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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 April 30, 1998
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
(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 June 10, 1998.
Common Stock, Par Value $.001 Per Shares 4,247,460 Shares Outstanding
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ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED April 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial statements 3-6
Condensed balance sheets - April 30, 1998 and July 31, 1997 3
Condensed statements of operations for the three and nine 4
months ended April 30, 1998 and 1997.
Condensed statements of cash flows for the nine months ended 5
April 30, 1998 and 1997.
Notes to unaudited condensed financial statements. 6
Item 2 Management's discussion and analysis of financial condition and
results of operations. 7-12
PART II - OTHER INFORMATION
Item 6 Exhibits and reports on Form 8 K 13
Signatures
2
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ARI NETWORK SERVICES, INC.
CONDENSED BALANCE SHEETS
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
APRIL 30 JULY 31
1998 1997
(UNAUDITED) (AUDITED)
----------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 77 $ 64
Receivables 1,661 1,568
Prepaid expenses and other 137 140
-------- --------
Total current assets 1,875 1,772
Equipment & leasehold improvements, net of
accumulated depreciation and amortization 370 315
Goodwill, net of accumulated amortization 357 372
Network platform, net of accumulated amortization 6,238 6,759
Industry specific applications, net of accumulated amortization 3,030 2,198
-------- --------
Total Assets $ 11,870 $ 11,416
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit with shareholder $ 1,059 $ 500
Accounts payable 526 650
Unearned revenue 496 543
Other accrued expenses 977 704
Current portion of capital lease obligations 61 64
-------- --------
Total current liabilities 3,119 2,461
Capital lease obligations 10 8
Shareholders' equity:
Preferred stock, par value $.001 per share, 1,000,000 shares authorized;
20,000 shares issued and outstanding at April 30, 1998 and July 31, 1997,
respectively - -
Common stock, par value $.001 per share, 25,000,000 shares authorized;
4,247,460 and 3,691,754 shares issued and outstanding at April 30, 1998
and July 31, 1997, respectively 4 4
Additional paid-in capital 85,023 82,873
Accumulated deficit (76,286) (73,930)
-------- --------
Total shareholders' equity 8,741 8,947
-------- --------
Total Liabilities & Shareholders' Equity $ 11,870 $ 11,416
======== ========
</TABLE>
See notes to unaudited condensed financial statements.
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ARI NETWORK SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine months
Ended Ended
April 30 April 30
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues:
Network and other services $ 1,400 $ 1,240 $ 4,050 $ 3,694
Software and development 317 466 1,469 1,360
------- ------- ------- -------
Total net revenues 1,717 1,706 5,519 5,054
Operating Expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown below):
Network and other services 315 292 964 866
Software and development 169 170 481 541
------- ------- ------- -------
Total variable costs of products and services sold 484 462 1,445 1,407
Depreciation and amortization 535 421 1,553 1.414
Network operations 176 253 559 740
Selling, general and administrative 1,230 1,277 3,634 3,796
Research and development 521 548 1,694 1,253
------- ------- ------- -------
Operating expenses before amounts capitalized 2,946 2,961 8,885 8,610
Less capitalized expenses* (362) (384) (1,094) (720)
Total operating expenses 2,584 2,577 7,791 7,890
------- ------- ------- -------
Operating loss (867) (871) (2,272) (2,836)
Interest expense (28) (38) (84) (153)
------- ------- ------- -------
Net loss ($895) ($909) ($2,356) ($2,989)
======= ======= ======= =======
Average common shares outstanding 4,247 3,691 4,076 3,581
Basic and diluted net loss per share ($ 0.21) ($ 0.25) ($ 0.58) ($ 0.83)
</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 financial statements.
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ARI NETWORK SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
April 30
1998 1997
------- -------
<S> <C> <C>
Operating activities
Net loss ($2,356) ($2,989)
Amortization of network platform 521 515
Amortization of industry specific applications 731 646
Depreciation and other amortization 301 253
Net change in operating assets 243 116
Net change in operating liabilities (311) 137
------- -------
Net cash used in operating activities (871) (1,322)
Investing activities
Purchase of equipment and leasehold improvements (84) (86)
Industry specific application costs capitalized (1,094) (720)
Other 10 10
------- -------
Net cash used in investing activities (1,168) (796)
Financing activities
Borrowings (repayments) under line of credit 559 (785)
Payment of capital lease obligations (3) (6)
Proceeds from issuance of common stock 1,496 2,787
------- -------
Net cash provided by financing activities 2,052 1,996
------- -------
Net change in cash
Net increase/(decrease) in cash 13 (122)
Cash at beginning of period 64 372
------- -------
Cash at end of period $ 77 $ 250
======= =======
Cash paid for interest $ 84 $ 153
======= =======
Non-cash investing and financing activities
Capital lease obligations incurred for:
Furniture, fixtures & equipment 30 71
Issuance of common stock for acquisition 654 252
Common stock issued to repay line of credit - 1,000
</TABLE>
See notes to unaudited condensed financial statements.
5
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
April 30, 1998
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 nine months ended April 30, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 31, 1998. 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, 1997.
2. BASIC AND DILUTED NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Loss per share amounts for all periods have been presented, and
where appropriate, restated to conform to SFAS No. 128 requirements. The
dilutive securities, if any, would be antidilutive due to the continuing loss
from operations.
3. REVERSE STOCK SPLIT
On November 19, 1997, the Company's shareholders voted to amend the Company's
Articles of Incorporation to effect a one-for-four reverse stock split of the
Company's Common Stock while keeping 25,000,000 authorized shares of $.001 par
value Common Stock. The number of shares and basic and diluted net loss per
share in the accompanying financial statements have been adjusted for the
reverse stock split.
4. PREFERRED STOCK
The Series A preferred stock accrues dividends on a quarterly basis,
cumulatively, at a rate per annum equal to the product of the par value thereof
and 2% above the prime rate (minimum dividend rate of 10% and maximum of 14%).
All Series A preferred stock must be redeemed at par plus accrued and unpaid
dividends prior to any payment of dividends on, or repurchases by the Company
of, the Company's common stock. Prior to August 1, 2002, dividends, if declared
by the Board of Directors, can be paid in either cash or additional shares of
Series A preferred stock. The total amount of dividends in arrears on the Series
A preferred stock is $164,000 at April 30, 1998.
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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 April 30, 1998 increased $11,000 or 1%
compared to the same period last year, representing the Company's ninth
consecutive quarter of year-over-year revenue improvement. Total revenue for the
nine month period ended April 30, 1998 increased $465,000 or 9% compared to the
same period last year. Management expects the year-over-year quarterly increases
in revenue to continue through fiscal 1998 and that the percentage increase will
fluctuate from quarter to quarter. Management expects that revenue for the full
year will increase by approximately 15-20% compared to fiscal 1997. This is
lower than management's growth target of 30-40% due to slower than expected
development of the market for retail-level electronic commerce in the
Agribusiness Industry and delayed release of the Company's PLUS1(R) for Windows
and TradeRouteTM software products. The Company is conducting an on-going
exploration of various initiatives to increase revenues in the Agribusiness
Industry, but there can be no assurance that any of these initiatives will be
effective. PLUS1(R) for Windows is now in full commercial release and
TradeRouteTM is expected to roll out in the RV Industry during the fourth
quarter. See "Forward Looking Statements."
The Company provides business-to-business electronic commerce network services
and end user software to customers in selected vertical markets with shared
distribution channels. The Company's strategy is to build sustainable recurring
revenues in these selected vertical markets from each of its primary services
and software products. Accordingly, management reviews the Company's recurring
vs. non-recurring revenue in the aggregate and within each vertical market.
