SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event
reported): April 20, 1998
ARI NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 0-19608 39-1388360
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
330 E. Kilbourn Avenue
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(414) 278-7676
<PAGE>
Item 5. Other Events
On April 20, 1998, the Company mailed a letter to its
shareholders, reviewing the Company's progress for the
first half of the fiscal year.
Item 7. Financial Statements and Exhibits
(c) Exhibits
99.1 Letter to Shareholders dated April
20, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 27, 1998 ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
--------------------------
Brian E. Dearing,
President and CEO
EXHIBITS
No. Description
99.1 Letter to Shareholders
dated April 20, 1998.
April 20, 1998
Dear Shareholder:
I am pleased to report that ARI continued its unbroken
string of quarterly year-over-year top and bottom line
improvements in the second quarter of fiscal 1998. We
also signed Jayco, our second Top Five manufacturer of
recreational vehicles. RV is our newest industry and
represents our hottest short term market opportunity.
Nevertheless, we face some challenges as we head into
the back half of our year. We need to capitalize
quickly on the opportunity in RV, deliver our new
products in a timely manner with high quality,
implement new customers quickly to build future
recurring revenue, and continue to control our costs.
None of these challenges will be easy or without risk;
however, I believe they are manageable. Even if
everything doesn't go our way in the short term on the
revenue side, we should still be able to achieve our
primary financial goal for the year, which is cash
break-even from operations net of changes in working
capital items by the fourth quarter of this fiscal
year.
Second Quarter Revenue
Revenues for the second quarter ending January 31, 1998
were 7% ahead of last year's second quarter,
representing the eighth consecutive quarter of year-
over-year growth. On a year-to-date basis, we are up
14% over last year as well. This quarter's revenue
increase was driven by growth and acquisitions in the
Equipment sector. Both recurring and non-recurring
revenues rose by 7% over Q2 of last year, indicating
balanced growth in the base of business as well as in
new customers. We remain approximately on target in
terms of the mix of recurring and non-recurring revenue
at 64% recurring revenue.
While I am pleased that we have continued our unbroken
growth record, I was not satisfied with the level of
growth this quarter. We are experiencing slower growth
than we had hoped for in the agribusiness sector, due
to slower-than-expected development of the market for
retail-level Electronic Commerce in that market sector.
However, we continue to believe this is a good long-
term opportunity for us.
A second reason for our less-than-planned growth is the
delay in new product releases. Our new PLUS1(R) for
Windows was commercially released during the second
quarter, so our revenues are only just starting to
ramp. The new TradeRoute(TM) product is not yet released,
though it is in beta test at selected customer sites
and has been well received. We are on track to release
this product - in both the dealer and manufacturer
versions - during the fourth quarter.
Finally, our average deal size is increasing, which
generally means a longer sales cycle. We are bringing
new salespeople on board to try to counteract this
trend by increasing the number of deals in the sales
pipeline overall.
Cash Consumption
Despite these delayed revenues, we have been able to
keep our expenses down. The combination of slightly
increased revenue and tight expense control enabled us
to reduce our loss by 7% compared to the first quarter
of last year, representing the fifth consecutive
quarter of year-over-year bottom line improvement.
Cash burn from operations net of changes in working
capital items dropped 43% over the second quarter of
fiscal year 1997. On a year to date basis, we are 59%
better than last year on this measure. We are on a
path to our fourth quarter goal of cash break-even from
operations net of changes in working capital items.
Let me take this opportunity to explain this specific
financial objective more fully. We divide our total
cash flow into three parts. We report each of these
three line items in the liquidity section of our
quarterly Form 10-Q filing with the SEC:
1. Net cash from operations
2. Net cash from investment
3. Changes in working capital items
Essentially, the first item measures the fundamental
cash generation capability of the Company's operations:
do we generate cash when we operate or do we use it?
It does not include investments we make (such as
developing new software products or plant & equipment
purchases), nor does it include the effects of the
timing of accounts payable payments and accounts
receivable collections. It is this line item which we
expect will turn positive during the fourth quarter of
this year (that is, the quarter ending July 31, 1998).
