<PAGE> 1
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 (Date of earliest event reported): January 31, 1999
Alydaar Software Corporation
(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of incorporation)
0-22325 87-0399301
(Commission File Number) (IRS Employer Identification No.)
2101 Rexford Road, Suite 250W, Charlotte, North Carolina 28211
(Address of principal executive offices) (Zip Code)
704-365-2324
Registrant's telephone number, including area code
<PAGE> 2
Item 5. Other Events.
On January 31, 1999, Alydaar Software Corporation, d/b/a Information
Architects Corporation (the "Company"), and Alydaar Acquisition Corp., a
wholly-owned subsidiary of the Company ("Alydaar Sub"), entered into an
Agreement and Plan of Merger dated as of that date (the "Merger Agreement")
with Data Systems Network Corporation ("Data Systems"). The Merger Agreement
sets forth the definitive terms and conditions of the proposed merger of
Alydaar Sub with and into Data Systems (the "Merger"). As a result of the
Merger: Alydaar Sub shall cease to exist; Data Systems will continue as the
surviving corporation of the Merger and will become a wholly owned subsidiary
of the Company; and the former shareholders of Data Systems will become
shareholders of the Company. The Merger Agreement and the Merger are each
subject to approval by the shareholders of Data Systems and certain other
conditions. The press release of the Company announcing the transaction is
filed herewith as Exhibit 99.1 and is incorporated herein by reference.
2
<PAGE> 3
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
7(a) Financial Statements of Data Systems Network Corporation
Report of Independent Certified Public Accountants
Board of Directors
Data Systems Network Corporation
We have audited the consolidated balance sheet of Data Systems Network
Corporation (a Michigan Corporation) and subsidiary as of December 31, 1998,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 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 audit provides a reasonable basis
for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Data
Systems Network Corporation and subsidiary as of December 31, 1998, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has a deficit in working capital. These matters, among others, as discussed
in Note B to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note B. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Grant Thornton LLP
Southfield, Michigan
March 8, 1999
3
<PAGE> 4
INDEPENDENT AUDITORS REPORT
To the Directors and Shareholders
Data Systems Network Corporation
We have audited the accompanying consolidated balance sheet of Data Systems
Network Corporation as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1997 and 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with 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 the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
presents fairly, in all material respects, the financial position of Data
Systems Network Corporation at December 31, 1997 and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced
significant recurring losses from operations, which raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note B. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PLANTE & MORAN, LLP
Southfield, Michigan
August 20, 1998
4
<PAGE> 5
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
December 31, 1997
1998 (Restated)
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,695,863 $ 4,463
Investments -- 6,203,361
Accounts receivable (net of allowance of $561,600 and $800,000
at December 31, 1998 and December 31, 1997 respectively) 11,339,484 26,343,980
Notes receivable 60,000 197,133
Inventories 1,296,145 1,001,350
Other current assets 347,983 537,780
------------ ------------
Total current assets 15,739,475 34,288,067
PROPERTY AND EQUIPMENT, net 2,522,978 2,369,744
GOODWILL, (net of amortization of $309,879 and $388,438 at
December 31, 1998 and 1997 respectively) 3,001,570 4,072,207
OTHER ASSETS 1,202,298 4,351,966
TOTAL ASSETS 22,466,321 45,081,984
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit 3,231,287 17,296,558
Accounts payable 9,640,159 16,154,232
Accrued liabilities 2,390,906 2,201,513
Shareholder Settlement Liability 1,768,000 --
Obligations Under Capital Leases - current portion -- 79,988
Deferred maintenance revenues 3,865,320 927,154
------------ ------------
Total current liabilities 20,895,672 36,659,445
OBLIGATIONS UNDER CAPITAL LEASES -- 157,551
COMMITMENTS and CONTINGENCIES (Notes I & P) -- --
NET LIABILITIES OF DISCONTINUED OPERATIONS -- 2,021,070
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000 shares, none outstanding -- --
Common stock ($.01 par value; authorized 10,000,000
shares; issued and outstanding 4,859,224 and 4,857,974 shares
at December 31, 1998 and December 31,1997, respectively) 48,592 48,580
Additional paid-in capital 17,951,219 17,945,606
Accumulated deficit (16,429,162) (11,750,269)
------------ ------------
Total stockholders' equity 1,570,649 6,243,917
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,466,321 $ 45,081,984
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE> 6
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
<TABLE>
<CAPTION>
1997 1996
1998 (Restated) (Restated)
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Product revenue $ 63,530,818 $ 67,845,466 $ 26,782,693
Service revenue 21,792,682 18,151,674 5,794,563
------------ ------------ ------------
Total revenues 85,323,500 85,997,140 32,577,256
COST OF REVENUES:
Cost of products 52,213,508 59,227,854 23,151,534
Cost of services 19,024,585 14,287,978 4,464,455
------------ ------------ ------------
Total cost of revenues 71,238,093 73,515,832 27,615,989
GROSS PROFIT 14,085,407 12,481,308 4,961,268
OPERATING EXPENSES:
Selling expenses 9,556,336 10,334,103 4,578,613
General and administrative expenses 6,116,171 5,814,607 3,632,580
------------ ------------ ------------
Total operating expenses 15,672,508 16,148,710 8,211,193
LOSS FROM OPERATIONS (1,587,100) (3,667,402) (3,249,926)
OTHER INCOME (EXPENSE):
Interest expense (802,329) (1,612,583) (580,304)
Interest income 109,592 371,716 267,886
Shareholder settlement (1,768,000) -- --
Other income 349,254 491,638 127,301
------------ ------------ ------------
(2,111,482) (749,229) (185,117)
Loss before extraordinary item and
discontinued operations (3,698,582) (4,416,631) (3,435,043)
EXTRAORDINARY ITEM
Gain recognized upon extinguishment of debt -- -- 75,494
------------ ------------ ------------
Loss before discontinued operations (3,698,582) (4,416,631) (3,359,549)
DISCONTINUED OPERATIONS
Loss from operations of Unified Network Services (1,686,054) (557,469) (481,524)
Gain on Disposal of Unified Network Services 705,742 -- --
------------ ------------ ------------
(980,311) (557,469) (481,524)
------------ ------------ ------------
NET LOSS $ (4,678,893) $ (4,974,100) $ (3,841,073)
============ ============ ============
Loss per common share - basic and diluted
Continuing operations $ (0.76) $ (1.02) $ (1.26)
Discontinued operations (0.20) (0.13) (0.18)
Extraordinary item -- -- 0.03
------------ ------------ ------------
Net loss per common share $ (0.96) $ (1.15) $ (1.41)
============ ============ ============