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's unaudited financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30 APRIL 30
(IN THOUSANDS) (IN THOUSANDS)
Percent Percent
VERTICAL MARKET 1998 1997 Change 1998 1997 Change
<S> <C> <C> <C> <C> <C> <C>
Agribusiness Industry
Recurring $ 561 $ 538 4% $ 1,635 $ 1,495 9%
Non-recurring 181 351 (48%) 689 1,255 (45%)
------- ------- ---- ------- ------- ---
Subtotal 742 889 (17%) 2,324 2,750 (15%)
Equipment Industry
Recurring 165 140 18% 453 347 31%
Non-recurring 224 136 65% 973 283 244%
------- ------- ---- ------- ------- ---
Subtotal 389 276 41% 1,426 630 126%
Transportation Industry
Recurring 190 182 4% 567 532 7%
Non-recurring 36 5 620% 117 88 33%
------- ------- ---- ------- ------- ---
Subtotal 226 187 21% 684 620 10%
Publishing Industry
Recurring 333 305 9% 983 895 10%
Non-recurring (3) 10 (130%) 12 35 (66%)
------- ------- ---- ------- ------- ---
Subtotal 330 315 5% 995 930 7%
Other Revenue
Recurring 30 39 (23%) 90 124 (27%)
Total Revenue
Recurring 1,279 1,204 6% 3,728 3,393 10%
Non-recurring 438 502 (13%) 1,791 1,661 8%
------- ------- ---- ------- ------- ---
Grand Total $ 1,717 $ 1,706 1% $ 5,519 $ 5,054 9%
======= ======= ==== ======= ======= ===
</TABLE>
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Recurring revenues are derived from network traffic fees, maintenance and
support fees, transaction fees, software license renewals and subscription fees.
Recurring revenue as a percentage of total revenue increased from 71% to 74% for
the three month period ended April 30, 1998 compared to the same period last
year while it remained at 67% for the nine month period ended April 30, 1998
compared to the same period last year. Management believes a 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 drive future increases in recurring revenue. This
revenue mix may fluctuate from quarter to quarter. See "Forward Looking
Statements."
Non-recurring revenues are derived from initial software license fees and
professional services fees. Non-recurring revenues decreased for the three month
period ended April 30, 1998 compared to the same period last year primarily due
to a decrease in new software licenses in the Agribusiness Industry offset in
part by increased professional services in the Equipment Industry. The
year-over-year increase for the nine month period ended April 30, 1998 was
primarily due to professional services in the Equipment Industry offset in part
by reduced new software licenses in the Agribusiness Industry.
Agribusiness Industry
The Agribusiness Industry comprises several vertical markets including
agricultural and specialty chemicals, livestock pharmaceuticals, fertilizer,
feed and seed. Revenues from the Agribusiness Industry are derived from software
license fees, maintenance and support fees, network traffic fees and
professional services fees. Recurring revenues in the Agribusiness Industry
increased for the three and nine month periods ended April 30, 1998 compared to
the same periods last year due to increases in network traffic. Non-recurring
revenues in the Agribusiness Industry decreased for the three and nine month
periods ended April 30, 1998 compared to the same periods last year due to the
completion of substantial sales force automation software customization projects
for two major customers during the fourth quarter of fiscal 1997. Management
expects total revenues in the Agribusiness Industry will decrease for the full
fiscal year ending July 31, 1998 compared to the year ending July 31, 1997 due
to the saturation of sales of software to the distributor level of the
Agrichemical distribution channel. See "Forward Looking Statements."
Equipment Industry
The Equipment Industry comprises several vertical markets including recreational
vehicle, outdoor power equipment, outboard marine, automotive, diesel truck,
motorcycle, and power generation. Revenues from the Equipment Industry are
derived from software license fees, maintenance and support fees, subscription
fees, network traffic fees and professional services fees. Revenues from
Empart(TM), the Company's recently acquired electronic publishing software, are
included in the Equipment Industry revenues. See "Other Items." Recurring
revenues in the Equipment Industry increased for the three and nine month
periods ended April 30,1998 compared to the same periods last year due to
increased maintenance and support. Non-recurring revenues in the Equipment
Industry increased for the three and nine month periods ended April 30,1998
compared to the same periods last year due to increased software license fees,
professional services and development fees. Management expects total revenues in
the Equipment Industry will continue to increase for the balance of fiscal 1998.
See "Forward Looking Statements."
Transportation Industry
Revenues from the Transportation Industry are derived from maintenance and
support fees, transaction fees and professional services fees charged to the
Association of American Railroads ("A.A.R.") for the creation and maintenance of
the Customer Identification File. Recurring revenues in the Transportation
Industry increased for the three and nine month periods ended April 30, 1998
compared to the same periods last year due to growth in recurring maintenance
and support fees as the Customer Identification File increased in size.
Non-recurring revenues in the Transportation Industry increased for the three
and nine month periods ended April 30, 1998 compared to the same periods last
year due to special systems development and modification projects the Company
undertook on behalf of the A.A.R. Management expects that revenues in the
Transportation Industry will continue at approximately the same level for the
remainder of fiscal 1998, and over time, will become a decreasing percentage of
the Company's total revenues. While relatively flat, this revenue is profitable
on the margin and helps to fund the Company's growth in other areas. See
"Forward Looking Statements."
Publishing Industry
Revenues from the Publishing Industry are derived from connect time fees, photo
traffic fees, subscription fees and service initiation fees charged to the
Company's Newsfinder(R) customers. Through Newsfinder(R), the Company manages
the approximately 20,000 news stories per week output of the Associated Press,
providing access on a dial-up basis and through the World Wide Web to some 800
publishers with more than 1,300 weekly and monthly newspapers. Revenues in the
Publishing Industry increased for the three and nine month periods ended April
30, 1998 due to price increases and a higher volume of photo traffic. Management
expects that revenues in the Publishing Industry will continue at approximately
the same level for the remainder of fiscal 1998, and over time, will become a
decreasing percentage of the Company's total revenues. While
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relatively flat, this revenue is profitable on the margin and helps to fund the
Company's growth in other areas. See "Forward Looking Statements."
OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's unaudited financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30 APRIL 30
(IN THOUSANDS) (IN THOUSANDS)
PERCENT PERCENT
1998 1997 CHANGE 1998 1997 CHANGE
---- ---- ------- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Variable cost of products and services sold
(exclusive of depreciation and amortization
shown below) $ 484 $ 462 5% $ 1,445 $ 1,407 3%
Network operations 176 253 (30%) 559 740 (24%)
Selling, General & Administrative 1,230 1,277 (4%) 3,634 3,796 (4%)
Research and development 521 548 (5%) 1,694 1,253 35%
------- ------- ------ ------- ------- ----
Gross cash expenses 2,411 2,540 (5%) 7,332 7,196 2%
Depreciation and amortization 535 421 27% 1,553 1,414 10%
Less capitalized expenses (362) (384) 6% (1,094) (720) (52%)
------- ------- ------ ------- ------- ----
Net operating expenses $ 2,584 $ 2,577 0% $ 7,791 $ 7,890 (1%)
======= ======= ====== ======= ======= ====
</TABLE>
Operating expenses remained flat for the three month period ended April 30, 1998
with slightly lower gross cash expenses offset by slightly decreased capitalized
expenses and increased depreciation and amortization. Operating expenses
decreased 1% for the nine month period ended April 30, 1998 with higher gross
cash and depreciation expenses offset by increased capitalized expenses. The
Company's technical staff (in-house and contracted) is allocated between
research and development and software customization services for customer
applications. Therefore, management expects fluctuations between software
customization services and development expenses quarter to quarter, as the mix
of development and customization activities will change based on customer
requirements. For the nine months ended April 30, 1998 the Company's technical
resources were focused primarily on the development of the TradeRoute(TM) and
PLUS1(R) for Windows products. During the same period last year, the technical
staff was focused primarily on certain large software customization projects.
