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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number 000-19608
ARI Network Services, Inc.
--------------------------
(Exact name of registrant as specified in its charter.)
WISCONSIN 39- 1388360
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
330 E. Kilbourn Avenue, Milwaukee, Wisconsin 53202
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(Address of principal executive office)
Registrant's telephone number, including area code (414) 278-7676
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 10, 1996.
Common Stock, Par Value $.001 Per Shares 14,319,462 Shares Outstanding
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ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED October 31, 1996
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Item 1 Financial statements 3-6
Condensed consolidated balance sheets - October 31, 1996 and 3
July 31, 1996.
Condensed consolidated statements of operations for the three 4
months ended October 31, 1996 and 1995.
Condensed consolidated statements of cash flows for the three 5
months ended October 31, 1996 and 1995.
Notes to unaudited condensed consolidated financial statements. 6
Item 2 Management's discussion and analysis of financial condition 7-13
and results of operations.
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 13-14
Item 5 Other Information 14
Item 6 Exhibits 14
</TABLE>
Signatures
2
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ARI NETWORK SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
October 31 July 31
1996 1996
(Unaudited) (Audited)
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<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $594 $372
Accounts receivable 1,210 1,306
Prepaid expenses 76 186
-------- --------
Total current assets 1,880 1,864
Equipment & leasehold improvements, net of
accumulated depreciation and amortization 236 352
Network systems-net 9,024 9,263
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Total Assets $11,140 $11,479
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $627 $818
Line of credit with shareholders 1,465 3,500
Other current liabilities 1,089 894
Current portion of capital lease obligations 110 64
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Total current liabilities 3,291 5,276
Capital lease obligations 19 22
Shareholders' equity:
Common stock 14 13
Additional paid-in capital 79,620 76,823
Accumulated deficit (71,804) (70,655)
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Total shareholders' equity 7,830 6,181
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Total Liabilities & Shareholders' Equity $11,140 $11,479
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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ARI NETWORK SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31
1996 1995
<S> <C> <C>
Net revenues:
Network and other services $1,328 $1,056
Software and development 355 81
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Total net revenues 1,683 1,137
Operating Expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown below):
Network and other services 268 207
Software and development 213 16
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Total variable costs of products and services sold 481 223
Depreciation and amortization 528 385
Network operations 229 223
Selling, General & Administrative 1,316 1,089
Network and product development 340 441
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Operating expenses before amounts capitalized 2,894 2,361
Less capitalized expenses* (152) (320)
Total net operating expenses 2,742 2,041
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Operating Loss (1,059) (904)
Other expense (90) (53)
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Net loss ($ 1,149) ( $ 957)
========= =========
Average common shares outstanding 13,726 12,187
Net loss per common share ($0.08) ($0.08)
</TABLE>
* In accordance with FASB 86, includes a portion of network and product
development expense and other operating expenses directly related to the
development process.
See notes to unaudited condensed consolidated financial statements.
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ARI NETWORK SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31
--------------------
1996 1995
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<S> <C> <C>
Cash flow from operating activities:
Net loss ($1,149) $(957)
Amortization of network system 391 243
Depreciation and other amortization 137 142
Net change in operating assets 207 508
Net change in operating liabilities 4 (302)
--------- ---------
Net cash used in operating activities (410) (366)
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (21) (3)
Network system costs capitalized (93) (320)
Other 0 2
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Net cash used in investing activities (114) (321)
Cash flows from financing activities:
Payment of capital lease obligations (16) (19)
Proceeds from issuance of common stock 2,797 0
Borrowings (repayments) under line of credit (2,035) 700
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Net cash provided by financing activities 746 681
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Net change in cash and cash equivalents 222 (6)
Beginning cash and cash equivalents balance 372 236
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Ending cash and cash equivalents balance $594 $230
========= =========
Cash paid for interest $90 $56
========= =========
Noncash investing and financing activities
Capital lease obligations incurred for:
Network System Equipment 59
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for fiscal year
end 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 months ended
October 31, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending July 31, 1997. For further information,
refer to the financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended July 31, 1996.
2. NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during each period.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Total revenue for the quarter ended October 31, 1996 increased $546,000 or 48%
as compared to the same period last year, representing the third consecutive
quarter of year-over-year revenue improvement. Nonrecurring revenues increased
183% as the Company received software license fees from ARISE(TM) and
Meppel(TM), its recently released Internet enabled electronic commerce software
applications. Recurring revenue increased by 19% over the first quarter last
year reflecting a shift in the nature of revenues in the Transportation
Industry from nonrecurring file creation and systems analysis fees to recurring
maintenance and support fees. Transportation revenue in total increased 115%
over the same period last year.
The Company has a strategy of building a sustainable recurring revenue stream
in selected vertical markets for each of its primary services. Accordingly,
the Company reviews its revenue by two distinct classifications: recurring
versus nonrecurring revenue and revenue by vertical market.
The following tables set forth, for the periods indicated, certain revenue
information derived from the Company's unaudited consolidated financial
statements.
RECURRING VS. NON-RECURRING REVENUE
<TABLE>
<CAPTION>
Three Months Ended
October 31
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(In thousands)
<S> <C> <C>
1996 1995
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Recurring Revenue $1,117 $ 937
Non-recurring Revenue 566 200
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Total revenue $1,683 $1,137
========= =========
</TABLE>
Recurring revenue for the quarter ended October 31, 1996 increased $180,000 or
19% as compared to last year. Recurring revenues consist of network traffic
fees, maintenance and support fees, transaction fees and subscription fees.
The increase in recurring revenue was primarily due to the initiation of
maintenance and support services in the Transportation industry. Recurring
revenue represents 66% of total revenue for the quarter ended October 31, 1996,
as compared to 82% last year. Management believes the relationship of
approximately two thirds recurring revenue to one third non-recurring revenue
is desirable in order to establish an appropriate level of base revenue while
continuing to add new sales to potentially drive future increases in recurring
revenue. There can be no assurance that this revenue mix will not fluctuate
from quarter to quarter. See "Forward Looking Statements."
Non-recurring revenue for the quarter ended October 31, 1996 increased $366,000
or 183% as compared to last year. Non-recurring revenue is derived from the
sale of software and professional services. The increase in non-recurring
revenue for the three months ended October 31, 1996 is due to the sales of the
Internet enabled Windows(R) sales force automation application, ARISE(TM) and
an Internet enabled Windows(R) EDI transaction management product, Meppel(TM),
which includes a sales reporting module. ARISE(TM) was released in March,
1996, and Meppel(TM) was released in the first quarter of fiscal 1997. Early
feedback indicates the products, which have a contemporary look and feel, as
well as many powerful and easy to use capabilities tailored to customers'
needs, are being well received.
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VERTICAL MARKET REVENUE
<TABLE>
<CAPTION>
Three Months Ended
Revenue by October 31
Vertical Markets ----------------------
(In Thousands)
1996 1995
<S> <C> <C>
Agribusiness &
Related Industry
Revenue $1,076 $ 655
Publishing Revenue 314 311
Transportation Revenue 213 99
Other Revenue 80 72
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Total Revenue $1,683 $1,137
====== ======
</TABLE>
Agribusiness and Related Industries
Revenues in this area are derived from network traffic fees, maintenance and
support fees, subscription fees, software sales and professional services fees
charged to the Company's customers that market outdoor power and agricultural
equipment, seed, agricultural chemical and other related products.
Agribusiness and related industry revenues represent 64% of total revenue for
the three month period ended October 31, 1996, compared to 58% for the same
period one year ago. Management believes Agribusiness and related industry
revenue will continue to be a significant portion of the total revenue.
Revenues in the Agribusiness Industry for the three month period ending October
31, 1996 increased 64% from $655,000 in fiscal 1996 to $1,076,000 in fiscal
1997. The increases in revenue are due to the sale of the Company's Internet
enabled Windows(R) sales force automation application, known as ARISE(TM) and
an Internet enabled Windows(R) EDI transaction management product known as
Meppel(TM), which includes a sales reporting module. ARISE(TM) was released in
March, 1996. ARISE(TM) sales for the first quarter of fiscal 1997 include
customization fees for the conversion of Hoffmann La Roche from the Company's
DOS product, and software license fees to Pharmacia & Upjohn. Pharmacia &
Upjohn is a current customer in the Animal Health market that has committed to
conversion from the DOS product to the new ARISE(TM) product. The company
expects to realize significant customization revenue from the sale to Pharmacia
& Upjohn and other new ARISE(TM) sales during the remainder of the year. As
this is a forward looking statement, future actual results may differ. See
"Forward Looking Statements." The Company converted approximately one-third of
its customers to the Meppel EDI product after its release in first quarter
fiscal 1997.
Recurring revenues from the Agribusiness industry, derived from network traffic
fees and maintenance and support fees, increased by 4% over last year for the
three month period ended October 31. The increase in recurring revenues is a
result of more transactions being transmitted over the network by the Company's
base of agrichemical and equipment manufacturers and distributors. Network
traffic activity increases as a result of increased number of transactions and
the addition of new distributors to the network.
The manufacturers in the AgriChemical/Crop Protection sector of Agribusiness
Industry have formed a jointly owned company known as "RAPID" to develop an
industry-wide Electronic Commerce network. Among its capabilities will be a
directory of physical locations and electronic commerce trading partners in the
so called "allied industries," which include specialty chemicals, seed, feed,
fertilizer, etc., which are not part of the crop protection sector but are
closely related to it. The Company and RAPID have reached an understanding in
which, with RAPID's endorsement, the Company will create and maintain this new
directory ("allied directory") for three years. The Company's creation and
maintenance of the allied directory will result in non-recurring revenues from
file conversion and recurring revenues from file maintenance. The Company
already maintains a similar directory for use in the Crop Protection industry.
The plans for the RAPID network also contemplate a PC subscriber interface,
communications connectivity, electronic mail, file transfer, bulletin board
services, Internet access, EDI/EFT and connectivity to third party value added
service providers, such as the Company. EDS has been retained by RAPID to
develop the end user software and network. Management believes that the
Company has developed a positive relationship with RAPID and that the Company
will
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be able to grow its revenue in the Agribusiness industry. However, there can be
no assurance that the Company's relationship with RAPID will be entirely or
primarily cooperative rather than competitive. As these are forward looking
statements, future actual results may differ. See "Forward Looking Statements."
