<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-19608
ARI Network Services, Inc.
(Exact name of registrant as specified in its charter.)
WISCONSIN 39-1388360
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
330 E. Kilbourn Avenue, Milwaukee, Wisconsin 53202
(Address of principal executive office)
Registrant's telephone number, including area code (414) 278-7676
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of The Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
YES X NO
----- -----
As of March 10, 1999, there were 5,097,430 shares of the registrant's shares
outstanding.
1
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ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED January 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 Financial statements 3-7
Condensed balance sheets - January 31, 1999 and July 31, 1998 3
Condensed statements of operations for the three and 4
six months ended January 31, 1999 and 1998.
Condensed statements of cash flows for the six 5
months ended January 31, 1999 and 1998.
Notes to unaudited condensed financial statements. 6-7
Item 2 Management's discussion and analysis of financial condition and results 7-13
of operations.
Item 3 Quantitative and qualitative disclosure about market risk 14
PART II - OTHER INFORMATION
Item 2 Changes in securities and use of proceeds 14
Item 4 Submission of matters to a vote of security holders 14-15
Item 6 Exhibits and reports on Form 8 K 15
Signatures 16
</TABLE>
2
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ARI NETWORK SERVICES, INC.
CONDENSED BALANCE SHEETS
(Amounts in thousands, except per share and share data)
(Unaudited)
<TABLE>
<CAPTION>
JANUARY 31, 1999 JULY 31, 1998
(UNAUDITED) (AUDITED)
Assets --------------- -------------
<S> <C> <C>
Current assets:
Cash $ 271 $ 194
Trade receivables, less allowances for doubtful accounts of $255 at
January 31, 1999 and $185 at July 31, 1998 3,300 2,643
Prepaid expenses and other 275 118
-------- --------
Total current assets 3,846 2,955
Equipment and leasehold improvements:
Network system hardware 3,822 3,778
Leasehold improvements 239 239
Furniture and equipment 845 485
-------- --------
4,906 4,502
Less accumulated depreciation and amoritzation 4,333 4,107
-------- --------
Net equipment and leasehold improvements 573 395
Goodwill, net of accumulated amortization 3,118 336
Network system:
Network platform 11,467 11,467
Industry-specific applications 21,361 19,906
-------- --------
32,828 31,373
Less accumulated amortization 23,479 22,251
-------- --------
9,349 9,122
-------- --------
Total Assets $ 16,886 $ 12,808
======== ========
Liabilities and shareholders' equity
Current liabiliities:
Notes payable $ 19 $ 28
Accounts payable 1,243 581
Unearned revenue 3,008 776
Accrued payroll and related expenses 859 620
Other accrued expenses 184 158
Current portion of capital lease obligations 21 30
-------- --------
Total current liabilities 5,334 2,193
Line of credit payable to shareholder 2,760 1,620
Capital lease obligations 26 33
Shareholders' equity:
Preferred stock, par value $.001 per share, 1,000,000 shares authorized;
20,250 and 20,000 shares issued and outstanding at January 31, 1999 and
July 31, 1998, respectively 0 0
Common stock, par value $.001 per share, 25,000,000 shares authorized;
5,097,180 and 4,247,460 shares issued and outstanding at January 31, 1998
and July 31, 1998, respectively 5 4
Additional paid-in capital 86,829 85,028
Accumulated deficit (78,068) (76,070)
Total shareholders' equity -------- --------
8,766 8,962
-------- --------
Total liabilities and shareholders' equity $ 16,886 $ 12,808
======== ========
</TABLE>
3
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ARI NETWORK SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share and share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31 JANUARY 31
------------ -----------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues:
Network and other services $ 2,472 $ 1,293 $ 4,548 $ 2,650
Software and development 584 486 1,058 1,152
------- ------- ------- -------
Total net revenues 3,056 1,779 5,606 3,802
Operating expenses:
Variable cost of products and services sold (exclusive of depreciation and
amortization shown below):
Network and other services 346 308 728 649
Software and development 513 178 736 312
------- ------- ------- -------
Total variable cost of products and services sold 859 486 1,464 961
Depreciation and amortization 950 604 1,713 1,018
Network operations 189 195 373 383
Selling, general and administrative 1,787 1,058 3,413 2,404
Network construction and expansion 708 610 1,509 1,173
------- ------- ------- -------
Operating expenses before amounts capitalized 4,493 2,953 8,472 5,939
Less capitalized expenses* (426) (328) (1,008) (732)
------- ------- ------- -------
Total operating expenses 4,067 2,625 7,464 5,207
------- ------- ------- -------
Operating loss (1,011) (846) (1,858) (1,405)
Interest and other expense (78) (22) (140) (56)
------- ------- ------- -------
Net loss $(1,089) $ (868) $(1,998) $(1,461)
======= ======= ======= =======
Average common shares outstanding 5,090 4,237 4,879 3,992
Basic and diluted net loss per share $ (0.21) $ (0.20) $ (0.41) $ (0.37)
</TABLE>
* In accordance with FASB 86, includes a portion of network and product
development expense and other operating expenses directly related to the
development process.
See notes to unaudited condensed financial statements.
4
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ARI NETWORK SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JANUARY 31
1999 1998
------- -------
<S> <C> <C>
Operating activities
Net loss $(1,998) $(1,461)
Amortization of network platform 348 348
Amortization of industry specific applications 880 476
Amortization of goodwill 259 49
Depreciation and other amortization 226 145
Net change in operating assets (80) 160
Net change in operating liabilities 495 (582)
------- -------
Net cash provided (used) by operating activities 130 (865)
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (44) (73)
Industry specific application costs capitalized (1,008) (732)
Other (142) --
------- -------
Net cash used by investing activities (1,194) (805)
FINANCING ACTIVITIES
Borrowings under line of credit 1,140 189
Payment of capital lease obligations (16) 5
Proceeds from issuance of common stock 17 1507
------- -------
Net cash provided by financing activities 1,141 1,701
------- -------
Net increase in cash 77 31
Cash at beginning of period 194 64
------- -------
Cash at end of period $ 271 $ 95
======= =======
Cash paid for interest $ 140 $ 56
======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES Capital lease obligations
incurred for:
Furniture and equipment $ -- $ 30
Issuance of common stock for acquisition 1,785 654
</TABLE>
See notes to unaudited condensed financial statements.
5
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JANUARY 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for fiscal year end financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended January 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 31, 1999. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended July 31, 1998.
2. BASIC AND DILUTED NET LOSS PER SHARE
Dilutive earnings per share is not shown as the impact is antidilutive.
3. PREFERRED STOCK
The Series A preferred stock accrues dividends on a quarterly basis,
cumulatively, at a rate per annum equal to the product of the par value thereof
and 2% above the prime rate (minimum dividend rate of 10% and maximum of 14%).
All Series A preferred stock must be redeemed at par plus accrued and unpaid
dividends prior to any payment of dividends on, or repurchases by the Company
of, the Company's common stock. Prior to August 1, 2002, dividends, if declared
by the Board of Directors, can be paid in either cash or additional shares of
Series A preferred stock. The total amount of dividends in arrears on the Series
A preferred stock is $331,000 at January 31, 1999.