Weighted average shares outstanding 4,859,224 4,324,229 2,719,091
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
-------- ------------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 27,150 $ 6,385,047 $ (2,935,096) $ 3,477,101
Exercise of warrants for 10,413 shares of common
stock -- (75,494) -- (75,494)
Issuance of common stock in connection with
acquisition 5,400 2,829,600 -- 2,835,000
Net loss -- -- (3,841,073) (3,841,073)
-------- ------------ ------------ ------------
Balance at December 31, 1996 32,550 9,139,153 (6,776,169) 2,395,534
Exercise of stock options and warrant
redemptions 16,030 8,806,453 -- 8,822,483
Net loss -- -- (4,974,100) (4,974,100)
-------- ------------ ------------ ------------
Balance at December 31, 1997 48,580 17,945,606 (11,750,269) 6,243,917
Exercise of stock options 12 5,613 -- 5,625
Net loss -- -- (4,678,893) (4,678,893)
-------- ------------ ------------ ------------
Balance at December 31, 1998 $ 48,592 $ 17,951,219 $(16,429,162) $ 1,570,649
======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
1998 (Restated) (Restated)
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,678,893) $ (4,974,100) $ (3,841,073)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 1,145,088 883,084 365,227
Extraordinary gain -- -- (75,494)
Provision for doubtful receivables -- 732,391 27,642
Provision for inventory obsolescence -- -- 195,767
Settlement of shareholder lawsuit 1,768,000 -- --
Changes in assets and liabilities that provided (used)
cash net of effects of discontinued operations:
Decrease(Increase) in investments 6,203,361 (6,203,361) --
Decrease(Increase) in accounts receivable 15,004,496 (17,142,838) (4,627,016)
(Increase)Decrease in notes receivable 137,133 (97,043) 142,446
(Increase)Decrease in inventories (294,795) 244,812 1,332,826
Decrease in other current assets 189,797 223,524 359,472
(Increase)Decrease in other assets 3,149,668 (667,355) 502,719
(Decrease)Increase in accounts payable (6,514,071) 8,798,041 3,380,262
Increase(Decrease) in accounts payable 199,678 1,346,598 (241,542)
Increase(Decrease) in deferred maintenance 2,938,166 (13,473) (146,088)
Decrease in net liabilities
of discontinued operations (2,021,070) (75,944) (1,945,126)
------------ ------------ ------------
Net cash provided by (used in) operations 17,226,557 (16,945,664) (4,569,978)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net (1,104,304) (1,627,789) (579,117)
Purchase of UNS common stock -- -- (7,000)
Payments for NSG net assets including transaction costs -- -- (1,133,035)
Reduction of intangible asset 866,335 -- --
Redemption of warrants and exercise of stock options, net 5,624 -- --
------------ ------------ ------------
Net cash used in investing activities (232,345) (1,627,789) (1,719,152)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net current borrowings (repayment) under bank line of credit (14,065,272) 8,071,347 4,664,133
Payment of principal on long-term debt -- (75,000) (25,000)
Proceeds from issuance of common stock (net of offering costs) -- 8,822,483 --
Net proceeds (repayment) from capital lease obligation financing (237,539) 237,539 --
------------ ------------ ------------
Net cash provided by (used in) financing activities (14,302,811) 17,056,369 4,639,133
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,691,400 (1,517,084) (1,649,997)
CASH AND CASH EQUIVALENTS AT JANUARY 1 4,463 1,521,547 3,171,544
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 2,695,863 $ 4,463 $ 1,521,547
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Cash paid during the period for:
Interest $ 965,000 $ 1,455,000 $ 559,000
============ ============ ============
Income taxes $ -- $ 60,000 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
DATA SYSTEMS NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company's principal activities involve sales of microcomputer and network
hardware and software and the performance of maintenance and advance services,
such as network management, imaging and systems consulting, to major corporate
and state and local government customers in the United States. The Company has
two technical helpdesk centers, one in Michigan and one in Louisiana, and 12
direct sales offices located throughout the midwest and eastern United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiary, Unified Network Service, Inc (UNS). The operations of UNS were
sold during 1998 and they are shown as discontinued operations (See Note D).
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Restricted Cash
At December 31, 1998, cash of $1,859,000 was restricted in connection with
maintenance agreements. It will become unrestricted as revenue is recognized
according to the terms of the agreements.
Investments
Management determines the appropriate classification of securities at the time
of purchase and re-evaluates such designation as of each balance sheet date. In
1997 the investments are primarily industrial revenue bonds. The securities are
reported at fair value with unrealized gains and losses, net of tax, reported in
the statement of operations. All of the securities were sold in 1998.
Inventories
Inventories are stated at the lower of cost or market as determined by the
weighted average method. Inventories consist of goods for resale and service
parts which represent equipment spares utilized for service contracts.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed principally using the straight-line method based upon estimated useful
lives ranging from 5 to 7 years. Amortization of leasehold improvements is
provided over the terms of the various leases.
Goodwill and Long-Lived Assets
The cost in excess of net assets acquired (goodwill) is amortized using the
straight-line method over twenty years which is the estimate of future periods
to be benefited. The Company performs a review for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Undiscounted estimated future cash flows of an asset are
compared with its carrying value, if the cash flows are less than the carrying
value, an impairment loss is recognized.
9
<PAGE> 10
Income Taxes
Income taxes are accounted for by using an asset and liability approach.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial basis and tax basis
of assets and liabilities. Assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Revenue recognition
Revenue recognition for consulting, network installation services, time and
materials services, and training is recognized when the services are rendered.
Revenue from the sale of merchandise is recognized when the customer receives
the product. Revenue from the sales of after-installation service maintenance
contracts is recognized on a straight-line basis over the lives of the
respective contracts.
Product returns and service adjustments
Product returns and service adjustments are estimated based upon historical
data. The Company's customers have no contractual rights to return products. The
Company determines whether to accept product returns on a case by case basis and
will generally accept product returns only upon payment of a restocking fee
and/or if the products may be returned to the manufacturer. The Company offers
no warranty separate from the product manufacturers' warranties.
Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 specifies the computation and
presentation and disclosure requirements for earnings per share ("EPS") of
entities with publicly held common stock or potential common stock. SFAS 128
defines two EPS calculations, basic and diluted. The objective of basic EPS is
to measure the performance of an entity over the reporting period by dividing
income available to common stock by the weighted average of shares outstanding.
The objective of diluted EPS is consistent with that of basic EPS while giving
effect to all dilutive potential common shares that were outstanding. All
potential common shares were excluded from the computation of diluted earnings
per share because the effect would have been anti-dilutive.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments consist primarily of
cash and cash equivalents, bank lines of credit, accounts receivables, accounts
payable and short-term and long-term debt approximate their fair values.
Financial Statement Presentation
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 presentation.
New Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying of
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and
10
<PAGE> 11
annual financial statements. SFAS No. 130 and 131 are effective for fiscal years
beginning after December 15, 1997. These statements did not have an effect on
the Company's 1998 financial statements.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the years ended December 31, 1998, 1997 and 1996, the Company
incurred losses of $4,688,893, $4,974,100 and $3,841,073, respectively. These
losses have contributed to the Company's deficit in working capital of
$5,156,197. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The financial statements do not include any adjustment relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. However, the Company has a long term
commitment for a working capital line of credit with its primary lender as
discussed in Note H. The Company has consolidated operations and reduced
overhead expenses. The Company has sold its UNS subsidiary (See Note D) and
reduced staff size in non-revenue generating areas. Management will attempt to
consolidate its business operations and stabilize strategic business
relationships so the Company can meet its obligations and attain a level of
operations that are profitable.
In addition, upon completion of the merger with Alydaar Software Corporation
(see Note Q) the Company believes that additional financial resources would be
available and certain synergies relating to business opportunities and
operations will be realized to help return the company to profitability.
NOTE C - ACQUISITIONS
On February 22, 1996, the Company purchased 70% (7,000 shares) of UNS for
$7,000, and acquired certain liabilities in a transaction accounted for as a
purchase. The purchase price was allocated to the assets acquired and
liabilities assumed based upon the estimated fair market value. The excess of
the purchase price over the estimated fair market value of the net assets
acquired amounted to $999,078, which is being accounted for as goodwill and is
being amortized over 20 years using a straight-line method. (See Note D
regarding the sale of the Company's interest in UNS during 1998).
Effective September 3, 1996, the Company purchased the assets and operations of
The Network Services Group of SofTech, Inc. ("SofTech"), and assumed certain
liabilities from SofTech. The acquisition has been accounted for as a purchase.
In exchange for certain assets and liabilities SofTech received cash in the
amount of $890,000 and 540,000 shares of the Company's common stock valued at
approximately $2,835,000. The purchase price was allocated to the net assets
acquired based upon their estimated fair market values. The excess of the
purchase price over the estimated fair market value of the net assets acquired
amounted to $3,390,008, which is being accounted for as goodwill and is being
amortized over 20 years using a straight-line method.
NOTE D - DISCONTINUED OPERATIONS - SALE OF UNIFIED NETWORK SERVICES INC.
During 1998, the Company decided to sell its 70% interest in its large account
network management services operation, Unified Network Services Inc. Under the
terms of the original purchase agreement, the minority shareholders of UNS
elected to exercise a contract option to initiate re-purchase of the UNS
subsidiary. The Company's Board of Directors accepted the proposal. On June 17,
1998, the Company executed an agreement to sell its interest in UNS for cash and
notes and to classify the business of UNS as a discontinued operation, effective
June 1, 1998. The terms of the sale included $7,000 in cash and a note for
$3,000,000, which is secured by the stock of UNS. The buyers also assumed the
existing liabilities of UNS. The gain upon disposal of the discontinued
operations is net of allowances of $3,000,000 due to the uncertainty of the
buyer's ability to repay the note and $989,400 in advances made by the Company
for working capital and payment of certain assumed liabilities.
11
<PAGE> 12
As of December 31, 1998 and 1997, assets and liabilities of the discontinued
operations included in the balance sheet are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997
1998 (RESTATED)
------ -----------
<S> <C> <C>
Assets
Current assets -- $ 764,813
Property,plant and equipment, net -- $ 213,695
Liabilities
Current liabilities -- $ (152,653)
Other liabilities -- $(2,846,925)
------ -----------
Net assets (liabilities) of discontinued operations $ -- $(2,021,070)
====== ===========
</TABLE>
The results of operations of the discontinued operations for the years ended
December 31, 1998, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
For years ended December 31, 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 278,060 $ 2,013,309 $ 72,338
Loss from discontinued operations $(1,686,054) $ (557,469) $ (481,524)
</TABLE>
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997
1998 (RESTATED)
----------- -----------
<S> <C> <C>
Computer equipment and software $ 3,889,597 $ 3,019,280
Furniture and Fixtures 856,720 712,972
Leasehold improvements 257,831 75,905
----------- -----------
5,004,148 3,808,157
Less accumulated depreciation and amortization (2,481,170) (1,438,413)
----------- -----------
$ 2,522,978 $ 2,369,744
=========== ===========
</TABLE>
Depreciation and amortization expense was approximately $914,000, $574,000 and
$583,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
12
<PAGE> 13
NOTE F - OTHER ASSETS
Other Assets Consist Of The Following At December 31,
<TABLE>
<CAPTION>
1997
1998 (RESTATED)
---------- ----------
<S> <C> <C>
Prepaid expenses $ 406,662 $ 709,405
Advances to Subsidiary -- 2,846,925
Accounts receivable - other 795,636 795,636
---------- ----------
$1,202,298 $4,351,966
========== ==========
</TABLE>
NOTE G - ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31,
<TABLE>
<CAPTION>
1997
1998 (RESTATED)
---------- ----------
<S> <C> <C>
Compensation benefits and taxes $1,229,821 $1,264,158
Customer advances 140,181 11,500
State sales and other taxes 74,208 414,742
Interest -- 161,801
Other 946,696 349,312
---------- ----------
$2,390,906 $2,201,513
========== ==========
</TABLE>
NOTE H - LINES OF CREDIT
As of September 30, 1998, the Company had a credit agreement ("NBD Agreement")
with NBD Bank ("NBD"). The Agreement provided for a discretionary line of credit
not to exceed $11 million. Borrowing limits under the credit facility were
determined based on a collateral formula, which included 80% of qualified trade
receivables. Borrowings under the credit agreement bore interest at 2% over NBD
prime and had a term extending to September 30, 1998. Previously, the Company
had a credit agreement that provided for a revolving line of credit not to
exceed $12 million, a discretionary line of credit not to exceed $8 million and
a discretionary lease line not to exceed $500,000. Each was collateralized by an
interest in the Company's accounts receivable, inventory (other than equipment
financed through IBM Credit) and equipment.