Variable cost of products and services sold consists primarily of royalties,
telecommunications and data processing fees, customization labor and temporary
help fees. Variable cost of products and services sold as a percentage of
revenue was 26% and 28% for the nine month periods ended April 30, 1998 and
1997, respectively. Management expects gross margins in future quarters to
fluctuate based on the mix of products and services sold. See "Forward Looking
Statements."
Network operations consists primarily of data center operations, software
maintenance agreements for the Company's core network and customer support
costs. Network operations expense decreased significantly for the three and nine
month periods ended April 30, 1998 compared to the same periods last year as the
Company successfully negotiated reduced software maintenance contracts and
completed a restructuring in the customer support area, increasing efficiency
and reducing costs.
Selling, general and administrative expenses decreased for the three and nine
month periods ended April 30, 1998 compared to the same periods last year
despite increases in revenues. The decrease was due to lower rent and payroll
expense. A one time fee of $125,000 was paid in February, 1998 in connection
with the termination of a consulting contract.
Depreciation and amortization expense increased for the three and nine month
periods ended April 30, 1998 compared to the same periods last year as
TradeRoute(TM) and PLUS1(R) for Windows were released and amortization expense
was recognized for the first time. Capitalized expenses represented 69% and 65%
of research and development for the three and nine month periods ended April 30,
1998, respectively, compared to 70% and 57% for the same periods last year. The
year to date increase
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was the result of the shift of technical staff from customization of software,
which is expensed as variable cost of products and services sold, to capitalized
development of TradeRoute(TM) and PLUS1(R) for Windows.
OTHER ITEMS
Interest expense decreased $10,000 or 26% and $69,000 or 45% for the three and
nine month periods ended April 30, 1998 compared to the same periods last year.
The decrease in interest expense reflects the conversion of portions of the
Company's line of credit with WITECH into shares of the Company's Preferred
Stock in fiscal 1997. Interest expense will fluctuate depending on the use and
timing of financing through lines of credit and/or additional equity financing.
Net loss decreased $14,000 or 2% and $633,000 or 21% for the three and nine
month periods ended April 30, 1998 compared to the same periods last year,
representing the Company's sixth consecutive quarter of year-over-year net loss
improvement. Management expects the year-over-year quarterly improvement in net
loss to continue through fiscal 1998. Although management does not expect to
achieve full profitability in fiscal 1998, it expects steady and continued
progress toward that goal. Management believes that the Company will achieve
full profitability for the first time in the fourth quarter of fiscal 1999. See
"Forward Looking Statements."
A thorough Year 2000 project continues on schedule with approximately one person
year of effort applied since the project began, and an estimated remaining
effort of two person years of in-house labor. The total Year 2000 direct cost of
hardware, labor, software and services are not expected to exceed $350,000.
Management is pursuing a strategy of supplementing its internal growth with
strategic and synergistic acquisitions. On November 4, 1996, the Company
completed the acquisition of cd\*.IMG, Inc. ("CDI") in a stock transaction. CDI
was in the business of publishing electronic parts catalogs and the software
that dealers and repair shops use to read the catalogs. CDI had the parts
catalogs of over 20 manufacturers in the Outdoor Power Equipment, Marine,
Motorcycles and Power Sports industries. Its customer base included Toro, Arctic
Cat, Kohler, Tecumseh, Mercury Marine, Harley Davidson and Outboard Marine
Corporation. CDI's operations have been consolidated into the Company's. As a
result of the acquisition, the Company recognized goodwill in the amount of
$434,000 which is being amortized over a five year period.
On September 30, 1997, the Company completed the acquisition of Empart
Technologies, Inc., in a stock for assets transaction. Empart Technologies, Inc.
was a California-based developer of software for electronic parts catalogs.
Empart's products included EMPART publisher(TM), which converts data from a
variety of forms into an electronic format, and EMPART viewer(TM), a high-end
configurable parts catalog. Empart's customers included ABB Power Generation,
Inc., Yamaha Electronics of America, the auto dealer service group of Automatic
Data Processing, Inc. (ADP) and Coachmen Recreational Vehicle Company. As a
result of the acquisition, the Company recognized goodwill in the amount of
$69,000 which is being amortized over a five year period.
Since December 1995, the Company has had a formal Business Development program
aimed at identifying, evaluating, and closing potential acquisition targets
which would augment and strengthen the Company's market position, product
offerings, and personnel resources. Over 100 potential acquisition targets have
been considered during the program, resulting in two acquisitions; cd\*.IMG,
Inc. and Empart Technologies, Inc. in November 1996 and September 1997,
respectively. The program is active now and is intended to remain active
indefinitely. The Company has engaged Cleary Gull Reiland & McDevitt, Inc., a
prominent Midwest investment banking firm, to help expand and accelerate the
program.
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LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, certain cash flow
information derived from the Company's unaudited financial statements.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30 APRIL 30
(IN THOUSANDS) (IN THOUSANDS)
PERCENT PERCENT
1998 1997 CHANGE 1998 1997 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Net cash used in operating activities
before changes in working capital ($360) ($488) 26% ($803) ($1,575) 49%
Net cash used in investing activities (363) (388) 6% (1,168) (796) (47%)
----- ----- -- ------ ------- ----
Subtotal (723) (876) 17% (1,971) (2,371) 17%
Effect of net changes in working capital 354 200 77% (68) 253 (127%)
----- ----- -- ------ ------- ----
Net cash used in operating and
investing activities ($369) ($676) 45% ($2,039) ($2,118) 4%
===== ===== == ======= ======= ====
</TABLE>
Net cash used in operating activities before changes in working capital
decreased due to cost controls and increased revenues. A one time payment of
$125,000 for a contract termination was included in the quarter ended April 30,
1998. Management believes that, based on current trends, the Company will
achieve positive cash flow from operations before changes in working capital in
the quarter ending July 31, 1998. Year-to-date net cash used in investing
activities increased due to the development of TradeRoute(TM) and PLUS1(R) for
Windows.
The Company expects to continue to incur operating losses for the fiscal year
ending July 31, 1998 and there can be no assurance that profitability will be
achieved thereafter. The Company also expects to incur significant expenditures
for research and development. The Company expects to fund research and
development costs and operations for the remainder of fiscal 1998 from the
WITECH line of credit described below. See "Forward Looking Statements."
At April 30, 1998, the Company had cash of approximately $77,000 compared to
approximately $64,000 at July 31, 1997. During the first half of fiscal 1998,
the Company raised $1,507,000, net of expenses, from the sale of common stock.
The proceeds were used to fund operations and retire portions of the outstanding
revolving credit lines. The shelf offering of the Company's common stock
terminated on January 21, 1998.
The Company has a line of credit with WITECH (the "WITECH Line") that has been
in place since October 4, 1993. The aggregate amount currently available under
the WITECH Line is $2,000,000 and the interest rate is prime plus 2%. On
November 17, 1997, the Company repaid $950,000 of the WITECH Line from the
proceeds of the sale of shares of the Company's common stock. On May 27, 1998
WITECH and the Company agreed to amend the WITECH Line, increasing the line from
$1,200,000 to the current $2,000,000 credit limit and extending the term from
December 31, 1998 to December 31, 2001. In conjunction with obtaining the WITECH
Line, since 1993, the Company issued total warrants to WITECH for the purchase
of up to 250,000 shares of its common stock, including warrants for the purchase
of 25,000 shares and a usage warrant for a maximum of 25,000 shares at an
exercise price of $2.8125 that were issued in connection with the May 27, 1998
amendment to the WITECH line. As of May 31, 1998 there were $1,200,000 of
borrowings outstanding under the WITECH Line.