4. ACQUISITION
On September 15, 1998, the Company acquired certain assets used in the operation
of Briggs & Stratton Corporation's Powercom business through the issuance of
840,000 shares of its common stock at $2.125 per share and the assumption of
certain liabilities of the Powercom business. The acquisition has been accounted
for under the purchase method; accordingly, its results are included in the
financial statements of the Company from the date of acquisition. As a result of
the purchase price allocation, based on a final determination of the fair value
of assets acquired and liabilities assumed, the Company recognized goodwill of
$2,918,000, which is being amortized over five years.
The following unaudited pro forma results of operations for the three and six
months ended January 31, 1999 and 1998 assume the acquisition of the Powercom
business occurred at the beginning of each period presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 JANUARY 31
(IN THOUSANDS) (IN THOUSANDS)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 3,056 $ 2,415 $ 6,032 $ 5,162
Net loss (1,089) (1,375) (1,998) (2,387)
Net loss per share (0.21) (0.27) (0.41) (0.47)
</TABLE>
This pro forma information does not purport to be indicative of the results that
actually would have been obtained if the combined operations had been conducted
during the periods presented and is not intended to be a projection of future
results.
6
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5. REVENUE RECOGNITION
As of August 1, 1998, the Company adopted AICPA Statement of Position 97-2 (SOP
97-2), Software Revenue Recognition, which is effective for transactions that
the Company enters into in fiscal 1999. Prior years are not restated. The
adoption of SOP 97-2 did not have a material impact on the Company's financial
statements.
6. UNEARNED REVENUE
The increase in unearned revenue for the six months ended January 31, 1999
compared to the same period last year was primarily due to unearned annual
maintenance contracts assumed as part of the Powercom acquisition. The unearned
revenue will be recognized ratably over three years.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the quarter ended January 31, 1999 increased $1,277,000 or 72%
compared to the same period last year, representing the Company's twelfth
consecutive quarter of year-over-year revenue improvement. Management expects
the year-over-year quarterly increases in revenue to continue through fiscal
1999 and that the percentage increase will fluctuate from quarter to quarter.
Management expects revenue for the full year to increase by approximately 50%
over fiscal 1998. Earnings before interest, taxes, depreciation and amortization
("EBITDA") also showed year over year improvement for the ninth consecutive
quarter. Net loss increased for the quarter ended January 31, 1999 compared to
the same period last year primarily due to non-cash amortization expenses
relating to the introduction of new products and the Company's September 15,
1998 acquisition of the Powercom division of Briggs & Stratton Corporation
("Powercom"). See "Other Items." Management believes that the Company will
continue to achieve improvements in EBITDA for the remainder of fiscal 1999 and
that full profitability will be achieved starting in the fourth quarter. See
"Forward Looking Statements."
REVENUES
The Company provides Internet-enabled electronic commerce for shared
distribution and service networks. The Company's strategy is to build
sustainable recurring revenues in selected vertical markets from each of its
primary services and software products. Accordingly, management reviews the
Company's recurring vs. non-recurring revenue in the aggregate and within each
industry sector.
7
<PAGE> 8
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's unaudited financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 JANUARY 31
(IN THOUSANDS) PERCENT (IN THOUSANDS) PERCENT
INDUSTRY SECTOR 1999 1998 CHANGE 1999 1998 CHANGE
- ----------------- ---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Equipment Industry
Recurring $ 825 $ 155 432% $ 1,289 $ 288 348%
Non-recurring 1,007 363 177% 1,572 749 110%
--------- --------- --------- ---------
Subtotal 1,832 518 254% 2,861 1,037 176%
Agribusiness Industry
Recurring 591 441 34% 1,271 1,074 18%
Non-recurring 79 251 -69% 344 508 -32%
--------- --------- --------- ---------
Subtotal 670 692 -3% 1,615 1,582 2%
Transportation Industry
Recurring 195 188 4% 392 377 4%
Non-recurring 12 17 -29% 22 81 -73%
--------- --------- --------- ---------
Subtotal 207 205 1% 414 458 -10%
Publishing Industry
Recurring 329 328 0% 677 650 4%
Non-recurring - 4 -100% 1 15 -93%
--------- --------- --------- ---------
Subtotal 329 332 -1% 678 665 2%
Other Revenue
Recurring 16 32 -50% 33 60 -45%
Non-recurring 2 - 100% 5 - 100%
--------- --------- --------- ---------
Subtotal 18 32 -44% 38 60 -37%
Total Revenue
Recurring 1,956 1,144 71% 3,662 2,449 50%
Non-recurring 1,100 635 73% 1,944 1,353 44%
--------- --------- --------- ---------
Grand Total $ 3,056 $ 1,779 72% $ 5,606 $ 3,802 47%
========= ========= ========= =========
</TABLE>
The Company derives its recurring revenues from maintenance and support fees,
transaction fees, software license renewals, subscription fees, and network
traffic fees. Recurring revenue as a percentage of total revenue increased from
64% to 65% for the three and six months period ended January 31, 1999 compared
to the same periods last year. Management believes a relationship of
approximately two thirds recurring revenue to one third non-recurring revenue is
desirable in order to establish an appropriate level of base revenue while
continuing to add new sales to drive future increases in recurring revenue. This
revenue mix may fluctuate from quarter to quarter. Recurring revenues increased
for the three and six month periods ended January 31, 1999 compared to the same
periods last year and the increases were primarily due to growth in the
manufactured equipment industry (the "Equipment Industry") driven in part by the
Powercom acquisition and by the Company's continuing penetration of the
recreational vehicle market segment.
Non-recurring revenues are derived from initial software license fees and
professional services fees. Non-recurring revenues increased for the three and
six month periods ended January 31, 1999 compared to the same periods last year
due primarily to increased software license and customization fees in the
Equipment Industry.
8
<PAGE> 9
Equipment Industry
The Company has targeted approximately 36 vertical markets within the Equipment
Industry that management believes have shared distribution and service networks
that would derive substantial benefit from the Company's electronic commerce
products and services. To date, the Company has customers in twelve of these
markets including recreational vehicle, outdoor power equipment, construction,
outboard marine, manufactured housing, power tools, diesel truck, motorcycle,
and power generation. Revenues from the Equipment Industry are derived from
software license fees, maintenance and support fees, subscription fees, network
traffic fees and professional services fees. Revenues from the Company's
September 15, 1998 acquisition of Powercom are included in the Equipment
Industry revenues. See "Other Items." Recurring revenues in the Equipment
Industry increased substantially for the three and six month periods ended
January 31, 1999 compared to the same periods last year primarily due to
increased maintenance and support and to revenues from Powercom. Non-recurring
revenues in the Equipment Industry also increased for the three and six month
periods ended January 31, 1999 compared to the same periods last year due to
revenues from Powercom and increased software license fees, professional
services and development fees as the Company continued its drive to penetrate
the recreational vehicle (RV) market. As of January 31, 1999, the Company had
signed contracts with six of the leading RV manufacturers and had expressions of
interest from several others. Management expects total revenues in the Equipment
Industry will continue to increase for the remainder of fiscal 1999.