On September 30, 1998 the Company and Foothill Capital Corporation ("Foothill")
entered into a new credit facility ("Foothill Agreement"), replacing in its
entirety, the NBD Agreement. The Foothill Agreement provides for an initial
revolving line of credit not to exceed $15 million. The available line of credit
at December 31,1998 was $3,231,287. The Company may, at its option and subject
to certain collateral requirements, increase the line to $20 million during the
term of the Foothill Agreement. Borrowing limits under the Foothill Agreement
are determined based on a collateral formula, which includes 85% of qualified
trade receivables. Borrowings under the Foothill Agreement bear interest at 1%
over Norwest Bank prime (7.5 % at December 31, 1998)and have a term extending to
September 30, 2001. All monies owed by the Company to NBD were paid on October
1, 1998.
The Company is required to maintain certain financial ratios. At December 31,
1998 the company was not in compliance with several ratios and obtained a waiver
from Foothill Capital Corporation.
The Company has also entered into a finance agreement with IBM Credit
Corporation. The agreement extended a maximum of $2,000,000 to be used
exclusively for the acquisition of inventory for resale. Use of this credit line
is at the Company's option. As collateral for payment of all debt incurred under
this agreement, IBM Credit Corporation was granted a first security interest in
the Company's inventory equal to the amount of the outstanding debt. This
agreement allows for thirty-day interest free financing of eligible inventory
and a variable discount off of invoice for eligible product purchases paid for
within fifteen days from the date of invoice. The Company or the lender can
terminate this agreement at any time. The terms and conditions of this financing
agreement can be
13
<PAGE> 14
changed at the discretion of IBM Credit Corporation. The amount outstanding at
December 31, 1998 and 1997 is approximately $1,400,000 and $1,500,000,
respectively, and has been included in accounts payable.
NOTE I - LEASE COMMITMENTS
The Company has entered into several non-cancelable operating leases for office
space, computer equipment, and certain furniture and fixtures that expire at
various dates through 2003. The approximate future minimum annual rentals under
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------
<S> <C>
1999 $1,103,973
2000 877,135
2001 790,671
2002 298,760
2003 77,320
-----------
Total minimum lease obligations $3,147,859
===========
</TABLE>
All leases previously recorded as capital leases were paid off as of October 1,
1998 in accordance with the terms of the Foothill Agreement.
Total rent expense for the years ended December 31, 1998, 1997, and 1996 was
approximately $1,558,000, $1,130,000 and $595,000, respectively.
NOTE J - INCOME TAXES
Deferred tax assets and liabilities at December 31, consist of the following:
<TABLE>
<CAPTION>
1997
1998 (RESTATED)
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,336,000 $ 3,205,000
Deferred maintenance revenue 17,000 --
Allowance for doubtful accounts 273,000 437,000
Shareholder lawsuit settlement 601,000 --
Inventory -- 19,000
Depreciation -- 112,000
Accrued vacation 102,000 93,000
----------- -----------
4,329,000 3,866,000
Deferred tax liabilities
Depreciation (138,000) --
Amortization (114,000) --
Other -- (69,000)
----------- -----------
(252,000) (69,000)
Less valuation allowance (4,077,000) (3,797,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
14
<PAGE> 15
The net operating loss carryforwards expire in 2007 - 2018.
The income tax provision reconciled to the tax computed at the statutory federal
rate for continuing operations was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996
1998 (RESTATED) (RESTATED)
----------- ----------- -----------
<S> <C> <C> <C>
Tax (benefit) at statutory rates applied to income before
federal income tax from continuing operations $(1,260,000) $(1,502,000) $(1,142,000)
Effect of nondeductible items 41,000 52,000 14,000
Extraordinary gain -- -- (26,000)
Other -- (144,000) 28,000
Change in treatment on income tax return 939,000 -- --
Valuation allowance 280,000 1,594,000 1,126,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
NOTE K - FORGIVENESS OF DEBT
Under the terms of the 1992 Plan of Reorganization, the unsecured creditors were
granted fully paid warrants for 170,000 shares of the Company's authorized
common stock and contingent payments of up to a total of $650,000. The Company
negotiated with certain creditors to accelerate the payment of unsecured debt in
exchange for the creditors' agreement to forgive a portion of the unsecured debt
and contingent liabilities and to cancel a portion of the fully paid warrants.
This contingent liability was not previously recorded, as the amount could not
be reasonably estimated. As a result of extensive negotiations, the Company
purchased approximately 110,000 warrants in 1995 and 10,400 in 1996. In
addition, the Company received the approval of the bankruptcy court to enter
into an agreement whereby all outstanding claims have been settled with
aggregate payments due of approximately $114,000 and the contingent payments
noted above have been eliminated. The bankruptcy court issued its final decree
on January 16, 1997.
There was an extraordinary gain of approximately $75,000 in 1996, which
represents the purchase of the warrants and the extinguishment of the related
debt.
NOTE L - REDEMPTION OF WARRANTS
During February 1997, the Company called all of its outstanding Redeemable
Common Stock Purchase Warrants ("Purchase Warrants") for redemption as of March
10, 1997 pursuant to the Warrant Agreement, dated October 28, 1994, setting
forth the terms of the Purchase Warrants. Approximately 99% of the Warrants were
exercised on or prior to the date of redemption at a price of $6.25 per Warrant,
resulting in net proceeds to the Company of approximately $7,300,000. In
connection with the receipt of consent to the redemption the Company agreed to
file a registration statement with the Securities and Exchange Commission with
respect to 60,000 units, issued to the underwriters' representatives in the
Company's initial public offering, consisting of two common shares and two
warrants to purchase an additional two common shares which may be purchased upon
exercise of a warrant. The exercise price of these warrants was reduced from
$16.50 to $12.50 per unit and the exercise price of the purchase warrants was
reduced from $10.3125 to $6.25 per unit. The registration was completed in July
1997 and during the third quarter of 1997, all related warrants were exercised,
resulting in net proceeds to the Company of approximately $1,400,000.
