<PAGE> 1
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 January 31, 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 March 10, 1998.
Common Stock, Par Value $.001 Per Shares 4,242,777 Shares Outstanding
1
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ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED January 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
<S> <C> <C>
Item 1 Financial statements 3-6
Condensed balance sheets - January 31, 1998 and July 31, 1997. 3
Condensed statements of operations for the three and six months 4
ended January 31, 1998 and 1997.
Condensed statements of cash flows for the six months ended 5
January 31, 1998 and 1997.
Notes to unaudited condensed financial statements. 6
Item 2 Management's discussion and analysis of financial condition and results 7-12
of operations.
PART II - OTHER INFORMATION
Item 2 Changes in securities 13
Item 5 Other Information 13
Item 6 Exhibits and reports on Form 8 K 13
Signatures
</TABLE>
2
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ARI NETWORK SERVICES, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
JANUARY 31 JULY 31
1998 1997
(UNAUDITED) (AUDITED)
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 95 $ 64
Receivables 1,711 1,568
Prepaid expenses and other 170 140
-------- --------
Total current assets 1,976 1,772
Equipment & leasehold improvements, net of
accumulated depreciation and amortization 452 315
Goodwill, net of accumulated amortization 381 372
Network platform, net of accumulated amortization 6,411 6,759
Industry specific applications, net of accumulated amortization 2,923 2,198
-------- --------
Total Assets $ 12,143 $ 11,416
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit with shareholder $ 689 $ 500
Accounts payable 495 650
Unearned revenue 586 543
Other accrued expenses 636 704
Current portion of capital lease obligations 72 64
-------- --------
Total current liabilities 2,478 2,461
Capital lease obligations 18 8
Shareholders' equity:
Preferred stock, par value $.001 per share, 1,000,000 shares authorized;
20,000 shares issued and outstanding at January 31, 1998 and July 31,
1997 - -
Common stock, par value $.001 per share, 25,000,000 shares authorized;
4,242,777 and 3,691,754 shares issued and outstanding at January 31,
1998 and July 31, 1997, respectively 4 4
Additional paid-in capital 85,034 82,873
Accumulated deficit (75,391) (73,930)
-------- --------
Total shareholders' equity 9,647 8,947
-------- --------
Total Liabilities & Shareholders' Equity $ 12,143 $ 11,416
======== ========
</TABLE>
See notes to unaudited condensed financial statements.
3
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ARI NETWORK SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31 JANUARY 31
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Network and other services $ 1,293 $ 1,126 $ 2,650 $ 2,454
Software and development 486 539 1,152 894
------- ------- ------- -------
Total net revenues 1,779 1,665 3,802 3,348
Operating Expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown below):
Network and other services 308 306 649 574
Software and development 178 158 312 371
------- ------- ------- -------
Total variable costs of products and services sold 486 464 961 945
Depreciation and amortization 604 465 1,018 993
Network operations 195 258 383 487
Selling, general and administrative 1,058 1,203 2,404 2,519
Research and development 610 365 1,173 705
------- ------- ------- -------
Operating expenses before amounts capitalized 2,953 2,755 5,939 5,649
Less capitalized expenses* (328) (184) (732) (336)
------- ------- ------- -------
Total operating expenses 2,625 2,571 5,207 5,313
------- ------- ------- -------
Operating loss (846) (906) (1,405) (1,965)
Interest expense (22) (25) (56) (115)
------- ------- ------- -------
Net loss ($868) ($931) ($1,461) ($2,080)
======= ======= ======= =======
Average common shares outstanding 4,237 3,639 3,992 3,543
Basic and diluted net loss per share ($0.20) ($0.26) ($0.37) ($0.59)
</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.
4
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ARI NETWORK SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($1,461) ($2,080)
Amortization of network platform 348 339
Amortization of industry specific applications 476 443
Depreciation and other amortization 194 211
Net change in operating assets 160 139
Net change in operating liabilities (582) (86)
-------- --------
Net cash used in operating activities (865) (1,034)
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (73) (72)
Industry specific application costs capitalized (732) (336)
-------- --------
Net cash used in investing activities (805) (408)
FINANCING ACTIVITIES
Borrowings (repayments) under line of credit 189 (1,630)
Payment of capital lease obligations 5 (3)
Proceeds from issuance of common stock 1,507 2,787
-------- --------
Net cash provided by financing activities 1,701 1,154
-------- --------
NET CHANGE IN CASH
Net increase/(decrease) in cash and cash equivalents 31 (288)
Cash at beginning of period 64 372
-------- --------
Cash at end of period $ 95 $ 84
======== ========
Cash paid for interest $ 56 $ 115
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for -
network system 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
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
January 31, 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 six months ended January 31, 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. Dilutive
net loss per share is the same amount as basic net loss per share for all
periods presented as the impact of dilutive securities is antidilutive.