Agribusiness Industry
The Agribusiness Industry comprises several vertical markets comprising
businesses which supply inputs to the agricultural industry including
agricultural and specialty chemicals, livestock pharmaceuticals, fertilizer,
feed and seed. Revenues from the Agribusiness Industry are derived from software
license fees, maintenance and support fees, network traffic fees and
professional services fees. Recurring revenues increased, while non-recurring
revenues decreased in the Agribusiness Industry for the three and six month
periods ended January 31, 1999 compared to the same periods last year. This was
primarily due to the recurring traffic fees generated from a major sales force
automation customer when non-recurring customization of their software was
completed in the fourth quarter of fiscal 1998. Management expects total
revenues in the Agribusiness Industry will remain relatively flat throughout
this fiscal year.
Transportation Industry
Revenues from the Transportation Industry are derived from maintenance and
support fees, transaction fees and professional services fees charged to the
Association of American Railroads ("AAR") for the creation and maintenance of
the Customer Identification File, an industry wide shared database of ship to
and bill to locations. Recurring revenues in the Transportation Industry
increased slightly for the three and six month periods ended January 31, 1999
compared to the same periods last year due to growth in recurring maintenance
and support fees as the Customer Identification File increased in size. As
expected, non-recurring revenues in the Transportation Industry decreased for
the three and six month periods ended January 31, 1999 compared to the same
periods last year when the Company undertook some special systems development
and modification projects on behalf of the AAR. Management expects that revenues
in the Transportation Industry will continue at approximately the same level for
the remainder of fiscal 1999 and, over time, will become a smaller percentage of
the Company's total revenues. While the revenues are relatively flat, the gross
margin helps to fund the Company's growth in the Equipment Industry.
Publishing Industry
Revenues from the Publishing Industry are derived from connect time fees, photo
traffic fees, subscription fees and service initiation fees charged to the
Company's Newsfinder(R) customers. Through Newsfinder(R), the Company manages
the approximately 20,000 news stories per week output from the Associated Press,
providing access through the World Wide Web and on a dial-up basis to
approximately 800 publishers with more than 1,300 weekly and monthly newspapers.
Revenues in the Publishing Industry remained consistent with the three and six
month periods ended January 31, 1999 compared to the same periods last year.
Management expects that revenues in the Publishing Industry will continue at
approximately the same level for the remainder of fiscal 1999, and over time,
will become a smaller percentage of the Company's total revenues. While the
revenues are relatively flat, the gross margin helps to fund the Company's
growth in the Equipment Industry.
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<PAGE> 10
OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's unaudited financial statements.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
(in thousands) (in thousands)
Percent Percent
Operating Expenses: 1999 1998 Change 1999 1998 Change
---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Variable cost of products and services sold (exclusive
of depreciation and amortization shown below) $ 859 $ 486 77% $ 1,464 $ 961 52%
Network operations 189 195 -3% 373 383 -3%
Selling, general & administrative 1,787 1,058 69% 3,413 2,404 42%
Network construction and expansion 708 610 16% 1,509 1,173 29%
------- ------- ------- -------
Gross cash expenses 3,543 2,349 51% 6,759 4,921 37%
Depreciation and amortization 950 604 57% 1,713 1,018 68%
Less capitalized expenses (426) (328) 30% (1,008) (732) 38%
------- ------- ------- -------
Net operating expenses $ 4,067 $ 2,625 55% $ 7,464 $ 5,207 43%
======= ======= ======= =======
</TABLE>
The increase in operating expenses for the three and six month periods ended
January 31, 1999 compared to the same periods last year was primarily due to
cash expenditures and non-cash amortization of software and goodwill, all of
which increased substantially as a result of the Powercom acquisition completed
on September 15, 1998. The revenue increase from the Powercom acquisition
exceeded the increase in cash expenditures but was not enough to cover the
increase in noncash amortization of goodwill from the acquisition and the
increase in software amortization. See "Other Items."
The Company's technical staff (in-house and contracted) is allocated between
research and development and software customization services for customer
applications. Therefore, management expects fluctuations between software
customization services and development expenses quarter to quarter, as the mix
of development and customization activities will change based on customer
requirements. For the six months ended January 31, 1999 the Company's technical
resources were focused primarily on the development and customization of the
TradeRoute(TM) software and the development of a World Wide Web version of the
Company's electronic catalog for implementation in the construction and heavy
equipment industry under the Company's contract with the Construction Industry
Manufacturers Association (CIMA) and the Associated Equipment Distributors
(AED). Variable cost of products and services sold consists primarily of
royalties, telecommunications, data processing, customization labor and
temporary help fees. Variable cost of products and services sold as a percentage
of revenue was 26% and 25% for the six months ended January 31, 1999 and 1998,
respectively. Management expects gross margins in future quarters to fluctuate
based on the mix of products and services sold.
Network operations consists primarily of data center operations, software
maintenance agreements for the Company's core network and customer support
costs. Network operations expense remained relatively flat for the first and
second quarters after decreasing significantly during fiscal 1998, despite
increases in revenue. Management expects these costs to remain relatively flat
for the remainder of the fiscal year.
The increase in selling, general and administrative expenses for the three and
six month periods ended January 31, 1999 compared to the same periods last year
was due to the addition of the Company's new Colorado Springs office and other
expenses arising out of the Powercom acquisition. See "Other Items."
The increase in depreciation and amortization expense for the three and six
month periods ended January 31, 1999 compared to the same periods last year was
due primarily to increased goodwill amortization resulting from the Powercom
acquisition. The Company recorded $2,918,000 in goodwill as a result of the
acquisition and is amortizing this asset over five years.
10
<PAGE> 11
OTHER ITEMS
Interest expense increased $56,000 and $84,000 for the three and six month
periods ended January 31, 1999 compared to the same periods last year. The
increase reflects additional borrowing by the Company under its line of credit
with WITECH. Interest expense will fluctuate depending on the use and timing of
financing through lines of credit and/or additional equity financing.
Net loss increased $221,000 and $537,000 for the three and six month periods
ended January 31, 1999 compared to the same periods last year. This was due to
non-cash amortization expenses resulting from the Powercom acquisition and from
amortization of completed software products. Earnings before interest, taxes,
depreciation and amortization (EBITDA) improved 75%, from negative $61,000 for
the three months ended January 31, 1999 compared to negative $242,000 for the
same period last year. For the first six months of the current fiscal year,
EBITDA totaled negative $145,000, improved from negative $387,000 over the same
period last year. On a rolling four quarter basis, EBITDA was positive $315,000
for the period ended January 31, 1999, compared to negative $754,000 for the
same period last year. Management continues to expect to achieve its stated goal
of full profitability during the fourth quarter of fiscal 1999 and to maintain
profitable operations thereafter. However, as the Company continues its
acquisition program, non-cash amortization of goodwill from the Company's
acquisitions may cause net losses to continue while earnings before interest,
taxes, depreciation and amortization are positive. See "Business Development"
below. See "Forward Looking Statements."
