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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(XX) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended July 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
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Commission File No. 0-19608
ARI NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1388360
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 East Kilbourn Ave. 53202-3149
Milwaukee, Wisconsin (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (414) 278-7676
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 12 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 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_____]
As of October 22, 1999, aggregate market value of the Common Stock held by
non-affiliates (based on the closing price on the NASDAQ National Market System)
was approximately $11.0 million.
As of October 22, 1999, there were 5,843,304 shares of Common Stock of the
registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, to be filed with the Securities and
Exchange Commission no later than 120 days after July 31, 1999, for the 1999
Annual Meeting of Shareholders are incorporated by reference in Part III hereof.
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ITEM 1. BUSINESS
BUSINESS OVERVIEW
ARI Network Services, Inc. (the "Company" or "ARI") is a provider of
business-to-business e-commerce solutions to manufacturers in selected
industries with shared service networks and distribution channels. We focus our
sales and marketing on the U.S., Canadian, European and Australian manufactured
equipment industry (the "Equipment Industry"), providing direct sales and
service in North America and operating through value-added sales and service
agents elsewhere. The Equipment Industry is made up of separate sub-markets in
which the manufacturers share common distributors, retail dealers and/or service
points. These sub-markets include: outdoor power, recreation vehicles,
motorcycles, manufactured housing, farm equipment, marine, construction, power
sports, floor maintenance and others. By "Equipment" we mean capital goods which
are repaired rather than discarded when broken and for which the repairs are
generally performed by a distributed network of independent dealers and/or
repair shops.
We also provide e-commerce services to certain non-equipment industries,
including the U.S. and Canadian agribusiness industry, the U.S. and Canadian
freight transportation industry, and the U.S. non-daily newspaper publishing
industry. The Equipment Industry has been a growing percentage of our revenue
over the past three years, representing over 57% of fiscal 1999 revenue.
Management expects this percentage to continue to increase in fiscal 2000 and
beyond.
Our products and services enable Equipment Industry manufacturers to transact
business-to-business electronic commerce with their distributors, dealers and
service points world-wide. We provide both electronic catalog and transaction
processing software and services. These products and services enable dealers and
distributors in a shared distribution and service network to electronically look
up parts, service bulletins and other technical information regarding the
products of multiple manufacturers and to exchange electronic business documents
such as purchase orders, invoices, warranty claims, and status inquiries with
those manufacturers. Our products and services use the Internet for data
transport and a combination of the World-Wide Web and CD-ROM technology for user
interfaces and data presentation. In the non-equipment industries, we also
provide electronic directory services and on-line information management
services.
Our sales and marketing process is focused primarily on manufacturers that
sponsor our products and services to their dealers, distributors and/or service
points. These manufacturers have the financial capability and business power to
implement an automation strategy throughout their service and distribution
networks. In addition to software licenses and support services, a typical
implementation for a given manufacturer will involve professional services for
project management, software customization, and roll-out management. Once
manufacturer sponsorship is obtained, we also develop a direct business
relationship with the distributors, dealers, and service points for software and
services.
Our customer base currently comprises approximately 100 manufacturers in 12
different sub-markets of the Equipment Industry, as well as over 20,000 dealers,
distributors, and repair facilities in more than 50 countries. No single
customer accounted for 10% or more of our revenues in fiscal 1999.
Our executive offices are located at 330 East Kilbourn Avenue, Milwaukee,
Wisconsin 53202 and our telephone number at that location is (414) 278-7676. ARI
is a Wisconsin corporation, incorporated in 1981. We maintain a website at
http://www.arinet.com(TM).
MISSION AND STRATEGY
Our mission is to be the leading provider of quality distribution and
service-side business-to-business e-commerce services in selected manufacturing
industry segments with shared distribution channels and service networks. Our
vision is that whenever a manufacturer in one of our target markets does
business electronically with a distributor, dealer or service location, it will
use at least some of our products and services to do so. To achieve this vision,
our strategy is to concentrate on a few vertical markets and to lead with two
services: (i) distributor/dealer communications and (ii) electronic product
catalogs. After establishing a position in a market, we will then bring
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other products and services to bear in order to expand our presence and solidify
our competitive position. Our goal is to provide a complete array of
high-quality services that industry participants will adopt and use effectively.
Our strategy includes driving growth in our targeted markets through three
distinct programs: (i) sales; (ii) strategic alliances; and (iii) acquisitions.
Our external sales team focuses on large manufacturers and distributors in the
targeted industry sectors, while internal telesales representatives sell to
dealers and small to medium sized distributors. Through our COMPASS Partners(TM)
program, we have a strategic alliance relationship with over 100 companies that
provide software and services to manufacturers, distributors and dealers in our
targeted industries. We seek alliance partners that provide the software and
services that complement our products, such as manufacturer warranty claim
processing software or dealer or distributor business management and point of
sale systems, which allow us to provide a complete end-to-end solution that
links the internal business systems of dealers to those of distributors and
manufacturers. These alliance relationships range from simple technical
interface agreements to value-added reseller arrangements. Outside of North
America, we sell to manufacturers directly, but use local agents to provide
sales and support to dealers. We also have an active acquisition program that
has generated four acquisitions in the last three years. We seek to acquire
businesses with complementary products or services and/or attractive market
positions in our targeted industries.
Through our sales, alliance and acquisition programs, we expect to expand our
business by both growing market share in our current Equipment sectors and
entering new sectors.
PRODUCTS AND SERVICES
We offer two basic kinds of electronic commerce services to our customers in the
Equipment Industry: (i) electronic catalogs for publishing and viewing technical
reference information about the equipment and (ii) electronic communications for
exchanging documents such as purchase orders, invoices, and warranty claims. The
following table shows the software products and services that we offer, a brief
description of the products and the industries where they are currently in use.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC CATALOG PRODUCTS AND SERVICES
- ------------------------------------------------------------------------------------------------------------------------
PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PartSmart(TM) Electronic parts catalog for equipment dealers Equipment - all sub-markets except
RV and manufactured housing
- ------------------------------------------------------------------------------------------------------------------------
EMPARTpublisher(TM) Electronic parts catalog creation software Equipment - all sub-markets
- ------------------------------------------------------------------------------------------------------------------------
EMPARTviewer(TM) Electronic parts catalog viewing software Equipment - RV and manufactured
Available in CD-ROM housing only
- ------------------------------------------------------------------------------------------------------------------------
ARIwebcat(TM) Web based electronic parts catalog based upon the Equipment -all sub-markets
EMPART database technology
- ------------------------------------------------------------------------------------------------------------------------
Electronic publishing Project management, data conversion, editing, Equipment - all sub-markets
services production, and distribution services for
manufacturers who wish to outsource catalog
production operations
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMMUNICATIONS PRODUCTS AND SERVICES
- ------------------------------------------------------------------------------------------------------------------------
PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TradeRoute(R) Document handling and communications for product Equipment - all sub-markets
ordering, warranty claims and other business documents
- ------------------------------------------------------------------------------------------------------------------------
Meppel(R) EDI software for product movement reporting Agribusiness
- ------------------------------------------------------------------------------------------------------------------------
Professional services Project management, software customization, roll-out All Industries
management, and help desk support services
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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The following table shows complementary products and services which we also
offer. In fiscal 1999, these products and services accounted for 31% of our
total revenue. We expect these products to contribute a declining percentage of
our revenues in the future.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
OTHER PRODUCTS AND SERVICES
- ------------------------------------------------------------------------------------------------------------------------
PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARISE(R) Field sales and service automation software Agribusiness
- ------------------------------------------------------------------------------------------------------------------------
Electronic Commerce Centrally managed, industry-common databases of Transportation and Agribusiness
Directories electronic commerce participant locations
- ------------------------------------------------------------------------------------------------------------------------
Newsfinder(R) Database of key-worded news stories Publishing
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
ACQUISITIONS
Since December 1995, ARI has had a formal and aggressive business development
program aimed at identifying, evaluating and closing acquisitions which augment
and strengthen our market position, product offerings, and personnel resources.
Since the program's inception, more than 200 acquisition candidates have been
evaluated, resulting in four completed acquisitions.
On November 4, 1996, we completed the acquisition of cd\*.IMG, Inc. ("CDI"). CDI
was in the business of publishing electronic parts catalogs and the software
that dealers and repair shops in the Equipment Industry use to read the
catalogs. CDI's PLUS1(R) electronic parts catalog featured parts information
from over 20 manufacturers in the outdoor power equipment, marine, motorcycles
and power sports sub-markets. We have recently announced that PartSmart(TM),
which we acquired as part of the NDI acquisition, described below, will replace
PLUS1(R) in these sub-markets.
On September 30, 1997, we acquired Empart Technologies, Inc. ("Empart"). Empart
was a Silicon Valley-based developer of software for electronic parts catalogs.
Empart's products included EMPARTpublisher(TM), a software tool used to convert
data from a variety of forms into an electronic format, and EMPARTviewer(TM), a
high-end configurable electronic parts catalog software package. The EMPART(TM)
software is being used in the recreation vehicles and manufactured housing
sub-markets. We intend to deploy the EMPARTpublisher(TM) software in all
segments of the Equipment Industry. The EMPART(TM) database is also the
underlying technology upon which our Web-based electronic catalog product,
ARIwebcat(TM), is based.
On September 15, 1998, we acquired POWERCOM-2000, a Colorado Springs,
Colorado-based division of Briggs & Stratton Corporation ("Powercom"). Powercom
provided electronic cataloging and communications software and services to
companies in the North American, European and Australian outdoor power, power
tools and power sports industries.
On May 13, 1999, we acquired Network Dynamics Incorporated, based in
Williamsburg, Virginia ("NDI"). NDI's PartSmart(TM) electronic catalog software
is now our primary catalog software in all of the Equipment Industry sub-markets
we serve other than recreation vehicles and manufactured housing. PartSmart(TM)
was used by over 10,000 dealers to view catalogs from over 50 different
manufacturers in six sectors of the Equipment Industry.
Our acquisitions have been successful, allowing us to increase our growth rate
by adding new products, expanding into new markets, increasing our penetration
of existing markets and adding new talent. In each case the financial
performance of the acquired business has met or exceeded our expectations.
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COMPETITION
Competition for ARI's products and services in the Equipment Industry varies by
product and by sub-market. No single competitor today competes with us in each
of our targeted vertical Equipment Industry sub-markets. In electronic catalog
software and services, competitors include Bell & Howell, which provides
electronic catalog services in the motorcycle, marine, and auto markets, and a
variety of small companies focused on specific industries. Many of these smaller
companies may also represent acquisition targets for us. There are also a number
of larger companies which have targeted Web-based catalogs for procurement, such
as Ariba, Commerce One, and Aspect Development, which could expand their
offerings to address the needs of our markets and become competitors in the
future. In the communications part of our business, the primary competition
comes from in-house information technology groups who may prefer to build their
own Web-based proprietary systems, rather than use our industry-common
solutions. There are also large, general market e-commerce companies like
Sterling Commerce and Harbinger, which offer products and services similar to
ours. These e-commerce companies do not typically compete with us directly, but
they could decide to do so in the future. In addition, as in the catalog side of
our business, there are a variety of small companies focused on specific
industries which compete with us and which may also represent acquisition
targets. Another potential source of competition in the future is the group of
companies attempting to build so-called "net communities," such as Chemdex or
VerticalNet, which could expand their offerings to target our served markets.
Finally, given the high level of interest in Internet-related investment
opportunities and the current pace of technological change, it is possible that
as yet unidentified well-capitalized competitors could emerge, that existing
competitors could merge and/or obtain additional capital thereby making them
more formidable, or that new technologies could come on-stream that could
threaten our position.
ARI's primary competitive advantages are the industry knowledge and customer
relationships we have developed. When combined with products and services that
are designed for our targeted industries, we believe that our industry knowledge
and customer relationships will enable us to compete effectively and sustainably
in these markets.
EMPLOYEES
As of September 30, 1999, we had 145 full-time equivalent employees. Of these,
26 are engaged in maintaining or developing software and providing software
customization services, 20 are in sales and marketing, 36 are engaged in catalog
creation and maintenance or database management, 41 are involved in customer
implementation and support and 22 are involved in administration and finance.
None of these employees is represented by a union.
ITEM 2. PROPERTIES
ARI occupies approximately 23,000 square feet in an office building in
Milwaukee, Wisconsin, under a lease expiring July 31, 2002. This facility houses
our headquarters and data center. In Colorado Springs, Colorado, we occupy
approximately 5,500 square feet of office space under a lease expiring January
31, 2001 and an additional 1,500 square feet under a lease that expires in March
2000. In Williamsburg, Virginia we occupy approximately 3,000 square feet of
office space under a lease that expires November 30, 1999 and another
approximately 3,000 square feet of office space under a lease that expires
November 30, 2002 which we are actively attempting to assign to a third party.
In November 1999, we will consolidate the Virginia offices into a single office
in Williamsburg with 5,100 square feet under a lease that expires in October,
2004.
ITEM 3. LEGAL PROCEEDINGS
ARI is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names of ARI's executive officers as of September
30, 1999. The officers serve at the discretion of the Board.
<TABLE>
<CAPTION>
Name Age Capacities in Which Serving
---- --- ---------------------------
<S> <C> <C>
Brian E. Dearing 44 Chairman of the Board of Directors, CEO, President, Acting CFO
and Treasurer
Mark L. Koczela 45 Executive Vice President of Business Development and
Administration and Secretary
John C. Bray 42 Vice President of Sales
Michael E. McGurk 51 Vice President of Technology Operations
Frederic G. Tillman 37 Vice President of Technology Development
</TABLE>
- --------------------
BRIAN E. DEARING. Mr. Dearing, Chief Executive Officer and a director since
1995, is Chairman of the Board of Directors, CEO, President, and Acting Chief
Financial Officer and Treasurer. Prior to joining ARI, Mr. Dearing held a series
of electronic commerce executive positions at Sterling Software, Inc. in the
U.S. and in Europe. Prior to joining Sterling in 1990, Mr. Dearing held a number
of marketing management positions in the EDI business of General Electric
Information Services since 1986. Mr. Dearing holds a Masters Degree in
Industrial Administration from Krannert School of Management at Purdue
University and a BA in Political Science from Union College.
MARK L. KOCZELA. Mr. Koczela is Executive Vice President of Business Development
and Administration and Secretary. Prior to joining ARI in January 1992, Mr.
Koczela was a shareholder at Godfrey & Kahn, S.C., a Milwaukee, Wisconsin law
firm where he had worked in the field of mergers and acquisitions since 1983
representing a variety of businesses, including ARI. He holds a BA in History
from the University of Massachusetts and a JD from Duke University Law School.
JOHN C. BRAY. Mr. Bray was appointed Vice President of Sales in September 1996.
Prior to joining ARI, Mr. Bray was Manager of Global Internet Sales and
Consulting at GE Information Services (GEIS) in Rockville, Maryland. Before
joining GEIS, Mr. Bray was a Regional Vice President of Sales for AT&T's
EasyLink Services, marketing electronic commerce services. Mr. Bray was employed
by AT&T from 1991 through 1996. He holds a BA in marketing from the University
of Iowa.
MICHAEL E. MCGURK. Mr. McGurk was appointed Vice President of Technology in
January 1997 and became Vice President of Technology Operations in August 1999.
Prior to joining ARI, Mr. McGurk developed and operated a large format printing
services business for customers involved in business process re-engineering
projects. Before opening the printing service, Mr. McGurk had a twelve year
career in information technology management at General Electric, including
Manager of Global Information Technology for GE Medical Systems, Program Manager
for GE Corporate and Manager of Data Management for GE Aircraft Engines. Mr.
McGurk's early career included sales and technology positions at Cullinet and
CinCom Systems. Mr. McGurk holds an MBA and BS from Miami University in Ohio.
FREDERIC G. TILLMAN. Mr. Tillman was appointed Vice President of Technology
Development in August 1999. He joined ARI in September 1998 as part of our
acquisition of Powercom where he had been Vice President of Software
Development. Prior to joining Powercom in May 1998, Mr. Tillman was Director of
New Product Development for ADAC Healthcare Information Systems in Houston,
Texas, a producer of information systems for hospital laboratories and radiology
departments. Before joining ADAC in 1990, Mr. Tillman spent six years at General
Dynamics as a software engineer. Mr. Tillman holds an MBA from Texas Christian
University and a BS in Computer Science from Oklahoma State University.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ARI's common stock is traded on the National Association of Securities Dealers,
Inc. Automated Quotation National Market System ("NASDAQ-NMS") under the symbol
ARIS. The following table sets forth the high and low bid prices on the
NASDAQ-NMS for the periods indicated as adjusted for ARI's one-for-four reverse
stock split implemented in 1997.
<TABLE>
<CAPTION>
Fiscal Quarter Ended High Low
<S> <C> <C>
October 31, 1997.......................... $4.500 $2.750
January 31, 1998.......................... $3.000 $1.250
April 30, 1998............................ $4.250 $1.625
July 31, 1998............................. $3.500 $2.000
October 31, 1998.......................... $2.375 $1.500
January 31, 1999.......................... $2.750 $1.750
April 30, 1999............................ $8.250 $1.875
July 31, 1999............................. $7.313 $3.250
</TABLE>
As of October 26, 1999, there were approximately 216 holders of record of ARI's
common stock. ARI has not paid cash dividends to date and has no present
intention to pay cash dividends.
On September 30, 1999, in connection with restructuring and amending our line of
credit with WITECH Corporation, we converted $1.0 million of debt to shares of
common stock at $5.125 per share and issued a seven year warrant to WITECH for
the purchase of 30,000 shares of common stock at $5.125 per share. The
transaction was exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 4(1) thereof.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial information with respect to ARI
as of and for each of the five years in the period ended July 31, 1999, which
was derived from audited Financial Statements and Notes thereto of ARI. Audited
Financial Statements and Notes as of July 31, 1999 and 1998 and for each of the
three years in the period ended July 31, 1999, and the report of Ernst & Young
LLP thereon are included elsewhere in this Report. The selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere herein.
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Network and other services revenues $ 8,616 $ 5,811 $ 5,235 $ 4,484 $ 3,880
Software revenues 2,822 1,431 888 418 538
Development revenues 1,450 722 790 350 917
---------- ---------- ----------- ---------- ----------
Total revenues 12,888 7,964 6,913 5,252 5,335
Operating expenses:
Variable cost of network & other services sold 1,431 1,327 1,035 925 1,087
Variable cost of software sold 486 212 168 85 100
Variable cost of development sold 1,234 407 484 203 49
Depreciation and amortization 3,830 2,142 1,722 1,800 2,388
Network operations 1,017 708 1,004 919 1,171
Selling, general and administrative 6,995 4,586 4,819 4,585 4,756
Network construction and expansion 2,786 2,198 1,897 1,897 1,788
---------- ---------- ----------- ---------- ----------
Operating expenses before amounts capitalized 17,779 11,580 11,129 10,414 11,339
Less capitalized portion (1,802) (1,546) (1,155) (1,230) (1,616)
---------- ---------- ----------- ---------- ----------
Net operating expenses 15,977 10,034 9,974 9,184 9,723
---------- ---------- ----------- ---------- ----------
Operating loss (3,089) (2,070) (3,061) (3,932) (4,388)
Other income (expense) (326) (70) (214) (274) 49
========== ========== =========== ========== ==========
Net loss $ (3,415) $ (2,140) $ (3,275) $ (4,206) $ (4,339)
========== ========== =========== ========== ==========
Weighted average common shares outstanding 5,061 4,119 3,611 3,114 3,018
Basic and diluted net loss per share $ (0.67) $ (0.52) $ (0.91) $ (1.35) $ (1.44)
</TABLE>
SELECTED BALANCE SHEET DATA:
<TABLE>
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ (3,476) $ 762 $ (689) $ (3,412) $ (1,564)
Capitalized network system (net) 8,844 9,122 8,957 9,264 9,277
Total assets 20,438 12,808 11,416 11,479 11,683
Current portion of long-term debt and capital
lease obligations 713 58 64 63 68
Total long-term debt and capital lease obligations 3,511 1,653 8 22 73
Total shareholders' equity 9,756 8,962 8,947 6,182 8,524
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
ARI achieved strong growth in revenue during fiscal 1999 compared to 1998,
driven by organic growth and acquisitions in the Equipment Industry. While all
expense categories increased from fiscal 1998 to 1999, only depreciation and
amortization increased at a faster rate than revenue. All expenses declined as a
percentage of revenue except variable cost of sales, which remained constant,
and depreciation and amortization expense, which increased by three percentage
points. Even so, total operating expenses declined as a percentage of revenue.
Therefore, the increase in loss can be attributed to an increase in non-cash
amortization charges resulting primarily from our acquisitions of Powercom and
NDI. See "Operating Expenses."
REVENUES
Total revenue for the year ended July 31, 1999 increased $4,924,000 or 62%
compared to last year. Total year-over-year quarterly revenue has increased for
fourteen consecutive quarters. Management expects the year-over-year quarterly
increases to continue through fiscal 2000. See "Forward Looking Statements."
ARI provides business-to-business electronic commerce products and services to
customers in selected vertical markets within the Equipment Industry. Each of
the targeted vertical markets in the Equipment Industry has a shared
distribution and/or service channel, meaning that the manufacturers share common
distributors, dealers and/or service points. Our strategy is to build
sustainable, recurring revenues in the Equipment Industry by providing
business-to-business e-commerce solutions tailored to address the business
problems of each of the targeted markets. We also have a legacy business that
provides a variety of electronic commerce services to non-Equipment industries.
The non-Equipment industries generate positive cash flows for ARI but have not
shown significant growth over the past three years and are not expected to do so
in the future. Management reviews ARI's recurring vs. non-recurring revenue in
the aggregate and within the Equipment Industry and all other industries.
The following table sets forth, for the periods indicated, certain revenue
information derived from ARI's financial statements:
REVENUE BY INDUSTRY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
--------------------------------------------------------------------------
PERCENT PERCENT
INDUSTRY: 1999 1998 CHANGE 1998 1997 CHANGE
---- ---- ------ ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Equipment Industry
Recurring $ 3,243 $ 606 435% $ 606 $ 486 25%
Non-recurring 4,157 1,588 162% 1,588 432 268%
------- ------ ------- ------
Subtotal 7,400 2,194 237% 2,194 918 139%
Other Revenues
Recurring 4,841 4,600 5% 4,600 4,321 6%
Non-recurring 647 1,170 (45%) 1,170 1,674 (30%)
------- ------ ------- ------
Subtotal 5,488 5,770 (5%) 5,770 5,995 (4%)
Total Revenue
Recurring 8,084 5,206 55% 5,206 4,807 8%
Non-recurring 4,804 2,758 74% 2,758 2,106 31%
------- ------ ------- ------
Grand Total $12,888 $7,964 62% $ 7,964 $ 6,913 15%
======= ====== ======= =======
</TABLE>
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Recurring revenues are derived from catalog subscription fees, software
maintenance and support fees, software license renewals, network traffic and
support fees and other miscellaneous subscription fees. Recurring revenues
increased in fiscal 1999 and fiscal 1998, compared to the prior year, primarily
due to increases in the customer base in the Equipment Industry caused in part
by the Powercom and NDI acquisitions. Recurring revenues, as a percentage of
total revenue, decreased from 70% in fiscal 1997 and 65% in fiscal 1998 to 63%
in fiscal 1999 due to increases in sales to new customers and
longer-than-expected new customer implementation cycles. Management believes a
ratio of approximately two thirds recurring revenues to one third non-recurring
revenues is desirable in order to establish an appropriate level of base revenue
while continuing to add new sales to drive future recurring revenues. This
revenue mix may fluctuate from quarter to quarter or year to year.
Non-recurring revenues are derived from initial software license fees and
professional services fees. Non-recurring revenues increased in fiscal 1999 and
fiscal 1998, compared to the prior year, primarily due to increased new business
in the Equipment Industry offset, in part, by reduced new business in all other
industries.
Equipment Industry
The Equipment Industry comprises several vertical sub-markets including outdoor
power, recreation vehicles, motorcycles, manufactured housing, farm equipment,
marine, construction, power sports, floor maintenance and others. Management's
strategy is to expand our electronic parts catalog software and services and
dealer communication business with manufacturers and distributors in the
existing vertical sub-markets and to expand to other similar sub-markets in the
future. Revenues from all of our acquisitions are included in the Equipment
Industry revenues. Fiscal 1999 recurring revenues in the Equipment Industry
increased, compared to 1998, primarily due to the acquisitions of Powercom and
NDI, both of which had substantial recurring revenue bases, and to increased
revenue from subscription fees and maintenance and support fees from our growing
base of manufacturers and dealers. The increase in fiscal 1998 recurring
revenues in the Equipment Industry over fiscal 1997 was primarily due to
increased revenues from subscription fees and maintenance and support fees from
an increased base of manufacturers and dealers. Fiscal 1999 non-recurring
revenues in the Equipment Industry increased over fiscal 1998 due to increased
software and professional services sold to new and existing manufacturer
customers. Fiscal 1998 non-recurring revenues in the Equipment Industry
increased, compared to fiscal 1997, due to increased sales of software licenses
and professional services as a result of ARI's entry into the recreation vehicle
market. Management expects recurring and non-recurring revenues in the Equipment
Industry to increase at a higher rate than total revenues in fiscal 2000, as we
continue to focus our attention and resources in this industry.
Non-Equipment Industry Business
ARI's business outside of the Equipment Industry includes sales of database
management services to the agricultural inputs and railroad industries,
electronic communications services to the agricultural inputs industry, and the
on-line provision of information for republication to the non-daily newspaper
publishing industry. The non-Equipment Industry business is characterized by a
stable base of customers with long-term relationships with ARI. Recurring
revenues in this business increased slightly over the prior year in fiscal 1999
and fiscal 1998 primarily due to price increases and some increased usage of our
services by existing customers, while non-recurring revenues declined
significantly over the prior year in both fiscal 1999 and fiscal 1998 because of
a lack of significant new customers or application development projects.