In July 1996, the Company formed an alliance with Dun & Bradstreet Information
Services ("D&B") to market a standard electronic commerce identification number
("EC-ID(TM)") that will allow companies to precisely identify each business
location involved in an electronic commerce transaction. The "allied industry"
database referred to above will be the first commercial use of the EC-ID(TM).
Management expects that the Company will work with D&B to develop the market for
this service in other industries based on its initial success in the "allied
industry" context. As this is a forward looking statement, actual results may
differ. See "Forward Looking Statements."
Publishing Revenue
Revenues in the publishing sector are derived from connect time fees and
subscription fees charged to the Company's Newsfinder(R) customers.
Newsfinder(R) manages the approximately 20,000 news stories per week output of
the Associated Press ("AP"), providing access to some 800 publishers with
approximately 1,300 weekly and monthly newspapers. Revenues for the three month
period ended October 31, 1996 remain relatively flat at $314,000 compared to
last years' $311,000. Publishing revenue represents 19% of total revenue for
the three month period ended October 31, 1996, compared to 27% for the
comparable period one year ago. Management believes revenue in this industry
will be generally flat with last year. As this is a forward looking statement,
actual results may differ. See "Forward Looking Statements."
During fiscal 1996, the Company developed an Internet-accessible version of its
Newsfinder(R) data management services for newspaper publishers. Management
expects the Internet to make access and use of the service faster and easier for
Newsfinder(R) customers. In February, 1996, the Company renewed its contract
with the AP for an additional five-year period. Under the terms of the contract
the Company provides a value-added version of the AP wire service, including the
new Internet-accessible version, to non-daily publications.
Transportation and Logistics Revenue
Revenues in the transportation sector are derived from maintenance and support
fees, transaction fees and professional service fees charged to the Association
of American Railroads for the creation and maintenance of the Customer
Identification File. Revenue in the Transportation industry increased 115% over
the comparable period last year. Revenue for the three month period ended
October 31, 1996 was $213,000 of which $174,000 was recurring revenue for
maintenance and support services, compared to $99,000 of primarily non-recurring
revenue for the same period last year. Last year's revenue was composed mainly
of non-recurring professional services revenue. Transportation industry revenue
represents 13% of total revenue for the three month period ended October 31,
1996, compared to 9% for the comparable period one year ago.
Other Revenue
Other revenue is $80,000 for the three month period ended October 31, 1996,
which is an increase of 11% from the comparable period last year. The increase
is due to customization of the ARISE(TM) product to FIserv, a leading outsource
data processing company serving the Banking industry. Management believes that
there will continue to be opportunities to provide its products and services
outside of its primary vertical markets, which it may elect to pursue on a
case-by-case basis. As this is a forward looking statement, actual results may
differ. See "Forward Looking Statements."
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OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's unaudited consolidated financial
statements.
<TABLE>
<CAPTION>
Three Months
Ended
October 31,
------------------
(In thousands)
1996 1995
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<S> <C> <C>
Operating expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown below) $ 481 $ 223
Network operations 229 223
Selling, General & Administrative 1,316 1,089
Network and product development 340 441
------ ------
Gross cash expenses 2,366 1,976
Depreciation and amortization 528 385
Less capitalized expenses (152) (320)
------ ------
NET OPERATING EXPENSES $2,742 $2,041
====== ======
</TABLE>
Net operating expenses for the three month period ended October 31, 1996
increased 34% from $2,041,000 in fiscal 1996 to $2,742,000 in fiscal 1997. The
increase in operating expenses for the three month period is due to increased
selling, general and administrative expense, increased amortization expense and
increased variable cost of products and services sold as a result of increased
revenue. Gross cash expenses for the three months ended October 31, 1996
increased 20% over the comparable period last year as compared to revenue
increases of 48%.
The increases in variable cost of products and services sold and selling expense
are directly attributable to the increase in sales. Variable cost of products
and services sold consists primarily of royalties, telecommunications and data
processing and temporary help fees. Temporary help is used by the Company in
connection with its database management services. Variable cost of products and
services sold as a percentage of revenue were 29% and 20% in the three months
ended October 31, 1996 and 1995, respectively. Variable cost of products and
services sold as a percentage of revenue will vary by quarter due to the product
sales mix. Variable cost of products and services sold as a percentage of
revenue was higher compared to last year due to increased software and
customization sales which have relatively higher variable costs. Management
expects margins in future quarters to be similar to the current quarter as a
result of the sales mix of recurring revenue representing approximately
two-thirds of revenue and non-recurring revenue representing approximately
one-third. As this is a forward looking statement, actual results may differ.
See "Forward Looking Statements."
Selling, general and administrative expense for the three month period increased
by 21% due to selling and commission expenses incurred in generating the
increased revenues as well as payroll and related recruiting fees for new hires.
Selling, general and administrative expense was lower last year due to open
positions in the areas of sales and administration, including the position of
chief executive officer.
For the three months ended October 31, 1996, depreciation and amortization
expense increased by 37%, which represents the beginning of amortization for the
ARISE(TM) and Meppel(TM) products and other related development projects. These
two products did generate revenue from software sales and customization in the
three month period ended October 31, 1996. The Company continues to invest in
equipment and technology. The cost of these investments has declined as a
result of the competitive nature of the environment and the reduced cost to
manufacture and maintain the equipment. During the three month period ended
October 31,1996, the Company invested in a mainframe upgrade, which has
approximately 20% more capacity, is environmentally safer and costs
approximately 30% less in ongoing maintenance and utilities compared to the old
mainframe.
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For the three months ended October 31, 1996, capitalized expenses decreased by
53% due to the completion of the ARISE(TM) and Meppel(TM) core products with
the focus of the development staff switching to software customization, which is
a variable cost of products and services sold. Customization will continue to
be significant; however, because development has started on an Internet enabled
Windows(R) electronic commerce application for parts ordering.
Network and software development expenditures for the three month period ended
October 31, 1996 have been focused on developing the Company's WINDOWS(R)
electronic commerce applications for parts ordering, ARISE(TM) enhancements,
and the Internet solution for Newsfinder(R). The sales force automation
product, ARISE(TM), was developed internally with tools acquired from a third
party. ARISE(TM) can be customized to support a range of information
management, information exchange, data base synchronization and other
productivity tools for field sales personnel. The EC platform product,
Meppel(TM), was developed utilizing third party tools and development staff. The
sales reporting application was the first module developed to utilize the new EC
platform. Last year's network and software development included expenditures
toward the ARISE(TM) product, as well as reengineering the Company's
telecommunications management systems to employ TCP/IP INTERNET transport
protocols and other INTERNET software standards for electronic commerce
services. Management anticipates that network and product development expense
and capitalized expenses will increase as a result of the Company investing in
development of the Internet enabled Windows(R) electronic commerce application
for parts ordering. As this is a forward looking statement, actual results may
differ. See "Forward Looking Statements."
OTHER ITEMS
Interest expense for the three months ended October 31, 1996, was $90,000,
compared to $53,000 a year ago. The increase in interest expense reflects the
Company's use of the credit lines with shareholders to finance operations and
development. This expense will fluctuate depending on the use and timing of
financing through lines of credit versus additional equity funding.
Net loss for the three month period ended October 31,1996 was higher than last
year by $192,000 or 20% due to the following five items: 1) variable cost of
products and services sold percentage, including royalty fees and development
costs, has increased as a result of one-third of total revenue being generated
from non-recurring software and customization sales, 2) selling, general and
administrative expenses increased as a result of hiring for positions which were
vacant last year, including the CEO and sales reps, 3) ARISE(TM) and Meppel(TM)
products were completed and amortization expense is being incurred, 4)
capitalization of expenses declined as a result of headcount in the network and
product development area being shifted to ARISE(TM) customization projects
(accounted for as variable cost of products and services sold) and to
maintenance and support projects, and 5) interest expense increased as a result
of utilizing the lines of credit with shareholders. Management believes that as
revenue growth continues, a greater percentage of the revenue will flow to the
bottom line. As this is a forward looking statement, actual results may differ.
See "Forward Looking Statements."
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant negative cash flows from its operating
activities. However, cash used in operating and investing activities has
decreased by 24% for the three month period ended October 31, 1996, as compared
to the same period last year. The Company will require significant increases to
cover fixed operating costs and to achieve a profitable level of operations. The
Company expects to continue to incur operating losses for the current fiscal
year ending July 31, 1997 and there can be no assurance that profitability will
be achieved thereafter. The Company also expects to continue to incur
significant expenditures for software development and network construction and
expansion. The Company's software development and network construction and
expansion costs and negative cash flow from operations historically have been
funded primarily from the sale of securities and currently from the lines of
credit with shareholders.
At October 31, 1996, the Company had cash and cash equivalents of approximately
$594,000 compared to approximately $372,000 at July 31, 1996. On November 15,
1995 the Company filed a registration statement with the Securities and Exchange
Commission for the sale of up to two million shares of the Company's common
stock. Between January 31, 1996 and September 13, 1996 all two million shares
were sold with net proceeds to the Company of $4,625,000. The proceeds were
used to fund operations and repay portions of the outstanding revolving credit
lines.
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On December 2,1994, the Company executed a Loan Agreement with WITECH
Corporation ("WITECH") and QUAESTUS Limited Partnership ("QLP") providing the
Company with a $1,500,000 senior secured revolving line of credit facility (the
"Senior Line"). Interest on the Senior Line accrued at the rate of 2% over the
prime rate. On December 13, 1996, the Senior Line was repaid in full and
terminated. In order to repay the $1,465,000 of borrowings under the Senior
Line, $1,00,000 was raised by the sale of 444,444 shares of Company common stock
to the lenders. The remaining $465,000 was borrowed under the WITECH Line
described below.