The Company 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 $450,000. Included in this estimate is approximately
$100,000 which management has estimated will be added to its year 2000 program
costs because of its recent acquisition of Powercom. This is a preliminary
estimate based upon a comparison of the systems and software operated and sold
by the Company compared to the systems operated and sold by Powercom. The
Company is in the Assessment phase of its year 2000 program as it relates to the
Powercom business which management expects to complete in the third quarter.
when a more definitive estimate will be produced. These costs are being funded
with cash from operations and with the Company's lines of credit. See "Liquidity
and Capital Resource." As of January 31, 1999, the Company has incurred
approximately $183,000 relating to all phases of the year 2000 program.
BUSINESS DEVELOPMENT:
Since December 1995, the Company has had a formal Business Development program
aimed at identifying, evaluating, and closing acquisitions which would augment
and strengthen the Company's market position, product offerings, and personnel
resources. To date, over 200 potential acquisition targets have been considered,
resulting in three acquisitions. The program is intended to remain active
indefinitely. The Company has engaged Cleary Gull Reiland & McDevitt, Inc., a
prominent Midwest investment banking firm, to help expand and accelerate the
program.
CD\*.IMG, INC. ("CDI")
On November 4, 1996, the Company completed the acquisition of CDI, located in
New Berlin, Wisconsin, in a stock for stock transaction. CDI was in the business
of publishing electronic parts catalogs and the software that dealers and repair
shops use to read the catalogs. CDI's operations have been consolidated into the
Company's. As a result of the acquisition, the Company recognized goodwill in
the amount of $434,000 which is being amortized over a five year period.
EMPART TECHNOLOGIES, INC. ("EMPART")
On September 30, 1998, the Company completed the acquisition of Empart, located
in Foster City, California, in a stock for assets transaction. Empart was a
developer of software for electronic parts catalogs. Empart's products included
EMPARTpublisher(TM), which converts data from a variety of forms into an
electronic format, and EMPARTviewer(TM), a high-end configurable parts catalog.
Empart's operations were consolidated into the Company's. As a result of the
acquisition, the Company recognized goodwill in the amount of $69,000 which is
being amortized over a five year period.
POWERCOM 2000, A DIVISION OF BRIGGS & STRATTON CORPORATION ("POWERCOM") On
September 15, 1998, the Company completed the acquisition of Powercom in a stock
for assets transaction. Powercom was in the business of providing electronic
communications and cataloging software and services to manufacturers and their
distributors and dealers in the outdoor power, power sports and power tools
industries. Its major customers included Briggs & Stratton, MTD, Polaris, Black
& Decker and Thermo King. Powercom also had been exclusively endorsed by the
Construction Industry Manufacturers Association (CIMA)and the Associated
Equipment Distributors (AED), the two leading trade associations in the
construction industry, as the vendor for the development and maintenance of a
Web based electronic catalog and electronic commerce system. As a result of the
Powercom acquisition, the Company has strengthened its position in the outdoor
power and power sports industries and has gained a strong foothold in the
construction industry. The Company also acquired an office with approximately 20
software development professionals located in Colorado Springs, Colorado,
located in one of the nation's leading regions for software development talent.
As a result of the acquisition, the Company recognized goodwill in the amount of
$2,918,000 which is being amortized over a five year period.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, certain cash flow
information derived from the Company's unaudited financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 JANUARY 31
(IN THOUSANDS) PERCENT (IN THOUSANDS) PERCENT
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Net cash used in operating activities
before changes in working capital $ (139) $ (264) 47% $ (285) $ (443) 36%
Net cash used in investing activities (486) (325) -50% (1,194) (805) -48%
------- ------- ------- -------
Subtotal (625) (589) -6% (1,479) (1,248) -19%
Effect of net changes in working capital 212 (211) 200% 415 (422) 198%
------- ------- ------- -------
Net cash used in operating and investing activities $ (413) $ (800) 48% $(1,064) $(1,670) 36%
======= ======= ======= =======
</TABLE>
Net cash used in operating activities before changes in working capital
decreased due to cost controls and increased revenues. As projected by
management, the Company achieved positive cash flow from operations before
changes in working capital in the quarter ending July 31, 1998. This number will
fluctuate from quarter to quarter due to the seasonality of revenue while
operating expenses remain relatively flat. On a rolling four quarter basis, cash
flow from operations before changes in working capital was positive $159,000 for
the period ended January 31, 1999 compared to negative $1,092,000 for the same
period last year. Management expects that, on an annualized basis, the Company
will achieve positive cash flow from operations before changes in working
capital for the fiscal year ending July 31, 1999. See "Forward Looking
Statements."
The Company expects to continue to incur operating losses for the fiscal year
ending July 31, 1999 and there can be no assurance that profitability will be
achieved thereafter. The Company also expects to incur significant expenditures
for research and development. The Company expects to fund research and
development costs and operations for the remainder of fiscal 1999 from the
Company's lines of credit described below. See "Forward Looking Statements."
At January 31, 1999, the Company had cash and cash equivalents of approximately
$271,000 compared to approximately $194,000 at July 31, 1998.
The Company has a line of credit with WITECH (the "WITECH Line") that has been
in place since October 4, 1993. On January 29, 1999 WITECH and the Company
agreed to amend the WITECH Line, increasing the line from $2,800,000 to the
current $3,000,000 credit limit. Under the loan agreement, $1,000,000 must be
repaid out of the proceeds of any equity securities sold by the Company. The
termination date of the line of credit is December 31, 2001 and the interest
rate is prime plus 2%. In conjunction with obtaining the WITECH Line, since
1993, the Company has agreed to issue WITECH 350 shares of non-voting Preferred
Stock and has issued total warrants for the purchase of up to 250,000 shares of
its common stock, including warrants for the purchase of 200,000 shares at an
exercise price of $4.00 per share and warrants for a maximum of 50,000 shares at
an exercise price of $2.8125. The exercise price is reduced if the Company
issues stock at less than the then current exercise price. As of February 28,
1999 there were $2,800,000 of borrowings outstanding under the WITECH Line.
The only financial covenant in the WITECH Line is that the Company must maintain
a net worth (calculated in accordance with generally accepted accounting
principles) of at least $5.3 million. The Company has been, and is currently, in
compliance with the financial covenant in the Agreement and currently expects to
comply with such covenant or obtain any required waivers or raise additional
equity, if necessary. See "Forward Looking Statements."
In connection with the acquisition of Powercom, the Company obtained a line of
credit from Briggs & Stratton Corporation in the amount of $250,000 (the "Briggs
Line"). The Company has agreed not to borrow under the Briggs Line until all
available amounts have been borrowed under the WITECH Line and that any
borrowings under the Briggs Line will be secured by certain accounts receivable
associated with the Powercom business. The Briggs Line extends until April 30,
1999 and borrowings thereunder bear interest at prime plus 2%. Borrowings under
the Briggs Line must be repaid with the proceeds of equity offerings (if any) in
excess of $1,000,000 plus accrued interest under the WITECH Line. To date, no
amounts have been borrowed under the Briggs Line.