The only financial covenant in 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. 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. See "Forward Looking Statements."
Management believes that the financing from the WITECH Line will be sufficient
to fund operations for the remainder of fiscal 1998. Management believes that,
based on current trends, the Company will achieve positive cash flow from
operations (excluding changes in working capital items) in the quarter ended
July 31, 1998. On a long term basis, management believes that financing for the
Company's operations, as well as capital expenditures, will come principally
from cash generated from operations. See "Forward Looking Statements."
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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 applications and their willingness
to upgrade from DOS versions of software, the Company's ability to release new
software applications and upgrades on a timely basis, 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 primary
cause of the variation is attributed to non-recurring revenues from software
license and customization fees. License fee revenues are based on contracts
signed and product delivered. Non-recurring revenues are affected 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.
Recurring revenues are also difficult to estimate. Recurring revenues from
maintenance and subscription fees may be estimated based on the number of
subscribers to the Company's services but will be affected by the renewal ratio,
which cannot be determined in advance. Recurring revenues from network traffic
fees and transaction fees are difficult to estimate as they are determined by
usage. Usage is a function of the number of subscribers and the number of
transactions per subscriber. Transactions include product ordering, warranty
claim processing, inventory and sales reporting, parts number updates and price
updates. The Company cannot materially affect or predict the volume of
transactions per customer.
Although the Company has recently introduced and plans to expand its
Internet-enabled Windows 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. Some of the Company's current and potential competitors have
greater financial, technical, sales, marketing and advertising resources than
the Company.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) 10.1 Amendment Number 11 to Loan Agreement dated January 21, 1998
10.2 Articles of Incorporation of the Company
10.3 Agreement dated February 11, 1998 between the Company,
Richard W. Weening and Quaestus Management Corporation
10.4 Amendment Number 12 to Loan Agreement dated May 27, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K. On April 27, 1998, the Company filed a report
on Form 8-K (dated April 20, 1998) with respect to Item 5 of Form
8-K. On May 21, 1998, the Company filed a report on Form 8-K
(dated May 21, 1998) with respect to Item 5 of Form 8-K.
13
<PAGE> 14
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: June 15, 1998 /s/ Brian E. Dearing
--------------------------
Brian E. Dearing, Chairman of the Board
(and acting CFO)
14
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NUMBER ELEVEN 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 dated January 21, 1998.
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. The amount stated in Paragraph 2.2 of the Loan Agreement shall be
changed to One Million Two Hundred Thousand Dollars ($1,200,000).
2. In Exhibit 1.1 to the Agreement, in the definition of "Termination
Date" and in the Revolving Credit Note, the references to December 31, 1997 are
hereby deleted and December 31, 1998 is substituted therefor.
3. In Exhibit 1.1 to the Agreement, in the definition of "Total Loan
Commitment," the reference to "Two Million Dollars ($2,000,000)" is deleted and
"One Million Two Hundred Thousand Dollars ($1,200,000)" is substituted therefor.
4. In Exhibit 2.2(a), the reference to "Two Million Dollars
($2,000,000)" is deleted and "One Million Two Hundred Thousand Dollars
($1,200,000)" is substituted therefor.
5. In consideration of the agreements by WITECH reflected in this
Amendment Number Eleven, ARI hereby grants WITECH a warrant (the "January 1998
Warrant") for the purchase of twenty five thousand (25,000) shares as reflected
in Exhibit A attached hereto.
6. Subject to the amendment described herein, the Loan Agreement and
associated documents and agreements remain in full force and effect.
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
By: ARI NETWORK SERVICES, INC.
----------------------------
Francis Brzezinski, President By:
------------------------
Brian E. Dearing, Chairman, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ARI NETWORK SERVICES, INC.
These amended and restated Articles of Incorporation are executed by the
undersigned to supersede and replace the heretofore existing Articles of
Incorporation of ARI Network Services, Inc., as amended (the "Corporation"), a
corporation organized under Chapter 180 of the Wisconsin Statutes:
ARTICLE I
The name of the Corporation is ARI Network Services, Inc.
ARTICLE II
The period of existence of the Corporation shall be perpetual.
ARTICLE III
The Corporation is authorized to engage in any lawful activity for which
corporations may be organized under Chapter 180 of the Wisconsin Statutes and
any successor provisions.
ARTICLE IV
4.1. Authorized Shares. The aggregate number of shares which the
Corporation shall have the authority to issue, the designation of each class of
shares, the authorized number of shares of each class of par value and the par
value thereof per share shall be as follows:
<TABLE>
<CAPTION>
Designation Par Value Authorized
of Class Per Share Number of Shares
----------- --------- ----------------
<S> <C> <C>
Common Stock....................... $.001 16,525,200
Preferred Stock.................... $.001 1,000,000
</TABLE>
4.2. Rights of Classes. The preferences, limitations and relative rights of
shares of each class of stock shall be as follows:
4.2.1. Common Stock.
(a) Voting. Except as otherwise provided by law and except as may be
provided with respect to shares of Preferred Stock in accordance with
subparagraph 4.2.2(a)(ii), below, only the holders of shares of Common Stock
shall be entitled to vote for the election of directors of the
<PAGE> 2
Corporation and for all other corporate purposes. Except as otherwise provided
by law, upon any such vote, each holder of Common Stock shall be entitled to one
vote for each share of Common Stock held of record by such shareholder.
(b) Dividends. Subject to the provisions of subparagraph 4.2.2(d), below,
the holders of Common Stock shall be entitled to receive such dividends as may
be declared thereon from time to time by the Board of Directors, in its
discretion, out of any funds of the Corporation at the time legally available
for payment of dividends on Common Stock.
(c) Liquidation. In the event of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, after there have been paid to or
set aside for the holders of shares of Preferred Stock the full preferential
amounts to which they are entitled as provided in subparagraph 4 2.2(e), below,
the holders of outstanding shares of Common Stock shall be entitled to share
ratably, according to the number of shares held by each, in the remaining assets
of the Corporation available for distribution.
4.2.2. Preferred Stock.
(a) Series and Variations Between Series. The Preferred Stock may from time
to time as hereinafter provided, be divided into and issued in one or more
series, and the Board of Directors is hereby expressly authorized to establish
one or more series, to fix and determine the variations as among series and to
fix and determine, prior to the issuance of any shares of a particular series,
the following designations, terms, limitations and relative rights and
preferences of such series:
(i) the designations of such series and the number of shares which
shall constitute such series, which number may at any time, or from time to
time, be increased or decreased (but not below the number of shares thereof
then outstanding) by the Board of Directors unless the Board of Directors
shall have otherwise provided in establishing such series;
(ii) whether and to what extent the shares of that series shall have
voting rights, in addition to the voting rights provided by law, which
might include the right to elect a specified number of directors in any
case or if dividends on such series were not paid for a specified period of
time;
(iii) the yearly rate of dividends, if any, on the shares of such
series, the dates in each year upon which such dividend shall be payable
and, the date or dates from which any such cumulative dividend shall be
cumulative;
(iv) the amount per share payable on the shares of such series in the
event of the voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
(v) the terms, if any, on which the shares of such series shall be
redeemable, and, if redeemable, the amount per share payable thereon in the
case of the redemption thereof
<PAGE> 3
(which amount may vary for (i) shares redeemed on different dates; and
(ii) shares redeemed through the operation of a sinking fund, if any,
applicable to such shares, from the amount payable with respect to shares
otherwise redeemed);
(vi) the extent to and manner in which a sinking fund, if any, shall
be applied to the redemption or purchase of the shares of such series, and
the terms and provisions relative to the operation of such fund;
(vii) the terms, if any, on which the shares of such series shall be
convertible into shares of any other class or of any other series of the
same or any other class and, if so convertible, the price or prices or the
rate or rates of conversion, including the method, if any, for adjustments
of such prices or rates, and any other terms and conditions applicable
thereto; and
(viii) such other terms, limitations and relative rights and
preferences, if any, of such series as the Board of Directors may lawfully
fix and determine and as shall not be inconsistent with the laws of the
State of Wisconsin or these Articles of Incorporation.