The Company also has a line of credit with WITECH, (the "WITECH" Line) that has
been in place since October 4, 1993. The WITECH Line is in the amount of
$1,500,000. On April 20, 1996 the WITECH Line was amended to provide a Bridge
Loan of $500,000 accruing at the same rate as the other lines through June 30,
1996, at which time the rate was increased to an annual interest rate of prime
plus 6%. The WITECH Line was amended on November 5, 1996, to increase the
amount to $2,000,000 and eliminate the Bridge Loan. Interest due on the Bridge
Loan was lowered to the prime rate plus 2%, retroactive to August 1, 1996. This
interest adjustment has been reflected in the financial statements. The WITECH
Line expires on December 31, 1997 (extended from December 31, 1996 by amendment
dated November 5, 1996). Under the WITECH Line, the Company has issued a
commitment warrant to WITECH for the purchase of up to 500,000 shares of its
common stock at a price of $2.00 per share and 100,000 shares of its common
stock at a price of $2.25 per share (per amendment dated November 5, 1996). The
Company has also issued a usage warrant to WITECH for a maximum of 100,000
shares of its common stock at a price of $2.25 (per amendment dated November 5,
1996). As of December 13, 1996 there was $565,000 of borrowings under the
WITECH Line. Borrowings under the WITECH Line were used to pay a portion of the
Senior Line and for operating expenses.
The only financial covenant in the Senior Line and the WITECH Line is that the
Company must maintain a net worth (calculated in accordance with generally
accepted accounting principles) of at least $5.3 million (reduced from $6.5
million effective May 3, 1996). The Company has been and is currently, in
compliance with the financial covenant in the Agreement and currently expects to
comply with such covenant or obtain any required waivers or raise additional
equity, if necessary.
The Company will require additional financing during fiscal 1997 in order to
meet its requirements for operations and development investments. Management
believes that sufficient financing for fiscal 1997 will be available from the
sale of additional securities and from additional borrowings from existing
shareholders. On a long term basis, management believes that financing for the
Company's operations, including capital expenditures, will come principally from
cash generated from operations, the sale of additional equity or other third
party financing, capital leases, additional borrowings from shareholders and
other sources of capital if available. There can be no assurance that these
financing arrangements will occur.
FORWARD LOOKING STATEMENTS
Certain statements contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward looking statements.
Several important factors can cause actual results to materially differ from
those stated or implied in the forward looking statements. Such factors
include, but are not limited to the growth rate of the Company's selected market
segments, the positioning of the Company's products in those segments,
variations in demand for and cost of customer services and technical support,
customer adoption of Internet enabled Windows(R) applications and their
willingness to upgrade from DOS versions of software, the Company's ability to
establish and maintain strategic alliances, the Company's ability to manage its
costs, the Company's ability to manage its business in a rapidly changing
environment, the Company's ability to finance capital investments, and the
Company's ability to implement its acquisition strategy to increase growth.
Projected revenues are difficult to estimate because the Company's revenues and
operating results may vary substantially from quarter to quarter. The recurring
revenues of maintenance and subscription fees may be estimated based on the
number of subscribers to the Company's services but will be greatly impacted by
the renewal ratio which cannot be determined in advance. Recurring revenues from
network traffic fees and transaction fees are difficult to estimate prior to
the end of the quarter as it is determined by usage. The number of transactions
processed by the Company is a function of the number of subscribers and the
quantity of reportable events per subscriber. Reportable events include product
ordering, warranty claim processing, inventory and sales reporting, parts number
updates and price updates. The Company cannot impact or predict the volume of
transactions per customer.
Non-recurring revenue is also difficult to estimate. This revenue is generated
from software license fees, customized development and related professional
services. License fee revenue is based on contracts signed and product
delivered
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within the quarter. Non-recurring revenue is impacted by the time required to
close large license fee and development agreements, which cannot be predicted
with any certainty due to customer requirements and decision making processes.
Although the Company has recently introduced and plans to expand its Internet
enabled Windows(R) portfolio of products, the marketplace is highly competitive
and there can be no assurance that a customer will select the Company's software
and services over that of a competitor. The environment in which the Company
competes is characterized by rapid technological changes, dynamic customer
demands, and frequent product enhancements and product introductions. The
Company's current and potential competitors have greater financial, technical,
sales, marketing and advertising resources than the Company. The widespread
acceptance of the Internet may increase the usage of the Company's product
applications but exert pressures on the network traffic revenue.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 1996 Annual Meeting of Shareholders on December
3, 1996.
(b) Votes cast for the election of three directors to serve until the 1999
Annual Shareholder's Meeting were as follows:
<TABLE>
<CAPTION>
William H. Alverson Francis Brzezinski Eric P. Robison
<S> <C> <C> <C> <C> <C>
For 11,430,676 For 11,430,676 For 11,430,676
Against 449,615 Against 449,615 Against 449,615
Withheld 0 Withheld 0 Withheld 0
Abstain 0 Abstain 0 Abstain 0
Broker Non-Vote 0 Broker Non-Vote 0 Broker Non-Vote 0
</TABLE>
Votes cast to amend the Company's Stock Option Plan to increase the number of
shares available for issuance from 120,000 to 300,000, to decrease the number
of shares granted for attendance at Board meetings from 1,500 to 1,000 and the
number of shares granted for attendance at Committee meetings from 500 to 350,
to provide authority to Board to grant additional options to directors and to
extend term of option beyond the expiration of the director's tenure on the
Board were as follows:
For 11,130,554
Against 458,522
Withheld 0
Abstain 29,814
Broker Non-Vote 261,401
Votes cast to amend the Company's Incentive Stock option Plan to increase the
number of shares available for issuance from 1,500,000 to 2,000,000, to provide
that all employees of the Company are eligible to receive options under the
plan and to increase the number of shares that can be granted to any individual
employee in a single year from 250,000 to 350,000 were as follows:
For 9,403,258
Against 2,186,718
Withheld 0
Abstain 28,914
Broker Non-Vote 261,401
13
<PAGE> 14
Votes cast to ratify the appointment of Ernst & Young LLP as the Company's
auditors for the year ending July 31, 1997 were as follows:
For 11,855,740
Against 21,901
Withheld 0
Abstain 2,650
Broker Non-Vote 0
ITEM 5. OTHER INFORMATION
On October 8, 1996, the Board of Directors accepted the resignation of Mr.
Mitchell Fromstein and Mr. Gerald Kahn as directors of the Company, effective
October 9, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) 10.1 Amendment Number 9 to Loan Agreement for Extension dated
November 5, 1996
10.2 Stock Purchase and Termination of Loan Amendment dated
December 13, 1996
10.3 Amended Director Stock Option Plan dated October 8, 1996
10.4 Amended Incentive Stock Option Plan dated October 8, 1996
(b) No reports on Form 8K were filed during the quarter for which this
report was filed.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARI Network Services, Inc.
(Registrant)
Date: December 13, 1996 /s/ Brian E. Dearing
-------------------------------------------
Brian E. Dearing, President & CEO
Date: December 13, 1996 /s/ Lynn M. Hafemeister
--------------------------------------------
Lynn M. Hafemeister, Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NUMBER NINE TO LOAN AGREEMENT
THIS AMENDMENT to the Loan Agreement entered into as of October 4, 1993,
between ARI NETWORK SERVICES, INC. ("ARI") and WITECH CORPORATION ("WITECH") as
amended (the "Loan Agreement") is entered into as of the 5th day of November,
1996 between ARI and WITECH.
BACKGROUND
This Amendment to the Loan Agreement reflects the mutual understanding and
agreement of the parties to amend the Loan Agreement regarding the provision by
WITECH of a revolving credit facility to ARI.
NOW THEREFORE, the parties agree as follows:
1. Paragraph 2.2(a) is amended to read as follows: "(a) Two Million Dollars
($2,000,000) or". The "Bridge Loan" referenced in Amendment Number Seven to the
Loan Agreement shall bear interest at the rate per annum equal to the Prime Rate
plus 2.0%, retroactive to August 1, 1996.
2. In Exhibit 1.1 in the definition of "Total Loan Commitment" on page
1.1-4, the reference to "One Million Five Hundred Thousand Dollars ($1,500,000)"
is deleted and "Two Million Dollars ($2,000,000)" is substituted therefor.
3. In Exhibit 2.2(a), the reference to $1,500,000.00" is deleted and
$2,000,000.00" is substituted therefor.
4. In Exhibit 1.1 in the definition of "Termination Date" and in the
Revolving Credit Note, the references to December 31, 1996 is deleted and
December 31, 1997 is substituted therefor.
5. The number of shares available for purchase under the Commitment Warrant
described in Paragraph 2.8 of the Loan Agreement is hereby increased to a total
of Six Hundred Thousand (600,000). An Amended and Restated Commitment Warrant
is being executed and delivered contemporaneously herewith.
6. As further consideration hereunder, upon execution hereof, ARI is
delivering to WITECH a Usage Warrant for up to 100,000 Shares of Common Stock of
ARI.
7. Subject to the amendments described herein, the Loan Agreement and
associated documents and agreements remain in full force and effect.
A-1
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers as of the date first
above written.
WITECH CORPORATION ARI NETWORK SERVICES, INC.
By: /s/ Francis Brzezinski By: /s/ Brian Dearing
------------------------------- -------------------------------------
Francis Brzezinski, President Brian Dearing,
President and Chief Executive Officer
A-2
<PAGE> 3
AMENDED AND RESTATED COMMITMENT WARRANT
This is to certify that for value received, including, without limitation,
the agreement of WITECH Corporation ("WITECH") to enter into a Loan Agreement
dated October 4, 1993, as amended (the "Loan Agreement") with ARI NETWORK
SERVICES, INC. (the "Company"), WITECH is entitled to purchase shares of the
Company's $.001 par value Common Stock, subject to the terms and conditions more
fully set forth herein.
1. Definitions. This Warrant is the "Commitment Warrant" referred to in
the Loan Agreement. Except as otherwise provided herein, capitalized terms used
herein shall be defined as provided in the Loan Agreement.
2. Number of Shares. This Warrant shall permit WITECH to purchase Six
Hundred Thousand (600,000) shares of Common Stock, as adjusted hereunder (the
"Underlying Shares"). In the event of any stock dividend, stock split, reverse
stock split, recapitalization or reorganization or any similar transaction, the
number of shares of the Common Stock that the holder hereof may acquire upon
exercise hereof and the Exercise Price shall be proportionately and
appropriately adjusted.
3. Exercise Price. The Underlying Shares of the Common Stock that may be
acquired by WITECH pursuant to the exercise of this Warrant may be acquired by
WITECH at a per share price of Two Dollars ($2.00) with respect to 500,000
Underlying Shares and at a per share price of $2.25 with respect to 100,000
Underlying Shares (the "Exercise Price").