Management currently believes that the financing from the WITECH Line and the
Briggs Line will be sufficient to fund operations for the remainder of fiscal
1999. However, this expectation is subject to a variety of assumptions
regarding, among other things, the timing of revenues and cash flow from new
sales, the Company's ability to control and/or reduce expenses, the timing of
the completion of software products currently under development, and the impact
of any other acquisitions.
12
<PAGE> 13
Should these assumptions prove incorrect such that additional working capital is
required, the Company believes it can be obtained from additional borrowings
and/or the sale of additional securities. Management believes that, based on
current trends, the Company will achieve positive cash flow from operations
(excluding changes in working capital items) for fiscal 1999. On a long term
basis, management believes that financing for the Company's operations, as well
as capital expenditures, will come principally from cash generated from
operations. See "Forward Looking Statements." The Company currently intends to
raise additional financing during fiscal 1999 in order to fund the Company's
investment requirements, including its acquisition program, and to repay the
Briggs Line and a portion of the WITECH Line. The Company has not yet determined
the terms of such financing but such financing will likely include the sale of
common stock and/or debt securities.
FORWARD LOOKING STATEMENTS
Certain statements contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward looking statements.
The forward-looking statements can generally be identified by words such as
"believes," "anticipates," "expects" or words of similar meaning.
Forward-looking statements also include statements relating to the Company's
future performance, such as future prospects, revenues, profits and cash flows.
Several important factors can cause actual results to materially differ from
those stated or implied in the forward looking statements. Such factors include,
but are not limited to the growth rate of the Company's selected market
segments, the positioning of the Company's products in those segments,
variations in demand for and cost of customer services and technical support,
customer adoption of Internet-enabled Windows applications and their willingness
to upgrade from earlier versions of software, the Company's ability to release
new software applications and upgrades on a timely basis, the Company's ability
to establish and maintain strategic alliances, the Company's ability to manage
its costs, the Company's ability to manage its business in a rapidly changing
environment, the Company's ability to finance capital investments, and the
Company's ability to implement its acquisition strategy to increase growth.
Projected revenues are difficult to estimate because the Company's revenues and
operating results may vary substantially from quarter to quarter. The primary
cause of the variation is attributed to non-recurring revenues from software
license and customization fees. License fee revenues are based on contracts
signed and product delivered. Non-recurring revenues are affected by the time
required to close large license fee and development agreements, which cannot be
predicted with any certainty due to customer requirements and decision-making
processes.
Recurring revenues are also difficult to estimate. Recurring revenues from
maintenance and subscription fees may be estimated based on the number of
subscribers to the Company's services but will be affected by the renewal ratio,
which cannot be determined in advance. Recurring revenues from network traffic
fees and transaction fees are difficult to estimate as they are determined by
usage. Usage is a function of the number of subscribers and the number of
transactions per subscriber. Transactions include product ordering, warranty
claim processing, inventory and sales reporting, parts number updates and price
updates. The Company cannot materially affect or predict the volume of
transactions per customer.
Although the Company has recently introduced and plans to expand its
Internet-enabled Windows portfolio of products, the marketplace is highly
competitive and there can be no assurance that a customer will select the
Company's software and services over that of a competitor. The environment in
which the Company competes is characterized by rapid technological changes,
dynamic customer demands, and frequent product enhancements and product
introductions. Some of the Company's current and potential competitors have
greater financial, technical, sales, marketing and advertising resources than
the Company.
13
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's annual report on Form 10-K contains certain disclosures about
market risks affecting the Company. There have been no material changes to the
information provided which would require additional disclosures as of the date
of this filing.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 1999, the Company agreed to sell to WITECH Corporation 100
additional shares of non-convertible Series A Preferred Stock in connection with
the execution of Amendment Number 14 to the Loan Agreement between the Company
and WITECH. The sale of Series A Preferred Stock to WITECH is exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a)The Company held its 1998 Annual Meeting of Shareholders on
December 10, 1998.
(b)Votes cast for the election of two directors to serve until 2001
Annual Shareholder's Meeting were as follows:
Brian E. Dearing Richard W. Weening
For 3,896,826 For 3,887,922
Against 130,757 Against 139,661
Votes cast to amend the Company's 1991 Incentive Stock Option Plan
to increase the number of shares thereunder from 500,000 to
850,000 were as follows:
For 2,580,846
Against 182,994
Abstained 5,090
Broker Non-Vote 1,258,653
Votes cast to amend the Company's 1993 Director Stock Option Plan
to increase the number of shares reserved thereunder from 75,000
to 150,000 were as follows:
For 2,661,045
Against 102,195
Abstained 5,690
Broker Non-Vote 1,258,653
Votes cast to amend the Company's 1992 Employee Stock Purchase
Plan to increase the number of shares reserved from 12,500 to
62,500 were as follows:
For 2,716,382
Against 48,333
Abstained 4,215
Broker Non-Vote 1,258,653
14
<PAGE> 15
Votes cast to ratify the appointment of Ernst & Young LLP as the
Company's auditors for the year ending July 31, 1999 were as
follows:
For 3,996,660
Against 12,908
Abstained 18,015
Broker Non-Vote 0
Votes cast to amend the terms of the Company's Series A Preferred
Stock were as follows:
For 2,667,769
Against 86,697
Abstained 14,464
Broker Non-Vote 1,258,653
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) 10.1 Amendment Number 14 to Loan Agreement dated January 29, 1999 between
the Company and WITECH Corporation.
b) 10.2 Amended 1991 Incentive Stock Option Plan
c) 10.3 Amended 1993 Director Stock Option Plan
27 Financial Data Schedule
d) Reports on Form 8-K. On November 30, 1998 and December 17,
1998, the Company filed reports on Form 8-K/A with respect to
Item 7. The Forms 8-K/A included pro forma financial
information at July 31, 1998 with respect to the Powercom
acquisition.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARI Network Services, Inc.
(Registrant)
Date: March 15, 1999 /s/ Brian E. Dearing
-----------------------
Brian E. Dearing, Chairman of the Board
(and acting CFO)
16
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NUMBER FOURTEEN TO LOAN AGREEMENT
THIS AMENDMENT to the Loan Agreement entered into as of October 4,
1993, between ARI NETWORK SERVICES, INC. ("ARI") and WITECH CORPORATION
("WITECH'), as amended (the "Loan Agreement"), is dated January 29, 1999.
BACKGROUND
This Amendment to the Loan Agreement reflects the mutual understanding
and agreement of the parties to amend the Loan Agreement regarding the provision
by WITECH of a revolving credit facility to ARI.
NOW, THEREFORE, the parties agree as follows:
1. Subject to paragraph 4 below, the amount stated in Paragraph 2.2 of
the Loan Agreement shall be changed to Three Million Dollars ($3,000,000).
2. Subject to paragraph 4 below, in Exhibit 1.1 to the Agreement, in
the definition of "Total Loan Commitment," the reference to "Two Million Eight
Hundred Thousand Dollars ($2,800,000)" is deleted and "Three Million Dollars
($3,000,000)" is substituted therefor.
3. Subject to paragraph 4 below, in Exhibit 2.2(a), the reference to
"Two Million Eight Hundred Thousand Dollars ($2,800,000)" is deleted and "Three
Million Dollars ($3,000,000)" is substituted therefor.