15
<PAGE> 16
NOTE M - STOCK OPTION PLANS
In April 1994 the Company adopted the 1994 Stock Option Plan ("the Plan"). A
total of 200,000 shares were reserved for issuance under the plan. The options
vest over a two-year period at the rate of 50% per year, beginning on the first
anniversary of the grant date. In April 1997, the Company amended the Plan to
increase the reserved shares to 600,000. The vesting period in the Company's
form option grant agreement was also changed to 50% on the second anniversary of
the grant date and 25% on each of the third and fourth anniversaries of the
grant date. The Company's Compensation Committee retains the ability to change
the vesting schedule at any time.
In 1998 the Company granted options for 40,000 shares to a Director of the
Company exercisable at a price of $.88 per share which approximated the fair
market value at the date of grant. Such options vest 50% on the second
anniversary date, and the 25% vest each of the next two years. In 1997 and 1996,
the Company granted options for 3,000 shares exercisable at a price of $9.83
and $3.00 per share, respectively, which was the fair market value at the date
of grant, to Directors of the Company. Such options vest one year from the grant
date.
The per share weighted-average fair value of stock options granted during 1998,
1997 and 1996 was $3.86, $9.83 and $4.00 per share, respectively.
<TABLE>
<CAPTION>
SHARES AVERAGE PER
UNDER SHARE EXERCISE
OPTIONS PRICE
-------- --------------
<S> <C> <C>
Balance at December 31, 1995 70,716 $ 4.58
Issued 146,437 $ 4.46
Forfeited (25,450) $ 4.11
Exercised -- --
--------
Balance at December 31, 1996 191,703 $ 4.55
Issued 215,350 $ 9.82
Forfeited (9,062) $ 6.19
Exercised (21,768) $ 4.57
--------
Balance at December 31, 1997 376,223 $ 7.54
Issued 138,750 $ 3.86
Forfeited (137,900) $10.10
Exercised (1,250) $ 4.50
--------
Balance at December 31, 1998 375,823 $ 5.15
========
</TABLE>
The range of exercise prices on outstanding options at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Weighted Average
AVERAGE REMAINING
PRICE RANGE SHARES EXERCISE PRICE LIFE
<S> <C> <C> <C>
.88 - 2.50 108,125 $ 1.10 9.4
2.51 - 5.00 123,548 4.18 7.1
5.01 - 7.50 80,900 6.86 8.2
7.51 - 10.00 18,550 8.99 8.2
10.01 - 13.75 44,750 12.91 8.8
-------
375,823
=======
</TABLE>
As of December 31, 1998, 1997 and 1996 the number of options exercisable was
193,123, 62,641 and 56,892, respectively and the weighted average exercise price
of those options was $5.29, $4.53 and $4.75, respectively.
The Financial Accounting Standard Board has issued Statement No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"). The Statement
established a fair value method of accounting for employee
16
<PAGE> 17
stock options and similar equity instruments such as warrants, and encourages
all companies to adopt that method of accounting for all of their stock
compensation plans. However, the statement allows companies to continue
measuring compensation for such plans using accounting guidance in place prior
to SFAS No. 123. Companies that elect to remain with the former method of
accounting must make pro-forma disclosures of net earnings and earnings per
share as if the fair value method provided for in SFAS No. 123 had been adopted.
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option - pricing model with the following weighted average
assumptions for grants: dividend yield of 0%, expected volatility of 157.6%,
70%, and 30% in 1998, 1997 and 1996 respectively, risk-free interest rate of
5.8%, 6.5% and 6.9% in 1998, 1997 and 1996 respectively, and expected life
ranging from seven to ten years.
The Company has not adopted the fair value accounting provisions of SFAS No.
123. Accordingly, SFAS No. 123 has no impact on the Company's financial position
or results of operations.
The Company accounts for the stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." No compensation costs have been
recognized. Had compensation cost for the plan been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS No.
123, the Company's net loss and loss per share would have been as follows (in
thousands, except for per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net Loss as reported $ 4,678 $ 4,974 $ 3,841
Proforma 4,985 5,418 3,930
Loss per share as reported $ (.96) $ (1.15) $ (1.41)
Proforma (1.03) (1.25) (1.45)
</TABLE>
NOTE N - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401(k) plan that covers
substantially all employees. Contributions to the Plan may be made by the
Company (which are discretionary) or by plan participants through elective
salary reductions. No contributions were made to the plan by the Company during
the years ended December 31, 1998, 1997, and 1996.
NOTE O - MAJOR CUSTOMERS
The Company had one customer, the State of Michigan, which accounted for
approximately 29% of revenue in each of 1998 and 1997. Additionally, during
1998, the State of New York represented 12%.
NOTE P - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in certain routine legal proceedings which are
incidental to its business. All of these proceedings arose in the ordinary
course of the Company's business and, in the opinion of the Company, any
potential liability of the Company with respect to these legal actions will not,
in the aggregate, be material to the Company's financial condition or
operations.
On or about October 29, 1998, the Securities and Exchange Commission ("SEC")
informed the Company that it is conducting a formal private investigation of the
accounting irregularities experienced by the Company in the fiscal years 1996
and 1997, This inquiry is ongoing, and the Company is cooperating with the SEC
and providing information as requested.
17
<PAGE> 18
Year 2000
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the revenues and financial condition could, be adversely
impacted.
NOTE Q - SUBSEQUENT EVENTS
During 1998 civil actions were filed against the Company, certain officers, and
the Board of Directors. The complaints allege violations of the Securities
Exchange Act of 1934 resulting from alleged nondisclosures and
misrepresentations of information concerning the Company's financial results and
future prospects due to accounting irregularities. On February 17, 1999, the
Company announced that it had agreed to a stipulation of settlement of the
consolidated securities class action lawsuits filed in 1998. The stipulation of
settlement has been filed in federal court in Detroit, Michigan. Although the
court gave preliminary approval for the proposed settlement, it is subject to
the court's later determination of the settlement's fairness at a hearing
currently set for May 12, 1999. Under the terms of the proposed settlement, and
subject to various conditions, the Company will create a settlement fund valued
at approximately $2 million. The fund will benefit a settlement class of
purchasers who bought the Company's stock during the period of May 16, 1996
through February 24, 1998. The fund would be comprised of $900,000 provided by
the Company's insurer, and at the defendants' option either 650,000 shares of
the Company's common stock or an additional $1.1 million. In agreeing to the
proposed settlement, the Company made no admission of any wrongdoing. As a
result of this tentative settlement, the Company has accrued $1,768,000 as the
estimate of its liability.