4. Adjustment of Exercise Price. In the event that ARI issues any shares
of Common Stock (other than to directors, employees or former employees of the
Company upon the exercise of stock options) ("Newly Issued Common Stock") or
warrants (other than the Usage Warrant) or other securities convertible into
Common Stock (other than stock option grants to directors or employees) ("Newly
Issued Securities") at any time while this Warrant is outstanding and the price
per share of such Newly Issued Common Stock or the exercise price per share
under such Newly Issued Securities is less than the Exercise Price hereunder,
the Exercise Price hereunder with respect to any Underlying Shares shall be
reduced to the per share price of such Newly Issued Common Stock or the exercise
price under such Newly Issued Securities.
5. Exercise. This Warrant may be exercised at any time on or before
September 30, 2000, as to all or part of the Underlying Shares. To exercise
this Warrant, WITECH shall present to the Company this Warrant, together with
the Exercise Price for the number of Underlying Shares to be purchased, in cash
or by certified check or bank draft drawn on immediately available funds,
whereupon this Warrant shall be exercised to the extent specified, and WITECH
shall be the holder of record of the number of shares of Common Stock purchased.
Certificates evidencing such shares shall be delivered to WITECH within a
reasonable time but not exceeding ten (10) days after this Warrant shall have
been exercised as provided herein.
<PAGE> 4
6. Representations and Warranties. The Company hereby represents and
warrants to WITECH as follows:
(a) The Company has full corporate power and authority to execute this
Warrant and perform its obligations hereunder.
(b) The execution and delivery of this Warrant and the consummation of the
transactions contemplated hereby have been duly and validly authorized
by all necessary corporate action on the part of the Company. This
Warrant has been duly executed by properly authorized officers of the
Company, and constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
(c) Neither the execution and delivery of this Warrant nor the
consummation of the transactions contemplated hereby will violate or
result in any violation of or be in conflict with or constitute a
default under any term or condition contained in any judgment, decree,
order, statute, rule or governmental regulation applicable to the
Company or any of its subsidiaries or any of its or their assets.
(d) The Company shall at all times from the date hereof until such time as
its obligations hereunder terminate, reserve for issuance upon
exercise of this Warrant, that number of shares of the Common Stock
equal to the maximum number of shares of the Common Stock which may be
acquired pursuant hereto. Any shares issued pursuant to the exercise
of this Warrant shall be duly and validly issued, fully paid and
nonassessable (other than as provided in Section 180.0622(2)(b) of the
Wisconsin Statutes and the case law interpreting such statute), shall
be free and clear of all liens, security interests, charges, claims or
encumbrances, and shall not have been issued in violation of any
preemptive rights of any stockholders of the Company.
7. Miscellaneous.
(a) This Warrant has not been registered under the Securities Act of 1993
as amended (the "Act"), but rather has been issued pursuant to an
exemption therefrom. This Warrant may not be transferred or assigned
except as expressly permitted herein, and then only in accordance with
a valid registration statement or an exemption form registration under
the provisions of the Act.
(b) This Warrant shall not entitle the holder hereof to any rights as a
stockholder of the Company, either at law or in equity; specifically,
this Warrant shall not entitle the holder hereof to vote on any matter
presented to the stockholders of the Company or to any notice of any
meetings of Stockholders or any other proceedings of the Company.
2
<PAGE> 5
(c) If any term, provision, covenant or restriction contained in this
Warrant is held by a court or a federal regulatory agency of competent
jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this
Warrant shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that this Warrant will not permit the
holder hereof to acquire the full number of shares of the Common Stock
provide in Paragraph 2, above, it is the express intention of the
Company to allow the holder hereof to acquire such lesser number of
shares as may be permissible, without any amendment or modification
hereof.
(d) This Warrant shall in all respects be governed by and construed in
accordance with the internal laws of the State of Wisconsin.
(e) This Warrant may not be modified, amended, altered or supplemented,
except upon the execution and delivery of a written agreement executed
by the Company and the holder hereof.
(f) This Warrant constitutes the entire agreement of WITECH and the
Company with respect to the matters contained herein, and supersedes
all prior agreements and understandings between the parties with
respect thereto, including the Amended and Restated Commitment
Warrant issued to WITECH dated October 18, 1995 which is superseded
hereby.
IN WITNESS WHEREOF, the Company has executed and delivered this Warrant
effective as of this 5th day of November, 1996.
ARI NETWORK SERVICES, INC.
By:/s/ Brian Dearing
-------------------------------------
Brian Dearing
President and Chief Executive Officer
Attest:
By:/s/ Mark L. Koczela
-------------------------------------
Mark L. Koczela, Secretary
3
<PAGE> 6
USAGE WARRANT
This is to certify that for value received, including, without limitation,
the agreement of WITECH Corporation ("WITECH") to enter into an Amendment
Number Nine to Loan Agreement on even date herewith with ARI NETWORK SERVICES,
INC. (the "Company"), WITECH is entitled to purchase shares of the Company's
$.001 par value Common Stock, subject to the terms and conditions more fully
set forth herein. Such Loan Agreement, as amended, is referred to herein as
the "Loan Agreement."
1. Number of Shares. This Warrant shall permit WITECH to purchase from
the Company at any time or from time to time during the term hereof the
following number of shares of Common Stock (the "Usage Shares") of the Company:
<TABLE>
<CAPTION>
If the maximum amount of borrowings
under the Loan Agreement at any time The number of
hereafter exceeds Usage Shares shall be
----------------------------------------------- ---------------------
<S> <C>
$1.0 million but does not exceed $1.25 million 25,000
$1.25 million but does not exceed $1.50 million 50,000
$1.50 million but does not exceed $1.75 million 75,000
$1.75 million 100,000
</TABLE>
In the event of any stock dividend, stock split, reverse stock split,
recapitalization or reorganization or any similar transaction, the number of
shares of the Common Stock that the holder hereof may acquire upon exercise
hereof and the Exercise Price shall be proportionately and appropriately
adjusted.
2. Exercise Price. The exercise price for the Usage Shares that may be
acquired by WITECH pursuant to the exercise of this Warrant shall be $2.25 per
share (the "Exercise Price").
3. Adjustment of Exercise Price. In the event that ARI issues any shares
of Common Stock (other than to directors, employees or former employees of the
Company upon the exercise of stock options) ("Newly Issued Common Stock") or
warrants (other than the Amended and Restated Commitment Warrant) or other
securities convertible into Common Stock (other than stock option grants to
directors or employees) ("Newly Issued Securities") at any time while this
Warrant is outstanding and the price per share of such Newly Issued Common Stock
or the exercise price per share under such Newly Issued Securities is less than
the Exercise Price hereunder, the Exercise Price hereunder with respect to any
Usage Shares shall be reduced to the per share price of such Newly Issued Common
Stock or the exercise price under such Newly Issued Securities.
4. Exercise. This Warrant may be exercised at any time on or before
September 30, 2000, as to all or part of the Usage Shares. To exercise this
Warrant, WITECH shall present to the Company this Warrant, together with the
Exercise Price for the number of Usage Shares to
<PAGE> 7
be purchased, in cash or by certified check or bank draft drawn on immediately
available funds, whereupon this Warrant shall be exercised to the extent
specified, and WITECH shall be the holder of record of the number of shares of
Common Stock purchased. Certificates evidencing such shares shall be delivered
to WITECH within a reasonable time but not exceeding ten (10) days after this
Warrant shall have been exercised as provided herein.
5. Representations and Warranties. The Company hereby represents and
warrants to WITECH as follows:
(a) The Company has full corporate power and authority to execute this
Warrant and perform its obligations hereunder.
(b) The execution and delivery of this Warrant and the consummation of the
transactions contemplated hereby have been duly and validly authorized
by all necessary corporate action on the part of the Company. This
Warrant has been duly executed by properly authorized officers of the
Company, and constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
(c) Neither the execution and delivery of this Warrant nor the
consummation of the transactions contemplated hereby will violate or
result in any violation of or be in conflict with or constitute a
default under any term or condition contained in any judgment, decree,
order, statute, rule or governmental regulation applicable to the
Company or any of its subsidiaries or any of its or their assets.
(d) The Company shall at all times from the date hereof until such time as
its obligations hereunder terminate, reserve for issuance upon
exercise of this Warrant, that number of shares of the Common Stock
equal to the maximum number of shares of the Common Stock which may be
acquired pursuant hereto. Any shares issued pursuant to the exercise
of this Warrant shall be duly and validly issued, fully paid and
nonassessable (other than as provided in Section 180.0622(2)(b) of the
Wisconsin Statutes and the case law interpreting such statute), shall
be free and clear of all liens, security interests, charges, claims or
encumbrances, and shall not have been issued in violation of any
preemptive rights of any stockholders of the Company.
6. Miscellaneous.
(a) This Warrant has not been registered under the Securities Act of 1993
as amended (the "Act"), but rather has been issued pursuant to an
exemption therefrom. This Warrant may not be transferred or assigned
except as expressly permitted herein, and then only in accordance with
a valid registration statement or an exemption form registration under
the provisions of the Act.
2
<PAGE> 8
(b) This Warrant shall not entitle the holder hereof to any rights as a
stockholder of the Company, either at law or in equity; specifically,
this Warrant shall not entitle the holder hereof to vote on any matter
presented to the stockholders of the Company or to any notice of any
meetings of Stockholders or any other proceedings of the Company.
(c) If any term, provision, covenant or restriction contained in this
Warrant is held by a court or a federal regulatory agency of competent
jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this
Warrant shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that this Warrant will not permit the
holder hereof to acquire the full number of shares of the Common Stock
provide in Paragraph 1, above, it is the express intention of the
Company to allow the holder hereof to acquire such lesser number of
shares as may be permissible, without any amendment or modification
hereof.
(d) This Warrant shall in all respects be governed by and construed in
accordance with the internal laws of the State of Wisconsin.
(e) This Warrant may not be modified, amended, altered or supplemented,
except upon the execution and delivery of a written agreement executed
by the Company and the holder hereof.
(f) This Warrant constitutes the entire agreement of WITECH and the
Company with respect to the matters contained herein, and supersedes
all prior agreements and understandings between the parties with
respect thereto.