Management believes the decline in non-recurring revenues may signal that we are
approaching saturation of the available market for the products and services
offered by ARI in these industries. Management expects revenues in the
non-Equipment Industry business will remain relatively flat between fiscal 1999
and fiscal 2000. These revenues are profitable on the margin and help to fund
ARI's growth in the Equipment Industry. Our five-year contracts with the
Association of American Railroads and the Associated Press, on which our
business in the railroad and non-daily newspaper publishing industries depends,
are up for renewal in December 2000. We have maintained good relations with the
Association of American Railroads and the Associated Press, and, based on
discussions we have had with these customers, we believe that it is likely that
each contract will be renewed.
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<PAGE> 11
OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from ARI's financial statements:
OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
--------------------------------------------------------------------
PERCENT PERCENT
1999 1998 CHANGE 1998 1997 CHANGE
-------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Variable cost of products and services sold
(exclusive of depreciation and amortization
shown below) $ 3,151 $ 1,946 62% $ 1,946 $ 1,687 15%
Network operations 1,017 708 44% 708 1,004 (29%)
Selling, general & administrative 6,995 4,586 53% 4,586 4,819 (5%)
Network construction and expansion 2,786 2,198 27% 2,198 1,897 16%
------- ------- ------- -------
Gross cash expenses 13,949 9,438 48% 9,438 9,407 0%
Depreciation and amortization 3,830 2,142 79% 2,142 1,722 24%
Less capitalized portion (1,802) (1,546) 17% (1,546) (1,155) 34%
------- ------- ------- -------
Net operating expenses $15,977 $10,034 59% $10,034 $ 9,974 1%
======= ======= ======= =======
</TABLE>
All categories of operating expense declined as a percentage of revenue from
fiscal 1998 to fiscal 1999 except variable cost of sales, which remained
constant, and depreciation and amortization expense, which increased by three
percentage points. Total operating expenses declined as a percentage of revenue.
Fiscal 1998 operating expenses remained relatively flat, compared to fiscal
1997, due to tight control of cash expenses.
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 increased in fiscal 1999
and fiscal 1998, compared to the prior year, as a direct result of increased
revenues. Variable cost of products and services sold as a percentage of total
revenue remained at 24% in fiscal 1999, as it had been in fiscal 1997 and fiscal
1998. Cost of development services sold as a percentage of development revenue
was 85% in fiscal 1999 compared to 56% in fiscal 1998 and 61% in fiscal 1997.
The increase in fiscal 1999 was due to cost overruns on several major software
customization projects in the Equipment Industry. Non-development cost of sales
as a percentage of non-development revenues was 17% in fiscal 1999 compared to
21% in fiscal 1998 and 20% in fiscal 1997. Management expects gross margins to
remain at approximately the same level in fiscal 2000 and to fluctuate slightly
from quarter to quarter based on the mix of products and services sold.
Network operations costs are derived primarily from data center operations,
software maintenance agreements for ARI's core network, catalog data maintenance
and customer support. Network operations costs increased in fiscal 1999 compared
to fiscal 1998 due to increased staffing in the catalog data maintenance area
from the May 13, 1999 acquisition of NDI. Network operations costs decreased
significantly in fiscal 1998, compared to fiscal 1997, as we successfully
negotiated reduced software maintenance contracts and completed a restructuring
in the customer support area, increasing efficiency and reducing costs, while at
the same time improving service levels.
Selling, general and administrative expenses increased in fiscal 1999, compared
to fiscal 1998, due to additional costs absorbed in the Powercom and NDI
acquisitions. These expenses decreased in fiscal 1998 compared to fiscal 1997
due to lower rent, payroll expense and management consulting fees. Selling,
general and administrative expenses, as a percentage of revenue, have steadily
decreased for each of the past five years.
The costs attributable to ARI's technical staff (both in-house and contracted)
are allocated between software development projects that are capitalized,
customization projects that are included in cost of sales and projects that
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<PAGE> 12
are part of operating expenses. During fiscal 1999, our technical resources were
focused primarily on customization projects for our customers in the recreation
vehicles market that are in the process of implementing our TradeRoute(R) dealer
communications system and on adjusting our various software products to bring
them into year 2000 compliance. During fiscal 1998 development resources were
focused primarily on the development of TradeRoute(R) and PLUS1(R). During
fiscal 1997, ARI's technical resources were focused on software customization
projects in the Agribusiness Industry. We expect our technical resources to
continue to focus on software customization in fiscal 2000, although the mix may
fluctuate quarter to quarter based on customer requirements.
Depreciation and amortization expenses increased substantially in fiscal 1999
compared to fiscal 1998 due primarily to the amortization of goodwill recognized
in connection with our acquisitions. Depreciation and amortization also
increased from fiscal 1997 to fiscal 1998 as TradeRoute(R) and PLUS1(R) for
Windows were released and amortization expense was recognized for the first
time. As a percentage of total revenue, depreciation and amortization was 30% in
fiscal 1999, 27% in fiscal 1998 and 25% in fiscal 1997.
Capitalized expenses represented 65% of network construction and expansion
expense in fiscal 1999, compared to 70% and 61% in fiscal 1998 and fiscal 1997,
respectively. Capitalized expenses decreased from fiscal 1998 to fiscal 1999, as
a percentage of network construction and expansion expense, due to labor
associated with our Year 2000 compliance program which is expensed as part of
operating overhead. Capitalized expenses increased from fiscal 1997 to fiscal
1998, as a percentage of network construction and expansion expense, due to the
shift of technical staff to capitalized development of TradeRoute(R) and
PLUS1(R) for Windows.
OTHER ITEMS
Interest expense increased $187,000 in fiscal 1999, compared to fiscal 1998, as
borrowing under our line of credit with WITECH increased. Interest expense
decreased $98,000 in fiscal 1998, compared to fiscal 1997, due to the conversion
of portions of ARI's lines of credit with shareholders into shares of ARI's
stock. We expect to incur additional expense for program fees in fiscal 2000
under the Receivables Sale facility ARI entered into with RFC Capital
Corporation in September 1999. See "Liquidity and Capital Resources".
Net loss increased $1,275,000 or 60% in fiscal 1999 after decreasing $1,135,000
or 35% in fiscal 1998, compared to the prior year. The increase in net loss is
attributable to the increase in ARI's non-cash depreciation and amortization
expense resulting from the two acquisitions completed in fiscal 1999. All other
categories of expense decreased as a percentage of revenue. As we intend to
continue our acquisition program, it is impossible to predict with certainty
when sustainable profits will be achieved. Given the level of non-cash expenses,
management expects to generate significant positive cash flow well before full
profitability is achieved.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, certain cash flow
information derived from ARI's financial statements.
CASH FLOW INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
-----------------------------------------------------------------
PERCENT PERCENT
1999 1998 CHANGE 1998 1997 CHANGE
------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities before changes in working capital $ 415 $ 2 n/a $ 2 $(1,553) 100%
Net cash used in investing activities (1,815) (1,601) (13%) (1,601) (1,234) (30%)
------- ------- ------- -------
Subtotal (1,400) (1,599) 12% (1,599) (2,787) 43%
Effect of net changes in working capital (74) (702) 89% (702) (202) (248%)
------- ------- ------- -------
Net cash used in operating and investing $(1,474) $(2,301) 36% $(2,301) $(2,989) 23%
activities ======= ======= ======= =======
</TABLE>
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<PAGE> 13
Net cash provided by operating activities before changes in working capital
increased in fiscal 1999 and fiscal 1998, compared to the prior year, due to
increased revenues and tight cost controls. ARI achieved positive cash flow from
operations before changes in working capital in fiscal 1998 and continued this
achievement throughout fiscal 1999. Net cash used in investing activities
increased in fiscal 1999 compared to fiscal 1998 due to increased costs
attributable to the development of a new release of ARI's TradeRoute(R)
software. The effect of net changes in working capital is dependent on the
timing of payroll and other cash disbursements and may vary significantly from
year to year.
Though management expects that positive cash flow from operations will continue,
we expect to continue to incur operating losses in fiscal 2000 due to non-cash
expenses. We expect to fund research and development costs with excess cash from
operations and the WITECH and RFC facilities described below.
At July 31, 1999, ARI had cash of approximately $127,000 compared to
approximately $194,000 at July 31, 1998.
ARI has a line of credit with WITECH that has been in place since October 4,
1993 (the "WITECH Credit Facility"). On September 30, 1999, ARI and WITECH
restructured the $3.0 million outstanding under the WITECH Credit Facility to
provide for (i) a $1.0 million revolving line of credit (the "WITECH Line")
which expires on December 31, 2001; (ii) a $1.0 million term loan (the "WITECH
Term Loan") payable in equal monthly principal installments over three years,
commencing November 1, 1999; and (iii) a purchase by WITECH of shares of ARI's
common stock by conversion of $1.0 million of the principal amount owed under
the WITECH Credit Facility to equity at the rate of $5.125 per share. The WITECH
Line bears interest at prime plus 2.0% and the WITECH Term Loan bears interest
at prime plus 3.25%. In conjunction with obtaining the WITECH Credit Facility,
since 1993, ARI has issued to WITECH 350 shares of its non-voting cumulative
preferred stock and total warrants for the purchase of up to 280,000 shares of
its common stock, including (i) warrants for the purchase of 250,000 shares at
$2.125 per share and (ii) warrants for the purchase of 30,000 shares of its
common stock at $5.125 per share. The exercise price under the warrants is
reduced if ARI issues stock at less than the then current exercise price. WITECH
also purchased 20,000 shares of non-voting cumulative preferred stock on July
15, 1997.
The only financial covenant in the WITECH Credit Facility is that ARI must
maintain a net worth (calculated in accordance with generally accepted
accounting principles) of at least $5.3 million. ARI 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.
As part of ARI's acquisition of Powercom from Briggs & Stratton Corporation
("Briggs") in September 1998, Briggs agreed to provide ARI with a working
capital line of credit in the amount of $250,000 (the "Briggs Line"). ARI agreed
to exhaust all available credit under the WITECH Line before borrowing any
amounts under the Briggs Line. The Briggs Line bore interest at prime plus 2%
and was secured by a first position lien against all accounts receivable
generated from customers of Powercom that were assigned to ARI as part of the
acquisition. The Briggs Line was repaid in full and cancelled on October 7,
1999.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each $1.0
million increase. Under the Sale Agreement, RFC will purchase 90% of eligible
receivables. In connection with the Sale Agreement, ARI is required to pay a
Commitment Fee of: $45,000 on September 28, 1999, $30,000 on September 28, 2000,
and $15,000 on September 28, 2001. In addition, ARI is obligated to pay a
monthly program fee equal to the greater of (a) $3,000 or (b) the amount of the
purchased but uncollected receivables times the prime rate plus 2%. ARI may
terminate the Sale Agreement prior to three years by paying: 3.0% of the
Purchase Commitment during the first year; 2.0% of the Purchase Commitment
during the second year; and 1.0% of the Purchase Commitment during the third
year.
Management believes that funds generated from operations and the RFC Facility
will be adequate to fund the Company's operations through the remainder of
fiscal 2000. In the event the Company requires additional financing during
fiscal 2000 in order to meet its requirements for operations and development
investments,
13
<PAGE> 14
management believes that sufficient financing will be available from the RFC
Facility and the WITECH Term Loan and WITECH Line and, if necessary, from the
sale of additional securities. On a long-term basis, management believes that
financing of operations as well as capital expenditures, will come principally
from cash generated from operations.
YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of ARI's computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We have developed and are implementing a comprehensive year 2000 program to
assess ARI's software and equipment and to develop and implement plans to
remediate any year 2000 issues that are uncovered. This program includes six
phases: Enterprise Planning, Assessment, Inventory, Compliance Development,
Post-Implementation and Business Continuity Planning. Oversight of the program
is the responsibility of the Vice President of Technology Operations with
progress reported to the other members of ARI's executive team.
Immediately following our acquisition of Empart, Powercom and NDI (the
"Acquisitions") we expanded our year 2000 program to include the products of
Empart (the "Empart Products"), the products and operations of Powercom (the
"Powercom Products and Operations") and the products and operations of NDI (the
"NDI Products and Operations"). Powercom had operations in Colorado Springs,
Colorado and NDI had operations in Williamsburg, Virginia, which were assumed by
ARI as part of the acquisitions. The same phased plan has been followed for the
Powercom and NDI Products and Operations, with independent timelines for each.
For purposes of our year 2000 program, the Empart Products have been treated as
part of the Powercom Products and Operations. None of the acquired companies had
an adequate year 2000 compliance program at the time of the acquisition.
For ARI, (excluding the Empart Products, the Powercom Products and Operations
and the NDI Products and Operations), the Enterprise Planning phase was
completed in May 1997, the Assessment Phase was completed in August 1997, and
the Inventory Phase was completed in April 1998. The Compliance Development
phase is targeted for completion by December 31, 1999. This phase includes
remediation of all non-compliant components and system testing of all ARI
supported components.
For the Powercom Products and Operations (including the Empart Products), the
Enterprise Planning phase was completed in February 1999, the Assessment Phase
was completed in March 1999, and the Inventory Phase is scheduled to be
completed by October 31, 1999. The Compliance Development phase is targeted for
completion by December 31, 1999. This phase includes remediation of all
non-compliant components and system testing of all ARI supported components.
For the NDI Products and Operations, the Enterprise Planning phase was completed
in June 1999, the Assessment Phase was completed in September 1999, and the
Inventory Phase is scheduled to be completed by October 31, 1999. The Compliance
Development phase is targeted for completion by December 31, 1999. This phase
includes remediation of all non-compliant components and system testing of all
ARI supported components.
Affected software includes software used by ARI for its own internal operations
and software that ARI has developed for its customers. Affected operating
equipment includes ARI's computers and other office equipment and infrastructure
systems such as HVAC, electric supply and telecommunications equipment and
services and similar equipment and services of ARI's suppliers and customers.
ARI's overall year 2000 program (including the Empart Products and the Powercom
and NDI Products and Operations) provides for plans to either sunset or bring
into compliance 52 different computing platforms, 37 ARI
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<PAGE> 15
products, and 339 vendor software products. We currently anticipate that any
problems resulting from non-compliant products will be addressed through a
combination of product modifications as part of planned product enhancements and
migration of customers to functionally similar products that are year 2000
compliant.
Surveys have been sent to all material suppliers. Alternatives will be
identified for any products or services that will not be compliant by December
31, 1999. As of the date hereof, we are not aware of any suppliers with year
2000 issues that would have a material impact on ARI's results of operations or
financial condition. However, ARI has no means of ensuring that suppliers
actually will be year 2000 compliant by January 1, 2000.
We are not aware of any customer with year 2000 issues that will have a material
impact on ARI's results of operations or financial condition. However, ARI has
no means of ensuring that customers actually will be year 2000 compliant by
January 1, 2000. There is a risk that customers may become increasingly resource
constrained by year 2000 issues and will, therefore, have fewer resources
available for purchasing our products and services or implementing our products
once purchased. This could have a material adverse effect on ARI's sales. It is
also possible that some of our customers will fail to remediate their own
internal year 2000 issues and that such failure will adversely affect the
customer and its ability to use and/or pay for our products and services.
ARI is using both internal and external resources to reprogram or replace, test
and implement the software and operating equipment for year 2000 modifications.
Management estimates that the total cost of the year 2000 program will be
approximately $550,000. Included in this estimate is approximately $100,000
which management has estimated will be added to our year 2000 program costs
because of the NDI Products and Operations. This estimate is based upon a
comparison of the systems and software operated and sold by ARI compared to the
systems operated and sold by NDI. These costs are being funded with cash from
operations and with the WITECH Credit Facility and the RFC Facility. As of
September 30, 1999, ARI has incurred approximately $307,000 relating to all
phases of the year 2000 program.
Our plans to complete the year 2000 modifications are based on our best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, and other factors.
Estimates on the status of completion and the expected completion dates are
based on costs incurred to date compared to total expected costs. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of trained personnel, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-K 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 ARI's selected market segments, the
positioning of ARI's products in those segments, consequences of year 2000
issues, 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 earlier versions of software, ARI's ability to
release new software applications and upgrades on a timely basis, ARI's ability
to establish and maintain strategic alliances, ARI's ability to manage its
costs, ARI's ability to manage its business in a rapidly changing environment,
ARI's ability to finance capital investments, and ARI's ability to implement its
acquisition strategy to increase growth.
Projected revenues and, therefore, profitability and cash flows are difficult to
estimate because ARI'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 ARI's services but will be affected by the renewal ratio, which
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<PAGE> 16
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. ARI cannot materially affect or predict the volume of transactions per
customer.
Although ARI 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 ARI's software and services over
that of a competitor. The environment in which ARI competes is characterized by
rapid technological changes, dynamic customer demands, and frequent product
enhancements and product introductions. Some of ARI's current and potential
competitors have greater financial, technical, sales, marketing and advertising
resources than ARI. The widespread acceptance of the Internet may increase the
usage of ARI's product applications and may change the manner in which ARI
charges for its services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ARI is subject to market risks pertaining to interest rate movements and
collectibility of accounts receivable. ARI's only expenses subject to interest
rate risk are (i) interest expense on the WITECH Line and the WITECH Term Loan
and (ii) monthly program fees owed with respect to the RFC Facility. See
"Liquidity and Capital Resources". The WITECH Line and Term Loan bear interest
tied to prevailing market rates. The monthly program fees under the RFC Facility
are also tied to prevailing market interest rates. An increase or decrease of
one percent in the prime interest rate would affect ARI's net loss by
approximately plus or minus $31,000, annualized, based on the outstanding
balances under the WITECH and RFC Facilities at October 7, 1999. As a result,
ARI believes that the market risk relating to interest rate movements is
minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARI's Financial Statements and related notes for the fiscal years ended July 31,
1999, 1998 and 1997 together with the report thereon of ARI's independent
auditors, Ernst & Young LLP, are attached hereto as Exhibit A-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ARI
Information regarding the directors of ARI and compliance with Section
16(a) of the Exchange Act is included in ARI's definitive 1999 Annual Meeting
Proxy Statement, and is incorporated herein by reference. See "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance".
Information with respect to ARI's executive officers is shown at the end of Part
I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation, Employment Agreements,
Compensation of Directors, Employee Stock Options and other compensation plans
is included in ARI's definitive 1999 Annual Meeting Proxy Statement, and is
incorporated herein by reference. See "Executive Compensation" and "Election of
Directors".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of ARI's common stock is
included in ARI's definitive 1999 Annual Meeting Proxy Statement and is
incorporated herein by reference. See "Security Ownership of Certain Beneficial
Owners".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information related to Certain Relationships and Related Transactions
is included in ARI's definitive 1999 Annual Meeting Proxy Statement, and is
incorporated herein by reference. See "Certain Transactions".
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PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(A)1.
FINANCIAL STATEMENTS
Report of independent auditors on Financial Statements and Financial Statement
Schedule.
Balance sheets - July 31, 1999 and 1998.
Statements of operations for each of the three years in the period ended
July 31, 1999.
Statements of shareholders' equity for each of the three years in the period
ended July 31, 1999.
Statements of cash flows for each of the three years in the period ended
July 31, 1999.
Notes to financial statements - July 31, 1999.
The Financial Statements are located immediately following the signature pages.
(A)2.
FINANCIAL STATEMENT SCHEDULES
Schedule II
Valuation and qualifying accounts for the years ended July 31, 1999, 1998, and
1997.
The Financial Statement Schedule is located immediately following the Financial
Statements. All other schedules to which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(A)3.
EXHIBITS:
See (c) below.
(B) REPORTS ON FORM 8-K:
On May 28, 1999 ARI filed a Form 8-K (dated May 28, 1999) with respect to Item 2
of Form 8-K. On July 27, 1999 ARI filed a report on Form 8-K/A (dated July 27,
1999) with respect to Item 7 which excluded audited financial statements of NDI
and related pro forma financial information.
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(C)
EXHIBITS:
EXHIBIT
NUMBER
DESCRIPTION
2.1
Asset Purchase Agreement dated September 15, 1998 between ARI and Briggs &
Stratton Corporation, incorporated herein by reference to Exhibit 2.1 of ARI's
current Report on Form 8-K filed September 25, 1998. ARI agrees to furnish
supplementally to the Commission upon request the Schedules and Exhibits to the
Asset Purchase Agreement listed on the Table of Contents of the Asset Purchase
Agreement.
2.2
Registration Rights Agreement dated September 15, 1998 between the Company and
Briggs & Stratton Corporation, incorporated herein by reference to Exhibit 2.2
of the Company's Current Report on Form 8-K filed September 25, 1998.
2.3
Agreement and Plan of Merger dated April 21, 1999 by and among the Company,
Network Dynamics Incorporated, Mr. R. Gale King and Mr. K. Shae Murphy,
incorporated herein by reference to Exhibit 2.1 of the Company's report on Form
8K filed May 28, 1999. The Company agrees to furnish supplementally to the
Commission upon request the schedules and exhibits to the Agreement and Plan of
Merger listed on the Table of Contents.
3.1
Articles of Incorporation of the Company, as amended, incorporated herein by
reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 1999.
3.2
By-laws of the Company incorporated herein by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (Reg. No. 33-43148).
4.1
The Company agrees to furnish to the Commission upon request copies of any
agreements with respect to long term debt not exceeding 10% of the Company's
consolidated assets.
10.1*
1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.2 of
the Company's Form 10-Q for the quarter ended January 31, 1999.
10.2*
1993 Director Stock Option Plan, as amended, incorporated herein by reference to
Exhibit 10.3 of the Company's Form 10-Q for the quarter ended January 31, 1999.
10.3
Loan Agreement by and between the Company and WITECH Corporation dated October
4, 1993, incorporated herein by reference to Exhibit 10.10 of the Company's Form
10-K for the fiscal year ended July 31, 1993.
10.4
Amendment to Loan Agreement dated May 19, 1994 between the Company and WITECH
Corporation, incorporated herein by reference to Exhibit 10.22 of the Company's
Registration Statement on Form S-3 (Reg. No. 33-75760).
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10.5
Amendment No. 2 to Loan Agreement dated July 28, 1994 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.22 of the
Company's Registration Statement on Form S-1 (Reg. No. 33-80914).
10.6
Consent and Amendment No. 3 to Loan Agreement dated December 2, 1994 between the
Company and WITECH Corporation, incorporated herein by reference to Exhibit 10.1
of the Company's Form 10-Q for the quarter ended October 31, 1994.
10.7
Amendment No. 4 to Loan Agreement dated October 18, 1995 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.14 of the
Company's Form 10-K for the fiscal year ended July 31, 1995.
10.8
Amendment No. 5 to Loan Agreement dated December 20, 1995 between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.31 of the
Company's Form 10-K for the fiscal year ended July 31, 1996.
10.9
Amendment No. 6 to Loan Agreement dated January 23, 1996, between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.32 of the
Company's Form 10-K for the fiscal year ended July 31, 1996.
10.10
Amendment No. 7 to Loan Agreement dated April 20, 1996 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended April 30, 1996.
10.11
Amendment No. 8 to Loan Agreement dated May 31, 1996 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.2 of the
Company's Form 10-Q for the quarter ended April 30, 1996.
10.12
Amendment No. 9 to Loan Agreement dated November 5, 1996, between the Company
and WITECH Corporation, including Forms of Amended and Restated Commitment
Warrant and Usage Warrant, incorporated herein by reference to Exhibit 10.1 of
the Company's Form 10-Q for the quarter ended October 31, 1996.
10.13
Amendment No. 10 to Loan Agreement dated May 30, 1997, between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended April 30, 1997.
10.14
Amendment No. 11 to Loan Agreement dated January 21, 1998 between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the fiscal quarter ended April 30, 1998.
10.15
Amendment No. 12 to Loan Agreement dated May 27, 1998 between the Company and
WITECH Corporation incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the fiscal quarter ended April 30, 1998.
20
<PAGE> 21
10.16
Amendment No. 13 to Loan Agreement dated September 14, 1998 between the Company
and WITECH Corporation incorporated herein by reference to Exhibit 10.16 of the
Company's Form 10-K for the fiscal year ended July 31, 1998.
10.17
Consent of WITECH Corporation, dated September 15, 1998, incorporated herein by
reference to Exhibit 10.1 of the Company's Form 10-Q for the fiscal quarter
ended October 31, 1998.
10.18
Amendment No. 14 to Loan Agreement dated January 29, 1999, between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's 10-Q for the fiscal quarter ended January 31, 1999.
10.19
Consent of WITECH Corporation, dated April 19, 1999, incorporated herein by
reference to Exhibit 4.1 of the Company's Form 10-Q for the fiscal quarter ended
April 30, 1999.
10.20
Amendment No. 15 to Loan Agreement dated September 23, 1999, between the Company
and WITECH Corporation.
10.21
Receivables Sales Agreement, dated September 28, 1999, between the Company and
RFC Capital Corporation.
10.22
Warrant dated July 15, 1994 issued by the Company to QUAESTUS L.P., incorporated
herein by reference to Exhibit 10.19 of the Company's Form 10-K for the fiscal
year ended July 31, 1994.
10.23
Warrant dated July 15, 1994 issued by the Company to Richard W. Weening,
incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K for
the fiscal year ended July 31, 1994.
10.24*
Employment letter dated October 20, 1995 from the Company to Brian Dearing,
incorporated herein by reference to Exhibit 10.35 of the Company's Form 10-K for
the fiscal year ended July 31, 1996.