(b) Redemption Right. Shares of Preferred Stock may be issued which are
redeemable by the Corporation at the price or prices determined by the Board of
Directors for shares of each series as provided in subparagraph 4.2.2(a)(v),
above.
(c) Conversion of Preferred Stock. Shares of Preferred Stock may be issued
which are convertible into shares of Common Stock or shares of any other series
of Preferred Stock on the terms and conditions determined by the Board of
Directors for shares of each series as provided in subparagraph 4.2.2(a)(vii),
above.
(d) Dividends. Shares of Preferred Stock may be issued which entitle the
holders thereof to cumulative, noncumulative or partially cumulative dividends.
The holders of Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefor,
dividends at the annual rate fixed by the Board of Directors with respect to
each series of shares and no more. Such dividends shall be payable on such dates
and in respect of such periods in such year as may be fixed by the Board of
Directors to the holders of record thereof on such date as may be determined by
the Board of Directors. Such dividends shall be paid or declared and set apart
for payment for each dividend period before any dividend (other than a dividend
payable solely in Common Stock) for the same period shall be paid upon or set
apart for payment on the Common Stock, and, if dividends on the Preferred Stock
shall be cumulative or partially cumulative, all unpaid dividends thereon for
any past dividend period shall be fully paid or declared and set apart for
payment, but without interest, before any dividend (other than a dividend
payable solely in Common Stock) shall be paid upon or set apart for payment on
the Common Stock. The holders of Preferred Stock shall not, however, be entitled
to participate in any other or additional earnings or profits of the
Corporation, except for such premiums, if any, as may be payable in case of
redemption, liquidation, dissolution or winding up.
<PAGE> 4
(e) Liquidation. In the event of liquidation, dissolution or winding up
(whether voluntary or involuntary) of the Corporation, the holders of shares of
Preferred Stock shall be entitled to be paid the full amount payable on such
shares upon the liquidation, dissolution or winding up of the Corporation fixed
by the Board of Directors with respect to such shares as provided in
subparagraph 4.2.2(a)(iv), above, before any amount shall be paid to the holders
of the Common Stock.
(f) Reissue of Shares. Shares of the Preferred Stock which shall have been
converted, redeemed, purchased or otherwise acquired by the Corporation, whether
through the operation of a sinking fund or otherwise, shall be retired and
restored to the status of authorized but unissued shares, but may be reissued
only as a part of the Preferred Stock other than the series of which they were
originally a part.
ARTICLE V
No holder of any stock of the Corporation shall have any preemptive or
subscription rights nor be entitled, as of right, to purchase or subscribe for
any part of the unissued stock of this Corporation or of any additional stock
issued by reason of any increase of authorized capital stock of this Corporation
or other securities whether or not convertible into stock of this Corporation.
ARTICLE VI
A dividend payable in shares of any class of stock of the corporation may
be paid in shares of any other class without specific approval of such issuance
by the shareholders of he class of stock to be issued.
ARTICLE VII
The address of the registered office of the Corporation is 330 East
Kilbourn Avenue, Milwaukee, Wisconsin 53202 in Milwaukee County. The name or its
registered agent at such address is Michael R. Pelton.
ARTICLE VIII
8.1. Number of Directors. The number of directors (exclusive of directors,
if any, elected by the holders of one or more series of Preferred Stock, voting
separately as a series pursuant to the provisions of these Articles of
Incorporation applicable thereto) shall not be less than 3 nor more than 11
directors, the exact number of directors to be determined from time to time by
resolution adopted by the affirmative vote of a majority of the entire Board of
Directors then in office except that the number of initial directors
constituting the initial Board of Directors shall be 10.
8.2. Classification. The directors shall be divided into three classes,
designated Class I, Class II and Class III, and the term of office of directors
of each class shall be three years. Class
<PAGE> 5
I shall consist of four directors; Class II shall consist of three directors;
and Class III shall consist of three directors. If the number of directors
is changed by resolution of the Board of Directors pursuant to this Article
VIII, any increase or decrease shall be apportioned among the classes so
as to maintain the number of directors in each class as nearly equal as
possible, but in no case shall a decrease in the number of directors shorten the
term of any incumbent director. The term of office for each director shall be
three years; provided, however, that the initial term of office of Class I
directors shall expire at the first annual meeting of shareholders after their
election, that of the Class II directors shall expire at the second annual
shareholder meeting after their election, and that of the Class III directors
shall expire at the third annual meeting after their election.
8.3. Term of Office. A director shall hold office until the annual meeting
for the year in which his or her term expires and until his or her successor
shall be elected and shall qualify. Any newly created directorship resulting
from an increase in the number of directors and any other vacancy on the Board
of Directors, however caused, shall be filled by the vote of a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director. Any director so elected to fill any vacancy in the Board of Directors,
including a vacancy created by an increase in the number of directors, shall
hold office for the remaining term of directors of the class to which he or she
has been elected and until his or her successor shall be elected and shall
qualify.
8.4. Removal. Exclusive of directors, if any, elected by the holders of one
or more series of Preferred Stock, no director of the Corporation may be removed
from office, except for Cause and by the affirmative vote of seventy-five
percent (75%) of the outstanding shares of capital stock of the Corporation
entitled to vote at a meeting of shareholders duly called for such purpose. As
used in this Article VIII, the term "Cause" shall mean solely malfeasance
arising from the performance of a director's duties which has a materially
adverse effect on the business of the Corporation.
8.5. Nomination. No person, except those nominated by or at the direction
of the Board of Directors, shall be eligible for election as a director at any
annual or special meeting of shareholders unless a written request, in the form
established by the Corporation's by-laws, that a person's name be placed in
nomination is received from a shareholder of record by the Secretary of the
Corporation, together with the written consent of such person to serve as a
director, (i) with respect to an election held at an annual meeting of
shareholders, not less than 90 nor more than 150 days prior to the meeting date
fixed pursuant to the Corporation's by-laws, or (ii) with respect to an election
held at a special meeting of shareholders for the election of directors, not
less than the close of business on the eighth day following the date on which
notice of such meeting is given to shareholders.
ARTICLE IX
Notwithstanding any provision of these Articles of Incorporation: (i)
Sections 4.2.2, 8.1, 8.2, 8.3, 8.4 and Articles IX and X of these Articles of
Incorporation may be amended, altered or repealed only by the affirmative vote
of the holders of not less than seventy-five percent (75%)
<PAGE> 6
of the outstanding total shares of stock of the Corporation entitled to vote
at a meeting of shareholders duly called for such purpose and by the
affirmative vote of the holders of not less than seventy-five percent (75%) of
the shares of each class or series, if any, entitled to vote thereon at such
meeting; and (ii) any other provisions of these Articles of Incorporation may be
amended, altered or repealed by the affirmative vote of the holders of not less
than a majority of the shares of each class or series, if any, entitled to vote
thereon at such meeting; provided, however, that this Article IX shall not limit
the power of the Corporation's Board of Directors to make certain amendments to
the Articles of Incorporation under Chapter 180 of the Wisconsin Statutes and
any successor provisions without shareholder approval.