IN WITNESS WHEREOF, the Company has executed and delivered this Warrant
effective as of this 5th day of November, 1996.
ARI NETWORK SERVICES, INC.
By:/s/ Brian Dearing
------------------------------------
Brian Dearing
President and Chief Executive Officer
Attest:
By:/s/ Mark L. Koczela
------------------------------
Mark L. Koczela, Secretary
3
<PAGE> 1
EXHIBIT 10.2
STOCK PURCHASE AND TERMINATION OF
LOAN AGREEMENT
This Agreement is made this 13th day of December, 1996, by and among ARI Network
Services, Inc. (The "Company"), QUAESTUS Limited Partnership ("QLP") and WITECH
Corporation ("WITECH").
1. Stock Purchase. QLP agrees to pay to the Company Three Hundred Thirty
Three Thousand Dollars ( $333,000) to purchase One Hundred Forty Eight
(148,000) shares of Common Stock of the Company. WITECH agrees to pay
to the Company Six Hundred Sixty Seven Thousand Dollars ($667,000) to
purchase Two Hundred Ninety Six Thousand Four Hundred and Forty-four
(296,444) Shares of Common Stock of the "Shares." The Company agrees
to deliver certificates for the Shares within five (5) business days,
which certificates shall bear a legend relating to the restriction on
transfer imposed by applicable law.
2. Acknowledgments. QLP and WITECH each acknowledge that the Shares have
not been registered under the Securities Act of 1933, as amended, and
each represents and warrants to and agrees with the Company as
follows:
a) It is acquiring the Shares for its own account and not with a
view to the distribution thereof.
b) It will not offer, sell, pledge or otherwise dispose of the
Shares except pursuant to an effective registration statement or
an exemption from registration under the Securities Act.
3. Loan Pay-off. The Company agrees to pay in full all principal,
interest and other amounts payable under that certain Loan Agreement
(the "Loan Agreement") dated December 2, 1994, as amended, by and
among the parties hereto. The amount so payable is agreed to be One
Million Four Hundred Sixty Five Thousand Seventy Three Dollars and
Twenty-five Cents ($1,465,073.25) plus accrued interest as of the date
hereof. The Company may apply all or any portion of the purchase
price of the Shares toward payment of such amount. Upon payment
thereof, the Loan Agreement shall be terminated and of no further
force or effect.
1
<PAGE> 2
4. Closing. The Purchase and sale of the Shares and the pay-off of the
Loan Agreement shall occur simultaneously upon execution hereof.
5. Piggyback Registration Rights.
(a) If at anytime the Company proposes to register any shares of
Common Stock under the Securities Act of 1933 (the "Act") for sale for cash
(otherwise than in connection with the registration of securities issuable
pursuant to an employee stock option, director stock option, stock purchase
or similar plan or pursuant to a merger, exchange offer or in a transaction
of the type specified in Rule 145(a) under the Act), the Company shall give
WITECH and QLP (individually an "Investor" or collectively the "Investors")
notice of such proposed registration at least thirty (30) days prior to the
filling of the registration statement. At the written request of either
Investor delivered to the Company within fifteen (15) days after the
receipt of the notice from the Company, which request shall state the
number of Shares that the Investor wishes to sell or distribute publicly
under the registration statement proposed to be filed by the Company, the
Company shall use its reasonable best efforts to register under the Act
such Shares, and to cause such registration (the "Piggyback Registration")
to become and remain effective as provided in Paragraph 6, below.
(b) If a Piggyback Registration is an underwritten primary
registration on behalf of the Company, and the managing underwriters
thereof advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering, the Company will include in such
registration (i) first, the securities the Company proposes to sell and
(ii) second, the securities the Investor(s) and any other stockholder of
the Company proposes top sell in proportion to the number of shares such
proposes to sell.
(c) If a Piggyback Registration is an underwritten secondary
registration on behalf of holders of the Company's securities, and the
managing underwriters thereof advise the Company in writing that in their
opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering, the
Company will include in such registration the securities Investor(s) and
any other stockholders of the Company proposes to sell in proportion to the
number of shares each proposes to sell. In the event the Company
subsequently desires to participate in such a registration of securities,
the provisions of Section 5(b) (and not of this Section 5 (c) shall apply
with respect to determining priority on such registration.
2
<PAGE> 3
6. Registration Covenants of the Company. In the event that Investors
elect to exercise their registration rights, the Company covenants and
agrees that the Company will use its reasonable best efforts to effect
the registration and cooperate in the sale of the Shares to be
registered (the "Registered Shares") and will as expeditiously as
possible:
a) prepare and file with the SEC a registration statement with
respect to the Registration Shares (as well as any necessary
amendments or supplements thereto) (a "Registration Statement") which
Registration Statement will state that the holders of Registration
Shares covered thereby may sell such Registration Shares either under
such Registration Statement or pursuant to Rule 144 (or any similar
rule then in effect), and use its reasonable best efforts to cause
such Registration Statement to become effective;
b) furnish to the Investor(s) copies of the Registration
Statement and any amendments or supplements thereto and any prospectus
forming a part thereof prior to filing, which documents will be
subject to the review of counsel for the Investors (but not approval
of such counsel except with respect to any statement in the
Registration Statement which relates to the Investor);
c) notify the Investor, promptly after the Company shall receive
notice thereof, of the time when said Registration Statement became
effective or when any amendment or supplement to any prospectus
forming a part of said Registration Statement has been filed;
d) notify the Investors promptly of any request by the SEC or any
state securities administrator for the amending or supplementing of
such Registration Statement or prospectus or for additional
information;
e) advise the Investors after the Company shall receive notice or
obtain knowledge thereof of the issuance of any order by the SEC or
any state securities administrator suspending the effectiveness of any
such Registration Statement or amendment thereto or of the initiation
or threatening of any proceeding for that purpose, and promptly use
its reasonable best efforts to prevent the issuance of any stop order
or to obtain its withdrawal promptly if such stop order should be
issued;
f) prepare and file with the SEC such amendments and supplements
to such Registration Statement and the prospectus forming a part
thereof as may be necessary to keep such Registration Statement
effective for the least of (i) a period of time necessary to permit
Investor(s) pursuant to such
3
<PAGE> 4
Registration to dispose of all of such Registration Shares, (ii) six
months and (iii) the maximum period of time permitted by law to keep
effective a registration statement, and comply with the provisions of
the Act with respect to the disposition of all securities covered by
such Registration Statement during such period in accordance with the
intended methods of dispositions by Investor(s) set forth in such
Registration Statement;
g) furnish to the Investors such number of copies of the
Registration Statement, each amendment and supplement thereto, the
prospectus included in such Registration Statement (including such
preliminary prospectus) and other documents as the Investors may
reasonably request in order to facilitate the disposition of the
Registration Shares;
h) use its reasonable best efforts to register or qualify the
Registration Shares under such other securities or blue sky laws of
jurisdictions as determined by the underwriter after consultation with
the Company and the Investors and do any and all others acts and
things which may be reasonably necessary or advisable to enable the
Investors to consummate the disposition in such jurisdictions of the
Registration Shares (provided that the Company will not be required to
(i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this paragraph,
(ii) subject itself to taxation in any such jurisdiction or (iii)
consent to general service of process in any such jurisdiction);
i) notify the Investors at any time when a prospectus relating
thereto is required to be delivered under the Act, of the happening of
any event as a result of which such Registration Statement contains
an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading and, at the request of the Investors, prepare a
supplement or amendment to such Registration Statement so that such
Registration Statement will not contain, to the Company's knowledge,
an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading;
4
<PAGE> 5
j) cause all Registration Shares to be listed on each securities
exchange on which similar securities issued by the Company are then
listed or, if similar securities are not then listed, take all
reasonable action either to list the Registration Shares on a
securities exchange or facilitate the reporting of the securities on
the National Association of Securities Dealers, Inc. Automated
Quotation System;
k) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other
actions as the investors or the underwriters, if any, reasonably
request in order to expedite or facilitate the disposition of the
Registration Shares;
l) make available for inspection by the Investors, any
underwriter participating in any disposition pursuant to such
Registration Statement, and any attorney, accountant or other agent
retained by the Investors or such underwriter, all financial and other
records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply
all information reasonably requested by the Investors, such
underwriter, attorney, accountant or agent in connection with such
Registration Statement; and
m) Either Investor may assign all or any part of its rights under
this Section 6 to anyone to whom such Investor transfers the Shares.
Any registration of Investor's Shares may include shares of the
Company's Common Stock owned by other shareholders of the Company with
demand and/or piggyback registration rights.
7. Conditions. If the Company determines, in its good faith judgment
that because of the existence of, or in anticipation of, any
acquisition or financing activity, the unavailability of any required
financial statements, or the existence of any other material
non-public information (a "Disadvantageous Condition"), it would be
significantly disadvantageous to the Company for the Registration
Statement to be maintained effective, or to be filed and become
effective, or for Registration Shares to be sold under the
Registration Statement, then anything herein to the contrary
notwithstanding, the Company shall be entitled, until such
Disadvantageous Condition no longer exists, to (i) cause such
Registration Statement to be withdrawn and the effectiveness of such
Registration Statement to be delayed or terminated; (ii) notify
Investors not to make any sales under the Registration Statement; or
(iii) in the event no Registration Statement has yet been filed, to
refuse to file any such
5
<PAGE> 6
Registration Statement, upon receipt of any notice of a
Disadvantageous Condition and until notified by the Company that such
Disadvantageous Condition no longer exists, the Investors must
discontinue offers or sales of Registration Shares.
8. Indemnification and Contribution. In connection with the registration
of the Registration Shares, the Company and the Investors will enter
into customary indemnification and contribution arrangements with
respect to information provided by each of them.
9. Investors Cooperation in Registration. In connection with a
registration of the Shares, Investors will (a) cooperate with the
Company and the underwriter for the Registration shares, if any, in
preparing the Registration Statement and execute all such agreements
as the underwriter may deem reasonably necessary, (b) promptly supply
the Company and the underwriter with all information, documents,
representations and agreements as the underwriter or the Company may
deem reasonably necessary, (c) discontinue sales of the Registration
Shares upon notification of any stop order or suspension of the
effectiveness of the Registration Statement, (d) notify the Company
immediately upon any change in the plan of distribution or other
information concerning the Investors described in the prospectus, and
(e) discontinue use of any prospectus following notification by the
Company that the prospectus must be amended or supplemented.