10.25*
Form of Change of Control Agreement between the Company and each of Brian E.
Dearing, Mark L. Koczela, John C. Bray, Michael E. McGurk and Frederic G.
Tillman.
10.26*
Deferred Compensation Plan.
10.27*
Deferred Bonus Plan.
10.28
Preferred Stock Purchase Agreement dated July 15, 1997, between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-2 (Reg. No. 333-31295) filed on July
15, 1997.
10.29
Revolving Credit Agreement dated September 15, 1998 between the Company and
Briggs & Stratton Corporation, incorporated herein by reference to Exhibit 2.3
of the Company's Current Report on Form 8-K filed September 25, 1998.
21
<PAGE> 22
10.30
Amendment 1 to Revolving Credit Agreement dated May 25, 1999 between the Company
and Briggs & Stratton Corporation, incorporated herein by reference to Exhibit
10.1 of the Company's Form 10-Q for the fiscal quarter ended April 30, 1999.
23.1
Consent of Ernst & Young LLP.
24.1
Powers of Attorney appear on the signature page hereof.
27.1
Financial Data Schedule
* Management Contract or Compensatory Plan.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee, State of Wisconsin on this 26th day of October, 1999.
ARI NETWORK SERVICES, INC.
By:
--------------------------------
Brian E. Dearing
Chairman, President, CEO & Acting CFO,
& Acting CAO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brian E. Dearing and Mark L. Koczela and
each of them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and his name, place and stead, in any
and all capacities, to sign any and all amendments to this report and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each act and thing requisite and necessary to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Chairman, President & CEO & Director , 1999
- ----------------------------- & Acting CFO & Acting CAO ---------------
Brian E. Dearing (Principal Executive Officer)
Director , 1999
- ----------------------------- ---------------
William H. Alverson
Director , 1999
- ----------------------------- ---------------
Gordon J. Bridge
Director , 1999
- ----------------------------- ---------------
Francis Brzezinski
Director , 1999
- ----------------------------- ---------------
George D. Dalton
Director , 1999
- ----------------------------- ---------------
Eric P. Robison
Director , 1999
- ----------------------------- ---------------
Richard W. Weening
</TABLE>
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee, State of Wisconsin on this 26th day of October, 1999.
ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
-----------------------------------------
Brian E. Dearing,
Chairman, President & CEO & Acting CFO,
& Acting CAO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brian E. Dearing and Mark L. Koczela and
each of them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and his name, place and stead, in any
and all capacities, to sign any and all amendments to this report and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each act and thing requisite and necessary to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Brian E. Dearing Chairman, President, CEO & Director October 29, 1999
- ------------------------------ Acting CFO & Acting CAO
Brian E. Dearing (Principal Executive Officer)
/s/ William H. Alverson Director October 29, 1999
- ------------------------------
William H. Alverson
/s/ Gordon J. Bridge Director October 29, 1999
- ------------------------------
Gordon J. Bridge
/s/ Francis Brzezinski Director October 29, 1999
- ------------------------------
Francis Brzezinski
/s/ George D. Dalton Director October 29, 1999
- ------------------------------
George D. Dalton
/s/ Eric P. Robison Director October 29, 1999
- ------------------------------
Eric P. Robison
/s/ Richard W. Weening Director October 29, 1999
- ------------------------------
Richard W. Weening
</TABLE>
24
<PAGE> 25
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders
ARI Network Services, Inc.
We have audited the accompanying balance sheets of ARI Network Services, Inc.
(the Company) as of July 31, 1999 and 1998, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended July 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at July 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended July 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Milwaukee, Wisconsin
September 24, 1999, except for Notes 3 and 10,
as to which the date is September 30, 1999 and
September 28, 1999, respectively
1
<PAGE> 26
ARI Network Services, Inc.
Balance Sheets
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
JULY 31
1999 1998
-----------------
<S> <C> <C>
ASSETS (Note 3)
Current assets:
Cash $ 127 $ 194
Trade receivables, less allowance for doubtful accounts of
$278 in 1999 and $185 in 1998 3,175 2,643
Prepaid expenses and other 126 118
-----------------
Total current assets 3,428 2,955
Equipment and leasehold improvements:
Network system hardware 4,246 3,778
Leasehold improvements 239 239
Furniture and equipment 513 485
-----------------
4,998 4,502
Less accumulated depreciation and amortization 4,574 4,107
-----------------
Net equipment and leasehold improvements 424 395
Goodwill, less accumulated amortization of $980 in
1999 and $171 in 1998 7,742 336
Network system:
Network platform 11,467 11,467
Industry-specific applications 22,155 19,906
-----------------
33,622 31,373
Less accumulated amortization 24,778 22,251
-----------------
8,844 9,122
-----------------
$20,438 $12,808
=================
</TABLE>
2
<PAGE> 27
<TABLE>
<CAPTION>
JULY 31
1999 1998
---------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit payable to shareholder $ 246 $ -
Current portion of notes payable 385 28
Accounts payable 1,204 581
Unearned income 3,307 776
Accrued payroll and related liabilities 1,091 620
Other accrued liabilities 589 158
Current portion of capital lease obligations 82 30
---------------------------
Total current liabilities 6,904 2,193
Line of credit payable to shareholder 2,754 1,620
Notes payable 734 -
Unearned income 267 -
Capital lease obligations 23 33
Commitments (Note 4)
Shareholders' equity:
Cumulative preferred stock, par value $.001 per
share, 1,000,000 shares authorized; 20,350 and
20,000 shares issued and outstanding in 1999 and
1998, respectively
- -
Common stock, par value $.001 per share, 25,000,000
shares authorized; 5,097,432 and 4,247,460 shares
issued and outstanding in 1999 and 1998, respectively 5 4
Common stock to be issued 2,406 -
Additional paid-in capital 86,830 85,028
Accumulated deficit (79,485) (76,070)
---------------------------
Total shareholders' equity 9,756 8,962
---------------------------
$ 20,438 $ 12,808
===========================
</TABLE>
See accompanying notes.
3
<PAGE> 28
ARI Network Services, Inc.
Statements of Operations
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Network and other services $ 8,616 $ 5,811 $ 5,235
Software 2,822 1,431 888
Development 1,450 722 790
------------------------------------------------
12,888 7,964 6,913
Operating expenses:
Variable cost of products and services
sold (exclusive of depreciation and
amortization shown separately below):
Network and other services 1,431 1,327 1,035
Software 486 212 168
Development 1,234 407 484
------------------------------------------------
3,151 1,946 1,687
Depreciation and amortization 3,830 2,142 1,722
Network operations 1,017 708 1,004
Selling, general and administrative 6,995 4,586 4,819
Network construction and expansion 2,786 2,198 1,897
------------------------------------------------
17,779 11,580 11,129
Less capitalized portion (1,802) (1,546) (1,155)
------------------------------------------------
Total operating expenses 15,977 10,034 9,974
------------------------------------------------
Operating loss (3,089) (2,070) (3,061)
Other income (expense):
Interest expense (312) (125) (223)
Other, net (14) 55 9
------------------------------------------------
(326) (70) (214)
------------------------------------------------
Net loss $ (3,415) $ (2,140) $ (3,275)
================================================
Net loss per share $ (.67) $ (.52) $ (.91)
================================================
</TABLE>
See accompanying notes.
4
<PAGE> 29
ARI Network Services, Inc.
Statements of Shareholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Number of Shares Issued Common Stock to be
and Outstanding Issued Par Value
--------------------------------------------- ----------------- Additional
Preferred Common Number of Preferred Common Paid-in Accumulated
Stock Stock Shares Amount Stock Stock Capital Deficit
--------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance July 31, 1996 - 3,234,277 - $ - $ - $3 $76,834 $(70,655)
Issuance of common stock (net of
offering costs of $11) - 316,176 - - - 1 2,785 -
Issuance of common stock in
connection with acquisition
of cd\*. IMG, Inc. - 29,412 - - - - 250 -
Issuance of common stock as
payment of line of credit - 111,111 - - - - 1,000 -
Issuance of common stock
under stock purchase plan - 778 - - - - 4 -
Issuance of preferred stock 20,000 - - - - - 2,000 -
Net loss - - - - - - - (3,275)
-----------------------------------------------------------------------------------------
Balance July 31, 1997 20,000 3,691,754 - - - 4 82,873 (73,930)
Issuance of common stock (net of
offering costs of $54) - 387,500 - - - - 1,496 -
Issuance of common stock in
connection with acquisition
of Empart Technologies, Inc. - 163,523 - - - - 654 -
Issuance of common stock under
stock purchase plan - 4,683 - - - - 5 -
Net loss - - - - - - - (2,140)
-----------------------------------------------------------------------------------------
Balance July 31, 1998 20,000 4,247,460 - - - 4 85,028 (76,070)
Issuance of preferred stock 350 - - - - - - -
Issuance of common stock in
connection with acquisitions - 840,000 550,019 2,406 - 1 1,784 -
Issuance of common stock under
stock purchase plan and
from exercise of stock options - 9,972 - - - - 18 -
Net loss - - - - - - - (3,415)
-----------------------------------------------------------------------------------------
Balance July 31, 1999 20,350 5,097,432 550,019 $ 2,406 $ - $5 $86,830 $(79,485)
=========================================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 30
<TABLE>
<CAPTION>
Common Stock to be
Issued Par Value
- ----------------------------------------------------- Additional
Number of Preferred Common Paid-in Accumulated
Shares Amount Stock Stock Capital Deficit
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- $ - $ - $3 $76,834 $(70,655)
- - - 1 2,785 -
- - - - 250 -
- - - - 1,000 -
- - - - 4 -
- - - - 2,000 -
- - - - - (3,275)
- --------------------------------------------------------------------------------------
- - - 4 82,873 (73,930)
- - - - 1,496 -
- - - - 654 -
- - - - 5 -
- - - - - (2,140)
- --------------------------------------------------------------------------------------
- - - 4 85,028 (76,070)
- - - - - -
550,019 2,406 - 1 1,784 -
- - - - 18 -
- - - - - (3,415)
======================================================================================
550,019 $ 2,406 $ - $5 $86,830 $(79,485)
======================================================================================
</TABLE>
See accompanying notes.
6
<PAGE> 31
ARI Network Services, Inc.
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,415) $ (2,140) $ (3,275)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of network platform 695 695 690
Amortization of industry-specific applications 1,832 1,121 772
Amortization of goodwill 809 100 71
Depreciation and other amortization 494 226 189
Net change in receivables, prepaid expenses
and other 431 (714) (183)
Net change in accounts payable, unearned
income and accrued liabilities (505) 12 (19)
--------------------------------------------
Net cash provided by (used in) operating
activities 341 (700) (1,755)
INVESTING ACTIVITIES
Purchase of equipment and leasehold
improvements (56) (55) (79)
Cash received in acquisitions 43 - -
Industry-specific applications costs capitalized (1,802) (1,546) (1,155)
--------------------------------------------
Net cash used in investing activities (1,815) (1,601) (1,234)
FINANCING ACTIVITIES
Borrowings (repayments) under line of credit 1,380 1,120 (2,000)
Borrowings under notes payable 80 - -
Payments of capital lease obligations and notes
payable (71) (190) (109)
Proceeds from issuance of preferred stock - - 2,000
Proceeds from issuance of common stock 18 1,501 2,790
--------------------------------------------
Net cash provided by financing activities 1,407 2,431 2,681
--------------------------------------------
Net increase (decrease) in cash (67) 130 (308)
Cash at beginning of year 194 64 372
--------------------------------------------
Cash at end of year $ 127 $ 194 $ 64
============================================
Cash paid for interest $ 310 $ 129 $ 214
============================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for -
Network system hardware $ - $ 55 $ 28
Issuance of common stock for acquisitions 4,191 654 250
Issuance of common stock as payment of
line of credit - - 1,000
</TABLE>
See accompanying notes.
6
<PAGE> 32
ARI Network Services, Inc.
Notes to Financial Statements
July 31, 1999
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ARI Network Services, Inc. (the Company) operates in one business segment and
provides business-to-business e-commerce services to manufacturers in selected
industries with shared service networks and distribution channels. The Company's
e-commerce services use telecommunications technology and software to help
customers conduct business electronically, computer-to-computer, with minimal
changes to their internal business systems. The Company focuses on the U.S.,
Canadian, European and Australian manufactured equipment industry as well as
certain non-equipment industries, including the U.S. and Canadian agribusiness
industry, the U.S. and Canadian freight transportation industry, and the U.S.
non-daily newspaper publishing industry. The company provides both electronic
catalog and transaction processing software and services, enabling dealers and
distributors in a shared distribution and service network to electronically look
up parts, service bulletins and other technical information, and to exchange
electronic business documents such as purchase orders, invoices, warranty
claims, and status inquiries with the manufacturers. The Company's customers are
located primarily in the United States and Canada.
REVENUE RECOGNITION
Revenue for use of the network and for information services is recognized in the
period such services are utilized.
The Company recognizes the revenue allocable to software licenses and specified
upgrades upon delivery of the software product or upgrade to the end user,
unless the fee is not fixed or determinable or collectibility is not probable.
The Company considers all arrangements with payment terms extending beyond
twelve months and other arrangements with payment terms longer than normal not
to be fixed or determinable. If the fee is not fixed or determinable, revenue is
recognized as payments become due from the customer. Arrangements that include
acceptance terms beyond the Company's standard terms are not recognized until
acceptance has occurred. If collectibility is not considered probable, revenue
is recognized when the fee is collected.
7
<PAGE> 33
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Arrangements that include software services are evaluated to determine whether
those services are essential to the functionality of other elements of the
arrangement. When software services are considered essential, revenue under the
arrangement is recognized using contract accounting. When software services are
not considered essential, the revenue allocable to the software services is
recognized as the services are performed.
Revenue from annual or periodic maintenance fees is recognized over the period
the maintenance is provided. Revenue from catalog subscriptions is recognized
over the subscription term.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed under the straight-line method for financial reporting
purposes and under accelerated methods for income tax purposes. Depreciation and
amortization have been provided over the estimated useful lives of the assets as
follows:
<TABLE>
<CAPTION>
Years
---------
<S> <C>
Network system hardware 2 - 10
Leasehold improvements 10
Furniture and equipment 2 - 5
</TABLE>
NETWORK CONSTRUCTION AND EXPANSION AND SOFTWARE DEVELOPMENT
The Company has developed a basic network and telecommunications platform which
is the foundation of its network. The platform can be used on different hardware
and is not subject to the frequency of technological changes that sometimes
occur with hardware or industry-specific applications.
8
<PAGE> 34
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company also develops and purchases industry-specific software applications
for personal computers and mainframes which, when utilized with the platform,
give rise to the Company's products and services tailored to its targeted
industries.
Certain software development costs and network construction and expansion costs
are capitalized when incurred. Capitalization of these costs begins upon the
establishment of technological feasibility. The establishment of technological
feasibility and the ongoing assessment of recoverability of software and network
system costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technologies.
The annual amortization of the platform and the industry-specific software
applications is the greater of the amount computed using (a) the ratio that
current gross revenues for the network or an industry-specific product bear to
the total of current and anticipated future gross revenues for the network or an
industry-specific product or (b) the straight-line method over the estimated
economic life of the product (20 years - platform, 3 years - industry-specific
software applications). Amortization starts when the product is available for
general release to customers.
All other network construction and expansion expenditures are charged to expense
in the period incurred.
GOODWILL
Goodwill, representing the excess of cost over net assets of businesses
acquired, is stated at cost and is amortized on a straight-line basis over five
years.
IMPAIRMENT OF LONG-LIVED ASSETS
Equipment and leasehold improvements, network system costs and goodwill are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets.
9
<PAGE> 35
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Such analyses necessarily involve judgment. The Company evaluated the ongoing
value of its long-lived assets as of July 31, 1999 and 1998, and determined that
there was no significant impact on the Company's results of operations.
CAPITALIZED INTEREST COSTS
In 1999, 1998 and 1997, interest costs of $109,000, $40,000 and $35,000,
respectively, were capitalized and included in the network system.
NET LOSS PER SHARE
The basic and dilutive weighted-average shares used in the earnings per share
calculation are 5,061,000, 4,119,000 and 3,611,000, respectively, in 1999, 1998
and 1997. Dilutive earnings per share is not shown as the impact is
antidilutive.
SHAREHOLDERS' EQUITY
On November 19, 1997, the Board of Directors of the Company declared a
one-for-four reverse stock split on the Company's common stock, to shareholders
of record on November 19, 1997. Shareholders' equity, share and per share data
appearing in the financial statements and notes thereto have been adjusted for
the reverse stock split.
RECLASSIFICATIONS
Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.
ACCOUNTING PRONOUNCEMENTS
Effective August 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." Net loss for 1999,
1998 and 1997 is the same as comprehensive income defined pursuant to SFAS No.
130.
The Company adopted Statement of Position (SOP) 97-2, "Software Revenue
Recognition," effective for transactions entered into beginning August 1, 1998.
The adoption of SOP 97-2 did not have a material impact on the Company's 1999
financial statements.
10
<PAGE> 36
ARI Network Services, Inc.
Notes to Financial Statements (continued)
2. ACQUISITIONS
In September 1998, the Company acquired certain assets used in the operation of
Briggs & Stratton Corporation's Powercom-2000 business (Powercom). Aggregate
consideration for the acquisition consisted of 840,000 shares of the Company's
common stock and the assumption of certain liabilities totaling $2,291,000.
In May 1999, the Company acquired the assets of Network Dynamics, Inc. (NDI).
Aggregate consideration for the acquisition consisted of 550,019 shares of the
Company's common stock, which were issued in September 1999, and the assumption
of certain liabilities totaling $3,623,000.
The acquisitions were accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based upon their respective fair values at the date of acquisition. The
financial statements include the operating results of the acquisitions from
their respective dates of acquisition. The excess of the purchase price over the
fair value of net assets acquired of $2,782,000 for Powercom and $5,433,000 for
NDI have been recorded as goodwill.
The following unaudited pro forma results of operations for the years ended July
31, 1999 and 1998 assume that the acquisitions had occurred on August 1, 1997
(in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Net revenues $15,482 $12,414
Net loss (4,533) (5,191)
Basic and diluted net loss per share (0.81) (0.94)
</TABLE>
The pro forma results do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred on
August 1, 1997, nor are they necessarily indicative of future operating results.
11
<PAGE> 37
ARI Network Services, Inc.
Notes to Financial Statements (continued)
3. LINE OF CREDIT AND NOTES PAYABLE
In December 1994, the Company entered into a $1,500,000 revolving line of credit
agreement with two shareholders. In December 1996, the Company issued 111,111
shares of common stock as payment of $1,000,000 of the revolving line of credit.
The remaining balance under the revolving line of credit was repaid and the line
of credit was terminated.
The Company had a $3,000,000 revolving line of credit agreement with a
shareholder that was to expire on December 31, 2001. On September 30, 1999, the
Company and the shareholder restructured and amended the line of credit
agreement in order to reduce the line of credit from $3,000,000 to $1,000,000,
establish a $1,000,000 term loan payable and convert $1,000,000 of the line of
credit into 195,122 shares of common stock. The term loan is payable in equal
monthly installments over three years commencing November 1, 1999 and bears
interest at prime plus 3.25%. The line of credit expires December 31, 2001. The
Company is required to pay a fee of .025% per month on the unused portion of the
line of credit. Borrowings under the line of credit bear interest at prime plus
2%. In connection with this amendment, the Company paid $12,500 in financing
fees and issued a warrant to purchase 30,000 shares of the Company's common
stock at $5.125 per share. The long-term portion of the $3,000,000 line of
credit balance outstanding at July 31, 1999 includes $1,000,000 which was
converted to common stock on September 30, 1999, $1,000,000 line of credit that
the Company intends to have outstanding for an uninterrupted period extending
beyond one year from the balance sheet date and $754,000 of the term note. The
entire agreement is secured by substantially all assets of the Company other
than accounts receivable sold under the receivables sales agreement described in
Note 10. The agreement contains various restrictive covenants including
maintenance of a minimum level of net worth and restrictions on additional
indebtedness.
In connection with the origination of the line of credit agreement and various
extensions of the agreement through July 31, 1999, the Company has issued the
shareholder 350 shares of its Series A Preferred Stock and total warrants for
the purchase of up to 250,000 shares of its common stock at $2.125 per share.
These warrants lapse on either September 30, 2000 or December 31, 2001, as to
any shares of common stock not issued.
12
<PAGE> 38
ARI Network Services, Inc.
Notes to Financial Statements (continued)
3. LINE OF CREDIT AND NOTES PAYABLE (CONTINUED)
Notes payable consist of the following at July 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Term loan $ 360 $ -
Note payable to bank 602 -
Note payable to Briggs & Stratton Corporation 80 -
Other 77 28
----------------------
1,119 28
Less current maturities 385 28
----------------------
$ 734 $ -
======================
</TABLE>
The term loan requires monthly principal and interest payments of approximately
$8,000 through June 2008. The note payable to bank bears interest at 9.75% which
is payable monthly through December 1999; thereafter monthly principal payments
of $25,000 plus interest are due through January 2002. The note payable to
Briggs & Stratton Corporation is due in October 1999 and bears interest at prime
plus 2% payable monthly.
Future maturities of notes payable as of July 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal year ending
------------------
<S> <C> <C>
2000 $ 385
2001 423
2002 234
2003 77
-------
$ 1,119
=======
</TABLE>
4. CAPITAL AND OPERATING LEASES AND RELATED-PARTY TRANSACTIONS
The Company leases office space under operating lease arrangements expiring in
2001 through 2004. The Company is generally liable for its share of increases in
the landlord's direct operating expenses and real estate taxes up to 5% of the
previous year's rent. Total rental expense for the operating leases was $400,000
in 1999, $487,000 in 1998 and $645,000 in 1997.
13
<PAGE> 39
ARI Network Services, Inc.
Notes to Financial Statements (continued)
4. CAPITAL AND OPERATING LEASES AND RELATED-PARTY TRANSACTIONS (CONTINUED)
Minimum lease payments under remaining capital and operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending Capital Leases Operating Lease
- ------------------ ------------------------------------
<S> <C> <C>
2000 $105 $ 677
2001 21 490
2002 14 435
2003 2 13
------------------------------------
Total minimum lease payments 142 $ 1,615
===============
Amounts representing interest 37
---------------
Present value of minimum capital lease payments 105
Less amounts payable in one year 82
---------------
$ 23
===============
</TABLE>
The Company and Quaestus Limited Partnership (Quaestus), a shareholder, had an
agreement dated September 30, 1993, which was terminated October 31, 1997,
whereby Quaestus assisted the Company with investor relations, executive
recruiting, business and strategic planning and corporate finance matters.
During fiscal 1998 and 1997, the Company expensed $36,000 and $176,000,
respectively.
Quaestus has been issued a warrant to purchase 62,500 shares of common stock at
$17 per share exercisable through December 1999.
5. SHAREHOLDERS' EQUITY
In July 1997, the Company issued 20,000 shares of Series A Preferred Stock for
$2,000,000 to a common shareholder. The shares are entitled to cumulative annual
dividends equal to the product of $100 and prime plus 2% payable quarterly, as
and when declared by the Board of Directors. Prior to August 1, 2002, dividends
payable may be paid, at the Company's option, in lieu of cash, in additional
shares of Series A Preferred Stock. The Company may redeem outstanding shares at
any time at the redemption price of $100 per share plus accrued and unpaid
dividends.
14
<PAGE> 40
ARI Network Services, Inc.
Notes to financial statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
In the event of liquidation or dissolution of the Company, the holders of shares
of Series A Preferred Stock shall be entitled to receive $100 per share plus
accrued and unpaid dividends before any distribution is made to the holders of
common stock. Accumulated dividends in arrears at July 31, 1999 are $447,000.
6. STOCK PLANS
The Company's 1991 Stock Option Plan (Stock Option Plan) has 850,000 shares of
common stock reserved for issuance. Options granted under the Stock Option Plan
may be either (a) options intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, or (b)
nonqualified stock options.
Any incentive stock option that is granted under the Stock Option Plan may not
be granted at a price less than the fair market value of the stock on the date
of grant (or less than 110% of the fair market value in the case of holders of
10% or more of the voting stock of the Company). Nonqualified stock options may
be granted at the exercise price established by the Stock Option Committee,
which may be less than, equal to, or greater than the fair market value of the
stock on the date of grant.
Each option granted under the Stock Option Plan is exercisable for a period of
ten years from the date of grant (five years in the case of a holder of more
than 10% of the voting stock of the Company) or such shorter period as
determined by the Stock Option Committee and shall lapse upon the expiration of
said period, or earlier upon termination of the participant's employment with
the Company.
At its discretion, the Stock Option Committee may require a participant to be
employed by the Company for a designated number of years prior to exercising any
options. The Committee may also require a participant to meet certain
performance criteria, or that the Company meet certain targets or goals, prior
to exercising any options.
15
<PAGE> 41
ARI Network Services, Inc.
Notes to financial statements (continued)
6. STOCK PLANS (CONTINUED)
Changes in option shares under the Stock Option Plan are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of year 528,715 350,685 261,214
Granted:
1999--$1.75 to $8.38 per share 213,175 - -
1998--$2.25 to $4.62 per share - 229,499 -
1997--$7.00 to $12.00 per share - - 185,875
Exercised:
1999--$2.13 to $2.25 per share (784) - -
Canceled or expired (65,257) (51,469) (96,404)
-------------------------------------
Options outstanding at end of year 675,849 528,715 350,685
=====================================
Options exercisable at July 31 429,763 318,282 180,282
=====================================
Options available for grant at July 31 132,717 280,635 108,665
=====================================
</TABLE>
The Company's 1992 Employee Stock Purchase Plan (Stock Purchase Plan) has 62,500
shares of common stock reserved for issuance and 18,706 shares have been issued
through July 31, 1999. All employees of the Company, other than executive
officers, with six months of service are eligible to participate. Shares may be
purchased at the end of a specified period at the lower of 85% of the market
value at the beginning or end of the specified period through accumulation of
payroll deductions.
