A
and Series B Preferred Stock shall be redeemed by the Company at the
price of $.50 per share and $1.00 per share, respectively.
Buy-sell agreement:
The majority shareholders of the Company are party to a buy-sell
agreement. Based on the agreement, the majority shareholders shall not
be permitted to sell their shares without first offering them to the
Company and the other shareholders at the price offered by the proposed
purchaser. The Company shall have the first right of refusal.
If for reason other than death a majority shareholder's shares are
transferred by operation of law to any person other than the Company
(involuntary transfer), the Company within sixty days, or the remaining
shareholders within seventy days shall purchase the shares at book
value. Upon the death of a majority shareholder, the Company shall
purchase such shares at the certificate of value in accordance with
generally accepted accounting principles within 90 days. If for any
reason the Company is prevented from acquiring the stock or the value
of the stock according to the method of valuation provided by the
agreement exceeds the insurance proceeds, the remaining majority
shareholder shall execute a promissory note in an amount representing
the excess. The note shall be paid on or before 36 months from the date
of death with interest at 8% per annum.
(7) Income taxes:
During 1998, the Company did not have a current income tax liability
due to its net operating losses. The Company has a deferred tax asset
resulting from the net operating losses and a deferred tax liability
resulting from temporary differences in depreciation. A valuation
allowance has been established to fully reserve the excess of the
deferred tax asset over the deferred tax liability due to the
uncertainty of the utilization of the operating loss carryforward.
As of December 31, 1998, the Company has a net operating loss
carryforward of approximately $2.8 million expiring through the year
2013.
(Report page 15)
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19
NETWORK DYNAMICS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) Employee benefit plan:
The Company maintains a 401(k) retirement plan for its employees.
Employees are eligible to participate after six months of service and
attaining the age of 21. Under the terms of the plan, employees are
entitled to contribute from 1% to 15% of their total compensation,
within limitations established by the Internal Revenue Code. The
Company does not make a matching contribution.
(9) Contingencies:
Going concern:
The Company has suffered recurring operating losses which has caused a
working capital deficiency of $2,909,810 and a net worth deficiency of
$2,771,851. This working capital deficiency has prevented the Company
from meeting its current obligations to make note payments, remit
payroll taxes withheld from employee pay and to pay accounts with
certain vendor creditors. As more fully described in note 3, the
Company is in default on its loan covenants with a bank. These
conditions cause the balances to become due upon demand.
The Company is not aware of any alternate sources of capital to meet
such demands, if made. Those conditions raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
The Company's continued ability to operate is dependent on its ability
to generate profitable operations, negotiate payment terms with its
bank and vendors and raise additional capital. Management has hired
consultants to assist in developing a plan to make the Company
profitable and negotiate terms with its bank and vendors. Management is
also actively trying to raise additional capital and has entered into
negotiations with a potential buyer. There can be no assurances that
the plan will be implemented in time for the Company to continue its
operations in its present form.
(End of Report)
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ITEM 7 (a)(2)
Network Dynamics, Inc.
Consolidated Balance Sheets
3/31/99 12/31/98
----------- -----------
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 5,817 $ 114,970
Restricted Cash 44,172 86,369
Trade Receivables 357,294 205,507
Other Current 2,803 2,803
----------- -----------
Total Current Assets 410,086 409,649
Property & Equipment:
Computer Equipment 337,676 337,676
Office Furniture & Equipment 118,713 118,713
----------- -----------
456,389 456,389
Less Accumulated Depreciation (276,451) (252,996)
----------- -----------
Net Property & Equipment 179,938 203,393
----------- -----------
TOTAL ASSETS $ 590,024 $ 613,042
=========== ===========
LIABILITIES
Current Liabilities
Notes Payable $ 539,536 $ 539,536
Current Portion of Notes Payable to Shareholders 31,342 44,500
Current Portion of Capital Lease Obligations 92,886 92,288
Due to Related Parties 71,714 118,296
Accounts Payable 547,840 521,752
Deferred Revenue 1,406,522 1,264,001
Accrued Wages & Commissions 198,372 264,077
Payroll Taxes Withheld & Accrued 386,945 401,103
Other Accrued Expenses 55,803 73,906
----------- -----------
Total Current Liabilities 3,330,959 3,319,459
Long Term Liabilities
Notes Payable to Shareholders 12,899 28,377
Capital Lease Obligations 16,844 37,057
----------- -----------
Total Liabilities 3,360,702 3,384,893
Shareholders' Equity
Common Stock 216,814 216,814
Retained Earnings (2,987,492) (2,988,665)
----------- -----------
Total Shareholders' Equity (2,770,678) (2,771,851)
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 590,024 $ 613,042
=========== ===========
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Network Dynamics, Inc.