10. Expenses. The Company shall pay all of the expenses in connection
with the registration of Registration Shares pursuant to the exercise
of these demand registration rights, including, without limitation,
costs of complying with federal and state securities laws and
regulations, attorney's and accounting fees of the Company, printing
expenses and Federal and State filing fees, except for transfer taxes,
underwriting commissions and discounts, and fees and expenses of
counsel for the Investors.
11. Registration Period Defined. For purposes hereof, the term
"Registration Period" shall mean the period commencing the date of
this agreement through December 31, 1998.
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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the
date first above written.
ARI NETWORK SERVICES
By: /s/ Brian Dearing
---------------------------------------
Brian E. Dearing
President and Chief Executive Officer
QUAESTUS LIMITED PARTNERSHIP
By: /s/ Richard Weening
--------------------------------------
Richard Weening, Managing Partner
WITECH CORPORATION
By: /s/ Francis Brzezinski
--------------------------------------
Francis Brzezinski, President
<PAGE> 1
EXHIBIT 10.3
ARI NETWORK SERVICES, INC.
1993 DIRECTOR STOCK OPTION PLAN
(Amended and Restated as of October 8, 1996)
1. PURPOSE OF THE PLAN
The purpose of the Plan is to attract and retain superior Directors, to
provide a stronger incentive for such Directors to put forth maximum effort for
the continued success and growth of the Company and its Subsidiaries and, in
combination with these goals, to encourage stock ownership in the Company by
Directors.
2. DEFINITIONS
Unless the context otherwise requires, the following terms shall have the
meanings set forth below:
(a) "Administrator" shall mean any committee of the Board of Directors or
any executive officer or officers of the Company designated by the
Board of Directors.
(b) "Board of Directors" shall mean the entire board of directors of the
Company, consisting of both Employee and non-Employee members.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Company" shall mean ARI Network Services, Inc., a Wisconsin
corporation.
(e) "Director" shall mean an individual who is a member of the Board of
Directors and is not an Employee.
(f) "Disability" shall mean a physical or mental incapacity which results
in a Director no longer serving as a member of the Board of Directors.
(g) "Effective Date" shall mean May 21, 1993, or such other date as the
Board of Directors may establish as the Effective Date.
(h) "Employee" shall mean an individual who is employed by the Company or
a Subsidiary.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Market Price" shall mean the average of the highest and lowest sale
prices of the Shares as reported on the National Association of
Securities Dealers, Inc. Automated Quotation - National Market System
("NASDAQ"). However, if at any time the Shares are listed on any
exchange, "Market Price" shall mean the average of the highest and
lowest prices at which
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Shares are sold on such exchange. In the absence of reported sales on
NASDAQ or on such exchange on any trading date, "Market Price" shall
mean the average of the reported closing bid and asked prices for the
Shares on NASDAQ or such exchange on such date.
(k) "Option" shall mean an option which does not comply with the
provisions of Section 422 of the Code and which is granted under the
Plan to purchase Shares.
(l) "Option Agreement" shall mean the agreement between the Company and a
Director whereby an Option is granted to such Director.
(m) "Plan" shall mean this 1993 Director Stock Option Plan.
(n) "Share" shall mean a share of the $0.001 par value common stock of the
Company.
(o) "Subsidiary" shall mean a subsidiary corporation of the Company as
defined in Section 424(f) of the Code.
(p) "Triggering Event" shall mean the first to occur of any of the
following:
(1) the acquisition (other than from the Company), by any person,
entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act), directly or indirectly, of
beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of 20% or more of the then outstanding shares of
common stock of the Company or voting securities representing 20%
or more of the combined voting power of the Company's then
outstanding voting securities entitled to vote in the election of
directors; provided, however, that no Triggering Event shall be
deemed to have occurred as a result of an acquisition of shares
of common stock or voting securities of the Company by any other
corporation or other entity with respect to which, following such
acquisition, more than 50% of the outstanding shares of the
common stock or voting securities entitled to vote in the
election of directors are then beneficially owned, directly or
indirectly, by the persons who were the Company's shareholders
immediately prior to such acquisition in substantially the same
proportions as their ownership, immediately prior to such
acquisition, of the Company's then outstanding common stock; or
(2) any merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which results
in more than 60% of the outstanding shares of the common stock,
and voting securities representing more than 60% of the combined
voting power of the then outstanding voting securities entitled
to vote in the election of directors, of the surviving or
consolidated corporation being then beneficially owned, directly
or indirectly, by the persons who were the Company's shareholders
immediately prior to such acquisition in substantially the same
proportions as their ownership, immediately prior to such
acquisition, of the Company's then outstanding common stock; or
(3) any liquidation or dissolution of the Company or the sale or
other disposition of all or substantially all of the assets of
the Company; provided, however, that the
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transfer of substantially all of the Company's assets to a wholly
owned Subsidiary in connection with any corporate reorganization
of the Company shall not be deemed to be a Triggering Event for
purposes of the Plan; or
(4) the Company shall enter into any agreement (whether or not
conditioned on shareholder approval) providing for or
contemplating, or the Board of Directors shall approve and
recommend that the shareholders of the Company accept, or approve
or adopt, or the shareholders of the Company shall approve, any
acquisition that would be a Triggering Event under clause (1),
above, or a merger or consolidation that would be a Triggering
Event under clause (2), above, or a liquidation or dissolution of
the Company or the sale or other disposition of all or
substantially all of the assets of the Company; or
(5) whether or not conditioned on shareholder approval, the issuance
by the Company of common stock representing a majority of the
outstanding common stock, or voting securities representing a
majority of the combined voting power of the outstanding voting
securities of the Company entitled to vote in the election of
directors, after giving effect to such transaction.
Following the occurrence of an event which is not a Triggering Event
whereby there is a successor holding company to the Company, or, if there
is no such successor, whereby the Company is not the surviving corporation
in a merger or consolidation, the surviving corporation or successor
holding company (as the case may be), for purposes of this definition,
shall thereafter be referred to as the Company.
3. ADMINISTRATION
The Plan shall be administered by the Administrator. The terms and
conditions under which Options may be granted are set forth in Paragraph 6. The
Administrator shall have the authority to interpret the provisions of the Plan,
to establish such rules and procedures as may be necessary or advisable to
administer the Plan and to make all determinations necessary or advisable for
the administration of the Plan; provided, however, that no such interpretation
or determination shall change or affect the eligibility of Directors to receive
Options, the number of Shares covered by or the timing of any Option grant under
the Plan or the terms and conditions thereof.
4. SHARES RESERVED UNDER PLAN
The aggregate number of Shares which may be issued or sold under the Plan
and which are subject to outstanding Options at any time shall not exceed three
hundred thousand (300,000) Shares, which may be treasury Shares or authorized
but unissued Shares, or a combination of the two, subject to adjustment as
provided in Paragraph 10 hereof. Any Shares subject to an Option which expires
or terminates for any reason (whether by voluntary surrender, lapse of time or
otherwise) and is unexercised as to such Shares may again be the subject of an
Option under the Plan subject to the limits set forth above. A Director shall
be entitled to the rights and privileges of ownership with respect to the Shares
subject to the Option only after actual purchase and issuance of such Shares
pursuant to exercise of all or part of an Option.
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5. PARTICIPATION
Only Directors shall be eligible to receive Options under the Plan.
6. OPTIONS: TERMS AND CONDITIONS
Each Option granted under the Plan shall be evidenced by a written Option
Agreement which shall comply with and be subject to the following terms and
conditions:
(a) Number of Option Shares Granted; Grant Date.
(i) Initial Options. Each Director initially elected to the Board
of Directors after the Effective Date shall be granted an Option
to purchase three thousand (3,000) Shares, or such other amount
determined by the Board of Directors, on the date of such
initial election (the "Initial Options").
(ii) Annual Option Grants. On the first business day of each
calendar year, each Director who has not within the prior twelve
months received an Initial Option under Subparagraph 6(a)(i),
above, shall be granted an Option to purchase five hundred (500)
Shares.
(iii) Attendance Grants. On the first business day of each calendar
year, each Director shall be granted an Option to purchase one
thousand (1,000) Shares for each meeting of the Board of
Directors attended by such Director during the prior year and
three hundred fifty (350) Shares for each meeting of a committee
of the Board attended by such Director during the prior year.
(iv) Other Grants. Each Director shall be entitled to receive an
option to purchase such number of Shares for performing other
services for the Company if and as shall be determined from time
to time by the Board of Directors.
In the event that the number of Shares available for grant under the
Plan is insufficient to make all grants hereby specified on the
relevant date, then all Directors who are entitled to a grant on such
date shall share ratably in the number of Shares then available for
grant under the Plan.
(b) Option Exercise Price. The per share purchase price of the Shares
purchasable under each Option shall be equal to one hundred percent
(100%) of the fair market value per Share. The fair market value per
Share referred to in the preceding sentences shall be the Market Price
for the business day immediately preceding the date of grant of such
Option.
(c) Exercise Period. Subject to acceleration as provided below, or
unless accelerated earlier by the Board of Directors, an Option shall
become exercisable for all of the Shares covered thereby one year
after the date of grant. If a Director's tenure ends during the
applicable one-year period due to death or Disability, each Option of
such Director shall become immediately exercisable as to 100% of the
Shares covered thereby. If a Director's tenure ends
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during such period for any reason other than death or Disability (i)
any Initial Options or granted during such period shall become
immediately exercisable as to 100% of the Shares covered thereby; and
(ii) all other Options granted during such period shall lapse
immediately as to one twelfth (1/12th) of the Shares covered by such
Options for each month or portion of a month remaining in such one
year period at the time of the termination.
Upon the occurrence of a Triggering Event, each Option outstanding
under this Plan shall become immediately exercisable as to 100% of
the Shares covered thereby. Once any portion of an Option becomes
exercisable, it shall remain exercisable for the shortest period of
(i) 10 years after the date of grant; (ii) one year (or such longer
period permitted by the Board of Directors) after a Director's tenure
on the Board of Directors terminates due to death or Disability; or
(iii) three months (or such longer period permitted by the Board of
Directors) after a Director's tenure on the Board of Directors
terminates for any reason other than death or Disability.