The Company's 1993 Director Stock Option Plan (Director Plan) has 150,000 shares
of common stock reserved for issuance to nonemployee directors. Options under
the Director Plan are granted at the fair market value of the stock on the date
immediately preceding the date of grant. Each option granted under the Director
Plan is exercisable
16
<PAGE> 42
ARI Network Services, Inc.
Notes to financial statements (continued)
6. STOCK PLANS (CONTINUED)
one year after the date of grant and cannot expire later than ten years from the
date of grant. Changes in option shares under the Director Plan are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Options outstanding at beginning of year 35,433 28,500 22,950
Granted:
1999--$2.13 to $4.13 per share 14,446 - -
1998--$1.78 to $2.50 per share - 15,208 -
1997--$6.88 per share - - 5,550
Expired - (8,275) -
-------------------------------------
Options outstanding at end of year 49,879 35,433 28,500
=====================================
Options exercisable at July 31 35,433 25,229 23,325
=====================================
Options available for grant at July 31 100,121 114,567 46,500
=====================================
</TABLE>
Certain nonemployee directors have been granted stock options aggregating 52,500
shares of common stock at $4 to $17 per share.
The Company reports stock-based compensation expense under the intrinsic
value-based method under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The pro forma effect of applying the fair
value-based method under SFAS No. 123, "Accounting for Stock-Based
Compensation," to the Company's stock options granted during the years ended
July 31, 1999 and 1998 would not result in net loss and net loss per share
materially different from the amounts reported.
17
<PAGE> 43
ARI Network Services, Inc.
Notes to financial statements (continued)
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of July 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $31,336 $ 31,598
Other 433 503
-------------------------
Total deferred tax assets 31,769 32,101
Valuation allowance for deferred tax assets (28,302) (28,525)
-------------------------
Net deferred tax asset 3,467 3,576
Deferred tax liabilities -
Network system 3,467 3,576
=========================
Net deferred taxes $ - $ -
=========================
</TABLE>
As of July 31, 1999, the Company has unused net operating loss carryforwards for
income tax purposes of $33,523,000 expiring in 2007 through 2018.
In addition, the Company has unused net operating loss carryforwards for income
tax purposes of $12,759,000 expiring between 2000 and 2002, of which not more
than $444,000 annually can be utilized to offset taxable income. Also, the
Company has unused net operating loss carryforwards for income tax purposes of
$33,656,000 expiring between 2003 and 2007, of which not more than $3,655,000
annually can be utilized to offset taxable income. Use of the net operating loss
carryforwards is restricted under Section 382 of the Internal Revenue Code
because of changes in ownership in 1987 and 1992.
A reconciliation between income tax expense and income taxes computed by
applying the statutory federal income tax rate to net loss is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Computed income taxes at 34% $(1,161) $(728) $(1,114)
Other 7 7 7
Net operating loss carryforward 1,154 721 1,107
======================================
Income tax expense $ - $ - $ -
======================================
</TABLE>
18
<PAGE> 44
ARI Network Services, Inc.
Notes to financial statements (continued)
8. EMPLOYEE BENEFIT PLAN
The Company has a qualified retirement savings plan (the 401(k) Plan) covering
its employees. Each employee may elect to reduce his or her current compensation
by up to 15%, up to a maximum of $10,000 in calendar 1999 (subject to adjustment
in future years to reflect cost of living increases) and have the amount of the
reduction contributed to the 401(k) Plan. Company contributions to the 401(k)
Plan are at the discretion of the Board of Directors. The Company has not made
any contribution to the 401(k) Plan since its inception.
9. MAJOR CUSTOMERS
During fiscal 1999, sales to any one customer did not exceed 10% of net
revenues. Sales to one customer were 12% of net revenues during each of fiscal
1998 and 1997. Accounts receivable from this customer was approximately $176,000
at July 31, 1998. Sales to one other customer were 11% and 10% of net revenues
during fiscal 1998 and 1997, respectively. Accounts receivable from this
customer was approximately $290,000 at July 31, 1998.
10. SUBSEQUENT EVENT
On September 28, 1999, the Company entered into a Receivables Sales Agreement
(Sale Agreement) establishing a $3,000,000 working capital facility. The three
year Sale Agreement allows the creditor to purchase up to $3,000,000 of the
Company's eligible accounts receivable, which may be increased in increments of
$1,000,000 upon mutual agreement and a payment by the Company of $10,000 upon
each increase. The Company will receive 90% of each increment purchased under
the Sale Agreement. In connection with the Sale Agreement, the Company is
required to pay a commitment fee of $45,000 on September 28, 1999, $30,000 on
September 28, 2000 and $15,000 on September 28, 2001. In addition, the Company
is obligated to pay a fee equal to the greater of prime plus 2% of the purchased
but uncollected receivables or $3,000 per month. The Company may terminate the
Sale Agreement prior to September 28, 2002 by paying 3% of the purchase
commitment during the first year, 2% of the purchase commitment during the
second year and 1% of the purchase commitment during the third year.
19
<PAGE> 45
Schedule II
ARI NETWORK SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS END OF YEAR
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts-
accounts receivable:
<S> <C> <C> <C> <C>
1999 $ 185 $ 307 $ 214 (A) $ 278
======= ======= ======= ======
1998 $ 132 $ 95 $ 42 (A) $ 185
======= ======= ======= ======
1997 $ 83 $ 100 $ 51 (A) $ 132
======= ======= ======= ======
</TABLE>
(A) Uncollectible accounts written off, net of recoveries.
<PAGE> 1
EX 10.20
Amendment No. 15 to Loan Agreement dated September 23,1999 between the Company
and WITECH Corporation
AMENDMENT NUMBER FIFTEEN 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 September 23, 1999.
B A C K G R O U N D:
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 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 Dollars ($1,000,000).
2. In Exhibit 1.1 to the Agreement, in the definition of "Total Loan
Commitment," the reference to "Three Million Dollars ($3,000,000)" is deleted
and "One Million Dollars ($1,000,000)" is substituted therefor.
3. In Exhibit 2.2(a), the reference to "Three Million Dollars
($3,000,000)" is deleted and "One Million Dollars ($1,000,000)" is substituted
therefor.
4. New Paragraphs 2.1.A. and 2.2.A. shall be added to the Loan
Agreement to read as follows:
2.1.A. Term Loan. Subject to the terms and conditions hereof,
as of September 30, 1999, One Million Dollars ($1,000,000) of the
outstanding principal amount of Revolving Credit Loans shall be
converted into a term loan of the same amount (the "Term Loan").
2.2.A. Term Note. The obligation to repay the Term Loan shall
be evidenced by and repayable in accordance with the provisions of a
promissory note of ARI substantially in the form of EXHIBIT 2.2(b) (the
"Term Note"), dated September 30, 1999 and payable to the order of
WITECH, with interest thereon as provided in Paragraph 2.5. The
principal portion of the Term Loan shall be payable in thirty five (35)
equal monthly installments of Twenty Seven Thousand Seven Hundred
Seventy Eight Dollars ($27,778.00), due the first day of November, 1999
and on the same day of each successive month thereafter, plus a final
payment of the unpaid principal due on October 1, 2002.
<PAGE> 2
5. Paragraph 2.4 shall be amended to read as follows:
2.4. Prepayments. ARI may, at its option, without premium or
penalty, prepay the Revolving Credit Loans and the Term Loan made
hereunder, in whole or in part at any time. All payments shall be
applied first to indemnification and other amounts due hereunder, then
to interest and then to principal.
6. Paragraph 2.5 shall be amended to read as follows:
2.5. Interest Rate.
(a) The Revolving Credit Loans shall bear interest for the
period from and including the date thereof until maturity on the
unpaid principal amount thereof at a rate per annum equal to the
Prime Rate plus two percent (2%). The Term Loan shall bear
interest for the period from and including the date thereof until
maturity on the unpaid principal amount thereof at a rate per
annum equal to the Prime Rate plus three and one-quarter percent
(3 1/4%);
(b) If all or a portion of the principal amount of
any Revolving Credit Loan or the Term Loan made hereunder
shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), all principal amounts outstanding
under the Revolving Credit Note and under the Term Note shall
bear interest at a rate per annum equal to the rate applicable
pursuant to (a) above plus four percent (4%) from the date of
such nonpayment until paid in full; and
(c) Interest on the Revolving Credit Note and on the
Term Note shall be payable in arrears on each Interest Payment
Date and at maturity.
7. WITECH agrees to purchase for One Million Dollars ($1,000,000) the
number of shares of ARI common stock obtained by dividing One Million Dollars
($1,000,000) by $5 1/8, rounded to the nearest full share. The purchase price
shall be paid by reducing the principal amount of Revolving Credit Loans
outstanding under the Loan Agreement. The exercise price of the warrants to
purchase ARI stock held by WITECH will not be adjusted as a result of such stock
purchase. WITECH represents and warrants that it is acquiring such shares of
common stock for investment purposes only without a view to the sale or other
disposition thereof, that it acknowledges that any such shares have not been
registered under the Securities Act of 1933, as amended, or applicable state
securities laws, and may not be sold, transferred or otherwise disposed of in
the absence of such registration or an exemption from the registration
requirements. The stock certificates representing such shares may bear a legend
with respect to the foregoing restrictions on transfer.
8. The provisions of Paragraph 4 of that certain Amendment Number
Fourteen to Loan Agreement between ARI and WITECH (relating to repayment of the
Bridge Loan with the
2
<PAGE> 3
proceeds of equity offerings), as well as similar provisions of prior Amendments
to the Loan Agreement, shall be deleted in their entirety.
9. Subject to the amendments described herein, the Loan Agreement, as
amended, and associated documents and agreements remain in full force and
effect.
10. As further consideration for this Agreement, ARI agrees to pay
WITECH a closing fee equal to 1 1/4% of the Term Loan, or $12,500.
11. As further consideration for this Agreement ARI agrees to issue to
WITECH a warrant (the "Warrant") to purchase 30,000 shares of common stock at
$5 1/8 per share, substantially in the form of Exhibit A.
12. The purchase and sale of the ARI common stock, the issuance of the
Warrant, the amendment to the Loan Agreement and ARI's payment of the closing
fee shall occur and be effective on September 30, 1999, provided, (a) the Board
of Directors of ARI shall have approved this Agreement, the Warrant and the sale
of common stock to WITECH, and (b) ARI shall have received assurances,
satisfactory to it, that the sale of ARI common stock and issuance of the
Warrant 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, Inc. applicable to ARI. If such conditions
are not satisfied by September 30, 1999, this Agreement shall terminate without
liability to either party.
13. This Agreement contains the entire agreement between the parties
hereto with respect to the transactions contemplated hereby and supersedes all
prior arrangements or understandings with respect thereto. This Agreement shall
be governed by the laws of the State of Wisconsin.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers as of the date first
above written.
WITECH CORPORATION ARI NETWORK SERVICES, INC.
By: /s/ Francis Brzezinski By: /s/ Brian E. Dearing
----------------------------- -------------------------------------
Francis Brzezinski, President Brian E. Dearing, Chairman, President
and Chief Executive Officer
3
<PAGE> 4
Exhibit 2.2(b)
TERM NOTE
$1,000,000.00 September 30, 1999
Milwaukee, Wisconsin
FOR VALUE RECEIVED, the undersigned, ARI NETWORK SERVICES, INC., a
Wisconsin corporation ("ARI"), hereby unconditionally promises to pay to the
order of WITECH CORPORATION (`WITECH'), in lawful money of the United States of
America and in immediately available funds, the principal sum of One Million
Dollars ($1,000,000), payable in installments of principal as follows:
Commencing on November 1, 1999, and continuing on the first day of each month
thereafter until September 1, 2002, monthly payments of Twenty Seven Thousand
Seven Hundred Seventy Eight Dollars ($27,778.00) each, plus a final installment
of all unpaid principal, plus all accrued and unpaid interest, on October 1,
2002.
ARI also unconditionally promises to pay interest on the unpaid
principal amount outstanding hereunder at the rates and on the dates set forth
in Paragraph 2.5 of the Loan Agreement (as hereinafter defined).
WITECH is hereby authorized to record the date and amount of each
payment or prepayment of principal or interest in the books and records of
WITECH and any such recordation shall constitute prima facie evidence of the
accuracy of the information so recorded.
This Term Note may be prepaid at any time, in whole or in part, as
provided in the Loan Agreement.
ARI and each guarantor and endorser hereof hereby waives presentment,
demand and protest and notice of presentment, protest, default, nonpayment,
maturity, release, compromise, settlement, extension or renewal of this Term
Note.
This Term Note is the Term Note referred to in the Loan Agreement dated
as of October 4, 1993, as amended between ARI and WITECH (as the same may be
further amended, modified, supplemented, or restated from time to time, the
"Loan Agreement"), is entitled to the benefits thereof and is secured by certain
collateral of ARI as provided therein and in other loan documents. References
should be made to the Loan Agreement for terms and provisions which bear upon
this Term Note and the payments to be made hereunder. All capitalized terms used
in this Term Note, unless herein defined, shall have the meaning ascribed to
such terms in the Loan Agreement.
4
<PAGE> 5
Upon the occurrence of any Event of Default specified in the Loan
Agreement, the amounts then remaining unpaid on this Term Note may be declared
to be or may become immediately due and payable as provided in the Loan
Agreement.
ARI NETWORK SERVICES, INC.
By:
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
5
<PAGE> 6
Exhibit A
WARRANT
This is to certify that for value received, including, without
limitation, the agreement of WITECH Corporation ("WITECH") to enter into
Amendment Number 15 to that certain Loan Agreement, dated October 4, 1993, as
amended (the "Loan Agreement") with ARI NETWORK SERVICES, INC. (the "Company"),
WITECH is entitled to purchase shares of the Company's $.001 par value Common
Stock, subject to the terms and conditions more fully set forth herein.
1. Number of Shares. This Warrant shall permit WITECH to purchase
Thirty Thousand (30,000) shares of Common Stock, as adjusted hereunder
(the "Underlying Shares"). In the event of any stock dividend, stock split,
reverse stock split, recapitalization or reorganization or any similar
transaction, the number of shares of the Common Stock that the holder hereof may
acquire upon exercise hereof and the Exercise Price shall be proportionately and
appropriately adjusted.
2. Exercise Price. The Underlying Shares of the Common Stock that may
be acquired by WITECH pursuant to the exercise of this Warrant may be acquired
by WITECH at a per share price of $5 1/8 (the "Exercise Price").
3. Adjustment of Exercise Price. In the event that ARI issues any
shares of Common Stock (other than to directors, employees or former directors
or employees of the Company upon the exercise of stock options) (the "Newly
Issued Common Stock") or warrants (other than the warrants originally issued to
or held by WITECH) or other securities convertible into Common Stock (other than
stock option grants to directors or employees) ("Newly Issued Securities") at
any time while this Warrant is outstanding and the price per share of such
Newly Issued Common Stock or the exercise price per share under such Newly
Issued Securities is less than the Exercise Price hereunder, the Exercise Price
hereunder with respect to any Underlying Shares shall be reduced to the per
share price of such Newly Issued Common Stock or the exercise price under such
Newly Issued Securities.
4. Exercise. This Warrant may be exercised at any time on or before
September 30, 2006, as to all or part of the Underlying Shares. To exercise this
Warrant, WITECH shall present to the Company this Warrant, together with the
Exercise Price for the number of Underlying Shares to be purchased, in cash or
by certified check or bank draft drawn on immediately available funds, whereupon
this Warrant shall be exercised to the extent specified, and WITECH shall be the
holder of record of the number of shares of Common Stock purchased. Certificates
evidencing such shares shall be delivered to WITECH within a reasonable time but
not exceeding ten (10) days after this Warrant shall have been exercised as
provided herein.
5. Representations and Warranties. The Company hereby represents and
warrants to WITECH as follows:
6
<PAGE> 7
(a) The Company has full corporate power and authority to execute
this Warrant and perform its obligations hereunder.
(b) The execution and delivery of this Warrant and the consummation
of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part
of the Company. This Warrant has been duly executed by properly
authorized officers of the Company, and constitutes a legal,
valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms.
(c) Neither the execution and delivery of this Warrant nor the
consummation of the transactions contemplated hereby will
violate or result in any violation of or be in conflict with or
constitute a default under any term or condition contained in
any judgment, decree, order, statute, rule or governmental
regulation applicable to the Company or any of its subsidiaries
or any of its or their assets.
(d) The Company shall at all times from the date hereof until such
time as its obligations hereunder terminate, reserve for
issuance upon exercise of this Warrant, that number of shares of
the Common Stock equal to the maximum number of shares of the
Common Stock which may be acquired pursuant hereto. Any shares
issued pursuant to the exercise of this Warrant shall be duly
and validly issued, fully paid and nonassessable (other than as
provided in Section 180.0622(2)(b) of the Wisconsin Statutes and
the case law interpreting such statute), shall be free and clear
of all liens, security interests, charges, claims or
encumbrances, and shall not have been issued in violation of any
preemptive rights of any stockholders of the Company.
6. Miscellaneous
(a) This Warrant has not been registered under the Securities Act of
1933, as amended (the "Act"), but rather has been issued
pursuant to an exemption therefrom. This Warrant may not be
transferred or assigned except as expressly permitted herein,
and then only in accordance with a valid registration statement
or an exemption from registration under the provisions of the
Act.
(b) This Warrant shall not entitle the holder hereof to any rights
as a stockholder of the Company, either at law or in equity;
specifically, this Warrant shall not entitle the holder hereof
to vote on any matter presented to the stockholders of the
Company or to any notice of any meetings of stockholders or any
other proceedings of the Company.
(c) If any term, provision, covenant or restriction contained in
this Warrant is held by a court or a federal regulatory agency
of competent jurisdiction to be invalid, void
7
<PAGE> 8
or unenforceable, the remainder of the terms, provisions and
covenants and restriction contained in this Warrant shall remain
in full force and effect, and shall in no way be affected,
impaired or invalidated. If for any reason such court or
regulatory agency determines that this Warrant will not permit
the holder hereof to acquire the full number of shares of the
Common Stock provided in Paragraph 1, above, it is the express
intention of the Company to allow the holder hereof to acquire
such lesser number of shares as may be permissible, without any
amendment or modification hereof.
(d) This Warrant shall in all respects be governed by and construed
in accordance with the internal laws of the State of Wisconsin.
(e) This Warrant may not be modified, amended, altered or
supplemented, except upon the execution and delivery of written
agreement executed by the Company and the holder hereof.
(f) This Warrant constitutes the entire agreement of WITECH and the
Company with respect to the matters contained herein, and
supersedes all prior agreements and understandings between the
parties with respect thereto.
IN WITNESS WHEREOF, the Company has executed and delivered this Warrant
effective as of this 30th day of September, 1999.
ARI NETWORK SERVICES, INC.
By:
---------------------------------
Brian E. Dearing,
Chairman, President and
Chief Executive Officer
Attest:
By:
---------------------------------
Mark L. Koczela, Secretary
8
<PAGE> 1
EX 10.21
Receivables Sale Agreement, dated September 28, 1999, between the Company and
RFC Capital Corporation
RECEIVABLES SALE AGREEMENT
Dated as of
September 28, 1999
by and between
ARI NETWORK SERVICES, INC.,
as Seller and Subservicer, and
RFC CAPITAL CORPORATION,
as Purchaser
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RECEIVABLES SALE AGREEMENT (the "Agreement"), dated as of September 28,
1999, by and between ARI NETWORK SERVICES, INC., a Wisconsin corporation, as
Seller and Subservicer, and RFC CAPITAL CORPORATION, a Delaware corporation, as
Purchaser.
WITNESSETH:
WHEREAS, the Seller desires to sell certain of its receivables and the
Purchaser is a corporation formed for the purpose of purchasing such receivables
from time to time;
WHEREAS, the Purchaser shall retain the complete right and ultimate
authority to perform certain servicing, administrative and collection functions
in respect of the receivables purchased by the Purchaser under this Agreement;
WHEREAS, the Purchaser desires that the Subservicer be appointed to perform
certain servicing, administrative and collection functions in respect of the
Purchased Receivables; and
WHEREAS, the Seller has been requested and is willing to act as the
Subservicer.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I - DEFINITIONS
Section 1.1. Certain Defined Terms. The capitalized terms used in this
Agreement shall have the respective meanings set forth on Exhibit A to this
Agreement.
Section 1.2. Other Terms. All accounting terms not specifically defined in
this Agreement shall be construed in accordance with generally accepted
accounting principles. All terms defined in Article 9 of the UCC, and not
specifically defined in this Agreement, are used in this Agreement as defined in
such Article 9 of the UCC.
ARTICLE II - PURCHASE AND SALE; ESTABLISHMENT OF ACCOUNTS
Section 2.1. Offer to Sell. Seller shall offer to sell, transfer, assign
and set over to Purchaser those Eligible Receivables selected for sale by
Seller, in its sole discretion, and to be set forth on a list of such Eligible
Receivables which list shall be delivered by the Seller to the Purchaser no
later than three (3) Business Days prior to each Purchase Date; provided,
notwithstanding the foregoing, Seller agrees to offer for Purchase to the
Purchaser Eligible Receivables in an amount not less than ten percent (10.0%) of
the Purchase Commitment during any ninety (90) day period during the term of
this Agreement.
Section 2.2. Purchase of Receivables. (a) Until the occurrence of a
Termination Date, upon receipt of the list of Eligible Receivables and offer to
sell pursuant to Section 2.1, the Purchaser, in its sole discretion, will
confirm which of the Eligible Receivables offered by Seller that the Purchaser
will Purchase. The Purchase of such Receivables shall occur upon payment of the
applicable Purchase Price, as provided at Section 2.3 of this Agreement. Upon
Purchase of the Receivables, Seller will have sold, transferred, assigned, set
over and conveyed to Purchaser, without recourse except as expressly provided
herein, all of Seller's right, title and interest in and to the Purchased
Receivables, and title to such Purchased Receivables shall have passed to
Purchaser at such time. If, in the event the Purchaser determines, in its sole
discretion, not to Purchase an Eligible Receivable under this Section 2.2, the
Purchaser shall provide the Seller with notice of the same within five Business
Days of Purchaser's receipt of the Seller's list of Eligible Receivables
pursuant to Section 2.1 and if, as a result thereof Seller elects to provide
written notice to the Purchaser of its intention to terminate this Agreement,
resulting in
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the occurrence of a Termination Date, provided there has not occurred any Event
of Seller Default, then the Seller shall not be obligated to pay to the
Purchaser a Termination Fee.
(b) The Seller shall not take any action inconsistent with such ownership
and, from and after the date of such transfer, shall not claim any ownership in
any Purchased Receivable. The Seller shall indicate in its Records that
ownership interest in any Purchased Receivable is held by the Purchaser. In
addition, the Seller shall respond to any inquiries with respect to ownership of
a Purchased Receivable by stating that it is no longer the owner of such
Purchased Receivable and that ownership of such Purchased Receivable is held by
the Purchaser. Documents relating to the Purchased Receivables shall be held in
trust by the Seller and the Subservicer, for the benefit of the Purchaser as the
owner of the Purchased Receivables, and possession of any Required Information
relating to the Purchased Receivables so retained is for the sole purpose of
facilitating the servicing of the Purchased Receivables and carrying out the
terms of this Agreement. Such retention and possession is at the will of the
Purchaser and in a custodial capacity for the benefit of the Purchaser only,
except to the extent necessary for the Seller's enforcement of its rights under
this Agreement.
Section 2.3. Purchase Price and Payment. The Purchase Price for Receivables
which have been billed to the Payor thereof and purchased on any Purchase Date
shall be an amount equal to the aggregate Net Values of such Purchased
Receivables and shall be paid by the Purchaser to the Seller by wire transfer.
The Purchase Price to be paid by the Purchaser to the Seller for Receivables
generated but yet to be billed by the Seller, or its Billing and Collection
Agent, as the case may be (each such Receivable an "Unbilled Receivable"), shall
be made in two installments the first of which to occur on the respective
Purchase Date such Receivable is sold by the Seller to the Purchaser in a manner
consistent with Sections 2.1 and 2.2 for an amount not to exceed the Gross
Liquidation Rate of the aggregate Net Value of such Unbilled Receivables (the
"Initial Payment"), and the second payment to be made on the Purchase Date
corresponding to such Unbilled Receivables being billed by the Seller, or its
Billing and Collection Agent, as the case may be, to the respective Payor in an
amount equal to the difference between the Initial Payment with respect to such
Unbilled Receivables and the aggregate Net Value of such Receivables. The
Purchase Price to be paid on such Purchase Date shall be reduced by (a) the
Program Fees as of such Purchase Date, (b) the amount, if any, by which the
Seller Credit Reserve Account (net of withdrawals required hereunder) is less
than the Specified Credit Reserve Balance as of such Purchase Date, (c) any
outstanding Rejected Receivable Amount, and (d) other amounts due the Purchaser
in accordance with this Agreement. At any time the aggregate Net Value of all
Purchased Receivables shall not exceed the Purchase Commitment.
Section 2.4. Establishment of Accounts; Conveyance of Interests Therein;
Investments. (a) A Lockbox Account will be established or assigned, as the case
may be, for the benefit of the Purchaser into which all Collections from Payors
with respect to Receivables shall be deposited. The Lockbox Account will be
maintained at the expense of the Seller. The Seller agrees to deposit all
Collections it receives with respect to Receivables in said Lockbox Account and
will instruct all Payors to make all payments on Receivables to said Lockbox
Account. All funds in said Lockbox Account will be remitted to the Collection
Account as instructed by the Purchaser.