4. Any borrowings in excess of $2.0 million under the Loan Agreement
shall be repaid with the proceeds of any common stock offerings for cash (other
than pursuant to director or employee benefit plans or upon exercise of
outstanding warrants) by ARI. The $3.0 million amount referenced in paragraphs
1, 2, and 3 above shall be reduced by the amount of such proceeds (and the Loan
Agreement automatically amended accordingly); provided, however, the amount of
the reduction shall not exceed $1,000,000 (and, therefore, the availability
under the Loan Agreement shall not be reduced to less than $2.0 million).
5. In consideration of the agreements by WITECH reflected in the
Amendment Number Fourteen, ARI shall issue to WITECH 100 additional shares of
Series A Preferred Stock, subject to Board of Directors approval of such
issuance.
6. Subject to the amendments described herein, the Loan Agreement, as
amended, and associated documents and agreements remain in full force and
effect.
2
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers as of the date first
above written.
WITECH CORPORATION ARI NETWORK SERVICES, INC.
By: Francis Brzezinski By: Brian E. Dearing
----------------------------- ------------------------------
Francis Brzezinski, President Brian E. Dearing, Chairman,
President and Chief Executive
Officer
3
<PAGE> 1
EXHIBIT 10.2
1991 STOCK OPTION PLAN OF
ARI NETWORK SERVICES, INC.
(Amended and Restated as of December 10, 1998)
1. Purpose. The purpose of this Plan is to provide additional
incentive compensation to certain key employees of ARI Network Services, Inc.
(the "Company") and to provide them with an opportunity to acquire an equity
interest in the Company. Stock options granted under this Plan may be "incentive
stock options" as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), and any successor thereto, or stock options which are
not qualified as incentive stock options under the Code ("nonqualified stock
options"). Each stock option granted under this Plan shall be clearly identified
as either an incentive stock option or a nonqualified stock option at the time
of grant.
2. Eligible Employees. Options to purchase $.001 par value Common
Stock of the Company (the "Common Stock") under this Plan may be granted to
employees of the Company, or of any present or future subsidiary or parent of
the Company. For this purpose, and for all purposes under this Plan, a parent or
subsidiary of the Company shall be a "parent corporation" or a "subsidiary
corporation" of the Company as defined in Sections 424(e) and 424(f) of the
Code. An employee who is a member of the class of employees eligible to receive
an option under this Plan shall hereinafter sometimes be referred to as an
"eligible employee" and an eligible employee who has been granted an option
shall hereinafter be referred to as a "Participant."
3. Shares Available for Options. There shall be available for
purchase under options granted pursuant to this Plan a total of eight hundred
and fifty thousand (850,000) shares of Common Stock, subject to adjustment as
provided in Paragraph 8.1 hereof. In the event that options which have been
granted under this Plan lapse, expire or terminate for any reason (whether by
voluntary surrender, lapse of time, termination of employment or otherwise), to
the extent that such options were unexercised, options for an equivalent number
of shares may be granted hereunder; provided, however, in no event shall the
number of shares purchased through the exercise of options granted under this
Plan and the number of shares subject to options outstanding at any time exceed
in the aggregate more than eight hundred fifty thousand (850,000) shares of
Common Stock. No Participant shall be eligible to receive options for more than
eighty seven thousand five hundred (87,500) shares of Common Stock during any
one-year period, subject to adjustment as provided in Paragraph 8.1 hereof.
4. Maximum Calendar Year Grant to Any Employee. The aggregate fair
market value (determined at the time the option is granted) of the stock with
respect to which incentive stock options are exercisable for the first time by
an individual employee during any calendar year under this Plan (and under all
other plans of the Company or any parent or subsidiary of the Company) shall not
exceed $100,000, and/or any other limit as may be prescribed by the Code from
time to time.
5. Administration.
5.1. The Committee. The Plan shall be administered by the Stock
Option Committee (the "Committee") which shall be constituted so as to permit
the Plan to comply with Section 162(m) of the Code and any regulations
promulgated thereunder, or any other statutory rule or regulatory require-
<PAGE> 2
ments. The members of the Committee shall be appointed from time to time by the
Board of Directors of the Company. A majority of the members of the Committee
shall constitute a quorum at any meeting thereof and the acts of a majority of
members present at any meeting of the Committee at which a quorum is present, or
acts unanimously approved in writing by a majority of the entire Committee,
shall be the acts of the Committee.
5.2. Power of the Committee. The Committee is authorized and shall
have plenary authority in its discretion, subject only to the provisions of the
Plan and the applicable provisions of the Code, to determine the exercise prices
applicable to options, the eligible employees to whom and the time or times at
which options shall be granted, the number of shares of Common Stock subject to
each option and the extent to which options may be exercisable in installments;
to interpret the Plan; to prescribe, amend and rescind rules and regulations
pertaining to the Plan; to determine the terms and provisions of the respective
Incentive Stock Option Agreements and Nonqualified Stock Option Agreements; and
to make determinations and interpretations which it deems consistent with the
Plan's provisions. The Committee's determinations and interpretations shall be
final, conclusive and binding.
5.3. Designation of Assistants to Committee. The Committee may
designate one or more employees of the Company to assist the Committee in the
administration of the Plan and may grant authority to such or other persons to
execute, deliver and receive documents on behalf of the Committee.
6. Terms and Conditions of Options.
6.1. Option Price. The purchase price of each share of Common
Stock under each incentive stock option granted pursuant to this Plan shall be
the fair market value thereof at the date of grant of such option, unless the
Participant owns (applying the attribution rules of Section 424(d) of the Code)
more than ten Percent (10%) of the total combined voting power of all classes of
stock of the Company or of a subsidiary or parent of the Company (hereinafter
referred to as a "10% Shareholder"), in which case the per share price shall be
at least one hundred ten percent (110%) of the fair market value per share of
Common Stock of the Company at the date of grant of such option. The fair market
value of Common Stock on the date each option is granted shall be the closing
price of a share of the Company's stock as reported in the Wall Street Journal
on the day of the grant or, if no closing price is listed on the date of grant,
on the last day prior to the date of grant that a closing price was listed or
the fair market value determined by the Committee in conformity with pertinent
law and applicable regulations and rulings of the Treasury Department. The
purchase price of each share of Common Stock under each nonqualified stock
option granted pursuant to this Plan shall be determined by the Committee in its
sole discretion.
6.2. Exercise Period. No option granted pursuant to this Plan
shall be exercisable after the expiration of ten (10) years (five (5) years in
the case of an incentive stock option granted to a 10% Shareholder) from its
date of grant and it shall lapse upon the expiration of said ten (or five) year
period unless it shall lapse at an earlier date by reason of termination of
employment as provided in Paragraph 6.3, below, or as otherwise determined by
the Committee. The Committee may, in its sole discretion, require that a
Participant be employed by the Company or a subsidiary or parent of the Company
for a designated number of years prior to the exercise by him of any option or
portions of options granted pursuant to this Plan, and may, in its sole
discretion, determine the exercise dates on which options or portions of options
may be exercised by a Participant. In addition, the Committee may, in its sole
discretion, require that a Participant meet certain performance criteria, or
that the Company meet certain targets or goals prior to the exercise by such
Participant of an option or a portion of an option granted pursuant to this
Plan. Any such requirements or limitations may subsequently be reduced or waived
by
B-2
<PAGE> 3
the Committee in its sole discretion, unless such reduction or waiver is
prohibited by the Code or other applicable law.