(d) Payment of Exercise Price. The purchase or exercise price shall
be payable in whole or in part in cash or Shares; and such price
shall be paid in full at the time that an Option is exercised. If a
Director elects to pay all or a part of the purchase or exercise
price in Shares, such Director shall make such payment by delivering
to the Company a number of Shares already owned by the Director equal
in value to the purchase or exercise price. All Shares so delivered
shall be valued at their Market Price on the business day immediately
preceding the day on which such Shares are delivered.
7. TRANSFERABILITY
Except as otherwise provided herein, or permitted by the Board of
Directors, an Option granted to a Director under this Plan shall not be
transferable or subject to execution, attachment or similar process, and during
the lifetime of the Director shall be exercisable only by the Director. A
Director shall have the right to transfer the Option upon such Director's death,
either by the terms of such Director's will, trust agreement or under the laws
of descent and distribution, and all such distributees shall be subject to all
terms and conditions of this Plan to the same extent as would the Director,
except as otherwise expressly provided herein.
8. EXERCISE
An Option shall be exercisable by a Director's giving written notice of
exercise to the Secretary of the Company specifying the number of Shares to be
purchased accompanied by payment in full of the required exercise price or other
arrangements satisfactory to the Company have been made to assure payment of the
exercise price. The Company shall have the right to delay the issue or delivery
of any Shares under the Plan until (a) the completion of such registration or
qualification of such Shares under any federal or state law, ruling or
regulation as the Company shall determine to be necessary or advisable, and (b)
receipt from the Director of such documents and information as the Company may
deem necessary or appropriate in connection with such registration or
qualification.
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9. SECURITIES LAWS
Each Option Agreement shall contain such representations, warranties and
other terms and conditions as shall be necessary in the opinion of counsel to
the Company to comply with all applicable federal and state securities laws.
10. ADJUSTMENT PROVISIONS
In the event of any stock dividend, split-up, recapitalization, merger,
consolidation, combination or exchange of shares, or the like, as a result of
which shares of any class shall be issued with respect to the outstanding
Shares, or the Shares shall be changed into the same or a different number of
the same or another class of stock, or into securities of another person, cash
or other property (not including a regular cash dividend), the total number of
Shares authorized to be offered in accordance with Paragraph 4, the number of
Shares subject to each outstanding Option, the exercise price applicable to each
such Option, and/or the consideration to be received upon exercise of each such
Option shall be appropriately adjusted.
11. TAXES
The Company shall be entitled to pay or withhold the amount of any tax
which it believes is required as a result of the exercise of any Option under
the Plan, and the Company may defer making delivery of Shares obtained pursuant
to the exercise of an Option until arrangements satisfactory to it have been
made with respect to any such withholding obligations. If a withholding
obligation should arise, a Director exercising an Option may, at his election,
provided applicable laws and regulations are complied with, satisfy his
obligation for payment of withholding taxes either by having the Company retain
a number of Shares having an aggregate Market Price on the date the Shares are
withheld equal to the amount of the withholding tax or by delivering to the
Company Shares already owned by the Director having an aggregate Market Price on
the business day immediately preceding the day on which such Shares are
delivered equal to the amount of the withholding tax.
12. EFFECTIVENESS OF THE PLAN
The Plan, subject to shareholder approval, shall become effective on and as
of the Effective Date.
13. TERMINATION AND AMENDMENT
The Board of Directors of the Company may terminate the Plan or make such
modifications or amendments thereof or to any Option as it shall deem advisable,
including, but not limited to, such modifications or amendments as it shall deem
advisable in order to conform to any law or regulation applicable thereto. No
termination, modification or amendment of the Plan or any Option may, without
the consent of a Director, adversely affect the rights of such Director under an
outstanding Option then held by the Director.
14. TENURE
The grant of an Option pursuant to the Plan is no guarantee that a Director
will be renominated, reelected or reappointed as a Director; and nothing in the
Plan shall be construed as conferring upon a Director the right to continue to
be associated with the Company as a Director or otherwise.
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EXHIBIT 10.4
1991 STOCK OPTION PLAN OF
ARI NETWORK SERVICES, INC.
(Amended and Restated as of October 8, 1996)
1. Purpose. The purpose of this Plan is to provide additional incentive
compensation to certain key employees of ARI Network Services, Inc. (the
"Company") and to provide them with an opportunity to acquire an equity interest
in the Company. Stock options granted under this Plan may be "incentive stock
options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any successor thereto, or stock options which are not
qualified as incentive stock options under the Code ("nonqualified stock
options"). Each stock option granted under this Plan shall be clearly
identified as either an incentive stock option or a nonqualified stock option at
the time of grant.
2. Eligible Employees. Options to purchase $.001 par value Common Stock
of the Company (the "Common Stock") under this Plan may be granted to employees
of the Company, or of any present or future subsidiary or parent of the Company.
For this purpose, and for all purposes under this Plan, a parent or subsidiary
of the Company shall be a "parent corporation" or a "subsidiary corporation" of
the Company as defined in Sections 424(e) and 424(f) of the Code. An employee
who is a member of the class of employees eligible to receive an option under
this Plan shall hereinafter sometimes be referred to as an "eligible employee"
and an eligible employee who has been granted an option shall hereinafter be
referred to as a "Participant."
3. Shares Available for Options. There shall be available for purchase
under options granted pursuant to this Plan a total of two million (2,000,000)
shares of Common Stock, subject to adjustment as provided in Paragraph 8.1
hereof. In the event that options which have been granted under this Plan
lapse, expire or terminate for any reason (whether by voluntary surrender, lapse
of time, termination of employment or otherwise), to the extent that such
options were unexercised, options for an equivalent number of shares may be
granted hereunder; provided, however, in no event shall the number of shares
purchased through the exercise of options granted under this Plan and the number
of shares subject to options outstanding at any time exceed in the aggregate
more than two million (2,000,000) shares of Common Stock. No Participant shall
be eligible to receive options for more than three hundred fifty thousand
(350,000) shares of Common Stock during any one-year period, subject to
adjustment as provided in Paragraph 8.1 hereof.
4. Maximum Calendar Year Grant to Any Employee. The aggregate fair market
value (determined at the time the option is granted) of the stock with respect
to which incentive stock options are exercisable for the first time by an
individual employee during any calendar year under this Plan (and under all
other plans of the Company or any parent or subsidiary of the Company) shall not
exceed $100,000, and/or any other limit as may be prescribed by the Code from
time to time.
5. Administration.
5.1. The Committee. The Plan shall be administered by the Stock Option
Committee (the
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"Committee") which shall be constituted so as to permit the Plan to comply with
Section 162(m) of the Code and any regulations promulgated thereunder, or any
other statutory rule or regulatory requirements. The members of the Committee
shall be appointed from time to time by the Board of Directors of the Company.
A majority of the members of the Committee shall constitute a quorum at any
meeting thereof and the acts of a majority of members present at any meeting of
the Committee at which a quorum is present, or acts unanimously approved in
writing by a majority of the entire Committee, shall be the acts of the
Committee.
5.2. Power of the Committee. The Committee is authorized and shall have
plenary authority in its discretion, subject only to the provisions of the Plan
and the applicable provisions of the Code, to determine the exercise prices
applicable to options, the eligible employees to whom and the time or times at
which options shall be granted, the number of shares of Common Stock subject to
each option and the extent to which options may be exercisable in installments;
to interpret the Plan; to prescribe, amend and rescind rules and regulations
pertaining to the Plan; to determine the terms and provisions of the respective
Incentive Stock Option Agreements and Nonqualified Stock Option Agreements; and
to make determinations and interpretations which it deems consistent with the
Plan's provisions. The Committee's determinations and interpretations shall be
final, conclusive and binding.
5.3. Designation of Assistants to Committee. The Committee may designate
one or more employees of the Company to assist the Committee in the
administration of the Plan and may grant authority to such or other persons to
execute, deliver and receive documents on behalf of the Committee.
6. Terms and Conditions of Options.
6.1. Option Price. The purchase price of each share of Common Stock under
each incentive stock option granted pursuant to this Plan shall be the fair
market value thereof at the date of grant of such option, unless the Participant
owns (applying the attribution rules of Section 424(d) of the Code) more than
ten Percent (10%) of the total combined voting power of all classes of stock of
the Company or of a subsidiary or parent of the Company (hereinafter referred to
as a "10% Shareholder"), in which case the per share price shall be at least one
hundred ten percent (110%) of the fair market value per share of Common Stock of
the Company at the date of grant of such option. The fair market value of Common
Stock on the date each option is granted shall be the closing price of a share
of the Company's stock as reported in the Wall Street Journal on the day of the
grant or, if no closing price is listed on the date of grant, on the last day
prior to the date of grant that a closing price was listed or the fair market
value determined by the Committee in conformity with pertinent law and
applicable regulations and rulings of the Treasury Department. The purchase
price of each share of Common Stock under each nonqualified stock option granted
pursuant to this Plan shall be determined by the Committee in its sole
discretion.
6.2. Exercise Period. No option granted pursuant to this Plan shall be
exercisable after the expiration of ten (10) years (five (5) years in the case
of an incentive stock option granted to a 10% Shareholder) from its date of
grant and it shall lapse upon the expiration of said ten (or five) year period
unless it shall lapse at an earlier date by reason of termination of employment
as provided in Paragraph 6.3, below, or as otherwise determined by the
Committee. The Committee may, in its sole discretion, require that a
Participant be employed by the Company or a subsidiary or parent of the Company
for a designated number of years prior to the exercise by him of any option or
portions of options granted pursuant to this Plan, and may, in its sole
discretion, determine the exercise dates on which options or portions of options
may be exercised by a Participant. In addition, the Committee may, in its sole
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discretion, require that a Participant meet certain performance criteria, or
that the Company meet certain targets or goals prior to the exercise by such
Participant of an option or a portion of an option granted pursuant to this
Plan. Any such requirements or limitations may subsequently be reduced or
waived by the Committee in its sole discretion, unless such reduction or waiver
is prohibited by the Code or other applicable law.