(b) The Purchaser has established and shall maintain the "Collection
Account" (the "Collection Account"), the "Purchase Account" (the "Purchase
Account") and the "Seller Credit Reserve Account" (the "Seller Credit Reserve
Account").
(c) Other than as set forth at Section 5.1, the Seller does hereby sell,
transfer, assign, set over and convey to the Purchaser all right, title and
interest of the Seller in and to all amounts deposited, from time to time, in
the Lockbox Account, the Collection Account and the Seller Credit Reserve
Account. Any Collections relating to Receivables held by the Seller or the
Subservicer pending deposit to the Lockbox Account as provided in this
Agreement, shall be held in trust for the benefit of the Purchaser until such
amounts are deposited into the Lockbox Account. All Collections in respect of
Purchased Receivables received by the Seller and not deposited directly by the
Payor in the Lockbox Account shall be remitted to the Lockbox Account within two
Business Days of receipt, and if such Collections are not remitted by Seller on
a timely basis, in addition to its other
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remedies hereunder, the Purchaser shall be entitled to receive a late charge
(which shall be in addition to the Program Fee) equal to 24% per annum of such
Collections or the maximum rate legally permitted if less than such rate,
calculated as of the first Business Day of such delinquency.
Section 2.5. Grant of Security Interest. It is the intention of the parties
to this Agreement that each payment of the Purchase Price by the Purchaser to
the Seller for Purchased Receivables to be made under this Agreement shall
constitute payment of consideration for a purchase of such Purchased Receivables
and not a loan. In the event, however, that a court of competent jurisdiction
were to hold that the transaction evidenced by this Agreement constitutes a loan
and not a purchase and sale, it is the intention of the parties that this
Agreement shall constitute a security agreement under the UCC and any other
applicable law, and that the Seller shall be deemed to have granted to the
Purchaser a first priority perfected security interest in all of the Seller's
right, title and interest in, to and under the Purchased Receivables; all
payments of principal of or interest on such Purchased Receivables; all amounts
on deposit from time to time in the Lockbox Account, the Collection Account and
the Seller Credit Reserve Account; all other rights relating to and payments
made under this Agreement, and all proceeds of any of the foregoing.
Section 2.6. Further Action Evidencing Purchases. The Seller agrees that,
from time to time, at its expense, it will promptly execute and deliver all
further instruments and documents, and take all further action, that may be
necessary or appropriate, or that the Purchaser may reasonably request, in order
to perfect, protect or more fully evidence the transfer of ownership of the
Purchased Receivables or to enable the Purchaser to exercise or enforce any of
its rights hereunder.
ARTICLE III - CONDITIONS OF PURCHASES
Section 3.1. Conditions Precedent to All Purchases. Each Purchase from the
Seller by the Purchaser shall be subject to the conditions precedent that as of
each Purchase Date:
(a) No Event of Seller Default has occurred and the Seller is in
compliance with each of its covenants and representations set forth in Sections
4.1 and 4.2 of this Agreement;
(b) The Seller shall have delivered to the Purchaser a complete copy of
each of the then current Billing and Collection Agreements, to the extent
applicable with respect to any Receivable, and any amendment or modification of
such agreements;
(c) Unless otherwise approved by Purchaser in writing, the Seller shall
have (i) (A) successfully converted to parallel operations under Seller's
existing accounts receivable operating system and a Year 2000 Compliant
operating system, or (B) successfully completed the conversion of its accounts
receivable operating system to Solomon, and (ii) upon completion of such
conversion to Solomon, to occur no later than November 30, 1999, delivered to
the Purchaser satisfactory evidence that Solomon is compliant with Section
4.1(l) of this Agreement;
(d) Seller shall have delivered to the Purchaser documentation
evidencing the following as the same pertains to WITECH: (i) conversion of
$1,000,000 note to equity, (ii) execution of $1,000,000 revolving note payable
December, 2001, (iii) execution of a $1,000,000 thirty-six month term loan, and
(iv) full release of any right, title and interest WITECH may have in, to and
under any Receivable of the Seller and the subordination of any right, title and
interest WITECH may have in, to and under the Customer Base of the Seller in
favor of a senior interest therein granted by Seller to Purchaser under this
Agreement;
(e) The Termination Date shall not have occurred; and
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(f) The Seller shall have taken such other action, including but not
limited to the delivery of an opinion of counsel prior to the initial Purchase
Date in the form of Exhibit D hereto, or delivered such other approvals,
opinions or documents to the Purchaser, as the Purchaser may reasonably request.
ARTICLE IV - REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER
Section 4.1. Representations, Warranties and Covenants as to the Seller.
The Seller represents and warrants to the Purchaser, as of the date of this
Agreement and on each subsequent Purchase Date, as follows:
(a) The Seller is a corporation duly organized, validly existing and in
good standing (or the relative equivalent thereof) under the laws of the State
of Wisconsin and is duly qualified to do business and is in good standing (or
the relative equivalent thereof) in each jurisdiction in which it is doing
business and has the power and authority to own and convey all of its properties
and assets and to execute and deliver this Agreement and the Related Documents
and to perform the transactions contemplated thereby; and each is the legal,
valid and binding obligation of the Seller enforceable against the Seller in
accordance with its terms;
(b) The execution, delivery and performance by the Seller of this
Agreement and the Related Documents and the transactions contemplated thereby
(i) have been duly authorized by all necessary corporate or other action on the
part of the Seller, (ii) do not contravene or cause the Seller to be in default
under (A) any contractual restriction contained in any loan or other agreement
or instrument binding on or affecting the Seller or its property; or (B) any
law, rule, regulation, order, writ, judgment, award, injunction, or decree
applicable to, binding on or affecting the Seller or its property and (iii) does
not result in or require the creation of any Adverse Claim upon or with respect
to any of the property of the Seller (other than in favor of the Purchaser as
contemplated hereunder);
(c) There is no court order, judgment, writ, pending or threatened
action, suit or proceeding, of a material nature against or affecting the
Seller, its officers or directors, or the property of the Seller, in any court
or tribunal, or before any arbitrator of any kind or before or by any
Governmental Authority (i) asserting the invalidity of this Agreement or any of
the Related Documents, (ii) seeking to prevent the sale and assignment of any
Receivable or the consummation of any of the transactions contemplated thereby,
(iii) seeking any determination or ruling that might materially and adversely
affect the Seller, this Agreement, the Related Documents, the Receivables or
Contracts, or (iv) asserting a claim for payment of money in excess of $100,000
which is not otherwise dismissed or settled within 60 days of Seller's actual or
constructive notice thereof, not covered by insurance or for which a performance
bond has not been obtained within 30 days of Seller's actual or constructive
notice thereof;
(d) The primary business of the Seller is the provision or sale of
electronic commerce products and/or services. All license numbers issued to the
Seller by any Governmental Authority are set forth on Schedule I and the Seller
has complied in all material respects with all applicable laws, rules,
regulations, orders and related Contracts and all restrictions contained in any
agreement or instrument binding on or affecting the Seller, and has and
maintains all permits, licenses, certifications, authorizations, registrations,
approvals and consents of Governmental Authorities or any other party necessary
for the business of the Seller and each of its Subsidiaries;
(e) The Seller (i) has filed on a timely basis all tax returns
(federal, state, and local) required to be filed and has paid or made adequate
provisions for the payment of all taxes, assessments, and other governmental
charges due from the Seller; (ii) the financial statements of the Seller, copies
of which have been furnished to the Purchaser, fairly present the financial
condition of the Seller, all in accordance with generally accepted accounting
principles consistently applied; (iii) since April 30, 1999, there has been no
material adverse change in any such condition, business or operations; and (iv)
the Seller has delivered to the Purchaser (a) (A) within 45 days after the end
of each subsequent three-month period, the financial statements, including
balance sheet and income statement prepared in accordance with generally
accepted accounting principles, certified by an officer of the Seller and
accompanied by a management narrative summarizing circumstances and issues
underlying such
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financial statements and facing the Seller going forward or (B) a copy of any
Form 10-Q within two Business Days of the filing thereof by the Seller, and (b)
(A) within 90 days after the end of the fiscal year of the Seller the financial
statements, including balance sheet and income statement prepared by an
accounting firm acceptable to Purchaser, or (B) a copy of any Form 10-K within
two Business Days of the filing thereof by the Seller;
(f) All information furnished by or on behalf of the Seller to the
Purchaser in connection with this Agreement is true and complete in all material
respects and does not omit to state a material fact and the sales of Purchased
Receivables under this Agreement are made by the Seller in good faith and
without intent to hinder, delay or defraud present or future creditors of the
Seller;
(g) The Lockbox Account is the only lockbox account to which Payors
have been or will be instructed to direct Receivable proceeds and each Payor of
an Eligible Receivable has been directed upon its receipt of the notice attached
hereto as Exhibit B, which such notice was mailed or provided to such Payors
within two Business Days of the Closing Date, or with respect to any given new
Payor prior to the submission of any Receivable related thereto by the Seller
for purchase by the Purchaser, to remit all payments with respect to such
Receivable for deposit in the Lockbox Account;
(h) The principal place of business and chief executive office of the
Seller are located at the address of the Seller set forth under its signature
below and there are not now, and during the past four months there have not
been, any other locations where the Seller is located (as that term is used in
the UCC) or keeps Records except as set forth in the designated space beneath
its signature line in this Agreement;
(i) The legal name of the Seller is as set forth at the beginning of
this Agreement and the Seller has not changed its legal name in the last six
years, and during such period, the Seller did not use, nor does the Seller now
use any tradenames, fictitious names, assumed names or "doing business as" names
other than those appearing on the signature page of this Agreement;
(j) The Seller has not done anything to impede or interfere with the
collection by the Purchaser of the Purchased Receivables and has not amended,
waived or otherwise permitted or agreed to any deviation from the terms or
conditions of any Purchased Receivable, Billing and Collection Agreement,
Contract or any related agreement so as to (i) create an Adverse Claim with
respect to any Receivable or (ii) materially affect the ability of Subservicer
or the Purchaser to act in its capacity as such; and has not allowed any invoice
due and owing by the Seller relating to any agreement, Contract, or Billing and
Collection Agreement with respect to a Receivable, to become any more than
thirty days past due; and
(k) For federal income tax reporting and accounting purposes, the
Seller will treat the sale of each Purchased Receivable pursuant to this
Agreement as a sale of, or absolute assignment of its full right, title and
ownership interest in such Purchased Receivable to the Purchaser.
(l) All computer software, equipment and/or related systems that
either relate to the Purchased Receivables, include imbedded date sensitive
software or are utilized by Seller in connection with the operation of its
business, and which are intended for use after December 31, 1999, are or will be
on or before December 31, 1999, "Year 2000 Compliant." For purposes hereof,
"Year 2000 Compliant" shall mean that the applicable computer software will (a)
function properly and without material interruption before, during, and
immediately after January 1, 2000; (b) accurately process date and time data
(including calculating, comparing, and sequencing) between the twentieth and
twenty-first centuries and between the years 1999 and 2000; (c) will respond to
or reject a two-digit year input in a way that resolves ambiguity as to century
in a defined and predetermined manner; and (d) will store and provide output of
date information in ways that are unambiguous as to century.
Section 4.2. Representations and Warranties of the Seller as to Purchased
Receivables. With respect to each Purchased Receivable sold pursuant to this
Agreement the Seller represents and warrants, as of the date hereof and as of
each subsequent Purchase Date, as follows:
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(a) Such Purchased Receivable (i) includes all the Required
Information; (ii) is the liability of an Eligible Payor, provided, that, unless
the Purchaser otherwise agrees in writing, the liability of each respective
Payor to the Seller does not comprise more than five percent (5.0%) of the Net
Value of all Purchased Receivables (which, to the extent a Receivable is
purchased by the Purchaser, the Purchaser shall be deemed to have provided its
written consent to the Seller); (iii) was created by the provision or sale of
electronic commerce products and/or services by the Seller in the ordinary
course of its business; (iv) has a Purchase Date no later than 90 days from its
Billing Date or such other period of time as the Purchaser may agree in writing
(which, to the extent a Receivable is purchased by the Purchaser, the Purchaser
shall be deemed to have provided its written consent to the Seller); (v) is not
a Purchased Receivable which with respect to which, as of any Determination
Date, payment by the Payor of such Receivable has been received and is not
duplicative of any other Receivable; and (vi) is owned by the Seller free and
clear of any Adverse Claim, and the Seller has the right to sell, assign and
transfer the same and interests therein as contemplated under this Agreement and
no consent other than those secured and delivered to the Purchaser on or prior
to the Closing Date shall be required to effect the sale of any such Purchased
Receivable;
(b) The Billed Amount of such Purchased Receivable is payable in United
States Dollars and the Eligible Receivable Amount with respect thereto, unless
the Purchaser and Seller agree otherwise in writing (which, to the extent a
Receivable is purchased by the Purchaser, the Purchaser shall be deemed to have
provided its written consent to the Seller), is not in excess of $100,000 with
respect to any one individual Payor of any Payor Class, and is net of any
adjustments or other modifications contemplated by any other agreement, Billing
and Collection Agreement, or Contract or otherwise and, unless otherwise agreed
in writing by Purchaser, neither the Purchased Receivable nor the related
agreement or Contract has been or will be compromised, adjusted, extended,
satisfied, subordinated, rescinded, set-off or modified by the Seller, the
Payor, a Billing and Collection Agent or any other third party, and is not nor
will be subject to compromise, adjustment, termination or modification, whether
arising out of transactions concerning the related agreement, Contract, Billing
and Collection Agreement, or otherwise; and
(c) There are no procedures or investigations pending or threatened
before any Governmental Authority (i) asserting the invalidity of such Purchased
Receivable, Billing and Collection Agreement, or Contract, (ii) asserting the
bankruptcy or insolvency of the related Payor, (iii) seeking the payment of such
Purchased Receivable or payment and performance of the related Contract, or (iv)
seeking any determination or ruling that might materially and adversely affect
the validity or enforceability of such Purchased Receivable or the related
Contract.
Section 4.3. Negative Covenants of the Seller. Unless otherwise set forth
herein, the Seller shall not, without the written consent of the Purchaser,
which such consent will not be unreasonably withheld:
(a) Sell, assign or otherwise dispose of, or create or suffer to exist
any Adverse Claim or lien upon any Receivable and related Contracts, its
Customer Base, the Lockbox Account, the Collection Account, or any other account
in which any Collections of any Receivable are deposited, or assign any right to
receive income in respect of any Receivable;
(b) Submit or permit to be submitted to Payors any invoice for services
or equipment rendered by or on behalf of Seller which contains a "pay to"
address other than the Lockbox Account;
(c) Make any change to (i) the location of its chief executive office
or the location of the office where Records are kept or (ii) its corporate name
or use any tradenames, fictitious names, assumed names or "doing business as"
names without providing the Purchaser of not less than thirty days prior written
notice thereof;
(d) Allow the ratio of the aggregate Net Value of Purchased Receivables
to Cash Collections to be greater than 2:1; or
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(e) Amend, waive or otherwise permit or agree to any deviation from the
terms or conditions of any Purchased Receivable.
Section 4.4. Repurchase Obligations. Upon discovery by any party to this
Agreement of a breach of any representation or warranty in Sections 4.1 or 4.2
of this Article IV which materially and adversely affects the value of a
Purchased Receivable or the interests of the Purchaser therein (herein a
"Rejected Receivable"), the party discovering such breach shall give prompt
written notice to the other parties to this Agreement. Thereafter, on the next
Purchase Date, the Net Value of the Rejected Receivables shall be deducted from
the amount otherwise payable to the Seller pursuant to Section 2.3 and deposited
in the Collection Account in satisfaction of the Rejected Receivable Amount and,
provided the full Net Value of such Rejected Receivables is deposited in the
Collection Account, such Rejected Receivables shall then be considered to have
been repurchased by the Seller. In the event that the full Net Value of such
Rejected Receivables is not deposited in the Collection Account pursuant to the
foregoing sentence, the Purchaser shall deduct any such deficiency from the
Excess Collection Amount or make demand upon the Seller to pay any such
deficiency to the Purchaser for deposit to the Collection Account. Upon full
payment of the amounts set forth above to the Collection Account, the Seller
will be deemed to have repurchased such Rejected Receivable.
ARTICLE V - ACCOUNTS ADMINISTRATION
Section 5.1. Collection Account. The Purchaser acknowledges that certain
amounts deposited in the Collection Account may relate to Receivables other than
Purchased Receivables and that such amounts continue to be owned by the Seller.
All such amounts shall be administered in accordance with Section 5.3.
Section 5.2. Determinations of the Purchaser. On each Determination Date,
the Purchaser will determine, in good faith, the following:
(a) the Net Value of all Purchased Receivables which have become Rejected
Receivables since the prior Purchase Date and which have not been repurchased or
offset in the manner set forth in Section 4.4 (the "Rejected Receivable
Amount");
(b) the amount of Collections up to the Purchase Price of all Purchased
Receivables received since the prior Determination Date (the "Paid Receivables
Amount");
(c) the Net Value of all Purchased Receivables which have become Defaulted
Receivables since the prior Purchase Date (the "Defaulted Receivable Amount" or
"Credit Deficiency");
(d) the aggregate amount deposited in the Collection Account in excess of
the Purchase Price of each Purchased Receivable, plus one hundred percent
(100.0%) of the Collections pertaining to Receivables not purchased under this
Agreement, since the prior Determination Date (the "Excess Collection Amount");
(e) the Net Value of all Purchased Receivables less the Rejected Receivable
Amount and the Defaulted Receivable Amount as of the current Determination Date;
and
(f) the amount of any accrued and unpaid Program Fee.
The Purchaser's determinations of the foregoing amounts shall be conclusive
in the absence of manifest error. The Purchaser shall notify the Seller of such
determinations.
Section 5.3. Distributions from Accounts. (a) On each Determination Date,
following the determinations set forth in Section 5.2, the Purchaser will make
the following withdrawals and deposits:
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(i) withdraw the Paid Receivables Amount and the Rejected Receivable Amount
plus any outstanding Rejected Receivable Amount applicable to any prior period,
to the extent such Rejected Receivable Amount is not paid to the Purchaser as a
reduction in Purchase Price to be paid to the Seller, from the Collection
Account and deposit such amount in the Purchase Account;
(ii) withdraw the Defaulted Receivable Amount from the Seller Credit
Reserve Account and deposit such amount in the Purchase Account;
(iii) withdraw the Excess Collection Amount from the Collection Account and
deposit such amount in the Seller Credit Reserve Account to the extent that the
Seller Credit Reserve Account is less than the Specified Credit Reserve Balance;
and
(iv) withdraw the balance of the Excess Collection Amount from the
Collection Account and, subject to any offset required under Section 5.3(b) of
this Agreement, remit such amount by wire transfer to an account designated by
the Seller, which, absent the occurrence of an Event of Seller Default and
provided that the Purchaser has received information in sufficient form and
format to allow the Purchaser to properly apply and/or post Collections against
Purchased Receivables, will occur no later than the next immediate Purchase Date
following such determination.
(b) The full amount of the Purchase Price before any offsets shall be
withdrawn from the Purchase Account and paid and administered as follows: (i)
the Program Fee due and owing as of each respective Purchase Date shall be paid
to the Purchaser, (ii) the amount, if any, by which the Seller Credit Reserve
Account is less than the Specified Credit Reserve Balance as of such respective
Purchase Date shall be deposited in the Seller Credit Reserve Account, (iii) the
amount, if any, due and owing the Purchaser pursuant to Section 9.4 of this
Agreement shall be paid to the Purchaser, and (iv) any remaining amount shall be
paid to the Seller in accordance with Section 2.3 of this Agreement.
(c) Until the Termination Date, with commercially reasonable best efforts
on each Purchase Date or in any event within two Business Days of each Purchase
Date, the Purchaser shall withdraw all amounts deposited hereunder (net of
withdrawals required hereunder) from the Seller Credit Reserve Account which are
in excess of the Specified Credit Reserve Balance and shall pay to the Purchaser
all amounts due and owing the Purchaser in accordance with Sections 2.3, 4.4,
5.3, 8.1, 9.4 and any applicable Termination Fee, and pay the balance, if any,
by wire transfer to an account designated by the Seller.
Section 5.4. Allocation of Monies following Termination Date. (a) Upon the
occurrence of a Termination Date hereunder, the Purchaser shall administer and
monitor the Lockbox Account and any and all Collections pertaining to Purchased
Receivables and apply the amount of such Collections to the outstanding Net
Value of Purchased Receivables. The application of such amounts to the
outstanding Net Value of Purchased Receivables shall not include any Excess
Collection Amount. Following the Termination Date and the Purchaser's receipt of
the Termination Fee, if applicable, from the Seller, the Purchaser shall, to the
extent funds deposited hereunder (net of withdrawals required hereunder) are
sufficient, withdraw an amount equal to the Program Fee from the Seller Credit
Reserve Account on each Purchase Date and deposit it in the Purchase Account. To
the extent that such funds do not equal the Program Fee, the Seller shall
deposit in the Purchase Account the balance of the Program Fee within five
Business Days following demand therefor. To the extent any Purchased Receivable
becomes a Defaulted Receivable, the Purchaser may withdraw an amount equal to
such Defaulted Receivable Amount from the Seller Credit Reserve Account and
deposit such amount in the Collection Account, provided, however, that such
recourse is expressly limited to the monies which comprise the Seller Credit
Reserve Account at the time of the Termination Date which shall not at any time
exceed the Specified Credit Reserve Balance. Following such Termination Date,
any Excess Collection Amount may not be used for deposit to the Seller Credit
Reserve Account and shall be otherwise administered in accordance with this
Agreement.
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(b) In any event, following the Termination Date and the Purchaser's
receipt of the Termination Fee, if any, the Seller may, at its option,
repurchase all previously Purchased Receivables which have not been fully paid
by the respective Payors thereof by depositing with the Purchaser the then
aggregate Net Value of such Purchased Receivables. Following such payment and
any other amount due and owing the Purchaser under this Agreement, this
Agreement shall be deemed terminated.
(c) On the first Determination Date on which the aggregate Net Value of all
Purchased Receivables (other than Defaulted Receivables) (i) is less than 10% of
the aggregate Net Value of Purchased Receivables (other than Defaulted
Receivables) on the Termination Date and (ii) is less than the aggregate amount
remaining in the Seller Credit Reserve Account, the Purchaser shall withdraw an
amount equal to such aggregate Net Value from such accounts and deposit it in
the Purchase Account. Thereupon the Purchaser shall disburse all remaining
amounts held in the Seller Credit Reserve Account to the Seller and all
interests of the Purchaser in all Purchased Receivables owned by the Purchaser
shall be reconveyed by the Purchaser to the Seller. Following such disbursement
and reconveyance, this Agreement shall be deemed terminated and the Purchaser
shall, at the request of the Seller, execute and deliver documentation
reasonably necessary to evidence such termination including but not limited to
the delivery of any necessary UCC Termination Statements.
ARTICLE VI - APPOINTMENT OF THE SUBSERVICER
Section 6.1. Appointment of the Subservicer. Subject to Section 6.5, as
consideration for the Seller's receipt of that portion of the Excess Collection
Amount relating to Purchased Receivables, the Purchaser hereby appoints the
Seller and the Seller hereby accepts such appointment to act as Subservicer
under this Agreement. The Subservicer may, with the prior consent of the
Purchaser, which consent shall not be unreasonably withheld, subcontract with a
subservicer for billing, collection, servicing or administration of the
Receivables. Any termination or resignation of the Subservicer under this
Agreement shall not affect any claims that the Purchaser may have against the
Subservicer for events or actions taken or not taken by the Subservicer arising
prior to any such termination or resignation.
Section 6.2. Duties and Obligations of the Subservicer. (a) The Subservicer
shall service the Purchased Receivables and enforce the Purchaser's respective
rights and interests in and under each Purchased Receivable and each related
Contract; and shall take, or cause to be taken, all such actions as may be
necessary or advisable to service, administer and collect each Purchased
Receivable all in accordance with (i) customary and prudent servicing procedures
for receivables of a similar type, and (ii) all applicable laws, rules and
regulations; and shall serve in such capacity until the termination of its
responsibilities pursuant to Section 6.4 or 7.1. The Subservicer shall at any
time permit the Purchaser or any of its representatives to visit the offices of
the Subservicer and examine and make copies of all Servicing Records;
(b) The Subservicer shall notify the Purchaser of any action, suit,
proceeding, dispute, offset, deduction, defense or counterclaim that is or may
be asserted by any Person with respect to any Purchased Receivable.
(c) The Purchaser shall not have any obligation or liability with respect
to any Purchased Receivables which may arise out of a related Contract, nor
shall it be obligated to perform any of the obligations of the Subservicer
hereunder.
Section 6.3. Subservicing Expenses. The Subservicer shall be required to
pay for all expenses incurred by the Subservicer in connection with its
activities hereunder (including any payments to accountants, counsel or any
other Person) and shall not be entitled to any payment or reimbursement
therefor.
Section 6.4. Subservicer Not to Resign. The Subservicer shall not resign
from the duties and responsibilities hereunder except upon determination that
(a) the performance of its duties hereunder has become impermissible under
applicable law and (b) there is no reasonable action which the Subservicer could
take to
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make the performance of its duties hereunder permissible under applicable law
evidenced as to clause (a) above by an opinion of counsel to such effect
delivered to the Purchaser.