6.3. Termination of Employment. If the employment of any
Participant with the Company, and any subsidiary or parent corporation of the
Company, is terminated, the following shall apply unless otherwise determined by
the Committee; provided, that no incentive stock option can be exercisable
subsequent to ten (10) years after the date of grant (five (5) years if the
Participant is a 10% shareholder):
(a) If such termination is due to retirement on or after such
Participant's normal retirement date, the Participant shall have three
(3) months from the date of such termination of employment to exercise
any option granted hereunder as to all or part of the shares under such
option, subject to the condition that no option shall be exercisable at
such time as the exercise thereof would result in a violation of
federal or state securities laws or subsequent to ten (10) years [five
(5) years if the Participant holds an incentive stock option and is a
10% Shareholder] after the date of grant, and provided that at the time
of termination the Participant had a present right to exercise such
option. To the extent an option is not exercised within such period, it
shall lapse. For this purpose, "normal retirement date" shall mean the
date of a Participant's 65th birthday. Notwithstanding the foregoing,
in the event that a Participant retires prior to his 65th birthday, the
date of such early retirement shall be deemed to be such Participant's
"normal retirement date" for purposes of this Plan if, and only if, at
the time of such early retirement, such Participant has attained at
least the age of 60 years and has been employed by the Company for at
least 15 years. An employee who continues his employment with the
Company beyond his normal retirement date shall continue to be an
eligible employee so long as he otherwise continues to qualify to
participate hereunder.
(b) If such termination is due to permanent and total
disability, as defined in Section 22(e)(3) of the Code, the Participant
shall have one (1) year from the date of such termination to exercise
any option granted hereunder as to all or part of the shares under such
option, subject to the condition that no option shall be exercisable at
such time as the exercise thereof would result in a violation of
federal or state securities laws or subsequent to ten (10) years [five
(5) years if the Participant holds an incentive stock option and is a
10% Shareholder] after the date of grant and provided that at the time
of termination the Participant had a present right to exercise such
option. To the extent an option is not exercised within such period, it
shall lapse.
(c) If such termination is due to death, the personal
representative, administrator or other representative of the estate of
the deceased Participant or the person or persons to whom the deceased
Participant's rights under the option shall pass by will or the laws of
descent and distribution, as the case may be, shall have the right to
exercise any option granted pursuant to this Plan as to all or part of
the shares subject to such option to the extent exercisable at the date
of the Participant's death. Such option must be exercised within one
(1) year after the date of the Participant's death, subject to the
condition that no option shall be exercisable at such time as the
exercise thereof would result in a violation of federal or state
securities laws or subsequent to ten (10) years [five (5) years if the
Participant holds an incentive stock option and is a 10% Shareholder]
after the date of grant. To the extent an option is not exercised
within such period, it shall lapse.
B-3
<PAGE> 4
(d) If such termination is for any reason other than those
specified above, to the extent an option is not effectively exercised
prior to such termination, it shall lapse immediately upon termination,
unless the Committee shall, in its sole discretion, make other
provisions for exercise not inconsistent with the terms of this Plan or
applicable law. The transfer of employment from a subsidiary or parent
of the Company to the Company or to a subsidiary or parent of the
Company or vice versa shall not be considered to constitute termination
of employment by a Participant.
6.4. Transferability of Options. Unless otherwise provided by the
Committee in the case of a nonqualified stock option, during his lifetime a
Participant may not transfer any option granted to him pursuant to this Plan and
such options shall be exercisable only by the Participant. Upon his death a
Participant shall have the right to transfer the option or options granted to
him either by the terms of his will or under the applicable laws of descent and
distribution, subject to the limitations set forth in Paragraph 6.3(c), above,
and all such distributees shall be subject to the same terms and conditions of
this Plan as would the Participant, except as otherwise expressly provided
herein or as determined by the Committee.
6.5. Exercise of Option. Subject to the limitations stated
elsewhere in this Plan, options granted pursuant to this Plan will be
exercisable on such dates and during such periods and for such number of shares
as shall be determined by the Committee. An option granted pursuant to this Plan
shall be exercisable by delivering to the chief financial officer of the Company
at its principal business office a written notice designating the number of
shares for which it is being exercised. Payment in full for the number of shares
for which the options have been exercised must accompany said written notice (or
arrangements must be made satisfactory to the Company for payment in full);
provided, however, that the Committee may, subject to the approval of the Board
of Directors of the Company, permit a Participant to partially finance the
exercise of his option with capital borrowed from the Company on a recourse
basis at the interest rate mandated by the applicable provisions of the Code.
The Company shall have the right to delay the issue or delivery of any shares of
Common Stock under the Plan until (a) the completion of such registration or
qualification of such shares under any federal or state law, ruling or
regulation as the Company shall determine to be necessary or advisable, and (b)
receipt from the Participant of any such documents and information as the
Committee may deem necessary or appropriate in connection with such registration
or qualification.
7. Securities Laws. Each Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement shall contain such representations,
warranties, and other terms and conditions as shall be necessary in the opinion
of counsel to the Company to comply with all applicable federal and state
securities laws.
8. Miscellaneous.
8.1. Adjustments. In the event there is any increase or decrease
in the number of issued and outstanding shares of any class of common stock of
the Company, or in the number of issued and outstanding shares of any class of
stock of the Company convertible into shares of any class of common stock of the
Company, by reason of a stock dividend, stock split, reverse stock split, or
similar adjustment or in the event of any change in the Company or in the issued
and outstanding shares of the common stock of the Company by reason of a
recapitalization, merger, consolidation, acquisition of stock or property,
reorganization, liquidation or other significant event affecting the Company or
the issued and outstanding shares of its Common Stock, the number of shares of
Common Stock available for options provided in Paragraph 3 hereof, the number of
shares subject to each outstanding option, the
B-4
<PAGE> 5
purchase price per share under each outstanding option, the consideration to be
received upon the exercise of each option and/or the per Participant limitation
on the number of shares of Common Stock subject to options contained in
Paragraph 3 shall be correspondingly adjusted as deemed equitable by the
Committee or each outstanding option may be converted, at the sole discretion of
the Committee, into a new option to purchase such number or kind of shares of
stock or other securities with appropriate adjustment of the purchase price per
share as the Committee deems appropriate to reflect such change. In addition,
the Committee shall, in its sole discretion, have authority to provide, in
appropriate cases, for (i) waiver in whole or in part of any remaining
restrictions or vesting requirements in connection with any option and/or (ii)
the conversion of any outstanding options into cash or other property to be
received in certain of the transactions specified above. Any adjustment, waiver,
conversion or the like carried out by the Committee under this Paragraph shall
be conclusive and binding for all purposes of the Plan. In no event shall the
aggregate fair market value (determined at the time the option is granted) of
the stock with respect to which incentive stock options are exercisable for the
first time during any calendar year under this Plan (and under all plans of the
Company or any parent or subsidiary of the Company) exceed $100,000 per employee
as a result of adjustments made under this Paragraph 8.1.