In February 1999, Data Systems and Alydaar Software Corporation, doing business
as Information Architects (Nasdaq/NMS: "ALYD") of Charlotte, North Carolina
announced the signing of a definitive merger agreement. Alydaar is a worldwide
developer of Enterprise Information Portals and provides management consulting,
design, development and deployment of Virtual Information Solutions.
Additionally, Alydaar assists organizations in modernizing their current legacy
information systems, and offers Y2K services utilizing SmartCode Technology.
18
<PAGE> 19
7(b) Pro Forma Financial Information
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combining Balance Sheet at December
31, 1998 and Pro Forma Condensed Combining Statements of Operations for the
years ended December 31, 1998, 1997 and 1996 (the "Pro Forma Condensed
Combining Financial Statements") illustrate the effect of the acquisition of
Data Systems Network, Inc. ("Data Systems") by Alydaar Software Corp.
("Alydaar") accounted for as a pooling of interests as if the acquisition had
occurred as of the beginning of the earliest period presented. Pursuant to the
terms of the merger agreement, each holder of Data Systems Common Stock will be
entitled to receive shares of Alydaar Common Stock based on an exchange ratio
of .33 of a share of Alydaar Common Stock for each share of Data Systems Common
Stock. The Pro Forma Condensed Combining Balance Sheet combines the audited
balance sheets of Alydaar and Data Systems as of December 31, 1998. The Pro
Forma Condensed Combining Statements of Operations combine Alydaar's and Data
Systems' audited Statements of Operations for the years ended December 31,
1998, 1997 and 1996. The Pro Forma Condensed Combining Statements of Operations
do not give effect to any transaction charges associated with the consummation
of the acquisition. The Pro Forma Condensed Combining Balance Sheet has been
adjusted to reflect these estimated obligations. All such costs are estimated
to aggregate $850,000. There are no intercompany transactions or balances
included in the Pro Forma Condensed Combining Financial Statements and no
adjustments are required to conform the accounting policies of Alydaar and Data
Systems.
The Pro Forma Condensed Combining Financial Statements should be read in
conjunction with the financial statements of Alydaar and Data Systems appearing
elsewhere in this registration statement. The Pro Forma Condensed Combining
Financial Statements are presented for comparative purposes only and are not
intended to be indicative of actual results had the
19
<PAGE> 20
transactions occurred as of the dates indicated above or of results which may
be attained in the future.
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
<TABLE>
<CAPTION>
ALYDAAR DATA SYSTEMS
AS OF AS OF
DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,962,570 $ 2,695,863 $ -- $ 5,658,433
Accounts receivable, net of allowance
for doubtful accounts 5,231,116 11,339,484 -- 16,570,600
Costs and estimated earnings in excess of billings 2,213,036 -- -- 2,213,036
Notes receivable -- 60,000 -- 60,000
Inventories -- 1,296,145 -- 1,296,145
Prepaid expenses and other current assets 304,621 347,983 -- 652,604
Deferred tax asset 1,800,000 -- -- 1,800,000
------------ ------------ ------------ ------------
Total current assets 12,511,343 15,739,475 -- 28,250,818
PROPERTY AND EQUIPMENT,net 2,561,253 2,522,978 -- 5,084,231
COMPUTER SOFTWARE 2,254,429 -- -- 2,254,429
GOODWILL, net of accumulated amortization 6,047,183 3,001,570 -- 9,048,753
OTHER ASSETS 97,186 1,202,298 -- 1,299,484
------------ ------------ ------------ ------------
TOTAL $ 23,471,394 $ 22,466,321 $ -- $ 45,937,715
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Bank line of credit $ -- $ 3,231,287 $ -- $ 3,231,287
Accounts payable 1,341,651 9,640,159 -- 10,981,810
Accrued liabilities 826,501 2,390,906 850,000 4,067,407
Shareholder settlement liability -- 1,768,000 -- 1,768,000
Deferred maintenance revenue -- 3,865,320 -- 3,865,320
Current portion of capital lease obligation 51,063 -- -- 51,063
Loans payable, stockholder 3,042,029 -- -- 3,042,029
------------ ------------ ------------ ------------
Total current liabilities 5,261,244 20,895,672 -- 27,006,916
------------ ------------ ------------ ------------
CAPITAL LEASE OBLIGATION 121,327 -- -- 121,327
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock
Common stock 17,506 48,592 (46,982) 19,116
Additional paid in capital 31,111,734 17,951,219 46,982 49,109,935
Deficit (12,696,567) (16,429,162) (850,000) (29,975,729)
Foreign currency translation adjustment (23,100) -- -- (23,100)
------------ ------------ ------------ ------------
18,409,573 1,570,649 (850,000) 19,130,222
Less treasury stock at cost
Less receivable from warrant exercise 320,750) -- -- (320,750)
------------ ------------ ------------ ------------
Total stockholders' equity 18,088,823 1,570,649 (850,000) 18,809,472
------------ ------------ ------------ ------------
$ 23,471,394 $ 22,466,321 $ (850,000) $ 45,937,715
============ ============ ============ ============
</TABLE>
20
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, ALYDAAR DATA SYSTEMS PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Product revenues $ -- $ 63,530,818 $ 63,530,818
Service revenues 27,790,621 21,792,682 49,583,303
------------- ------------- -------------
Total revenues 27,790,621 85,323,500 113,114,121
------------- ------------- -------------
COST OF REVENUES:
Cost of products 52,213,508 52,213,508
Cost of services 13,331,425 19,024,585 32,356,010
------------- ------------- -------------
Total cost of revenues 13,331,425 71,238,093 84,569,518
------------- ------------- -------------
GROSS PROFIT 14,459,196 14,085,407 28,544,603
------------- ------------- -------------
OPERATING EXPENSES:
Selling expenses 6,772,723 9,556,336 16,329,059
General and administrative expenses 7,289,955 6,116,171 13,406,126
------------- ------------- -------------
14,062,678 15,672,507 29,735,185
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 396,518 (1,587,100) (1,190,582)
OTHER EXPENSE (198,978) (2,111,481) (2,310,460)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 197,540 (3,698,581) (3,501,042)
INCOME TAX BENEFIT (1,200,000) -- (1,200,000)
------------- ------------- -------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS 1,397,540 (3,698,582) (2,301,042)
------------- ------------- -------------