Section 6.5. Authorization of the Purchaser. The Seller hereby acknowledges
that the Purchaser (including any of its successors or assigns), shall retain
the authority to take any and all reasonable steps in its name and on its behalf
necessary or desirable in the determination of the Purchaser to collect all
amounts due under any and all Purchased Receivables, process all Collections,
commence proceedings with respect to enforcing payment of such Purchased
Receivables and the related Contracts, and adjusting, settling or compromising
the account or payment thereof. The Seller shall furnish the Purchaser (and any
successors thereto) with any powers of attorney and other documents necessary or
appropriate to enable the Purchaser to carry out its servicing and
administrative duties under this Agreement, and shall cooperate with the
Purchaser to the fullest extent in order to facilitate the collectibility of the
Purchased Receivables.
ARTICLE VII - EVENTS OF SELLER DEFAULT
Section 7.1. Events of Seller Default. If any of the following events
(each, an "Event of Seller Default") shall occur and be continuing:
(a) The Seller (either as Seller or Subservicer) shall materially fail to
perform or observe any term, covenant or agreement contained in this Agreement
which remains uncured for a period of 10 days;
(b) The Seller or any Affiliate defaults: (i) whether as primary or
secondary obligor, in the payment of any principal or interest on any obligation
for borrowed money beyond any applicable grace period or, if such obligation is
payable on demand, fails to pay such obligation upon demand; or (ii) in the
observance of any covenant, term or condition contained in any agreement, if the
effect of such default is to cause, or to permit any other party to such
obligation to cause, all or part of such obligation to become due before its
stated maturity provided that such obligation shall be an amount in excess of
$25,000;
(c) An Insolvency Event shall have occurred;
(d) There is a material breach of any of the representations and warranties
of the Seller as stated in Sections 4.1 or 4.2 that has remained uncured for a
period of 30 days, or, as such breach may pertain to a Purchased Receivable, has
not been cured pursuant to Section 4.4;
(e) Any Governmental Authority shall file notice of a lien in excess of
$25,000 with regard to any of the assets of the Seller or with regard to the
Seller which remains undischarged for a period of 30 days or there shall have
been an uncured default or breach with respect to any agreement, payment
arrangement or otherwise by and between the Seller or its Affiliates and the
Internal Revenue Service and/or any other taxing authority;
(f) As of the first day of any month, the aggregate Net Value of Purchased
Receivables which became Defaulted Receivables or Rejected Receivables during
the prior four month period shall exceed 10.0% of the Net Value of all Purchased
Receivables then owned by the Purchaser at the end of each of such three months;
(g) This Agreement shall for any reason cease to evidence the transfer to
the Purchaser (or its assignees or transferees) of the legal and equitable title
to, and ownership of, the Purchased Receivables;
(h) The amount deposited hereunder (net of withdrawals required hereunder)
in the Seller Credit Reserve Account has remained at less than the Specified
Credit Reserve Balance for fourteen consecutive days; or
(i) A Termination Event shall have occurred;
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then and in any such event, the Purchaser may, by notice to the Seller declare
that an Event of Seller Default shall have occurred and, the Termination
Date shall forthwith occur, without demand, protest or further notice of any
kind, and the Purchaser shall make no further Purchases from the Seller. The
Purchaser, in addition to all other rights and remedies under this Agreement,
all other rights and remedies provided under the UCC and other applicable law,
which rights shall be cumulative.
ARTICLE VIII - INDEMNIFICATION AND SECURITY INTEREST
Section 8.1. Indemnities by the Seller. (a) Without limiting any other
rights that the Purchaser or any director, officer, employee or agent of the
Purchaser (each an "Indemnified Party") may have under this Agreement or under
applicable law, the Seller hereby agrees to indemnify each Indemnified Party
from and against any and all claims, losses, liabilities, obligations, damages,
penalties, actions, judgments, suits, and related costs and expenses of any
nature whatsoever, including reasonable attorneys' fees and disbursements (all
of the foregoing being collectively referred to as "Indemnified Amounts") which
may be imposed on, incurred by or asserted against an Indemnified Party in any
way arising out of or relating to this Agreement or the ownership of the
Purchased Receivables or in respect of any Receivable or any Contract,
excluding, however, Indemnified Amounts to the extent resulting from gross
negligence or willful misconduct on the part of any Indemnified Party or
recourse with respect to Purchased Receivables.
(b) Any Indemnified Amounts subject to the indemnification provisions of
this Section shall be paid to the Indemnified Party within five Business Days
following demand therefor, together with interest at the lesser of 12% per annum
or the highest rate permitted by law from the date of demand for such
Indemnified Amount.
Section 8.2 Security Interest. The Seller hereby grants to the Purchaser a
first priority perfected security interest in the Seller's Customer Base,
including but not limited to, all past, present and future customer contracts,
lists, agreements, or arrangements relating thereto; all of the Seller's right,
title and interest in, to and under all of the Seller's Receivables not sold to
the Purchaser hereunder, including all rights to payments under any related
Contracts, contract rights, instruments, documents, chattel paper, general
intangibles, or other agreements with all Payors and all the Collections,
Records and proceeds thereof; any other obligations or rights of Seller to
receive any payments in money or kind with respect to that set forth in this
Section 8.2; all cash or non-cash proceeds of the foregoing; all of the right,
title and interest of the Seller in and with respect to the services which gave
rise to or which secure any of the foregoing as security for the timely payment
and performance of any and all obligations the Seller or the Subservicer may owe
the Purchaser under Sections 2.3, 4.4, 5.3, 8.1, 9.4 and any applicable
Termination Fee, but excluding recourse for unpaid Purchased Receivables. This
Section 8.2 shall constitute a security agreement under the UCC and any other
applicable law and the Purchaser shall have the rights and remedies of a secured
party thereunder. Such security interest shall be further evidenced by Seller's
execution of appropriate UCC-1 financing statements prepared by and acceptable
to the Purchaser, and such other further assurances that may be reasonably
requested by the Purchaser from time to time.
ARTICLE IX - MISCELLANEOUS
Section 9.1. Notices, Etc. All notices, shall be in writing and mailed or
telecommunicated, or delivered as to each party hereto, at its address set forth
under its name on the signature pages hereof or at such other address as shall
be designated by such party in a written notice to the other parties hereto. All
such notices and communications shall not be effective until received by the
party to whom such notice or communication is addressed.
Section 9.2. Remedies. No failure or delay on the part of the Purchaser to
exercise any right hereunder shall operate as a waiver or partial waiver
thereof. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
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Section 9.3. Binding Effect; Assignability. This Agreement shall be binding
upon and inure to the benefit of the Seller, the Subservicer, the Purchaser and
their respective successors and permitted assigns. Neither the Seller nor the
Subservicer may assign any of their rights and obligations hereunder or any
interest herein without the prior written consent of the Purchaser, such consent
not to be unreasonable withheld by the Purchaser. The Purchaser may, at any
time, without the consent of the Seller or the Subservicer, assign any of its
rights and obligations hereunder or interest herein to any Person. Without
limiting the generality of the foregoing, the Seller acknowledges that the
Purchaser has assigned its rights hereunder for the benefit of third parties.
The Seller does hereby further agree to execute and deliver to the Purchaser all
documents and amendments presented to the Seller by the Purchaser in order to
effectuate the assignment by the Purchaser in furtherance of this Section 9.3
consistent with the terms and provisions of this Agreement. This Agreement shall
create and constitute the continuing obligations of the parties hereto in
accordance with its terms, and shall remain in full force and effect until its
termination; provided, that the rights and remedies with respect to any breach
of any representation and warranty made by the Seller pursuant to Article IV and
the indemnification and payment provisions of Article VIII shall be continuing
and shall survive any termination of this Agreement.
Section 9.4. Costs, Expenses and Taxes. (a) In addition to the rights of
indemnification under Article VIII, the Seller agrees to pay upon demand, all
reasonable costs and expenses in connection with this Agreement and the other
documents to be delivered hereunder, including, without limitation: (i) the
periodic auditing of the Seller and the modification or amendment of this
Agreement; (ii) the reasonable fees and out-of-pocket expenses of counsel for
the Purchaser with respect to (A) advising the Purchaser as to its rights and
remedies under this Agreement or (B) the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement or the other
documents to be delivered hereunder; (iii) any and all accrued Program Fee and
amounts related thereto not yet paid to the Purchaser; and (iv) any and all
stamp, sales, excise and other taxes and fees payable or determined to be
payable in connection with the execution, delivery, filing or recording of this
Agreement or the other agreements and documents to be delivered hereunder, and
agrees to indemnify and save each Indemnified Party from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees.
(b) If the Seller or the Subservicer fails to pay any Lockbox Account fees
or other charges or debits related to such accounts, or to pay or perform any
agreement or obligation contained under this Agreement, the Purchaser may pay or
perform, or cause payment or performance of, such agreement or obligation, and
the expenses of the Purchaser incurred in connection therewith shall be payable
by the party which has failed to so perform.
Section 9.5. Amendments; Waivers; Consents. No modification, amendment or
waiver of, or with respect to, any provision of this Agreement or the Related
Documents, shall be effective unless it shall be in writing and signed by each
of the parties hereto. This Agreement, the Related Documents and the documents
referred to therein embody the entire agreement among the Seller, the
Subservicer and the Purchaser, and supersede all prior agreements and
understandings relating to the subject hereof, whether written or oral.
Section 9.6. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAWS PROVISIONS) OF THE STATE OF OHIO,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE INTERESTS OF THE
PURCHASER IN THE PURCHASED RECEIVABLES OR REMEDIES HEREUNDER OR THEREUNDER, IN
RESPECT THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE
OF OHIO.
(b) THE SELLER AND THE SUBSERVICER HEREBY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF OHIO AND THE UNITED STATES DISTRICT
COURT LOCATED IN THE SOUTHERN DISTRICT OF OHIO, AND EACH WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE
MADE BY REGISTERED MAIL DIRECTED TO THE ADDRESS SET FORTH ON THE
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SIGNATURE PAGE HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE
DAYS AFTER THE SAME SHALL HAVE BEEN DEPOSITED IN THE U.S. MAILS, POSTAGE
PREPAID. THE SELLER AND THE SUBSERVICER EACH HEREBY WAIVES ANY OBJECTION BASED
ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED
HEREUNDER AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS
DEEMED APPROPRIATE BY THE COURT. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT
OF THE PURCHASER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
AFFECT THE RIGHT OF THE PURCHASER TO BRING ANY ACTION OR PROCEEDING AGAINST THE
SELLER OR ITS PROPERTY, OR THE SUBSERVICER OR ITS PROPERTY IN THE COURTS OF ANY
OTHER JURISDICTION. THE SELLER AND THE SUBSERVICER EACH HEREBY AGREE THAT THE
EXCLUSIVE AND APPROPRIATE FORUMS FOR ANY DISPUTE HEREUNDER ARE THE COURTS OF THE
STATE OF OHIO AND THE UNITED STATES DISTRICT COURT LOCATED IN THE SOUTHERN
DISTRICT OF OHIO AND AGREE NOT TO INSTITUTE ANY ACTION IN ANY OTHER FORUM.
(c) THE SELLER, AND THE SUBSERVICER EACH HEREBY WAIVES ANY RIGHT TO HAVE A
JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT,
OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR IN CONNECTION WITH
THIS AGREEMENT. INSTEAD, ANY DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A
BENCH TRIAL WITHOUT A JURY.
Section 9.7. Execution in Counterparts; Severability. This Agreement may be
executed in any number of counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall constitute
one and the same agreement. In case any provision in or obligation under this
Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby.
Section 9.8. Confidentiality. The Purchaser and Seller understand and agree
to keep confidential, and shall cause its respective directors, officers,
shareholders, employees, agents, and attorneys to keep confidential the terms
and conditions of this Agreement, all documents referenced herein and the
respective terms thereof, and any communication between the parties regarding
this Agreement or the services to be provided hereunder hereby, except to the
extent that (a) any party makes any disclosure to his or its auditors, attorneys
or other professional advisors, (b) any disclosure is otherwise required by law
or pursuant to any rule or regulation of any federal, state or other
governmental authority or regulatory agency, provided that Purchaser or Seller,
as the case may be, provides prior written notice thereof to the other or (c)
the Seller is in receipt of the prior written consent of Purchaser with respect
to any compromise by Seller of the confidentiality contemplated hereunder.
Purchaser and Seller further understand and agree that the violation by the
Seller or its agents of the foregoing shall entitle the other, at its option, to
obtain injunctive relief without a showing of irreparable harm or injury and
without bond.
ARTICLE X - ARBITRATION
Section 10.1 Mediation and Arbitration of Disputes. In their course of
dealing under this agreement, the parties shall bring problems or potential
problems to the attention of each other as soon as possible and discuss them.
The parties shall attempt to resolve any dispute arising out of or relating to
this Agreement promptly by good faith negotiations between the appropriate
officers of the parties.
The disputing party shall initiate negotiations by giving the other party
written notice of the dispute. Within thirty (30) days after receipt of the
notice, the receiving party shall submit to the other party a written response.
Both the notice and the response shall include (a) a statement of the party's
position and a summary of the evidence and argument supporting that position,
and (b) the name of the officer of the party. The officers shall
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confer within thirty (30) days of receipt of the disputing party's notice, in
person at a mutually acceptable time and place, if reasonable or by telephone
service, at least once and thereafter as often as they reasonably deem
necessary, to exchange relevant information and to attempt in good faith to
resolve the dispute.
If the dispute is not resolved within thirty (30) days of their first
meeting, the officers shall refer the dispute to designated representatives (who
may be legal counsel) who do not have direct responsibility for administration
of this Agreement. The officers shall also prepare and exchange summaries of
their negotiations and send the summaries and all other documents to the
designated representatives. The designated representatives shall confer within
sixty (60) days of receipt of the disputing party's notice, in person at a
mutually acceptable time and place if reasonable or by telephone otherwise, at
least once, and thereafter as often as they reasonably deem necessary, to
exchange any further relevant information and to attempt in good faith to
resolve the dispute.
If the dispute is not resolved within thirty (30) days of the first meeting
of the designated representatives, either party may initiate mediation of the
dispute under the auspices and procedures of the American Arbitration
Association. Also, if either party fails to participate in the mediation, the
other party may initiate the arbitration. The arbitration shall be conducted by
a single arbitrator at the offices of the American Arbitration Association,
Columbus, Ohio, or in the vicinity thereof. The arbitrator shall be governed by
this Agreement and may not change it. The arbitrator may not award punitive
damages. The award of the arbitrator shall finally resolve the dispute, and
judgment upon the award may be entered by any Court with jurisdiction to do so.
The parties shall share the fees and expenses of the mediator or arbitrator
equally. Otherwise, each party shall pay its own negotiation, mediation or
arbitration expense. All time limitations specified here may be extended by
mutual written agreement. The procedures specified herein shall be the sole and
exclusive methods for the resolution of disputes between the parties arising out
of or relating to this Agreement, any conflicting provisions notwithstanding.
However, a party may seek a temporary restraining order, a preliminary
injunction or other preliminary judicial relief if in its reasonable judgment,
such action is necessary to avoid irreparable damage. Despite such action, the
parties shall continue to participate in good faith in the procedures specified
herein. All applicable statutes of limitation shall be tolled while the
procedures specified herein are pending. The parties will take any action
required to effectuate such tolling.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
ARI NETWORK SERVICES, INC., as Seller and Subservicer
By:
------------------------------------
Name: Brian E. Dearing
Title: Chairman and Chief Executive Officer
Address at which the chief executive office is
located:
Address: 330 E. Kilbourn Avenue
Milwaukee, WI 53202
Attention: Brian E. Dearing
Phone number: 414/283-4300
Telecopier number: 414/283-4375
Additional locations at which the Seller does
business and maintains Records:
102 N. Cascade, Suite 600
Colorado Springs, CO 80903
2225 S. Henry Street
Williamsburg, VA 23185-3968
309 McLaws Circle, Suite E
Williamsburg, VA 23185
Additional names under which Seller does business:
AgriData Resources, Inc.
RFC CAPITAL CORPORATION
By:
------------------------------------
Name: Mark D. Quinlan
Title: Vice President
Address: 130 East Chestnut Street
Suite 400
Columbus, OH 43215
Attention: Mark D. Quinlan
Phone number: (614) 229-7979
Telecopier number: (614) 229-7980
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SCHEDULE 1
SELLER'S LICENSE NUMBERS
Name of Seller License Numbers
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SCHEDULE 2
LIST OF NAMES UNDER WHICH SELLER IS DOING BUSINESS
AND ADDRESSES AT WHICH SELLER IS DOING BUSINESS
Names Under Which Seller Addresses At Which Seller
Is Doing Business and Payee Names Is Doing Business
ARI Network Services, Inc. 330 E. Kilbourn Avenue
Milwaukee, WI 53202
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AgriData Resources, Inc.
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EXHIBIT A
DEFINITIONS
"ADVERSE CLAIM" means any claim of ownership, any lien, security
interest or other charge or encumbrance, or any other type of preferential
arrangement having the effect of a lien or security interest.
"AFFILIATE" means, as to any Person, any other Person that, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person within the meaning of control under Section 15 of the Securities Act
of 1933.
"BASE RATE" means, as of any Purchase Date, a percentage equal to the
prime lending rate of First Chicago, NA, plus 2.00% per annum.
"BILLED AMOUNT" means, with respect to any Receivable the amount billed
or to be billed to the related Payor with respect thereto prior to the
application of any Gross Liquidation Rate.
"BILLING AND COLLECTION AGENT" means the party performing billing and
collection services for and on behalf of the Seller pursuant to the terms of a
Billing and Collection Agreement.
"BILLING AND COLLECTION AGREEMENT" means, to the extent applicable, any
written agreement whereby a party is obligated to provide end-user billing and
collection services with respect to the Seller's accounts.
"BILLING DATE" means the date on which the invoice with respect to a
Receivable was submitted to the related Payor which shall be not more than 45
days from the date on which services were provided to the end user of such
services.
"BUSINESS DAY" means any day of the year other than a Saturday, Sunday
or any day on which banks are required, or authorized, by law to close in the
State of Ohio or Wisconsin.
"CASH COLLECTIONS" means all Collections in the Lockbox Account from
the immediately preceding one month period.
"CLOSING DATE" means September 28, 1999.
"COLLECTION ACCOUNT" means the account titled "Collection Account"
established pursuant to Section 2.4(b).
"COLLECTIONS" means, with respect to any Receivable, all cash
collections and other cash proceeds of such Receivable.
"CONTRACT" means an agreement (or agreements) pursuant to, or under
which a Payor shall be obligated to pay for services rendered by the Seller from
time to time.
"CREDIT DEFICIENCY" has the meaning specified in Section 5.2(c).
"CUSTOMER BASE" means all of the Seller's past, present and future
customer contracts, agreements, or other arrangements, any customer list
relating thereto and any information regarding prospective customers and
contracts, agreements, or other arrangements and all of the goodwill and other
intangible assets associated with any of the foregoing; provided, such
definition of "Customer Base" shall specifically exclude the Seller's customers
not located in the United States or not organized under the
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laws of any jurisdiction in the United States and having its principal office at
a location other than the United States.
"DEFAULTED RECEIVABLE" means a Purchased Receivable as to which, on any
Determination Date (a) any part of the Net Value thereof remains unpaid for more
than 90 days, or, such other period of time as the Purchaser may agree in
writing,, from the Billing Date for such Receivable; or (b) the Payor thereof
has taken any action, or suffered any event to occur, of the type described in
Section 7.1(f) or (g); or (c) the Purchaser otherwise reasonably deems any part
of the Net Value thereof to be uncollectible for reasons other than a breach of
a representation or warranty under Article IV hereof.
"DEFAULTED RECEIVABLE AMOUNT" has the meaning specified in Section
5.2(c).
"DETERMINATION DATE" means the Business Day preceding the Purchase
Date, to be not less than one day per week.
"ELIGIBLE PAYOR" means a Payor which is (a) (i) a corporation, limited
liability company, partnership or any statutory organization organized under the
laws of any jurisdiction in the United States and having its principal office in
the United States, (ii) an individual or sole proprietorship which is a resident
of any jurisdiction in the United States, or (iii) a Billing and Collection
Agent; (b) not an Affiliate of any of the parties hereto other than Textron
Financial Corporation or any Affiliate thereof; (c) has executed and delivered
to the Seller a copy of any related Contract or Billing and Collection
Agreement; and (d) not subject to bankruptcy or insolvency proceedings at the
time of sale of the Receivables to be purchased.
"ELIGIBLE RECEIVABLE" means, at any time, a Receivable as to which the
representations and warranties of Section 4.2 are true and correct in all
respects at the time of Purchase.
"ELIGIBLE RECEIVABLE AMOUNT" means, with respect to any Eligible
Receivable, an amount equal to its Billed Amount after giving effect to the
Gross Liquidation Rate associated with the Payor Class with respect to such
Eligible Receivable.
"EVENT OF SELLER DEFAULT" has the meaning specified in Section 7.1.
"EXCESS COLLECTION AMOUNT" has the meaning specified in Section 5.2(d).
"GOVERNMENTAL AUTHORITY" means the United States of America, any state,
local or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions thereof
or pertaining thereto.
"GROSS LIQUIDATION RATE" means a factor, conclusively determined by the
Purchaser from time to time, with respect to a designated Payor Class based on
(i) the Seller's historical experience with respect to Collections for such
Payor Class, and (ii) the terms and provisions of any related Contract, Billing
and Collection Agreement, or other agreement, determined on the basis of actual
Collections which are expected to be received on a Receivable within 90 days,
or, to the extent applicable, 120 Days of its Billing Date; provided, that any
adjustment in such Gross Liquidation Rate by the Purchaser shall not be applied
to any Purchased Receivable purchased prior to such adjustment. For purposes of
the initial purchase of Receivables hereunder, the "Gross Liquidation Rate"
shall be 75.0% for with respect to Receivables which have been billed to the
respective Payor thereof and 55.0% for Unbilled Receivables.
"INSOLVENCY EVENT" means the occurrence of an event whereby the Seller
makes a general assignment for the benefit of creditors; or where any proceeding
is instituted by or against the Seller seeking to adjudicate it a bankrupt or
insolvent, or which seeks the liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of the Seller or any
of its debts
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<PAGE> 21
under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, custodian or other similar official for it or for any
substantial part of its property.
"LOCKBOX ACCOUNT" means the account established pursuant to Section
2.4(a).
"NET VALUE" of any Receivable at any time means an amount (not less
than zero) equal to (a)(i) the Eligible Receivable Amount multiplied by (ii)
.90; minus (b) all Collections received with respect thereto; provided, that if
the Purchaser makes a determination that all payments by the Payor with respect
to such Receivable have been made, the Net Value shall be zero.
"PAID RECEIVABLES AMOUNT" has the meaning specified in Section 5.2(b).
"PAYOR" means, the Person obligated to make payments in respect of any
Receivables.
"PAYOR CLASS" means, with respect to any Payor, one of the following:
(a) statutory organization, (b) individuals and sole proprietorships, or (c)
Billing and Collection Agent.
"PERSON" means an individual, partnership, limited liability company,
corporation (including a business trust), joint stock company, trust, voluntary
association, joint venture, a government or any agency or political subdivision
thereof, or any other entity of whatever nature.
"PROGRAM FEE" means as of each Purchase Date, the greater of (a)
$3000.00 per month, or (b) an amount equal to (i) 7/360, of the annualized Base
Rate, multiplied by (ii) the sum of (a) the aggregate Initial Payments with
respect to Unbilled Receivables which have been purchased and (b) the Net Value
of all Purchased Receivables which are not Unbilled Receivables including (A)
Rejected Receivables and (B) those Receivables to be purchased on such Purchase
Date; provided, however, that in the event there is more than one Purchase Date
per week, the Program Fee as of each subsequent Purchase Date during such week
shall mean an amount equal to 7/360, of the annualized Base Rate, multiplied by
the sum of (x) the aggregate Initial Payments with respect to additional
Unbilled Receivables and (y) the Net Value of all Purchased Receivables which
are not Unbilled Receivables, to be purchased on such Purchase Date consistent
with the terms and conditions of this Agreement.
"PURCHASE" means a purchase by the Purchaser of Eligible Receivables
from the Seller pursuant to Section 2.2.
"PURCHASE ACCOUNT" means the account titled "Purchase Account"
established pursuant to Section 2.4(b).
"PURCHASE COMMITMENT" means an amount not to exceed $3,000,000;
provided, however, that with respect to the initial Purchase Date, such amount
shall not exceed $2,000,000 and other than with respect to the initial Purchase
Date, the aggregate Net Value of Purchased Receivables on the first Purchase
Date of any month may not be greater than $500,000, or such other amount as the
Purchaser and Seller may otherwise agree in writing, over the highest aggregate
Net Value of Purchased Receivables at any time during the immediately preceding
month. Subject to the prior written approval by the Purchaser and payment by the
Seller of all applicable fees as agreed by and between the Seller and Purchaser,
the Purchase Commitment may be increased to $10,000,000 provided, however, that
no single incremental increase in such Purchase Commitment may be for an amount
less than $1,000,000.
"PURCHASE DATE" means the date on which the Purchaser initially
purchases Receivables from the Seller and thereafter, such other day of each
week, as the case may be, that the Seller and Purchaser mutually agree;
provided, that unless otherwise agreed otherwise such day shall be Wednesday of
each
A-3
<PAGE> 22
such week and in any event there shall occur a "Purchase Date" for purposes
of this Agreement not less than once per week.
"PURCHASE PRICE" has the meaning specified in Section 2.3.
"PURCHASED RECEIVABLE" means any Receivable which has been purchased by
the Purchaser hereunder including a Rejected Receivable to the extent such
Rejected Receivable has not been repurchased by Seller.
"PURCHASER" means RFC Capital Corporation, a Delaware corporation,
together with its successors and assigns.