The second item measures the fundamental cash
generation capability of the Company's investment
activities: are we investing in the business or are we
reaping the benefits of investing our free cash outside
the Company? Since we are developing products
(investing) and have little free cash to invest outside
the Company, this item is normally negative and will
likely stay negative for the forseeable future.
The third item measures the effect of timing of cash
flows: when did the quarter end relative to our last
check run? what are the terms of our receivables and
payables? are we paying or getting paid late or early?
Typically this will vary from quarter to quarter
depending on the actual timing of payments and
receipts.
Re-capitalization Status
Last summer, we announced a comprehensive three-part
financing plan that was expected to lower the Company's
debt burden, improve our cash flow, increase the
audience of potential investors, and provide the
Company with the funding to continue our growth. The
only part of the plan which remained uncompleted as of
the beginning of this quarter was the sale of the
remaining 112,500 shares from the S-2 shelf
registration. Due to the Company's low stock price in
the wake of year-end tax loss selling, the Board
determined that it would be too dilutive to continue to
sell shares and elected to terminate the shelf offering
and increase the Company's debt with WITECH instead.
Management and the Board of Directors reviews the
Company's funding requirements and sources on an
ongoing basis. It is very possible that the Company
may require additional credit and/or equity investment
to cover working capital, additional investment in
products or acquisitions, and/or operations costs in
the short to medium term. We are at a critical stage
in the Company's financial history where we need to
carefully balance investment for long term growth with
our drive for short term improvement in cash flow.
A comment is in order regarding the one-for-four
reverse split, which was approved by the shareholders
and effected in November. On the positive side, it did
enable us to keep our stock price above the $1.00
minimum bid price for continued listing on the NASDAQ
National Market Service, which took effect in February.
An additional objective of the reverse split was to
place the stock price in a range where additional
groups of investors would participate in the Company's
future growth and prosperity. Based on market value
traded per day, it appears that this objective was met:
the dollar volume does indeed appear to have increased
(though there may be many contributing reasons for the
increase). However, the reverse split also may have
exacerbated the tax loss selling we saw at the end of
December. Investors who had purchased the stock in
past years at higher prices now had a potential tax
shelter with greater value than the current price of
the stock, and they therefore sold their shares. I am
hopeful that, with continued good financial performance
by the Company, the stock will appreciate in value as
our "turnaround in progress" is recognized by
investors.
Summary and Outlook
I expect that we will have our second year in a row of
sales growth and that we will indeed achieve cash break-
even from operations net of changes in working capital
items by the last quarter of the current fiscal year.
Our strategy to drive increased revenues and leverage
our fixed cost by delivering quality solutions for
customer-side electronic commerce in selected vertical
markets remains unchanged. We are tracking to that
plan and we are grateful for the encouragement and
support we have received from you, our valued
shareholders. The entire ARI team remains optimistic
about ARI's future and fully committed to making it a
bright one.
Sincerely,
/s/ Brian E. Dearing
Brian E. Dearing
Chairman, President & Chief Executive Officer
Note: Statements in this letter include "forward-
looking statements" within the meaning of the Private
Securities Litigation Reform Act. The forward-looking
statements can generally be identified by words such as
"believes," "anticipates," "expects" or words of
similar meaning. Forward-looking statements also
include statements relating to the Company's future
performance, such as future prospects, revenues,
profits and cash flows. The forward-looking statements
are subject to risks and uncertainties, which may cause
actual results to be materially different from any
future performance suggested in the forward-looking
statements. Such risks and uncertainties include those
factors described under "Forward Looking Statements" in
the Company's most recent annual report on Form 10-K or
quarterly report on Form 10-Q filed with the Securities
and Exchange Commission. Readers are cautioned not to
place undue reliance on these forward-looking
statements. The forward-looking statements are made
only as of the date hereof, and the Company undertakes
no obligation to publicly release the result of any
revisions to these forward-looking statements. For
more information, please refer to the Company's filings
with the Securities and Exchange Commission.