DISCONTINUED OPERATIONS:
Loss from operations of Unified Network Services -- (1,686,054) (1,686,054)
Gain on disposal of Unified Network Services -- 705,742 705,742
------------- ------------- -------------
-- (980,312) (980,312)
------------- ------------- -------------
NET INCOME (LOSS) $ 1,397,540 $ (4,678,893) $ (3,987,096)
============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE-
BASIC AND FULLY DILUTED:
Continuing operations $ .08 $ (0.76) $ (0.12)
Discontinued operations -- (0.20) (0.05)
------------- ------------- -------------
$ 0.08 $ (0.96) $ (0.17)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 17,446,467 4,859,224 19,057,514
Diluted 17,584,510 4,859,224 19,195,557
</TABLE>
21
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ALYDAAR DATA SYSTEMS PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Product revenues $ -- $ 67,845,466 $ 67,845,466
Service revenues 10,736,237 18,151,674 28,887,911
------------ ------------ ------------
Total revenues 10,736,237 85,997,140 96,733,377
------------ ------------ ------------
COST OF REVENUES:
Cost of products -- 59,227,854 59,227,854
Cost of services 8,113,179 14,287,978 22,401,157
------------ ------------ ------------
Total cost of revenues 8,113,179 73,515,832 81,629,011
------------ ------------ ------------
GROSS PROFIT 2,623,058 12,481,308 15,104,366
------------ ------------ ------------
OPERATING EXPENSES:
Selling expenses 2,994,654 10,334,103 13,328,757
General and administrative expenses 8,109,835 5,814,607 13,924,442
------------ ------------ ------------
11,104,489 16,148,710 27,253,199
------------ ------------ ------------
LOSS FROM OPERATIONS (8,481,431) (3,667,402) (12,148,833)
OTHER INCOME (EXPENSE) 84,264 (749,229) (664,965)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS (8,397,167) (4,416,631) (12,813,798)
INCOME TAX BENEFIT (600,000) -- (600,000)
------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (7,797,167) (4,416,631) (12,213,798)
DISCONTINUED OPERATIONS:
Loss from operations of Unified Network Services -- (557,469) (557,469)
------------ ------------ ------------
NET LOSS $ (7,797,167) $ (4,974,100) $(12,771,267)
============ ============ ============
NET (LOSS) PER COMMON SHARE-BASIC
AND FULLY DILUTED:
Continuing operations $ (0.51) $ (1.02) $ (0.72)
Discontinued operations -- (0.13) (0.03)
------------ ------------ ------------
$ (0.51) $ (1.15) $ (0.75)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 15,387,125 4,324,229 16,998,172
Diluted 15,387,125 4,324,229 16,998,172
</TABLE>
22
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ALYDAAR DATA SYSTEMS PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Product revenues $ -- $ 26,782,693 $ 26,782,693
Service revenues 37,500 5,794,563 5,832,063
------------ ------------ ------------
Total revenues 37,500 32,577,256 32,614,756
------------ ------------ ------------
COST OF REVENUES
Cost of products -- 23,151,534 23,151,534
Cost of services 31,500 4,464,455 4,495,955
------------ ------------ ------------
Total cost of revenues 31,500 27,615,989 27,647,489
------------ ------------ ------------
GROSS PROFIT 6,000 4,961,267 4,967,267
------------ ------------ ------------
OPERATING EXPENSES:
Selling expenses 339,206 4,578,613 4,917,819
General and administrative expenses 4,828,064 3,632,580 8,460,644
------------ ------------ ------------
5,167,270 8,211,193 13,378,463
------------ ------------ ------------
LOSS FROM OPERATIONS (5,161,270) (3,249,926) (8,411,196)
OTHER INCOME (EXPENSE) 28,425 (185,117) (156,692)
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM AND
DISCONTINUED OPERATIONS (5,132,845) (3,435,043) (8,567,888)
EXTRAORDINARY ITEM:
Gain recognized on extinguishment of debt -- 75,494 75,494
------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (5,132,845) (3,359,549) (8,492,394)
DISCONTINUED OPERATIONS:
Loss from operations of Unified Network Services -- (481,524) (481,524)
------------ ------------ ------------
NET LOSS $ (5,132,845) $ (3,841,073) $ (8,973,918)
============ ============ ============
NET (LOSS) PER COMMON SHARE-BASIC
AND FULLY DILUTED:
Continuing operations $ (0.41) $ (1.26) $ (0.61)
Discontinued operations -- (0.18) 0.01
Extraordinary item -- 0.03 (0.03)
------------ ------------ ------------
$ (0.41) $ (1.41) $ (0.64)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 12,394,056 2,719,091 14,005,103
Diluted 12,394,056 2,719,091 14,005,103
</TABLE>
23
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
(1) The Pro Forma Condensed Combining Statements of Operations exclude the
non-recurring costs of the Merger, which are estimated at $850,000. This
estimate includes amounts for financial advisor, legal and accounting fees
related to the merger. The Pro Forma Condensed Combining Balance Sheet has
been adjusted to reflect these estimated obligations. The non-recurring
cost estimate is an estimate only, although it is not likely that material
additional costs will be incurred. The non-recurring expense will be
charged to operations upon the consummation of the merger. Accumulated
deficit as of December 31, 1998 has been adjusted to reflect the after tax
impact of the estimated costs of the merger ($850,000). Accrued merger and
restructuring has been adjusted to reflect the accrual of such estimated
costs, pre-tax ($850,000). Deferred taxes and deferred tax assets have not
been adjusted to reflect the estimated deferred tax benefits associated
with the estimated charge because the estimate of their utilization has
been offset by a similar increase in the valuation allowance against the
deferred tax asset.
(2) Stockholders' equity as of December 31, 1998 has been adjusted to reflect
the issuance of 1,611,047 shares of Alydaar Common Stock in exchange for
all of the issued and outstanding shares of Data Systems Stock resulting
in 19,116,733 shares issued and outstanding on a pro forma basis. The Pro
Forma Condensed Combining Financial Statements do not reflect the exercise
of outstanding stock options.
(3) The pro forma combined net income (loss) per share is based on the
combined weighted average number of common and common equivalent shares,
after adjusting Data Systems' weighted average number of common shares
outstanding and dilutive common share equivalents for the conversion into
Alydaar's Common Stock at a conversion ratio of .33. Common share
equivalents consist of common stock issuable upon exercise of outstanding
options.