"RECEIVABLE" means (a) an account receivable arising from the provision
or sale of electronic commerce products, goods and/or services (and any services
or sales ancillary thereto) by the Seller including the right to payment of any
interest or finance charges and other obligations of the Payor with respect
thereto; (b) all security interests or liens and property subject thereto from
time to time purporting to secure payment by the Payor; (c) all rights,
remedies, guarantees, indemnities and warranties and proceeds thereof, proceeds
of insurance policies, UCC financing statements and other agreements or
arrangements of whatever character from time to time supporting or securing
payment of such account receivable and (d) all Collections, Records and proceeds
with respect to any of the foregoing; provided, however, that "Receivable" shall
not include the foregoing as it pertains to (x) license, renewal, maintenance
and/or subscription payments due from customers of the Seller payable by or
through a credit card program, and (y) receivables payable by any obligor/payor
not located in the United States or not organized under the laws of any
jurisdiction in the United States and having its principal office at a location
other than the United States.
"RECORDS" means all Contracts and other documents, books, records and
other information (including, without limitation, computer programs, tapes,
disks, punch cards, data processing software and related property and rights)
prepared and maintained by the Seller or the Subservicer with respect to
Receivables (including Purchased Receivables) and the related Payors. In the
instance of a Receivable with respect to which the Payor is a Billing and
Collection Agent pursuant to a Billing and Collection Agreement, the amount owed
to the Seller by the Billing and Collection Agent is the "Receivable" which is
eligible for Purchase by the Purchaser and not the amount owing to, or collected
by, the Billing and Collection Agent from the end user of the services provided
by the Seller.
"REJECTED RECEIVABLE AMOUNT" has the meaning specified in Section
5.2(a).
"REJECTED RECEIVABLE" has the meaning specified in Section 4.4.
"RELATED DOCUMENTS" means all documents required to be delivered under
this Agreement.
"REQUIRED INFORMATION" means, with respect to a Receivable, (a) the
identity of the Payor, (b) the Eligible Receivable Amount, (c) the Billing Date,
(d) the Payor telephone number and (e) the Payor account number, if applicable.
"SELLER" means ARI Network Services, Inc., a Wisconsin corporation,
together with its successors and assigns.
"SELLER CREDIT RESERVE ACCOUNT" means the account titled "Seller Credit
Reserve Account" established pursuant to Section 2.4(b).
"SERVICING RECORDS" means all documents, books, records and other
information (including, without limitation, computer programs, tapes, disks,
punch cards, data processing software and related
A-4
<PAGE> 23
property and rights) prepared and maintained by the Subservicer or the Purchaser
with respect to the Purchased Receivables and the related Payors.
"SPECIFIED CREDIT RESERVE BALANCE" means, as of any Purchase Date, an
amount equal to 5.00% of the sum of (i) the aggregate Initial Payments with
respect to Unbilled Receivables which have been purchased and (ii) the Net Value
of Purchased Receivables which are not Unbilled Receivables including (a)
Rejected Receivables to the extent not repurchased and (b) those Receivables to
be purchased on such Purchase Date.
"SUBSERVICER" means the Seller, or any Person designated as Subservicer
hereunder.
"TERMINATION DATE" means the earlier of (a) September 28, 2002; (b) a
Termination Event; (c) the occurrence of an Event of Seller Default as set forth
in Section 7.1 of this Agreement; or (d) ninety days following the Seller's
delivery of a written notice to the Purchaser setting forth Seller's desire to
terminate this Agreement and the payment of the Termination Fee with respect
thereto.
"TERMINATION EVENT" means the occurrence of an event under any loan
agreement, indenture or governing document following which the funding of the
Purchaser to be utilized in purchasing Receivables hereunder may be terminated.
"TERMINATION FEE" means, other than as a result of the occurrence of a
Termination Event, an amount to be paid by the Seller to the Purchaser equal to
(A) 4.0% of the Purchase Commitment in the event of an occurrence of an Event of
Seller Default resulting in the termination of this Agreement; or (B) in the
event the Seller desires to terminate this Agreement, such termination shall be
effective only in the event that the Seller has (i) provided the Purchaser
ninety days prior written notice thereof and (ii) paid to Purchaser and
Purchaser has received from Seller an amount equal to (a) 3.0% of the Purchase
Commitment if such notice of termination is provided to the Purchaser during the
one year period commencing on the Closing Date and ending on the one year
anniversary of the Closing Date, (b) 2.0% in the event such notice of
termination is provided to the Purchaser during the period commencing the day
after the one year anniversary of the Closing Date and ending on the second
anniversary of the Closing Date, or (c) 1.0% in the event such notice of
termination is provided to the Purchaser during the period commending the day
after the second anniversary of the Closing Date through the Termination Date.
"UCC" means the Uniform Commercial Code as from time to time in effect
in the state of the location of the Seller's chief executive office.
A-5
<PAGE> 24
EXHIBIT B
[SELLER LETTERHEAD]
FORM OF NOTICE TO PAYORS - [INDIVIDUAL PAYORS]
[NAME AND ADDRESS OF PAYOR]
Dear :
--------------
Because of our continued growth and in an effort to better serve our
valued customers, we have entered into a receivables sale arrangement with RFC
Capital Corporation ("RFC") whereby certain receivables of ARI Network Services,
Inc. will be sold from time to time to RFC. One result of this relationship is
that your payments will be received and posted in a more timely manner. Payments
should [for resellers with existing lockboxes] continue to be forwarded to the
same address which is as follows or [for resellers establishing new lockboxes]
be forwarded to the following new address:
[bank name]-Lockbox Account (ARI NETWORK SERVICES, INC.) # .
-----------
[BANK NAME]
[BANK ADDRESS]
[BANK ABA #]
Your payments will continue to be serviced by, and all inquiries
regarding your service, billing invoices and payments should continue to be
directed to ARI Network Services, Inc.'s Customer Service Department at [phone
number]. This change is effective immediately and may not be further amended or
modified without the written consent of RFC.
Thank you for your cooperation and we look forward to continuing to
satisfy your business needs.
Sincerely,
ARI NETWORK SERVICES, INC.
-------------------------------
By: Brian E. Dearing
Its: Chairman and Chief
Executive Officer
B-6
<PAGE> 25
EXHIBIT C
FORM OF CORPORATE CERTIFICATE FOR THE SELLER
I hereby certify that I am a duly elected [Officer] of ARI NETWORK
SERVICES, INC. (in its capacity as Seller, the "Seller") with all requisite
knowledge of the matters set forth below, and further certify as follows:
1. Except as otherwise previously disclosed by the Seller to
the Purchaser in writing, there has been no change of the Seller's
legal name, identity or corporate structure within the six month period
preceding the execution date hereof.
2. No proceedings looking toward merger (where the Seller will
not be the surviving entity without the Purchaser's written consent),
liquidation, dissolution or bankruptcy of the Seller are pending or
contemplated.
3. There is no litigation pending, or to my knowledge,
threatened, which, if determined adversely to the Seller, would
adversely affect the execution, delivery or enforceability of the
Receivables Sale Agreement (the "Sale Agreement"), dated as September
28, 1999 by and among the Seller and RFC Capital Corporation ("RFC") as
Purchaser (the "Purchaser"), or the sale or servicing of the
Receivables as provided therein.
4. With respect to the Sale Agreement, the Seller has complied
with all the agreements by which it is bound and has satisfied all the
conditions on its part to be performed or satisfied prior to the
Closing Date.
5. No Event of Seller Default or other event of default in the
performance of any of the Seller's covenants or agreements under the
Sale Agreement has occurred and is continuing, nor has an event
occurred which with the passage of time or notice or both would become
such an Event of Seller Default.
6. The Seller is not a party to, or governed by, any contract,
indenture, mortgage, loan agreement, note, lease, deed of trust or
other instrument which restricts the Seller's ability to sell or
service Receivables or consummate any of the transactions contemplated
by the Sale Agreement.
7. For tax and reporting purposes, the Seller will treat the
transfer to the Purchaser of the Seller's interests in the Receivables
as a sale.
8. The transfer to the Purchaser of the Seller's interests in
the Receivables will be made (a) in good faith and without intent to
hinder, delay, or defraud present or future creditors, and (b) in
exchange for reasonably equivalent value and fair consideration.
9. On the date hereof, the Seller (a) was paying its Debts, if
any, as they matured; (b) neither intended to incur, nor believed that
it would incur, Debts beyond its ability to pay as they mature; and (c)
after giving effect to the purchase of certain Receivables by the
Purchaser the Seller will have an adequate amount of capital to conduct
its business and anticipates no difficulty in continuing to do so for
the foreseeable future.
10. The Seller has and maintains all material permits,
licenses (including any applicable and necessary license, permit or
certification from the Federal Communication Commission),
authorizations, registrations, approvals and consents of Governmental
Authorities
C-1
<PAGE> 26
necessary for (a) the activities and business of the Seller and each of
its Subsidiaries as currently conducted, (b) the ownership, use,
operation and-maintenance by each of them of its respective properties,
facilities and assets, and (c) the performance by the Seller of the
Agreement.
11. Without limiting the generality of the foregoing
paragraph: (a) each Contract of the Seller and each Subsidiary relating
to Receivables is in full force and effect and has not been amended or
otherwise modified, rescinded or revoked or assigned, and (b) no
condition exists or event has occurred which, in itself or with the
giving of notice or lapse of time or both, would result in the
suspension, revocation, impairment, forfeiture, and non-renewal
thereof.
12. Other than those UCC financing statements to be filed by
the Purchaser, no UCC financing statements, federal or state tax liens
or judgments with respect to the Purchased Receivables and all other
Receivables generated by the Seller have been filed nor shall be filed
from and after the date and time of the UCC search results provided by
the Seller in accordance with the conditions precedent set forth in the
Sale Agreement.
13. As of the date hereof, the undersigned hold the respective
office set forth opposite their name, and the signature set forth
opposite their name is their genuine signature:
NAME OFFICE SIGNATURE
______________________________
______________________________
______________________________
______________________________
14. The Seller is a corporation duly organized and validly
existing under the laws of the State of [state incorporated] validly
acting by and through its Board of Directors. Other than the Articles
of Incorporation filed on [date articles filed] and annexed to the
Certificate of the Secretary of State of the State of, a true, correct
and complete copy of which is attached hereto as Exhibit A and which
are in effect on the date hereof, there has been no amendment or other
document filed with said Secretary of State with respect to the Seller
and no such amendment or other document has been authorized.
15. The Seller is in good standing (including the payment of
all franchise taxes and the filing of required reports) under the laws
of the State of ____________ and is duly qualified to do business in
the State(s) of [states qualified]. A certificate of good standing
issued by the Secretary of State of [states qualified] is attached
hereto as Exhibit B.
16. Attached hereto as Exhibit C is a true, correct and
complete copy of the Bylaws of the Seller, which Bylaws have not
subsequently been amended, modified or rescinded; no such amendment,
modification or rescission is contemplated and said Bylaws continue in
force on the date hereof.
C-2
<PAGE> 27
17. Attached hereto as Exhibit D is a true, correct and
complete copy of resolutions (the "Resolutions") duly authorized and
adopted by the Board of Directors of the Seller pertaining to the RFC
Receivables Program; said Resolutions were duly adopted by the
unanimous written consent of the Board of Directors without a meeting
in accordance with the Articles of Incorporation and Bylaws of the
Seller and have not been amended, modified, annulled or revoked and are
in full force and effect; and the instruments referred to in said
Resolutions to which the Seller is a party were executed pursuant
thereto and in compliance therewith by the duly authorized officer of
the Seller.
All capitalized terms used herein that are not otherwise defined shall
have the respective meanings ascribed thereto in the Sale Agreement.
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal
of the Seller this _______ day of _______ , 199__.
By
__________________________________
Name:
Title:
C-3
<PAGE> 28
EXHIBIT D
TO CORPORATE CERTIFICATE
CERTIFIED COPY OF RESOLUTION
WHEREAS, at a meeting of the Board of Directors of , a corporation
organized and existing under the laws of the State of ____________, duly and
regularly called and held at the office of the corporation on the day of
<<MeetingMonthandYear>>, at which meeting a quorum of said Board was present,
the following resolution was duly adopted by the unanimous vote of all Directors
present, and the same has not been rescinded or modified:
RESOLVED, that the <<OfficerTitlesonGenCert>> of this corporation be
and they are hereby authorized on behalf of and in the name of this corporation
to enter into and perform that certain "Receivables Sale Agreement" or
modifications, amendments, or supplements thereof or thereto with RFC Capital
Corporation (the "Purchaser"), a corporation organized and existing under the
laws of the State of Delaware, relating to the sale, assignment, transfer,
conveyance and/or the creation of a security interest in 's Receivables, Seller
Credit Reserve Account and Collection Account as defined in said "Receivables
Sale Agreement", and to execute and deliver said "Receivables Sale Agreement"
and any other documents to be executed and delivered in relation to, or pursuant
to said "Receivables Sale Agreement"; and said officers are hereby further
authorized at any time to sell, assign, transfer, convey and/or create a
security interest in such Receivables and related Seller Credit Reserve Account
and Collection Account on such terms and conditions and in such form as may be
acceptable to the Purchaser; and said officers are authorized to execute and
deliver all such instruments and documents and to do all such things as may be
required to complete any such transactions; and all acts and things of the
nature herein referred to, heretofore and hereafter done by the said officers or
any of them, are hereby approved, ratified, and confirmed.
RESOLVED FURTHER, that the authority conferred upon said officers by
this resolution shall remain in full force until written notice of revocation
thereof shall have been received by the Purchaser and a copy of this resolution
certified by , Chairman, and , Secretary, with the seal of this corporation
affixed, is delivered to the Purchaser.
We, and , hereby certify that we are the Chairman and Secretary,
respectively, of ; and that the foregoing resolution was duly and regularly
passed, as above stated, by the said Board of Directors at a meeting of said
Board of Directors, duly and regularly called and held at the office of said
corporation at the time and place hereinbefore stated.
IN WITNESS WHEREOF, we have hereunto signed our names as , Chairman,
and , Secretary, and affixed the seal of said corporation as of
<<SaleSubservAgmtDate>>.
CHAIRMAN SECRETARY
- ----------------------------------------- ------------------------------
D-1
<PAGE> 29
EXHIBIT D
FORM OF OPINION OF COUNSEL FOR THE SELLER
[DATE OF INITIAL PURCHASE OF RECEIVABLES]
RFC Capital Corporation
130 E. Chestnut Street
Columbus, Ohio 43215
RE: RFC CAPITAL CORPORATION - RECEIVABLES SALE AGREEMENT
Gentlemen and Ladies:
We have acted as legal counsel to____________________________ (the
"Seller") in connection with the transactions contemplated by that certain
Receivables Sale Agreement (the "Sale Agreement"), dated as of___________, 199_,
by and among the Seller, a(n)__________________ corporation, and RFC Capital
Corporation, a Delaware corporation, as Purchaser ("Purchaser"). All references
herein to the Seller shall refer to the Seller in its capacity as both Seller
and Subservicer under the Sale Agreement. This opinion is being delivered at the
Seller's request.
Capitalized terms used and not otherwise defined herein shall have the
meanings ascribed thereto in the Sale Agreement.
In this connection, we have examined the following:
i) An executed copy of the Sale Agreement and all exhibits and
attachments thereto;
ii) Copies of the UCC-1 financing statements executed by the
Seller as assignor/debtor and naming the Purchaser as
assignee/secured party relating to the Purchased Receivables
and all other Receivables generated by the Seller (the
"Financing Statements"), copies of which are attached hereto
as Annex 1;
iii) The results of the searches (the "Searches") conducted by the
Secretary of State of ([AND THE COUNTY RECORDER,__________
COUNTY,_________ , AS OF_____________,]) certified by such
filing offices on Form UCC- 11, as to financing statements on
Form UCC- I on file with such offices and naming the Seller as
a "debtor" as of such date, copies of which are attached
hereto as Annex 2A;
iv) [ADD IF APPLICABLE] [EXECUTED COPIES OF APPROPRIATE RELEASES
OF ALL OUTSTANDING FINANCING STATEMENTS RELATING TO SECURITY
INTERESTS IN ACCOUNTS OF THE SELLER IN FAVOR OF THIRD PARTIES
WHICH ARE REFLECTED ON THE SEARCHES AND WHICH SHALL BE
RELEASED AT CLOSING] (the "Releases") copies of which are
attached hereto as Annex 213; and
v) Such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
------------------
(1) All references to "State of _________" in this form of opinion mean
state of the present location of the Seller.
(2) UCC searches certified on form UCC-11 by the appropriate government
officials should be dated within ten (10) days of the closing of the
transaction.
D-1
<PAGE> 30
As to various questions of fact material to our opinions set forth
below we have relied upon certificates of officers of the Seller, copies of
which are attached hereto as Annex 3. Nothing has come to our attention in the
course of our representation of the Seller which leads us to believe that the
representations set forth in any of the foregoing certificates are inaccurate or
incomplete in any material respect.
In connection with the opinions set forth below we have assumed, with
your agreement, that each party to the Sale Agreement other than the Seller has
executed and delivered such Sale Agreement and has the corporate power and
authority to enter into and perform its obligations thereunder, and that the
execution, delivery and performance of the Sale Agreement by each party thereto
other than the Seller will not breach, contravene, conflict with, or constitute
a violation of any provision of the articles of incorporation or bylaws or other
organizational documents of such party, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which such party is bound or
to which any of its property or assets is subject, or constitute a violation of
any law, statute, rule, regulation, order, writ, judgment, award, injunction or
decree of any Governmental Authority as to any such party.
In connection with the opinions set forth below which deal with the
perfection and priority of security interests, we have assumed that no financing
statements relating to Seller, the Receivables or the Purchased Receivables have
been misindexed or misfiled in the appropriate filing offices covered by the
Searches.
We have also assumed that all documents submitted to us as originals
are complete and authentic, that all copies of documents submitted to us conform
in all respects to the originals thereof, including all amendments or
modifications thereto; and that all signatures of parties, other than those of
the Seller and its authorized officers, to the respective documents are genuine.
We have also assumed that all documents or copies thereof examined by us have
been or will be duly, validly and properly authorized, executed, acknowledged
and delivered by all parties thereto other than the Seller.
As you have agreed, for purposes solely of ascertaining the existence
of security interests perfected by the filing of UCC financing statements, we
have limited our investigation to an examination of the Searches, which indicate
that there are no filed financing statements naming the Seller as debtor and
relating to the Seller's Receivables [,OTHER THAN THOSE WHICH WILL BE TERMINATED
BY THE FILING OF THE RELEASES].
For purposes of the opinion expressed in the first sentence of
Paragraph 4 below, we have assumed, with your consent, that the description of
"Purchased Receivables" set forth in the Sale Agreement accurately and
completely describes all of the Seller's Purchased Receivables being transferred
to the Purchaser pursuant to the Sale Agreement and the description of
"Receivable" set forth in the Sale Agreement accurately and completely describes
all of the Seller's Receivables generated by the Seller historically and from
time to time.
For purposes of the opinions expressed in Paragraphs 5 and 6 below,
with your agreement we have assumed that all transfers of Purchased Receivables
will have occurred in accordance with the terms and conditions set forth in the
Sale Agreement.
In addition to the foregoing, in rendering the opinions set forth
herein we have acted only as attorneys licensed to practice in the State of
_________________ and do not hold ourselves out as being knowledgeable as to the
laws of any other jurisdiction. We therefore express no opinions as to the
effect of any laws other than federal laws of the United States of America and
the laws of the State of ___________________. In this regard, we note that [- if
the Seller is located in a state other than Ohio -] the Sale Agreement is
governed by the laws of the State of Ohio. We have assumed, for purposes of
issuing this letter, that insofar as the laws of any such other jurisdiction are
applicable to the matters set forth below,
D-2
<PAGE> 31
such laws (including applicable conflict of laws provisions) are identical to
and will be interpreted in-all respects in the same manner as the laws of the
State of _________.
On the basis of the foregoing and subject to the limitations,
qualifications and exceptions set forth above, we are of the opinion as of the
date hereof that:
1. The Seller is a corporation duly organized and validly existing
under the laws of the State of___________,
is in good standing under the laws of the State of [STATE OF ORGANIZATION] and
is duly qualified to do business, and is in good standing in each jurisdiction
in which it maintains an office and has the corporate power and authority to
own, lease and operate its properties and to conduct its business as now
conducted. The Seller has made all filings with, and has obtained all necessary
or appropriate licenses and approvals from federal and State of ___________
Governmental Authorities, which such licenses and approvals are in full force
and effect as of the date hereof, that are necessary to permit the Seller to
own, lease and operate its properties, to lawfully generate receivables and to
lawfully conduct its business as presently conducted, and to consummate the
transactions contemplated by the Sale Agreement.
2. The Seller has the corporate power and authority to execute,
deliver and perform the Sale Agreement. The execution, delivery and performance
of the Sale Agreement has been duly authorized by all necessary corporate action
of the Seller and such Sale Agreement constitutes a legal, valid and binding
obligation of Seller enforceable against the Seller in accordance with its
terms.
3. The execution and delivery of, and the performance of the
Purchaser's obligations under, the Sale Agreement does not and will not (a)
violate any provision of the Seller's articles of incorporation or bylaws, (b)
violate any statute, law, ordinance, rule or regulation of the United States of
America or the State of ____________ binding on the Seller, (c) violate any
orders, judgments, writs or decrees known to us to which the Seller is subject
in any respect, or (d) violate or create a breach or default under any loan
agreement, indenture, note, evidence of indebtedness, mortgage, financing
agreement, bond, debenture or similar agreement or instrument relating to
obligations of the Seller for borrowed money or for the deferred purchase price
of property or services payable more than one year from the date of incurrence
thereof or on demand or relating to obligations of the Seller under capital
leases which is presently in effect and known to us and to which the Seller is a
party of its property is subject.
4. The Purchased Receivables and Receivables constitute "accounts" and
"general intangibles" within the meaning of the UCC. The Seller is "located" in
the State of __________ for purposes of Section 9-103(3)(b) of the UCC such that
the laws (including the conflict of law rules) of the State of _____________
govern the perfection of security interests in accounts and general intangibles
of the Seller and the sale of accounts by the Seller. The grant of a first
priority security interest in the Receivables, other than Purchased Receivables,
is perfected by the filing of appropriate UCC financing statements in the
appropriate UCC filing offices identified in paragraph 5(i) below. The transfers
of the Purchased Receivables are "true sales" of the Purchased Receivables to
the Purchaser. In the event, however, that a court of competent jurisdiction
were to hold that such transaction constitutes a loan and not a purchase and
sale, then the Sale Agreement creates a first priority perfected valid security
interest in the Receivables and Purchased Receivables in favor of the Purchaser.
5. If transfers of the Purchased Receivables from the Seller to the
Purchaser pursuant to the Sale Agreement constitute a "true sale" of the
Purchased Receivables to the Purchaser, the execution and delivery of the Sale
Agreement and
(i) upon the proper filing of the Financing Statements in the UCC
filing offices of the Secretary of State of _____________,
[and in the UCC filing offices of the County Recorder of
__________County,] and
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<PAGE> 32
(ii) the delivery to the Payors of such Purchased Receivables of
the notices in the form of the notices on Exhibit B to the
Sale Agreement (assuming no such prior notice has been
delivered to any such Payor by any person claiming an
interest in the Purchased Receivables, and we hereby advise
you that we have no knowledge that the Seller has previously
made any such assignment thereof or granted any such lien or
encumbrance thereupon);
are effective under the laws of the [STATE OR LOCATION OF SELLER] to vest title
thereto in the Purchaser, and all necessary steps have been taken under the laws
of the State of [LOCATION OF SELLER] to protect the Purchaser's ownership
interest in the Purchased Receivables now existing, and hereafter created,
against creditors of, or subsequent Purchasers from, the Seller, provided that
(x) if the transfers of the Purchased Receivables are deemed to
be subject to Article 9 of the UCC, or previously filed
financing statements, priority may be subject to financing
statements effective as a result of Section 9-401(2) of the
UCC, or
(y) if the Purchased Receivables are deemed to be interests or
claims "in or under any policy of insurance" under
ss.9-104(g) of the UCC, priority may be subject to [IN
ENGLISH RULE STATES: PRIOR NOTICES TO PAYORS OF SUCH
POLICIES] [IN AMERICAN RULE STATES: PRIOR SALES OF SUCH
PURCHASED RECEIVABLES].(3)
The filing of the Financing Statements in the filing offices identified in
paragraph 5(i) above are the only filings required to be made in the State of
____________ to evidence, provide notice to third parties with respect to, or
otherwise perfect the Purchaser's ownership interest in the Purchased
Receivables and the Purchaser's security interest in all Receivables other than
Purchased Receivables under any applicable law of the State of _______________.
No other filings, either in the filing offices identified in paragraph 5(i) or
in any other filing offices in the State of ______________, are required or are
advisable to be made to evidence, provide notice to third parties with respect
to, or otherwise perfect such interests, or to establish the priority of the
Purchaser's interest with respect to such Purchased Receivables.