6.3. Termination of Employment. If the employment of any Participant
with the Company, and any subsidiary or parent corporation of the Company, is
terminated, the following shall apply unless otherwise determined by the
Committee; provided, that no incentive stock option can be exercisable
subsequent to ten (10) years after the date of grant (five (5) years if the
Participant is a 10% shareholder):
(a) If such termination is due to retirement on or after such
Participant's normal retirement date, the Participant shall have three (3)
months from the date of such termination of employment to exercise any
option granted hereunder as to all or part of the shares under such option,
subject to the condition that no option shall be exercisable at such time
as the exercise thereof would result in a violation of federal or state
securities laws or subsequent to ten (10) years [five (5) years if the
Participant holds an incentive stock option and is a 10% Shareholder] after
the date of grant, and provided that at the time of termination the
Participant had a present right to exercise such option. To the extent an
option is not exercised within such period, it shall lapse. For this
purpose, "normal retirement date" shall mean the date of a Participant's
65th birthday. Notwithstanding the foregoing, in the event that a
Participant retires prior to his 65th birthday, the date of such early
retirement shall be deemed to be such Participant's "normal retirement
date" for purposes of this Plan if, and only if, at the time of such early
retirement, such Participant has attained at least the age of 60 years and
has been employed by the Company for at least 15 years. An employee who
continues his employment with the Company beyond his normal retirement date
shall continue to be an eligible employee so long as he otherwise continues
to qualify to participate hereunder.
(b) If such termination is due to permanent and total
disability, as defined in Section 22(e)(3) of the Code, the Participant
shall have one (1) year from the date of such termination to exercise any
option granted hereunder as to all or part of the shares under such option,
subject to the condition that no option shall be exercisable at such time
as the exercise thereof would result in a violation of federal or state
securities laws or subsequent to ten (10) years [five (5) years if the
Participant holds an incentive stock option and is a 10% Shareholder] after
the date of grant and provided that at the time of termination the
Participant had a present right to exercise such option. To the extent an
option is not exercised within such period, it shall lapse.
(c) If such termination is due to death, the personal
representative, administrator or other representative of the estate of the
deceased Participant or the person or persons to whom the deceased
Participant's rights under the option shall pass by will or the laws of
descent and distribution, as the case may be, shall have the right to
exercise any option granted pursuant to this Plan as to all or part of the
shares subject to such option to the extent exercisable at the date of the
Participant's death. Such option must be exercised within one (1) year
after the date of the Participant's death, subject to the condition that no
option shall be exercisable at such time as the exercise thereof would
result in a violation of federal or state securities laws or subsequent to
ten (10) years [five (5) years if the Participant holds an incentive stock
option and is a 10% Shareholder] after the date of grant. To the extent an
option is not exercised within such period, it
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shall lapse.
(d) If such termination is for any reason other than those
specified above, to the extent an option is not effectively exercised prior
to such termination, it shall lapse immediately upon termination, unless
the Committee shall, in its sole discretion, make other provisions for
exercise not inconsistent with the terms of this Plan or applicable law.
The transfer of employment from a subsidiary or parent of the Company to
the Company or to a subsidiary or parent of the Company or vice versa shall
not be considered to constitute termination of employment by a Participant.
6.4. Transferability of Options. Unless otherwise provided by the
Committee in the case of a nonqualified stock option, during his lifetime a
Participant may not transfer any option granted to him pursuant to this Plan and
such options shall be exercisable only by the Participant. Upon his death a
Participant shall have the right to transfer the option or options granted to
him either by the terms of his will or under the applicable laws of descent and
distribution, subject to the limitations set forth in Paragraph 6.3(c), above,
and all such distributees shall be subject to the same terms and conditions of
this Plan as would the Participant, except as otherwise expressly provided
herein or as determined by the Committee.
6.5. Exercise of Option. Subject to the limitations stated elsewhere
in this Plan, options granted pursuant to this Plan will be exercisable on such
dates and during such periods and for such number of shares as shall be
determined by the Committee. An option granted pursuant to this Plan shall be
exercisable by delivering to the chief financial officer of the Company at its
principal business office a written notice designating the number of shares for
which it is being exercised. Payment in full for the number of shares for which
the options have been exercised must accompany said written notice (or
arrangements must be made satisfactory to the Company for payment in full);
provided, however, that the Committee may, subject to the approval of the Board
of Directors of the Company, permit a Participant to partially finance the
exercise of his option with capital borrowed from the Company on a recourse
basis at the interest rate mandated by the applicable provisions of the Code.
The Company shall have the right to delay the issue or delivery of any shares of
Common Stock under the Plan until (a) the completion of such registration or
qualification of such shares under any federal or state law, ruling or
regulation as the Company shall determine to be necessary or advisable, and (b)
receipt from the Participant of any such documents and information as the
Committee may deem necessary or appropriate in connection with such registration
or qualification.
7. Securities Laws. Each Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement shall contain such representations,
warranties, and other terms and conditions as shall be necessary in the opinion
of counsel to the Company to comply with all applicable federal and state
securities laws.
8. Miscellaneous.
8.1. Adjustments. In the event there is any increase or decrease in
the number of issued and outstanding shares of any class of common stock of the
Company, or in the number of issued and outstanding shares of any class of stock
of the Company convertible into shares of any class of common stock of the
Company, by reason of a stock dividend, stock split, reverse stock split, or
similar adjustment or in the event of any change in the Company or in the issued
and outstanding shares of the common stock of the Company by reason of a
recapitalization, merger, consolidation, acquisition of stock or property,
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<PAGE> 5
reorganization, liquidation or other significant event affecting the Company or
the issued and outstanding shares of its Common Stock, the number of shares of
Common Stock available for options provided in Paragraph 3 hereof, the number of
shares subject to each outstanding option, the purchase price per share under
each outstanding option, the consideration to be received upon the exercise of
each option and/or the per Participant limitation on the number of shares of
Common Stock subject to options contained in Paragraph 3 shall be
correspondingly adjusted as deemed equitable by the Committee or each
outstanding option may be converted, at the sole discretion of the Committee,
into a new option to purchase such number or kind of shares of stock or other
securities with appropriate adjustment of the purchase price per share as the
Committee deems appropriate to reflect such change. In addition, the Committee
shall, in its sole discretion, have authority to provide, in appropriate cases,
for (i) waiver in whole or in part of any remaining restrictions or vesting
requirements in connection with any option and/or (ii) the conversion of any
outstanding options into cash or other property to be received in certain of the
transactions specified above. Any adjustment, waiver, conversion or the like
carried out by the Committee under this Paragraph shall be conclusive and
binding for all purposes of the Plan. In no event shall the aggregate fair
market value (determined at the time the option is granted) of the stock with
respect to which incentive stock options are exercisable for the first time
during any calendar year under this Plan (and under all plans of the Company or
any parent or subsidiary of the Company) exceed $100,000 per employee as a
result of adjustments made under this Paragraph 8.1.
8.2. Fractional Shares. No fractional shares of stock shall be
issued upon the exercise of any option and the Company shall not be under any
obligation to compensate any Participant in any way for any such fractional
share.
8.3. Reservation of Shares. The Company shall at all times reserve
and keep available such number of shares of its Common Stock as shall be
necessary for the exercise of all options which may be granted pursuant to
Paragraph 3, above. Said shares may be in the form of treasury shares or
authorized but previously unissued shares, or both. If in the opinion of its
counsel the issue or sale of any shares of its stock hereunder shall not be
lawful for any reason, including the inability of the Company to obtain from any
regulatory body having jurisdiction authority deemed by such counsel to be
necessary to such issuance or sale, the Company shall not be obligated to issue
or sell any such shares.
8.4. No Obligation for Employment. The Plan shall not impose any
obligation on the Company to continue the employment of any Participant or
eligible employee.
8.5. Indemnification of Committee. Each person who is a member of
the Committee shall be indemnified and held harmless by the Company against and
for any and all loss, cost, liability, or expense, including attorneys' fees,
that may be imposed upon or be reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to which he may be a party
or in which he may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of judgment in any such action, suit or proceeding against him, except in
relation to matters as to which it shall be adjudged in such claim, action, suit
or proceeding, that such Committee member is liable for gross negligence or
willful misconduct in the performance of his duties. Each such person shall
give the Company an opportunity, at its own expense, to handle and defend the
same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such person may be entitled under the Company's
Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them and hold them harmless.
5
<PAGE> 6
8.6. Rights as a Shareholder. No holder of an option granted
pursuant to this Plan shall have any rights as a shareholder of the Company with
respect to any shares covered by his option until the date such shares are
issued pursuant to the exercise of such option.
8.7. Taxes. The Company shall be entitled to pay or withhold the
amount of any tax which it believes is required as a result of the grant or
exercise of any option under the Plan, and the Company may defer making delivery
with respect to shares of Common Stock obtained pursuant to the exercise of any
option until arrangements satisfactory to it have been made with respect to any
such withholding obligations. In accordance with any applicable administrative
guidelines it establishes, the Committee may allow a Participant to satisfy any
withholding obligations upon exercise of an option by withholding Common Stock
otherwise issuable upon exercise of the option, or by permitting the Participant
to deliver to the Company shares of Common Stock having a fair market value, as
determined by the Committee, equal to the amount of such withholding taxes.
9. Termination and Amendment. No incentive stock options shall be
granted under the Plan after September 20, 2001. The Plan may at any time and
from time to time be terminated, modified, or amended by the Board of Directors
of the Company in its sole discretion; provided, however, that the Board of
Directors may not, unless otherwise permitted under federal law, without the
approval of the Company's shareholders, adopt any amendment to the Plan for
which shareholder approval is required under tax, securities or any other
applicable law, including, but not limited to any amendment of the Plan which
would cause the Plan not to comply with or Code Section 162(m), or any successor
rule or regulatory requirements. No termination, modification or amendment of
the Plan may, without the consent of the Participant, materially adversely
affect the rights of such Participant under an outstanding option.
The Committee may amend, modify or terminate an outstanding option,
including, but not limited to, substituting another award of the same or of a
different type, changing the date of exercise, or converting an incentive stock
option into a nonqualified stock option; provided, however, that the
Participant's consent to such action shall be required unless the Committee
determines that the action, taking into account any related action, would not
materially adversely affect the Participant.
6
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