7(c) Exhibits
Exhibit No. Description
23.1 Consent of Grant Thornton LLP
23.2 Consent of Plante & Moran, LLP
99.1 Press Release issued by Alydaar Software Corporation on
February 1, 1999
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Alydaar Software Corporation
(Registrant)
By: /s/ ROBERT F. GRUDER
-----------------------------
Robert F. Gruder
Chief Executive Officer
Dated: April 7, 1999
25
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 8, 1999, accompanying the consolidated
financial statements of Data Systems Network Corporation for the year ended
December 31, 1998. These financial statements and our report thereon are
included in the Form 8-K filed by Alydaar Software Corporation on or about April
7, 1999. We hereby consent to the incorporation by reference of said report in
the Registration Statements of Alydaar Software Corporation on Form S-8 (File
No. 333-56919 and File No. 333-50825) and on Form S-3 (File No. 333-75685 and
File No. 333-75689).
/s/ GRANT THORNTON LLP
Southfield, Michigan
April 7, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File No. 333-56919 and File No. 333-50825) and on Form S-3 (File No.
333-75685 and File No. 333-75689) of Alydaar Software Corporation of our report
on the consolidated financial statements of Data Systems Network Corporation
dated August 20, 1998 appearing in this Current Report on Form 8-K of Alydaar
Software Corporation.
/s/ PLANTE & MORAN, LLP
Southfield, Michigan
April 7, 1999
<PAGE> 1
EXHIBIT 99.1
ALYDAAR SOFTWARE CORPORATION TO ACQUIRE DATA SYSTEMS NETWORK CORPORATION
ALYDAAR ACQUIRES DATA NETWORKING CAPABILITIES, EXPANDING ITS NEW
E-BUSINESS/ENTERPRISE INFORMATION PORTAL (EIP) FOCUS
CHARLOTTE, NC--(BUSINESS WIRE)--Feb. 1, 1999--Alydaar Software Corporation
(NASDAQ: ALYD) today announced it has signed a definitive agreement to acquire
Data Systems Network Corporation (OTC: DSYS) a Farmington Hills, Michigan, based
network integration company with sales in excess of $85MM and 206 employees.
Under the terms of the acquisition and subject to certain adjustments,
approximately 1.6 million shares of Alydaar common stock will be exchanged for
all outstanding shares of Data Systems, with an overall estimated value for the
transaction of approximately $17.5 million. The acquisition has been approved by
the board of directors of each company and is subject to various closing
conditions, including shareholder approval by the shareholders of Data Systems.
Data Systems provides innovative, custom designed data networking solutions,
including design analysis, project management, product procurement, network
security, document imaging, configuration services and a wide array of support
services including help desk and system monitoring services.
Alydaar believes that the acquisition of Data Systems should be accretive to the
combined business' net income per share for 1999. The acquisition will be
accounted for as a pooling of interests.
Alydaar's CEO, Robert Gruder, stated, "The acquisition of Data Systems is a key
component of our ongoing strategy to create Enterprise Information Portal
solutions. EIP's allow users to access both structured and unstructured data
stored in ERP systems, web sites, data warehouses, legacy mainframes, and client
server systems. In order to effectively integrate EIP solutions, Alydaar plans
to offer a wide range of e-business services, including network design and
integration, web hosting, application server technology, consulting, sales force
automation, and intranet/extranet implementation."
Gruder continued, "Data Systems has an established practice in enterprise
document management and workflow systems. This competency is a key element in
enhancing Alydaar's strategy to be the premier provider of EIP solutions. This
is fundamental to the design of any EIP solution because 90% of an
organization's information is unstructured data, i.e., documents, voice, video,
and processes. The ability to manage both structured and unstructured data is
critical to the successful deployment of these types of business solutions."
Michael Grieves, Data System's CEO, stated, "Alydaar has a strategic plan to
implement enterprise wide digital solutions. The first phase of implementation
of a digital solution is to have the right network design and to build upon it.
For the last eight years, Data Systems has successfully assisted organizations
with all facets of networking needs and requirements. We
<PAGE> 2
look forward to working with Alydaar as we integrate the Data Systems knowledge
and expertise into the growing e-business marketplace."
A major strategic benefit for Alydaar from the acquisition is obtaining a 165
person sales and engineering force. Through the acquisition of Data Systems,
Alydaar Software, which derived most of its 1998 revenues from factory based
Year 2000 remediation services for legacy systems, will now be able to offer its
clients the ability to evaluate, remediate, and audit Year 2000 issues
surrounding their PCs, as well as their network environments. In addition, Data
Systems, which has a significant state government contract base, will provide
Alydaar the ability to accelerate the launch of its new e-Business/EIP products
and services as well as a significant new marketing opportunity for its Year
2000 remediation services.
Alydaar Software Corporation is a worldwide developer of Enterprise Information
Portals. Alydaar provides management consulting, design, development and the
deployment of Virtual Information Portal solutions. Additionally, Alydaar
assist's organizations in transforming their current legacy information systems
architecture to support a heterogeneous, scalable, flexible, and ubiquitous
internet/intranet architecture. Alydaar also offers Year 2000 services utilizing
its SmartCode technology, remediating or auditing most computer languages on
most hardware platforms. Alydaar's clients include: 3M (MMM), Advanced Micro
Devices (AMD), DuPont (DD), Kelly Services (KELYA), McDonnell-Douglas (MD),
Nabisco (NA), British Airways, Northern States Power (NSP), RJ Reynolds (RJR),
TOTAL (TOT), OMG World-wide, and Whirlpool (WHR), among others. More information
about Alydaar Software Corporation and its services can be found on the World
Wide Web at http://www.alydaar.com.
Data Systems provides computer network services and products that enable the
control of complex distributed computing environments and allow companies to
capitalize on their investments in technology and people. The company provides a
wide range of network integration services including installation, consultation,
technical support and training. It also provides specialized services in network
management, application development, enterprise document management and Year
2000 consulting. Based in Farmington Hills, Michigan, Data Systems has 16
offices and 206 employees. Data Systems customers include the State of Michigan,
the State of Louisiana, the State of New York, and the State of Florida.
The statements made in this news release that are not historical facts contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may", "will", "anticipates", "projects",
"estimates" or "continue", the negative thereof, other variations or comparable
terminology, involve risks and uncertainties. Important factors, including
certain risks and uncertainties, with respect to such forward looking statements
that could cause actual results to differ materially from those reflected in
such forward looking statements include, but are not limited to, the impact of
competitive products and services, the Company's ability to manage growth and
acquisitions of technology or people, the effect of economic and business
conditions, including risks inherent in international operations and the ability
to attract and retain technical personnel.