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.
6
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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 January 31, 1998 increased $114,000 or 7%
compared to the same period last year, representing the Company's eighth
consecutive quarter of year-over-year revenue improvement. Total revenue for the
six month period ended January 31, 1998 increased $454,000 or 14% 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 30% compared to fiscal 1997.
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 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 SIX MONTHS ENDED
JANUARY 31 JANUARY 31
(IN THOUSANDS) (IN THOUSANDS)
PERCENT PERCENT
VERTICAL MARKET 1998 1997 CHANGE 1998 1997 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Agribusiness Industry
Recurring $ 441 $ 428 3% $1,074 $ 957 12%
Non-recurring 251 441 (43%) 508 904 (44%)
------- ------ ------ ------
Subtotal 692 869 (20%) 1,582 1,861 (15%)
Equipment Industry
Recurring 155 135 15% 288 207 39%
Non-recurring 363 99 267% 749 147 410%
------- ------ ------ ------
Subtotal 518 234 121% 1,037 354 193%
Transportation Industry
Recurring 188 176 7% 377 350 8%
Non-recurring 17 44 (61%) 81 83 (2%)
------- ------ ------ ------
Subtotal 205 220 (7%) 458 433 6%
Publishing Industry
Recurring 328 287 14% 650 590 10%
Non-recurring 4 14 (71%) 15 25 (40%)
------- ------ ------ ------
Subtotal 332 301 10% 665 615 8%
Other Revenue
Recurring 32 41 (22%) 60 85 (29%)
Total Revenue
Recurring 1,144 1,067 7% 2,449 2,189 12%
Non-recurring 635 598 6% 1,353 1,159 17%
------- ------ ------ ------
Grand Total $ 1,779 $1,665 7% $3,802 $3,348 14%
======= ====== ====== ======
</TABLE>
7
<PAGE> 8
Recurring revenues are derived from network traffic fees, maintenance and
support fees, transaction fees, software license renewals and subscription fees.
The year-over-year increases in recurring revenues for the three and six month
periods ended January 31, 1998 were primarily due to increased network traffic
in the Agribusiness Industry, maintenance and support fees in the Equipment
Industry and recurring fees in the Publishing Industry. Recurring revenues
remained at 64% of total revenue for the three and six month periods ended
January 31, 1998 compared to the same periods 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. The year-over-year increases in non-recurring
revenues for the three and six month periods ended January 31, 1998 were
primarily due to increases in software licenses and professional services in the
Equipment Industry.
Agribusiness Industry
The Agribusiness Industry comprises several vertical markets including
agricultural and specialty chemicals, livestock pharmaceuticals, 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 six month periods ended January 31, 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 six month periods ended
January 31, 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 slightly for the full fiscal
year ending July 31, 1998 compared to the year ending July 31, 1997 due to a
shift in focus of the Company's sales force automation software from the
Agribusiness Industry to the Equipment Industry. See "Forward Looking
Statements."
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power equipment, outboard marine, automotive, diesel truck, motorcycle,
recreational vehicle 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 six month periods
ended January 31,1998 compared to the same periods last year due to maintenance
and support from the Company's PLUS1(R) software acquired in November 1996.
Non-recurring revenues in the Equipment Industry increased for the three and six
month periods ended January 31,1998 compared to the same periods last year due
to software license fees from PLUS1(R) and TradeRoute(TM), the Company's new
Windows(R) based dealer communications software, and development fees from
Empart(TM). See "Other Items." Growth in non-recurring revenue was due, in part,
to the addition of a second major manufacturer in the RV Industry during the
second quarter. 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 for the creation and maintenance of the
Customer Identification File. Recurring revenues in the Transportation Industry
increased for the three and six month periods ended January 31, 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 decreased for the three month period
ended January 31, 1998 compared to the same period last year due to the
completion of certain development projects in January, 1997. 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."
8
<PAGE> 9
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. Newsfinder(R) manages the approximately
20,000 news stories per week output of the Associated Press, providing access to
some 800 publishers with more than 1,300 weekly and monthly newspapers. Revenues
in the Publishing Industry increased for the three and six month periods ended
January 31, 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
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 SIX MONTHS
ENDED ENDED
JANUARY 31 JANUARY 31
(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) $ 486 $ 464 5% $ 961 $ 945 2%
Network operations 195 258 (24%) 383 487 (21%)
Selling, general & administrative 1,058 1,203 (12%) 2,404 2,519 (5%)
Research and development 610 365 67% 1,173 705 66%
------ ------- ------ ------
Gross cash expenses 2,349 2,290 3% 4,921 4,656 6%
Depreciation and amortization 604 465 30% 1,018 993 3%
Less capitalized expenses (328) (184) (78%) (732) (336) (118%)
------ ------- ------ ------
Net operating expenses $2,625 $ 2,571 2% $5,207 $5,313 (2%)
====== ======= ====== ======
</TABLE>
Operating expenses remained relatively flat for the three and six month periods
ended January 31, 1998, with slightly higher gross cash 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 development and capitalized expenses quarter to quarter, as
the mix of development and customization activities will change based on
customer requirements. For the six months ended January 31, 1998 the Company's
technical resources were focused primarily on the development of the
TradeRoute(TM) and PLUS1(R) for Windows(R) 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 25% and 28% for the six month periods ended January 31, 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."