Consolidated Statements of Operations
Three months Three months
ended ended
3/31/99 3/31/98
--------------- --------------
(Unaudited) (Unaudited)
Revenues $688,422 $687,764
Cost of Goods Sold 176,654 278,324
--------------- --------------
Gross Profit 511,768 409,441
Selling, General, & Administrative 477,409 574,208
Operating Income (Loss) 34,360 (164,768)
Other Income/(Expense):
Receivable Factoring Fees (3,047) (10,535)
Interest Expense (36,562) (40,326)
Interest Income 383 889
Other Income 6,039 3,673
--------------- --------------
Net Income (Loss) $1,173 ($211,066)
=============== ==============
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22
Network Dynamics, Inc.
Consolidated Statements of Cash Flows
Three months Three months
ended ended
3/31/99 3/31/98
-------------- -------------
(unaudited) (unaudited)
Operating Activities:
Net income/(loss) $1,173 ($211,066)
Depreciation 23,455 29,500
Net change in operating assets (151,787) (46,103)
Net change in operating liabilites 11,500 176,785
-------------- -------------
Net cash used in operating activities (115,658) (50,885)
Financing Activities:
Payments of notes payable (15,478) (38,729)
Payments of capital lease obligations (20,213) (23,894)
-------------- -------------
Net cash used in financing activities (35,691) (62,622)
Net decrease in cash and cash equivalents (151,350) (113,507)
Cash and cash equivalents, beginning of period 201,339 206,610
-------------- -------------
Cash and cash equivalents, end of period $49,989 $30,481
============== =============
Cash paid for interest ($39,609) ($50,860)
============== =============
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Notes to Condensed Consolidated Financial Statements
(unaudited)
March 31, 1999
Note A: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments ( consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the Three month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in this report.
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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 May 13, 1999 acquisition of substantially all of the assets and the
assumption of specified liabilities of Network Dynamics, Inc. ("NDI"). 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 NDI.
The unaudited pro forma condensed balance sheet at April 30, 1999 reflects
the historical financial position of the Company and NDI at April 30, 1999, with
pro forma adjustments as if the acquisition had occurred on April 30, 1999. The
unaudited pro forma condensed statement of operations for the nine months ended
April 30, 1999 reflects the historical results of both companies with pro forma
adjustments as if the acquisition had occurred on August 1, 1998. The unaudited
pro forma condensed statement of operations for the year ended July 31, 1998
reflects the historical results of operations of the Company for the twelve
months ended July, 31, 1998 and NDI for the twelve months ended December 31,
1998, with pro forma 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. Statement of operations
information of NDI for the months of August, September, October, November and
December of 1998 are included in both the annual and the interim pro forma
consolidated statements of operations.
The unaudited pro forma condensed financial statements should be read in
connection with the Company's and NDI'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 NDI'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 NDI's financial position or
results of operations for any future date or period.
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25
ARI Network Services, Inc.
Unaudited Pro Forma Financial Statements
April 30, 1999
(in thousands)
ARI Network Network
Services Dynamics Pro Forma
4/30/99 4/30/99 Adjustments Pro Forma
------------------------------------------- --------------
ASSETS
Current Assets
Cash and Cash Equivalents $32 $39 $0 $71
Trade Receivables 3,078 484 0 3,562
Other Current 282 4 0 286
----------------------------------------- -------------
Total Current 3,392 527 0 3,919
Property, Plant & Equipment, Net 453 162 0 615
Other Assets, Net 2,935 0 5,340 (a) 8,275
Network System:
Network Platform 11,467 0 0 11,467
Industry Specific Applications 21,779 0 0 21,779
----------------------------------------- -------------
33,246 0 0 33,246
Less Accumulated Amortization 24,064 0 0 24,064
----------------------------------------- -------------
Network System, Net 9,182 0 0 9,182
----------------------------------------- -------------
TOTAL ASSETS $15,962 $689 $5,340 $21,991
========================================= =============
LIABILITIES
Current Liabilities
Accounts Payable $1,041 $554 $0 $1,595
Accrued Expenses 1,033 608 250 (b) 1,891
Deferred Revenue 3,008 1,525 0 4,533
Current Portion of Debt 28 686 0 714
----------------------------------------- -------------
Total Current 5,110 3,373 250 8,733
Long Term Debt 2,975 0 0 2,975
Shareholders' Equity
Preferred Stock 0 0 0 0
Common Stock 5 302 (302)(a) 5
Additional Paid-In-Capital 86,829 0 2,406 (a) 89,235
Retained Earnings (78,957) (2,986) 2,986 (a) (78,957)
----------------------------------------- -------------
Total Shareholders' Equity 7,877 (2,684) 5,090 10,283
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $15,962 $689 $5,340 $21,991
========================================= =============
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ARI Network Services, Inc.