6. If the transfers of the Purchased Receivables from the Seller to the
Purchaser pursuant to the Sale Agreement does not constitute a "true sale" of
the Purchased Receivables to the Purchaser, the Sale Agreement creates a valid
security interest in favor of the Purchaser in the Purchased Receivables from
time to time transferred to the Purchaser pursuant to the Sale Agreement, which
security interest will constitute
(i) upon the proper filing of the Financing Statements in
the UCC filing offices of the Secretary of State of
___________________, [and in the UCC filing offices
of the County Recorder of _______________, County,]
and
(ii) upon the delivery to the Payors of such Purchased
Receivables of the notices in the form of the notices
on Exhibit B to the Sale Agreement (assuming that no
such prior notice has been delivered to any such
Payor by any person claiming an
---------------
(3) As to assignments of accounts and intangibles, if the UCC is not
applicable because of Sections 9-104, most jurisdictions follow either the
so-called "American rule" (which in general provides that the transfer of an
interest made effective by a written assignment, with priority being granted to
the assignment which is first in time) or the so-called "English rule" (which in
general provides that the transfer of an interest therein is only effective if
notice is given to the payor). Counsel should choose one approach or the other
in completing paragraph 5(y) or, if the law in the jurisdiction is unsettled,
counsel may include both as exceptions (i.e., by indicating in paragraph 5(y)
"prior notices to payors of such policies or prior sales of such Purchased
Receivables").
D-4
<PAGE> 33
interest in the Purchased Receivables and we hereby
advise you that we have no knowledge that the Seller
has previously delivered any prior notice);
a security interest (perfected under the UCC and under other appropriate law to
the extent applicable) in the Seller's right, title and interest in and to the
Purchased Receivables and the proceeds thereof now existing, and hereafter
created, prior and senior to all other liens, provided that:
(x) if the granting of a security interest in the
Purchased Receivables is deemed to be subject to
Article 9 of the UCC or previously filed financing
statements, priority may be subject to financing
statements effective as a result of Section 9-401(2)
of the UCC, or
(y) if the Purchased Receivables are deemed to be
interests or claims "in or under any policy of
insurance" under ss.9-104(g) of the UCC, priority may
be subject to [IN ENGLISH RULE STATES: PRIOR NOTICES
TO PAYORS OF SUCH POLICIES] [IN AMERICAN RULE STATES:
PRIOR SALES OF SUCH PURCHASED RECEIVABLES].
The filing of the Financing Statements in the filing offices identified in
paragraph 6(i) above are the only filings required to be made in the State of
__________ to evidence, provide notice to third parties with respect to, or
otherwise perfect the Purchaser's security interest in the Purchased Receivables
under any applicable law of the State of__________. No other filings, either in
the filing offices identified in paragraph 6(i) or in any other filing offices
in the State of__________, are required or are advisable to be made to evidence,
provide notice to third parties with respect to, or otherwise perfect such
interests, or to establish the priority of the Purchaser's interest with respect
to such Purchased Receivables.
7. A State of __________ court and a federal court sitting in the
State of __________ would give effect to the choice of law provisions of the
Sale Agreement, except that such court may apply State of _________ law to (a)
certain remedial and procedural rights, (b) matters of public policy, (c)
matters pertaining to the perfection and priority of security interests, and (d)
matters as to which Ohio law cannot be proven to such court to be sufficiently
authoritative or certain for such court to rely on it.
8. No consent of, or other action by, and no notice to or filing with,
or licensing by any federal or State of ____________ Governmental Authority or
any other party (except for those consents required under Section _________of
the Sale Agreement which have been provided by the Seller to the Purchaser) is
required for the due execution, delivery and performance by the Seller of the
Sale Agreement or any other agreement, document or instrument to be delivered
thereunder or for the perfection of or the exercise by the Seller or the
Purchaser of any of their rights or remedies thereunder. The transactions
contemplated by the Sale Agreement will not cause the Purchaser to be subjected
to any obligation to pay any transfer tax to any Governmental Authority in the
State of _________, including without limitation any transfer, sales, use, added
value, documentary stamp or other similar transfer tax other than [DESCRIBE ANY
SUCH TAXES WHICH ARE APPLICABLE].
9. To the best of our knowledge, there are no actions or proceedings
against or affecting the Seller or any of its assets, pending or threatened,
before any Governmental Authority (including, without limitation, any federal or
state court of competent jurisdiction) (i) which seek to affect the
enforceability of the Sale Agreement or the transactions contemplated thereby,
or (ii) which, if determined adversely, would materially and adversely affect
the ability of the Seller to perform its obligations under the Sale Agreement.
Our opinions set forth herein are subject to the following
qualifications and exceptions:
(a) The effect of certain laws governing bankruptcy,
reorganization, fraudulent conveyance, moratorium and
insolvency and relating to or affecting the enforcement of
creditors'
D-5
<PAGE> 34
rights generally, including, but not limited to, the right to
take or retain personal property encumbered by the Sale
Agreement and the Financing Statements;
(b) The application of general principles of equity (regardless of
whether considered in a proceeding in equity or at law);
(c) Standards of commercial reasonableness and good faith;
(d) In the case of proceeds, perfection of security interests is
limited to the extent set forth in Section 9-306 of the UCC;
(e) Continuation of perfection in any proceeds which are subject
to a security interest or in any after acquired property may,
if such proceeds or after acquired property consist of
property of a type in which a perfected security interest
cannot be obtained by filing a financing statement, require
additional compliance with applicable provisions of the UCC
and we express no opinion as to the perfection, priority an
effectiveness of any security interest in any proceeds of the
Purchased Receivables initially subject to the security
interest or after acquired property to the extent that
perfection, priority or effectiveness depends upon additional
compliance with the UCC. Any change (from one state to another
state) in the location of the Seller's place of business or
chief executive offices to a location outside of the State of
__________, or any change in the name, identity or corporate
structure of the Seller that would make a filed financing
statement seriously misleading, may result in the lapse of
perfection of the security interest to the extent that
perfection is dependent on filing unless new and appropriate
financing statements are filed in a timely manner; and
(f) In the case of collateral (as such term is defined in Article
9 of the UCC) in which a debtor (as such term is defined in
Article 9 of the UCC) has no present rights, a security
interest will be created therein only when the debtor acquires
rights to such collateral.
Our opinions expressed herein are limited to those matters expressly
set forth herein, and no opinion may be implied or inferred beyond the matters
expressly stated herein. Further, the opinions expressed herein are being
rendered solely in connection with the consummation of the transactions
contemplated by the Sale Agreement to which Seller is a party, and may not be
relied upon for any other purpose.
Our opinions are rendered only as of the date hereof and we assume no
obligation to update or supplement this opinion to reflect any facts or
circumstances that may hereafter occur or to reflect the applicability of any
laws that may affect the transactions contemplated by the Sale Agreement after
the date hereof.
In addition to the foregoing, this letter may not be distributed to,
furnished to or relied upon by any person without the express written consent of
this firm, provided, however, that any assignee of the Purchaser pursuant to the
Sale Agreement may likewise rely upon this opinion as if named as an addressee
herein.
Very truly yours,
D-6
<PAGE> 1
EX - 10.25 - Form of Change of Control Agreement
FORM OF CHANGE OF CONTROL AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of the __th day of __________,
_____, is between ARI Network Services, Inc. (the "Company") and _____________
(the "Employee").
W I T N E S S E T H :
WHEREAS, the Employee has been employed by the Company since ____ and
currently serves as its __________________; and
WHEREAS, the Board of Directors of the Company has determined that it
wishes to assure the continued availability of the Employee as the
___________________ of the Company by entering into this Change of Control
Agreement (the "Agreement"); and
WHEREAS, the Board of Directors of the Company wants to assure that, in
the event of a Change of Control (as hereinafter defined), the Employee's
service to the Company will be recognized.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the Company and the Employee hereby agree as follows:
1. DEFINITIONS. For Purposes of this Agreement:
(a) Cause. "Cause" means (i) the willful and continued failure by the
Employee to substantially perform the Employee's duties with the Company (other
than any such failure resulting from the Employee's incapacity due to physical
or mental illness) for a period of at least ten days after a written demand for
substantial performance is delivered to the Employee which specifically
identifies the manner in which the Employee has not substantially performed his
duties, or (ii) the willful engaging by the Employee in misconduct which is
demonstrably and materially injurious to the Company, monetarily or otherwise.
For purposes of this Agreement, no act or failure to act on the Employee's part
shall be considered "willful" unless done or omitted to be done by the Employee
not in good faith and without reasonable belief that such action or omission was
in the best interest of the Company. Notwithstanding the foregoing, the Employee
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to the Employee a copy of a resolution, duly adopted
by the affirmative vote of not less than a majority of the Board of Directors of
the Company at a meeting of the Board called and held for such purposes (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee's counsel, to be heard before the Board), stating that in the
good faith opinion of the Board the Employee was guilty of conduct constituting
Cause as set forth above and specifying the particulars thereof in detail.
<PAGE> 2
(b) Change of Control. A "Change of Control" means the first to occur
of the following:
(i) the acquisition by an individual, entity or group, acting
individually or in concert (a "Person") of beneficial ownership of
more than 50% of the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock"); provided, however, that
for purposes of this Subsection 1(b)(i), the following acquisitions
shall not constitute a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company, (C)
any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation
controlled by the Company, or (D) any acquisition by any
corporation pursuant to a transaction which complies with clauses
(A), (B) and (C) of Subsection 1(b)(ii) below; or
(ii) consummation of a reorganization, merger or
consolidation, share exchange, or sale or other disposition of all
or substantially all of the assets of the Company (a "Business
Combination"), in each case, unless, immediately following such
Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners of the
Outstanding Common Stock immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50%
of, respectively, the then outstanding shares of common stock and
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as
a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Common Stock, (B) no Person
(excluding any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, more than
50% of, respectively, the then outstanding common stock of the
corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership existed
prior to the Business Combination, and (C) at least a majority of
the members of the Board of Directors of the corporation resulting
from such Business Combination were members of the Board of
Directors of the Company at the time of the execution of the
initial agreement providing for such Business Combination; or
(iii) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(c) Date of Termination. "Date of Termination" means the date specified
in the Notice of Termination where required (which date shall be on
or after the date of the Notice of Termination) or in any other
case during the Term, upon the Employee's ceasing to perform
services for the Company.
2
<PAGE> 3
(d) Effective Date. "Effective Date" means the date on which the
Change of Control occurs.
(e) Good Reason. "Good Reason" means, without the Employee's written
consent, the occurrence of one or more of the following during the Term:
(i) a material diminution of or interference with the
Employee's duties and responsibilities as _________________ of the
Company, including, but not limited to a material demotion of the
Employee, a material reduction in the number or seniority of other
Company personnel reporting to the Employee, or a material reduction in
the frequency with which, or in the nature of the matters with respect
to which, such personnel are to report to the Employee;
(ii) a change in the principal workplace of the Employee to a
location outside of a 50-mile radius from ____________________;
(iii) a reduction or adverse change in the salary, bonus,
perquisites, benefits, contingent benefits or vacation time which had
theretofore been provided to the Employee; or
(iv) an unreasonable increase in the workload of the Employee.
For purposes hereof, any good faith determination made by the Employee
that he has Good Reason to terminate his employment with the Company shall be
conclusive. The Employee's continued employment or failure to give Notice of
Termination will not constitute consent to, or a waiver of rights with respect
to, any circumstance constituting Good Reason hereunder.
(f) Notice of Termination. Any termination of the Employee's employment
by the Company without Cause, or termination by the Employee for Good Reason,
during the Term will be communicated by a Notice of Termination to the other
party hereto. A "Notice of Termination" means a written notice which specifies a
Date of Termination (which date shall be on or after the date of the Notice of
Termination), indicates the provision in this Agreement applying to the
termination and, if applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee's
employment under the provision so indicated.
(g) Term. The "Term" means a period beginning on the Effective Date and
ending on the date two years after the occurrence of a Change of Control.
2. TERMINATION OF EMPLOYMENT DURING THE TERM.
(a) Termination by the Company Without Cause or by the Employee for
Good Reason. If the Employee's employment is terminated during the Term by the
Company without Cause or by the Employee for Good Reason, the Employee shall be
entitled to the following:
3
<PAGE> 4
(i) the Company shall pay the Employee his full base salary
through the Date of Termination at the rate in effect at the time
the Notice of Termination is given;
(ii) as the annual bonus for the year in which the Date of
Termination occurs, the Company will pay the Employee an amount
equal to the product of (i) the average of the Employee's annual
bonus for the three fiscal years of the Company ending prior to the
Date of Termination and (ii) a fraction, the numerator of which is
the actual number of the days Employee was employed by the Company
during the fiscal year in which the Date of Termination occurs and
the denominator of which is 365;
(iii) the Company shall pay to the Employee as a severance
benefit a lump-sum amount equal to two (2) times the sum of (a) the
Employee's annual base salary as in effect on the Effective Date or
Date of Termination, whichever is greater, without reduction for any
mandatory or voluntary deferrals, (b) 100% of the targeted
commissions, if any, for the year in which the Effective Date or
Date of Termination occurs, whichever is greater, and (c) 100% of
the targeted short-term and long-term cash bonuses for the year in
which the Effective Date or Date of Termination occurs, whichever is
greater, without reduction for any amounts that would otherwise be
deferred, within thirty days after the Date of Termination; and
(iv) for a 24-month period after the Date of Termination
starting with month immediately after the month in which the Date of
Termination occurs, the Company will arrange to provide the Employee
and the Employee's eligible dependents, at the Company's expense,
with benefits under the medical and dental plans of the Company, or,
if such benefits are not available, benefits substantially similar
to the benefits the Employee was receiving during the 90-day period
immediately prior to the Date of Termination; provided, however,
that benefits otherwise receivable by the Employee pursuant to this
Subsection 2(a)(iv) will be reduced to the extent other comparable
benefits are actually received by the Employee from subsequent
employment during the 24-month period following the Date of
Termination, and any such benefits actually received by the Employee
will be reported to the Company; and provided, further, that any
access to insurance continuation coverage that the Employee may be
entitled to receive under the Consolidated Omnibus Budget
Reconciliation Act of 1986 ("COBRA") will commence on the Date of
Termination.
(b) Termination for Any Other Reason. If the Employee's employment with the
Company is terminated during the Term for any reason not specified in Subsection
2(a) above, the Employee will be entitled to the following:
(i) the Company will pay the Employee his full base salary
through the Date of Termination at the rate in effect on the Date of
Termination; and
(ii) as the annual bonus for the year in which the Date of
Termination occurs, the Company will pay the Employee an amount
equal to the product of (i) the average of the Employee's annual
bonus for the three fiscal years of the Company ending prior to the
Date of Termination and (ii) a fraction, the numerator of which is
the actual number
4
<PAGE> 5
of days the Employee was employed by the Company during the fiscal
year in which the Date of Termination occurs and the denominator of
which is 365. Notwithstanding the foregoing, no bonus will be paid
to the Employee under this Subsection 2(b)(ii) if the Employee's
employment is terminated for Cause.
3. RESTRICTIONS. As of the Effective Date, all restrictions limiting
the exercise, transferability or other incidents of ownership of any outstanding
award, including but not limited to restricted stock, options, stock
appreciation rights, or other property or rights of the Company granted to the
Employee shall lapse, and such awards shall become fully vested and be held by
the Employee free and clear of all such restrictions. In addition, all amount
deferred under any plan or agreement providing for deferred compensation,
including increases in salary which have been deferred and that portion of the
long-term bonus which is deferred, shall become immediately vested and shall be
paid in a lump sum to the Employee no later than thirty days after the Effective
Date. This provision shall apply to all such property or rights notwithstanding
the provisions of any other plan or agreement to the contrary.
4. LIMITATION ON PAYMENTS. Subsections 2(a)(iii) and (iv) and Section
3, above, provide for certain payments to be made or benefits to be given to the
Employee if the Employee's employment with the Company terminates during the
Term (the "Change of Control Payments"). Notwithstanding such subsections, the
Change of Control Payments will be reduced such that the present value of the
payments to the Employee or for the Employee's benefit, receipt of which is
deemed to be contingent on a change of control under Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code"), shall not exceed an
amount equal to the maximum which the Company may pay without loss of deduction
under Section 280G(a) of the Code (the "Golden Parachute Threshold"). If the
Golden Parachute Threshold is exceeded, the payments made pursuant to Subsection
2(a)(iii) will be reduced, but not below zero, so that the total amount paid to
the Employee or for the Employee's benefit is not in excess of the Golden
Parachute Threshold. Notwithstanding the foregoing, if not reducing the Change
of Control Payments would result in a greater after-tax amount to the Employee,
such payments shall not be reduced. All calculations required pursuant to this
Section 4 shall be made in accordance with proposed, temporary or final
regulations promulgated under Section 280G of the Code or other applicable
authority by the Company's public accountants, the Company's lawyers or such
other third party as is mutually agreed between the Executive and the Company.
In the event that the provisions of Sections 280G and 4999 of the Code or any
successor provision are repealed without succession this Section 4 shall be of
no further force or effect.
5. NO MITIGATION. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as a result of employment by another employer other than as
provided in subsection 2(a)(iv), above, by retirement benefits distributed after
the Date of Termination, or otherwise.
5
<PAGE> 6
6. NO ASSIGNMENTS.
(a) Successors and Assigns. This Agreement is personal to the Employee,
and the Employee may not assign or delegate any of the Employee's rights or
obligations hereunder without first obtaining the written consent of Company.
The Company will require any successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by an assumption agreement in form and
substance satisfactory to the Employee, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession or assignment had taken place.
If such succession or assignment does not take place, and if this Agreement is
not otherwise binding on the Company's successors or assigns by operation of
law, the Employee is entitled to compensation from the Company in the same
amount and on the same terms as the compensation pursuant to Subsection 2(a)
hereof.
(b) Inurement. This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any amount
would still be payable to the Employee hereunder if the Employee had continued
to live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Employee's devisee, legatee
or other designee or if there is no such designee, to the Employee's estate.
7. NOTICE. For the purposes of this Agreement, notices and all other
communication provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by fax with
confirmation printed on the sending fax machine, or five days after mailing
certified mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth opposite the parties' signatures to this
Agreement (provided that all notices to the Company shall be directed to the
attention of the Board of Directors of the Company with a copy to the Secretary
of the Company), or to such other address as either party may have furnished to
the other in writing in accordance herewith.
8. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties hereto.
9. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Wisconsin, without giving effect to its principles of conflicts of
laws.
11. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration by a
single arbitrator mutually agreed to by the disputing parties in accordance with
the rules of the American Arbitration Association then in effect. Such
arbitration shall be held in Milwaukee, Wisconsin, or such other place as is
6
<PAGE> 7
mutually agreeable to the parties hereto. Judgment may be entered on the
Arbitrator's award in any court having jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ARI NETWORK SERVICES, INC.
330 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
By:
______________________________
Brian E. Dearing, Chairman of
the Board and
Chief Executive Officer
EMPLOYEE
_______________________________
_______________________________
_______________________________
(Address)
________________________________
(Signature)
________________________________
(Print Name)
7
<PAGE> 1
EX 10.26 Deferred Compensation Plan
1999 DEFERRED COMPENSATION PLAN OF
ARI NETWORK SERVICES, INC.
1. Purpose. The purpose of this Plan is to provide certain executives
(the "Participant") of ARI Network Services, Inc. (the "Company") an increase in
salary while at the same time deferring payment of the amount of the increase
until the Company has adequate operational cash flows.
2. Administration. The Plan shall be administered by the Company's
Board of Directors (the "Board"). The Board is authorized and shall have plenary
authority in its discretion, subject only to the provisions of the Plan. The
Board's determinations and interpretations shall be final, conclusive and
binding. The Board may designate one or more employees of the Company to assist
the Board in the administration of the Plan and may grant authority to such
other person to execute, deliver and receive documents on behalf of the Board.
3. Deferred Compensation. In addition to any other compensation
provided to each Participant by the Company, effective as of January 1, 1999,
the Board will grant the Participant an increase in salary in an amount
designated by the Board as appropriate for such Participant (the "Salary
Increase").
4. Payment of Salary Increase. The Salary Increase shall be accrued by
the Company but payment thereof shall be deferred until such time (the "Payment
Date") as the Board, in its sole discretion, shall determine that the
operational cash flows of the Company are adequate to (i) begin paying the
Salary Increase as part of Participant's regular salary and (ii) pay the full
amount of the Salary Increase accrued as of the Payment Date (the "Deferred
Amount"). The Deferred Amount may be paid in one lump sum or in not more than
three equal monthly or bimonthly installments if the Deferred Amount is in
excess of Ten Thousand Dollars ($10,000) as of the Payment Date. Thereafter, (i)
the Deferred Amount shall be paid in one lump sum or in three installments, as
the case may be, (ii) the Company shall begin paying the Salary Increase to
Participant as part of his or her regular salary payments, and (iii) no further
Salary Increase shall accrue under this Plan.
5. Obligation Not Secured. In no event shall the Company be required to
deposit the Salary Increase or the Deferred Amount into any account or otherwise
segregate the Salary Increase or Deferred Amount from its general fund or take
any other action to secure its obligation to pay the Salary Increase or the
Deferred Amount.
6. Termination of Employment. The Company's obligation to pay the
Deferred Amount, as provided in Paragraph 4, will survive the termination of
Participant's employment with the Company, provided however, that the entire
Deferred Amount may become due and payable upon Participant's termination of
employment with the Company if the terms of any Change of Control Agreement
between the Participant and the Company require such payment.
<PAGE> 2
7. Assignment. Any and all rights and provisions hereunder are personal
to Participant and any rights or interest herein or arising hereunder shall be
subject to voluntary or involuntary alienation, assignment or transfer. However,
nothing in this Plan shall be construed to entitle Participant, Participant's
surviving spouse or Participant's beneficiary to any payments hereunder prior to
the date they become due or shall be construed to entitle Participant to any
specific assets of the Company.
8. Amendment. The Plan may at any time and from time to time be
terminated, modified, or amended by the Board in its sole discretion; provided
however, that the Board may not, unless otherwise permitted under federal law,
without the approval of the Company's shareholders, adopt any amendment to the
Plan for which shareholder approval is required under tax, securities or any
other applicable law. No termination, modification or amendment of the Plan may,
without the consent of the Participant, materially affect the rights of such
Participant to a Deferred Amount.
9. Governing Law. This Plan shall be construed according to the laws of
the State of Wisconsin.
<PAGE> 1
1999 DEFERRED BONUS PLAN OF
ARI NETWORK SERVICES, INC.
1. Purpose. The purpose of this Plan is to provide certain executives (the
"Participant") of ARI Network Services, Inc. (the "Company") with
additional incentive to remain employed by the Company.
2. Administration. The Plan shall be administered by the Company's Board of
Directors (the "Board"). The Board is authorized and shall have plenary
authority in its discretion, subject only to the provisions of the Plan.
The Board's determinations and interpretations shall be final, conclusive
and binding. The Board may designate one or more employees of the Company
to assist the Board in the administration of the Plan and may grant
authority to such or other persons to execute, deliver and receive
documents on behalf of the Board.
3 Deferred Bonus. In addition to any other compensation Participant is
entitled to receive from ARI, Participant will be entitled to additional
deferred compensation as follows:
(a) Amount of Bonus. Pursuant to the terms and conditions of this
Plan, each Participant shall be entitled to a special bonus equal
to 100% of the annual bonus amount earned by Participant with
respect to the Company's fiscal year ending July 31, 1999
excluding any commissions and excluding any special bonus paid to
Participant during the year (the "Deferred Bonus").
(b) Payment of Deferred Bonus. The Deferred Bonus shall be paid to
each Participant according to the following Schedule, provided
Participant is employed by ARI at the time of the payment (unless
Participant's employment is terminated by reason of death or
permanent disability):
(i) 33.33% of the Deferred Bonus shall be paid during the
first quarter of the Company's fiscal year ending July
31, 2000;
(ii) 33.33% of the Deferred Bonus shall be paid during the
first quarter of the Company's fiscal year ending July
31, 2001; and
(iii) 33.34% of the Deferred Bonus shall be paid during the
first quarter of the Company's fiscal year ending July
31, 2002.
4. Termination Employment. Regardless of the foregoing provisions of the Plan,
the Company will not be obligated to make any payments hereunder after the
termination of Participant's employment with the Company, except in the
case that the termination of Participant's employment is a direct result of
death or permanent disability. However, notwithstanding the foregoing, the
entire Deferred Bonus amount may become immediately due and payable upon
Participant's termination of
<PAGE> 2
employment with the Company if the terms of any Change of Control
Agreement between the Participant and the Company, require such payment.
5. Assignment. Any and all rights and provisions hereunder are personal to
Participant and any rights or interest herein or arising hereunder shall
not be subject to voluntary or involuntary alienation, assignment or
transfer. Notwithstanding the foregoing, Participant's heirs or designated
beneficiaries may receive any Deferred Bonus that may be owed under the
Plan. However, nothing in this Plan shall be construed to entitle
Participant, Participant's surviving spouse or Participant's beneficiary to
any payments hereunder prior to the date they become due or shall be
construed to entitle Participant to any specific assets of the Company.
6. Amendment. The Plan may at any time and from time to time be terminated,
modified, or amended by the Board in its sole discretion; provided however,
that the Board may not, unless otherwise permitted under federal law,
without the approval of the Company's shareholders, adopt any amendment to
the Plan for which shareholder approval is required under tax, securities
or any other applicable law. No termination, modification or amendment of
the Plan may, without the consent of the Participant, materially affect the
rights of such Participant to a Deferred Amount.
7. Governing Law. This Plan shall be construed according to the laws of the
State of Wisconsin.
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Selected Financial
Data" and to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-48316) pertaining to the 1991 Stock Option Plan of ARI Network
Services, Inc. and the Registration Statement (Form S-8 No. 33-54144) pertaining
to the 1992 Employee Stock Purchase Plan of ARI Network Services, Inc., of our
report dated September 24, 1999, except for Notes 3 and 10 as to which the date
is September 30, 1999 and September 28, 1999, respectively, with respect to the
financial statements and schedule of ARI Network Services, Inc. included in the
Annual Report (Form 10-K) for the year ended July 31, 1999.
Milwaukee, Wisconsin ERNST & YOUNG LLP
October 22, 1999
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