9
<PAGE> 10
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 for the three and six month periods
ended January 31, 1998 compared to the same periods last year due to reduced
software maintenance contracts and a restructuring in the customer support area,
which successfully increased efficiency and reduced cost.
Selling, general and administrative expenses decreased for the three and six
month periods ended January 31, 1998 compared to the same periods last year
despite increases in revenues. The decrease was due to lower rent expense and
management consulting expense.
Depreciation and amortization expense increased for the three and six month
periods ended January 31, 1998 compared to the same periods last year as
TradeRoute(TM) and PLUS1(R) for Windows(R) were released and amortization
expense was recognized for the first time. Capitalized expenses represented 54%
and 62% of research and development for the three and six month periods ended
January 31, 1998, respectively, compared to 50% and 48% for the same periods
last year. The increase 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(R).
OTHER ITEMS
Interest expense decreased $3,000 or 12% and $59,000 or 51% for the three and
six month periods ended January 31, 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. See "Liquidity and Capital Resources." Interest expense will fluctuate
depending on the use and timing of financing through lines of credit and/or
additional equity financing.
Net loss decreased $63,000 or 7% and $619,000 or 30% for the three and six month
periods ended January 31, 1998 compared to the same periods last year,
representing the Company's fifth 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. See "Forward Looking Statements."
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., Outboard
Marine and 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. The acquisition of
CDI has not otherwise had a material effect on the Company's current financial
position.
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. Empart
Technologies is the Company's second acquisition in less than 12 months. 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. The acquisition is not
expected to have a material impact on the Company's financial position. However,
this non cash transaction is reflected in several line items of the Company's
balance sheet, but is not reflected in the statements of cash flows because the
acquisition was a non-cash transaction. See "Forward Looking Statements."
10
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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 SIX MONTHS
ENDED ENDED
JANUARY 31 JANUARY 31
(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 ($264) ($466) 43% ($443) ($1,087) 59%
Net cash used in investing activities (325) (294) (11%) (805) (408) (97%)
------ ------ -------- --------
Subtotal (589) (760) 23% (1,248) (1,495) 17%
Effect of net changes in working capital (211) (158) (34%) (422) 53 (896%)
------ ------ -------- ---------
Net cash used in operating and investing
activities ($800) ($918) 13% ($1,670) ($1,442) (16%)
====== ====== ======== ========
</TABLE>
Net cash used in operating activities before changes in working capital
decreased due to cost controls and increased revenues. 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. Net cash used in investing activities increased due to the development of
TradeRoute(TM) and PLUS1(R) for Windows(R).
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 negative cash flow from operations for the remainder of
fiscal 1998 from the current WITECH line of credit. See "Forward Looking
Statements."
At January 31, 1998, the Company had cash of approximately $95,000 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 $1,200,000 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 January 21,
1998, WITECH and the Company agreed to amend the WITECH Line, establishing the
$1,200,000 credit limit and extending the term to December 31, 1998. In
conjunction with obtaining the WITECH Line, since 1993, the Company issued total
warrants to WITECH for the purchase of up to 225,000 shares of its common stock.
Pursuant to the terms of the warrants, the exercise price was reduced to $4.00
when the Company issued common stock at that price during the quarter ended
January 31, 1998. As of February 28, 1997 there were $814,000 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."
11
<PAGE> 12
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."
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
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(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. 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 2. CHANGES IN SECURITIES
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. This amendment was effective as of November 19, 1997 and has
been reflected in the financial statements. The number of shares and net loss
per share in the accompanying financial statements have been adjusted for the
reverse stock split.
ITEM 5. OTHER INFORMATION
On November 19, 1997, Mr. Richard Weening tendered his resignation as Chairman
of the Board in light of other pressing business commitments. The Board
appointed Mr. Brian Dearing to replace Mr. Weening as Chairman of the Board. Mr.
Weening remains a member of the Board of Directors.
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.
27 Financial Data Schedule
(b) Reports on Form 8-K. On October 10, 1997, a Report on Form 8-K
with respect to Item 2 of Form 8-K. On December 21, 1997, the
Company filed a report on Form 8-K/A with respect to Item 7
which excluded audited financial statements of Empart and
related pro forma financial information.
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: March 11, 1998 /s/ Brian E. Dearing
---------------------------------------
Brian E. Dearing, Chairman of the Board
(and acting CFO)
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