ARTICLE X
Except as required by law, and notwithstanding any other provision of these
Articles of Incorporation or the Corporation's By-laws, the Corporation's
By-laws may be amended, altered or repealed, and new By-laws may be enacted only
by a vote of not less than three-quarters (3/4) of the entire Board of Directors
then in office, or by the affirmative vote of the holders of not less than
seventy-five percent (75%) of the outstanding shares of stock of the Corporation
entitled to vote at a meeting of shareholders duly called for such purpose.
<PAGE> 7
CERTIFICATE
This is to certify that the foregoing Amended and Restated Articles of
Incorporation of ARI Network Services, Inc. contain the amendments, briefly
described below, to the Articles of Incorporation. All of these amendments were
adopted in accordance with Wisconsin Statute sec. 180.1003, by the Board of
Directors on September 19, 1991 and by the Shareholders on September 20, 1991.
Articles IV, V, XII and XIII have been deleted in their entirety.
Article VI, stating the number of authorized shares and dividing such
shares among seven classes of common stock and three classes of preferred stock,
is amended as set forth in the new Section 4.1 of Article IV to provide the same
number of authorized shares divided between a single class of common stock and a
single class of preferred stock. The provisions for the reclassification of
common stock and the conversion of the preferred stock is set forth in Section
6.6 of Article VI. The par value of all shares following the amendment is $.001
per share. The number of authorized shares is not changed by the amendment.
Article VII, stating the rights and preferences of the various classes of
preferred and common stock, is amended as set forth in the new Section 4.2 of
Article IV.
Article VIII, stating the number and manner of election of directors and
dividing such directors among five classes, is amended as set forth in the new
Article VIII, which divides the directors among three classes.
Article X, providing preemptive rights to certain shareholders upon certain
issuances of securities, is amended to eliminate all preemptive rights as set
forth in the new Article V.
Article XI, stating which matters require shareholder approval in excess of
a simple majority, is amended as set forth in the new Article IX.
A portion of Section 11.4 of Article XI, relating to the amendment of the
By-laws of the Corporation, is amended to provide that the By-laws may be
amended by the Board of Directors as set forth in the new Article X.
Article IX is renumbered as new Article VII.
A new Article VI, providing for the payment of dividends in shares of
stock, has been added.
EXECUTED on behalf of the Corporation on Tuesday, November 12, 1991.
--------------------------
By: /s/ Edward D. Markham
--------------------------------------
Edward D. Markham, President
This document was drafted by: An acknowledgment copy of the filed
document should be sent to:
Ruth E. Booher Mark Koczela
330 East Kilbourn Avenue Godfrey & Kahn, S.C.
Milwaukee, W1 53202 780 North Water Street
(414) 283-4507 Milwaukee, W1 53202
(414) 273-3500
<PAGE> 8
ARTICLES OF AMENDMENT
OF
ARI NETWORK SERVICES, INC.
On December 2, 1994, in accordance with Section 180.1003 of the Wisconsin
Statutes, the following resolution to amend the articles of incorporation of ARI
Network Services, Inc. was duly adopted:
BE IT RESOLVED, Paragraph 4.1 of the Amended and Restated Articles of
Incorporation of ARI Network Services, Inc. is hereby amended to read as
follows:
4.1. Authorized Shares. The aggregate number of shares which the
Corporation shall have the authority to issue, the designation of each
class of shares, the authorized number of shares of each class of par value
and the par value thereof per share shall be as follows:
<TABLE>
<CAPTION>
Designation Par Value Authorized
of Class Per Share Number of Shares
----------- --------- ----------------
<S> <C> <C>
Common Stock....................... $.001 25,000,000
Preferred Stock.................... $.001 1,000,000
</TABLE>
Executed in duplicate this 4th day of December, 1994.
ARI NETWORK SERVICES, INC.
By: /s/ Don Knudsen
--------------------------------------
Don Knudsen, President and
Chief Executive Officer
This instrument was drafted by:
Larry D. Lieberman
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
<PAGE> 9
ARTICLES OF AMENDMENT
OF
ARI NETWORK SERVICES, INC.
Pursuant to Section 180.0602 of the Wisconsin Business Corporation Law,
ARI Network Services, Inc., a corporation organized and existing under the
Wisconsin Business Corporation Law (the "Company"), DOES HEREBY CERTIFY:
That (a) pursuant to the authority conferred upon the Board of Directors by
the Articles of Incorporation of the Company and in accordance with Section
180.1002 of the Wisconsin Statutes, the Board of Directors on July 17, 1997
adopted the resolution set forth below creating a series of Preferred Stock, par
value $.001 per share, designated as Series A Preferred Stock, (b) shareholder
action approving the creation of the Series A Preferred Stock was not required,
and (c) no shares of Series A Preferred Stock have been issued:
NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority vested in
the Board of Directors of this Company in accordance with the provisions of its
Articles of Incorporation, a series of Preferred Stock, par value $.001 per
share, of the Company be and it hereby is created, and that the designation and
amount and relative rights, limitations and preferences thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Preferred Stock" (the "Series A Preferred Stock"); the
number of shares constituting such series shall be Forty Thousand (40,000). Such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided, that no decrease shall reduce the number of shares of
Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Company into Series A Preferred Stock.
Section 2. Voting Rights. The holders of the Series A Preferred Stock shall
not, except as required by law, have any right or power to vote on any question
or in any proceeding or to be represented at, or to receive notice of, any
meeting of the Company's stockholders. On any matters in which the holders of
shares of the Series A Preferred Stock shall be so entitled to vote under
applicable law, they shall be entitled to one (1) vote for each share held.
Section 3. Dividends.
<PAGE> 10
(a) Each holder of a share of Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the Company's Board of Directors, out of
the funds of the Company legally available therefor, cumulative dividends during
each Quarterly Dividend Period (as hereinafter defined) that such share of
Series A Preferred Stock is outstanding at a per annum dividend rate equal to
the product of (i) One Hundred Dollars and (ii) two percent (2%) per annum above
the fluctuating per annum rate of interest published from time to time in the
Midwest Edition of The Wall Street Journal under the "Money Rates" caption as
the "Prime Rate" (and if more than one such "Prime Rate" shall be so published
on any date, the highest of such rates for such date), which rate shall change
effective as of the date of any published change in such published "Prime Rate,"
but not less than a rate per annum equal to Ten Dollars ($10.00) per share nor
more than Fourteen Dollars ($14.00) per share; provided, however, that dividends
for any period during which any shares of Series A Preferred Stock shall be
outstanding for less than a full Quarterly Dividend Period (as defined below)
shall be paid pro rata based on the actual number of days in such Quarterly
Dividend Period. As used herein, "Quarterly Dividend Period" means the period
from November 1 through the next January 31, from February 1 through the next
April 30, from May 1 through the next July 31 or from August 1 through the next
October 31; provided that the first Quarterly Dividend Period shall be the
period commencing on the date of initial issuance of shares of the Series A
Preferred Stock (other than Additional Shares (as defined below)) and ending on
October 31, 1997.