Unaudited Pro Forma Statement of Operations
Nine Months Ended 4/30/99
(in thousands)
ARI Network Network Pro Forma
Services Dynamics Adjustments Pro Forma
--------------------------------------------- -------------
Revenues $8,598 $2,064 ($206)(C) $10,456
Cost of Goods Sold 2,300 699 (126)(d) 2,873
------------------------------------------ -------------
Gross Profit 6,298 1,365 (81) 7,582
Operating Expenses
Selling, General, & Administrative 5,204 1,513 (272)(e) 6,445
Depreciation & Amortization 2,586 80 801 (f) 3,467
Network Operations 566 0 0 566
Network Construction & Expansion 2,040 0 0 2,040
------------------------------------------ -------------
Sub-Total Operating Expenses 10,396 1,593 529 12,518
less Capitalized Portion (1,426) 0 0 (1,426)
------------------------------------------ -------------
Total Operating Expenses 8,970 1,593 529 11,092
Operating Loss (2,672) (228) (609) (3,510)
Other Income/(Expense) (215) (121) 0 (336)
------------------------------------------ -------------
Net Loss ($2,887) ($349) ($609) ($3,846)
========================================== =============
Average Common Shares Outstanding 4,950 550 (g) 5,500
Net Loss per Share ($0.58) ($0.70)
========================================== =============
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ARI Network Services, Inc.
Unaudited Pro Forma Statement of Operations
Twelve Months Ended 7/31/98
(in thousands)
ARI Network Network Pro Forma
Services Dynamics Adjustments Pro Forma
---------------------------------------------- --------------
Revenues $7,964 $2,751 ($275)(c) $10,440
Cost of Goods Sold 1,946 1,113 (200)(d) 2,859
------------------------------------------ -------------
Gross Profit 6,018 1,638 (75) 7,581
Operating Expenses
Selling, General, & Administrative 4,586 2,179 (392)(e) 6,373
Depreciation & Amortization 2,142 118 1,068 (f) 3,328
Network Operations 708 0 0 708
Network Construction & Expansion 2,198 0 0 2,198
------------------------------------------ -------------
Sub-Total Operating Expenses 9,634 2,297 676 12,607
less Capitalized Portion (1,546) 0 0 (1,546)
------------------------------------------ -------------
Total Operating Expenses 8,088 2,297 676 11,061
Operating Loss (2,070) (659) (752) (3,481)
Other Income/(Expense) (70) (185) 0 (255)
------------------------------------------ -------------
Net Loss ($2,140) ($844) ($752) ($3,736)
========================================== =============
Average Common Shares Outstanding 4,119 550 (g) 4,669
Net Loss per Share ($0.52) ($0.80)
========================================== =============
27
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ARI Network Services Inc.
Notes to Unaudited Pro Forma
Condensed Financial Statements
a.) To record the May 13, 1999 acquisition of Network Dynamics, Inc.(NDI).
Purchase accounting adjustments include:
1) issuance of 550,018 shares of ARI common stock at $4.375 per share
as part of the acquisition price;
2) the elimination of NDI's equity prior to the acquisition including
common stock of $302,000 and retained earnings of
($2,986,000); and
3) the recognition of $5,340,000 of intangible assets.
b.) To record estimated closing costs of $250,000.
c.) To eliminate estimated overlap in revenues.
d.) To eliminate cost of goods sold for reductions in force implemented at
closing.
e.) To eliminate selling, general & administrative expense to reflect
reductions in force implemented at closing.
f.) To record the increase in amortization of intangible assets of $5,340,000
amortized over 5 years.
g.) The weighted average number of shares of Common Stock outstanding are
adjusted for the issuance of 550,018 shares of ARI Common Stock for the
acquisition of Network Dynamics, Inc.
28
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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: July 27, 1999 ARI NETWORK SERVICES, INC.
By:
---------------------------------
Brian E. Dearing, President,
CEO and Acting CFO
29