(b) Except as provided below, each such dividend shall be paid in cash on
the first day of February, May, August and November in each year (each a
"Quarterly Dividend Payment Date") commencing on November 1, 1997, to the
holders of record of shares of Series A Preferred Stock as they appear on the
stock register of the Company on such record date as shall be fixed by the Board
of Directors of the Company or a duly authorized committee thereof, which date
shall be at least ten (10) but no more than thirty (30) days preceding the
Quarterly Dividend Payment Date immediately following the relevant Quarterly
Dividend Period. Notwithstanding anything to the contrary herein, prior to
August 1, 2002, all (but not less than all) dividends payable on any particular
Quarterly Dividend Payment Date may be paid, at the option of the Company, in
lieu of cash, in additional shares of Series A Preferred Stock ("Additional
Shares") with a Liquidation Preference (as defined below) equal to the amount of
such dividend. Such Quarterly Dividend Payment Date shall be the original
issuance date of such Additional Shares for purposes of the accrual of
dividends. Prior to each issuance of any Additional Shares as a dividend on any
of the Series A Preferred Stock, the Company will prepare and mail to each
holder of shares of the Series A Preferred Stock a certificate setting forth the
computation of the number of Additional Shares issuable in payment of such
dividend to each holder of record of the Series A Preferred Stock. A dividend
payment in Additional Shares shall not be considered paid if the Company, on the
applicable Quarterly Dividend Payment Date, has not caused share certificates
representing the Additional Shares issuable in payment of such dividend to be
delivered to the holders of the Series A Preferred Stock.
(c) The amount of any dividends "accrued" on any share of the Series A
Preferred Stock at any Quarterly Dividend Payment Date shall be deemed to be the
amount of any
2
<PAGE> 11
unpaid dividends accumulated thereon to and including such Quarterly Dividend
Payment Date, whether or not earned or declared. Dividends in arrears shall bear
dividends as if such dividends in arrears had been declared and paid in
Additional Shares as set forth herein. Dividends on account of arrears for any
past Quarterly Dividend Periods may be declared and paid at any time, without
reference to any regular Quarterly Dividend Payment Date, to holders of record
on such date, not exceeding 45 days preceding the payment date thereof, as may
be fixed by the Board of Directors of the Company or a duly authorized committee
thereof.
(d) So long as any shares of the Series A Preferred Stock shall remain
outstanding, no dividends shall be paid or declared, or other distributions made
(upon dissolution or otherwise), whether in cash or property or in obligations
or shares of the Company, on any shares of the Common Stock or stock of any
other series of Preferred Stock of the Company over which the Series A Preferred
Stock has a priority in the distribution of assets in the event of any
liquidation, dissolution or winding up of the affairs of the Company ("Junior
Preferred Stock") (other than dividends payable solely in shares of Common Stock
or Junior Preferred Stock), nor shall any shares of the Common Stock or Junior
Preferred Stock be purchased, redeemed, retired or otherwise acquired by the
Company or any corporation or other entity controlled by the Company for any
consideration of any kind (or any payment made to or available for a sinking
fund for the redemption of any such securities), and neither the Company nor any
corporation or other entity controlled by the Company shall incur any obligation
for any of the foregoing.
Section 4. Redemption.
(a) The Company may, at the election of its Board of Directors, redeem
outstanding shares of the Series A Preferred Stock, in whole at any time or in
part from time to time, at the redemption price of One Hundred Dollars ($100.00)
per share, plus, in each case, accrued and unpaid dividends through the day
immediately preceding the date fixed for the redemption of shares of the Series
A Preferred Stock (the "Redemption Date"), but without premium.
(b) At least ten (10) days but not more than sixty (60) days prior to the
Redemption Date, written notice of such redemption shall be mailed to each
holder of record of shares of the Series A Preferred Stock to be redeemed, in a
postage prepaid envelope sent by first class mail and addressed to such holder
at its post office address as shown on the records of the Company; provided,
however, that no failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceeding for the redemption
of the shares of the Series A Preferred Stock to be redeemed.
Each such notice shall state:
(1) the Redemption Date;
3
<PAGE> 12
(2) the number of shares of the Series A Preferred Stock to be
redeemed and, if less than all the shares held by such holder are to be
redeemed from such holder, the number of shares to be redeemed from such
holder and the method of calculating such number;
(3) the cash redemption price (including the amount of accrued
dividends being paid);
(4) the place or places where certificates for such shares are to be
surrendered for payment of the redemption price; and
(5) that dividends on the shares to be redeemed shall cease to accrue
on such Redemption Date.
On or after the Redemption Date, each holder of shares of the Series A Preferred
Stock to be redeemed shall present and surrender its certificate or certificates
for such shares (duly endorsed for transfer or accompanied by appropriate stock
powers) to the Company at the place designated in such notice and thereupon the
redemption price of such shares shall be paid to or on the order of the person
whose name appears on such certificate or certificates as the owner thereof. In
case fewer than all the shares represented by such certificate are redeemed, a
new certificate shall be issued representing the shares that are not redeemed.
From and after the Redemption Date (unless the Company shall default in payment
of the redemption price), all dividends on the shares of the Series A Preferred
Stock designated for redemption in such notice shall cease to accrue and all
rights of the holders thereof as stockholders of the Company, except the right
to receive the redemption price thereof (including all accrued and unpaid
dividends up to the Redemption Date), without interest, upon the surrender of
certificates representing the same, shall cease and terminate and such shares
shall not thereafter be transferred (except with the consent of the Company) on
the books of the Company and such shares shall not be deemed to be outstanding
for any purpose whatsoever.
(c) If fewer than all of the shares of the Series A Preferred Stock are to
be redeemed, the Board of Directors of the Company shall select the shares of
the Series A Preferred Stock to be redeemed pro rata (or as nearly pro rata as
practicable); provided, however, that no fractional shares of the Series A
Preferred Stock shall be redeemed.
Section 5. Liquidation, Dissolution and Winding Up. In the event of any
liquidation, dissolution, or winding up of the affairs of the Company, whether
voluntary or otherwise, after payment or provision for payment of the debts and
other liabilities of the Company, the holders of shares of the Series A
Preferred Stock shall be entitled to receive, out of the remaining net assets of
the Company, the amount of One Hundred Dollars ($100.00) in cash for each share
of the Series A Preferred Stock (the "Liquidation Preference"), plus an amount
equal to all accrued and unpaid dividends on each such share to the date fixed
for distribution, before any distribution shall be made to the holders of the
Common Stock or any Junior Preferred Stock. After such payment to the holders of
the
4
<PAGE> 13
Series A Preferred Stock, the holders of the Series A Preferred Stock shall
not be entitled to any distribution in the event of liquidation, dissolution or
winding up of the affairs of the Company.
Section 6. Additional Issuances of Preferred Stock. So long as any shares
of Series A Preferred Stock are outstanding, the Company shall not issue any
additional Preferred Stock, other than Junior Preferred Stock (as defined in
Section 3(d) hereof) or additional shares of Series A Preferred Stock as
provided in Section 3(b) hereof.
* * *
Executed this 18th day of July, 1997.
ARI NETWORK SERVICES, INC.
[Corporate Seal]
/s/ Brian E. Dearing
---------------------------------------
Brian E. Dearing, President and
Chief Executive Officer
This instrument was drafted by
Larry D. Lieberman
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, Wisconsin 53202
5
<PAGE> 14
ARTICLES OF AMENDMENT
OF
ARI NETWORK SERVICES, INC.
On November 19, 1997, in accordance with Section 180.1003 of the Wisconsin
Statutes, the following resolution to amend the articles of incorporation of ARI
Network Services, Inc. was duly adopted:
RESOLVED, that the Company effect a 1-for-4 reverse stock split (the
"Reverse Stock Split") of the Company's Common Stock to be effected by
amending Paragraph 4.1 of the Amended and Restated Articles of
Incorporation of ARI Network Services, Inc. to read as follows:
4.1. Authorized Shares. The aggregate number of shares which the
Corporation shall have the authority to issue, the designation of each
class of shares, the authorized number of shares of each class of par value
and the par value thereof per share shall be as follows:
<TABLE>
<CAPTION>
Designation Par Value Authorized
of Class Per Share Number of Shares
------------ --------- ----------------
<S> <C> <C>
Common Stock...................... $.001 25,000,000
Preferred Stock................... $.001 1,000,000
</TABLE>
Upon filing of the Articles of Amendment with the Department of
Financial Institutions, each share of Common Stock issued at that time
shall automatically be reclassified and changed into one-fourth (1/4) of
one share of Common Stock. In lieu of the issuance of any fractional shares
that would otherwise result from the reverse stock split effected by this
paragraph, the Company shall issue to any shareholder that would otherwise
receive fractional shares one (1) additional share of Common Stock.
Executed in duplicate this 19th day of November, 1997.
ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
------------------------------------
Brian E. Dearing, President and
Chief Executive Officer
This instrument was drafted by:
Larry D. Lieberman
Godfrey & Kahn, S.C.
6
<PAGE> 15
780 North Water Street
Milwaukee, Wisconsin 53202
7
<PAGE> 1
EXHIBIT 10.3
AGREEMENT
THIS AGREEMENT, is entered into this 11th day of February, 1998, by and
among ARI NETWORK SERVICES, INC. ("ARI" or the "Company"), RICHARD W. Weening
("Mr. Weening") and QUAESTUS Management Corporation ("QMC").
BACKGROUND:
A. ARI and QMC are parties to a Consulting Agreement dated December 1,
1996 (the "QMC Agreement").
B. ARI and Mr. Weening are parties to an Employment Agreement dated August
1, 1991, which was recast as a Consulting Agreement by an amendment
dated September 30, 1993 (the "Weening Agreement"). The Weening
Agreement was further amended by amendments dated August 1, 1994 and
August 1, 1995 and August 1, 1996.
C. The parties desire to terminate both the QMC Agreement and the Weening
Agreement effective October 31, 1997 in accordance with the terms and
conditions hereof.
NOW, THEREFORE, for good and valuable consideration, the parties agree as
follows:
1. TERMINATION OF QMC AGREEMENT. The QMC Agreement is hereby terminated
effective October 31, 1997 and shall be of no further force or effect
thereafter. Notwithstanding any of the terms of the QMC Agreement, no
termination fee or other consideration shall be paid by ARI in connection with
such termination.
2. ARI SERVICES. All sharing of ARI services by QMC shall be
discontinued immediately except that ARI shall continue to permit QMC and its
employees to utilize ARI's telephone system until such time as QMC shall obtain
an independent telephone system which shall in no event be later than December
31, 1998. QMC shall reimburse ARI for the cost of such usage on a monthly basis
upon invoice by ARI.
3. TERMINATION OF WEENING AGREEMENT. The Weening Agreement is hereby
terminated effective October 31, 1997 and shall be of no further force or effect
thereafter. In accordance with the terms of the Weening Agreement, ARI will pay
Mr. Weening One Hundred Twenty Five Thousand Dollars ($125,000) concurrently
with the execution of this Agreement. ARI shall have no further obligation with
respect to any benefits Mr. Weening has received under the Weening Agreement
including without limitation any disability, health or other insurance policies.
4. LIFE INSURANCE POLICIES. ARI owns two split dollar life insurance
policies on Mr. Weening's life: Policy Number 7-877-783 and Policy Number
7-877-787, both issued by Northwestern Mutual Life Insurance Co. (the
"Policies"). As required under the Weening Agreement, ARI hereby assigns and
transfers to Mr. Weening all of ARI's right, title and interest in and to the
Policies. Mr. Weening agrees to assume all of ARI's obligations with respect to
the Policies and agrees to indemnify and hold ARI harmless from and against any
and all liabilities arising in connection therewith. Notwithstanding such
assignment, Mr. Weening agrees that ARI shall continue to be entitled to
repayment of the amount listed below for each Policy (the "ARI Premium
Amount(s)") upon Mr. Weening's death out of the proceeds of the Policies as a
result of ARI's having paid premiums on the Policies through December 31, 1997.
ARI will also be entitled to repayment of the relevant ARI Premium Amount in the
event that either Policy lapses for any reason.
<PAGE> 2
POLICY NUMBER ARI PREMIUM AMOUNT
(AS OF 1/21/98)
7-877-783 $85,180.80
7-877-787 $129,228.35
5. MISCELLANEOUS. This Agreement shall be governed by the laws of
Wisconsin. This Agreement is the entire agreement among the parties with respect
to the subject matter hereof and supersedes all prior written or oral agreements
or understandings among the parties with respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
QUAESTUS MANAGEMENT CORPORATION
_______________________________________________ By:____________________________
Richard W. Weening Terry Leahy, _______________
ARI NETWORK SERVICES, INC.
By:____________________________________________
Brian E. Dearing, Chairman, President and CEO
rwwterm.wpd
June 12, 1998
<PAGE> 1
EXHIBIT 10.4
AMENDMENT NUMBER TWELVE 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 dated May 27, 1998.
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. The amount stated in Paragraph 2.2 of the Loan Agreement shall be
changed to Two Million Dollars ($2,000,000).
2. In Exhibit 1.1 to the Agreement, in the definition of "Termination
Date" and in the Revolving Credit Note, the references to December 31, 1998 are
hereby deleted and December 31, 2001 is substituted therefor.
3. In Exhibit 1.1 to the Agreement, in the definition of "Total Loan
Commitment," the reference to "One Million Two Hundred Thousand Dollars
($1,200,000)" is deleted and "Two Million Dollars ($2,000,000)" is substituted
therefor.
4. In Exhibit 2.2(a), the reference to "One Million Two Hundred
Thousand Dollars ($1,200,000)" is deleted and "Two Million Dollars ($2,000,000)"
is substituted therefor.
5. In consideration of the agreements by WITECH reflected in this
Amendment Number Twelve, ARI shall grant WITECH a warrant (the "May 1998
Warrant") for the purchase of twenty five thousand (25,000) shares as reflected
in Exhibit A attached hereto and a usage warrant (the "May 1998 Usage Warrant")
for the purchase of twenty five thousand shares as reflected in Exhibit B
attached hereto. Warrants currently held by WITECH shall not be repriced as a
result of the issuance of the May 1998 Warrant or the May 1998 Usage Warrant.
6. Subject to the amendment described herein, the Loan Agreement and
associated documents and agreements remain in full force and effect.
7. This Agreement shall be effective, and ARI shall issue the May 1998
Warrant and the May 1998 Usage Warrant, promptly after (a) the Board of
Directors of ARI shall have approved this Agreement and the issuance of the May
1998 Warrant and May 1998 Usage Warrant, and (b) ARI shall have received
assurances, satisfactory to it, that the issuance or exercise of warrants as
contemplated hereby would not require shareholder approval, and would not
constitute a corporate governance violation, under the rules of the National
Association of Securities Dealers,
<PAGE> 2
Inc. applicable to ARI. If such conditions are not satisfied by June 30, 1998,
this Agreement shall terminate without liability to either party.
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:______________________________ By:_____________________________________
Francis Brzezinski, President Brian E. Dearing, Chairman, President
and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 77
<SECURITIES> 0
<RECEIVABLES> 1,835
<ALLOWANCES> 174
<INVENTORY> 0
<CURRENT-ASSETS> 1,875
<PP&E> 4,633
<DEPRECIATION> 4,263
<TOTAL-ASSETS> 11,870
<CURRENT-LIABILITIES> 3,119
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 8,737
<TOTAL-LIABILITY-AND-EQUITY> 11,870
<SALES> 5,519
<TOTAL-REVENUES> 5,519
<CGS> 1,445
<TOTAL-COSTS> 6,346
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> (2,356)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,356)
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<CHANGES> 0
<NET-INCOME> (2,356)
<EPS-PRIMARY> (.58)
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</TABLE>