8.2. Fractional Shares. No fractional shares of stock shall be
issued upon the exercise of any option and the Company shall not be under any
obligation to compensate any Participant in any way for any such fractional
share.
8.3. Reservation of Shares. The Company shall at all times reserve
and keep available such number of shares of its Common Stock as shall be
necessary for the exercise of all options which may be granted pursuant to
Paragraph 3, above. Said shares may be in the form of treasury shares or
authorized but previously unissued shares, or both. If in the opinion of its
counsel the issue or sale of any shares of its stock hereunder shall not be
lawful for any reason, including the inability of the Company to obtain from any
regulatory body having jurisdiction authority deemed by such counsel to be
necessary to such issuance or sale, the Company shall not be obligated to issue
or sell any such shares.
8.4. No Obligation for Employment. The Plan shall not impose any
obligation on the Company to continue the employment of any Participant or
eligible employee.
8.5. Indemnification of Committee. Each person who is a member of
the Committee shall be indemnified and held harmless by the Company against and
for any and all loss, cost, liability, or expense, including attorneys' fees,
that may be imposed upon or be reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to which he may be a party
or in which he may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of judgment in any such action, suit or proceeding against him, except in
relation to matters as to which it shall be adjudged in such claim, action, suit
or proceeding, that such Committee member is liable for gross negligence or
willful misconduct in the performance of his duties. Each such person shall give
the Company an opportunity, at its own expense, to handle and defend the same
before he undertakes to handle and defend it on his own behalf. The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such person may be entitled under the Company's
Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them and hold them harmless.
B-5
<PAGE> 6
8.6. Rights as a Shareholder. No holder of an option granted
pursuant to this Plan shall have any rights as a shareholder of the Company with
respect to any shares covered by his option until the date such shares are
issued pursuant to the exercise of such option.
8.7. Taxes. The Company shall be entitled to pay or withhold the
amount of any tax which it believes is required as a result of the grant or
exercise of any option under the Plan, and the Company may defer making delivery
with respect to shares of Common Stock obtained pursuant to the exercise of any
option until arrangements satisfactory to it have been made with respect to any
such withholding obligations. In accordance with any applicable administrative
guidelines it establishes, the Committee may allow a Participant to satisfy any
withholding obligations upon exercise of an option by withholding Common Stock
otherwise issuable upon exercise of the option, or by permitting the Participant
to deliver to the Company shares of Common Stock having a fair market value, as
determined by the Committee, equal to the amount of such withholding taxes.
9. Termination and Amendment. No incentive stock options shall be
granted under the Plan after September 30, 2001. The Plan may at any time and
from time to time be terminated, modified, or amended by the Board of Directors
of the Company in its sole discretion; provided, however, that the Board of
Directors may not, unless otherwise permitted under federal law, without the
approval of the Company's shareholders, adopt any amendment to the Plan for
which shareholder approval is required under tax, securities or any other
applicable law, including, but not limited to any amendment of the Plan which
would cause the Plan not to comply with or Code Section 162(m), or any successor
rule or regulatory requirements. No termination, modification or amendment of
the Plan may, without the consent of the Participant, materially adversely
affect the rights of such Participant under an outstanding option.
The Committee may amend, modify or terminate an outstanding
option, including, but not limited to, substituting another award of the same or
of a different type, changing the date of exercise, or converting an incentive
stock option into a nonqualified stock option; provided, however, that the
Participant's consent to such action shall be required unless the Committee
determines that the action, taking into account any related action, would not
materially adversely affect the Participant.
B-6
<PAGE> 1
EXHIBIT 10.3
ARI NETWORK SERVICES, INC.
1993 DIRECTOR STOCK OPTION PLAN
(Amended and Restated as of December 10, 1998)
1. PURPOSE OF THE PLAN
The purpose of the Plan is to attract and retain superior Directors, to
provide a stronger incentive for such Directors to put forth maximum effort for
the continued success and growth of the Company and its Subsidiaries and, in
combination with these goals, to encourage stock ownership in the Company by
Directors.
2. DEFINITIONS
Unless the context otherwise requires, the following terms shall have
the meanings set forth below:
(a) "Administrator" shall mean any committee of the Board of
Directors or any executive officer or officers of the Company
designated by the Board of Directors.
(b) "Board of Directors" shall mean the entire board of
directors of the Company, consisting of both Employee and
non-Employee members.
(c) "Code" shall mean the Internal Revenue Code of 1986 as
amended.
(d) "Company" shall mean ARI Network Services, Inc., a
Wisconsin corporation.
(e) "Director" shall mean an individual who is a member of the
Board of Directors and is not an Employee.
(f) "Disability" shall mean a physical or mental incapacity
which results in a Director no longer serving as a member of
the Board of Directors.
(g) "Effective Date" shall mean May 21, 1993, or such other
date as the Board of Directors may establish as the Effective
Date.
(h) "Employee" shall mean an individual who is employed by the
Company or a Subsidiary.
(i) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(j) "Market Price" shall mean the closing price of the Shares
as reported on the National Association of Securities Dealers,
Inc. Automated Quotation - National Market System ("NASDAQ").
However, if at any time the Shares are listed on any exchange,
"Market Price" shall mean the average of the highest and
lowest prices at which Shares are sold on such exchange. In
the absence of reported sales on NASDAQ or on such exchange on
any trading date, "Market Price" shall mean the reported
closing price for the Shares on NASDAQ or such exchange on the
day immediately preceding such date during which there were
sales of Shares.
<PAGE> 2
(k) "Option" shall mean an option which does not comply with
the provisions of Section 422 of the Code and which is granted
under the Plan to purchase Shares.
(l) "Option Agreement" shall mean the agreement between the
Company and a Director whereby an Option is granted to such
Director.
(m) "Plan" shall mean this 1993 Director Stock Option Plan.
(n) "Share" shall mean a share of the $0.001 par value common
stock of the Company.
(o) "Subsidiary" shall mean a subsidiary corporation of the
Company as defined in Section 424(f) of the Code.
(p) "Triggering Event" shall mean the first to occur of any of
the following:
(1) the acquisition (other than from the Company),
by any person, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act),
directly or indirectly, of beneficial ownership (within
the meaning of Rule 13d-3 under the Exchange Act) of 20%
or more of the then outstanding shares of common stock
of the Company or voting securities representing 20% or
more of the combined voting power of the Company's then
outstanding voting securities entitled to vote in the
election of directors; provided, however, that no
Triggering Event shall be deemed to have occurred as a
result of an acquisition of shares of common stock or
voting securities of the Company by any other
corporation or other entity with respect to which,
following such acquisition, more than 50% of the
outstanding shares of the common stock or voting
securities entitled to vote in the election of directors
are then beneficially owned, directly or indirectly, by
the persons who were the Company's shareholders
immediately prior to such acquisition in substantially
the same proportions as their ownership, immediately
prior to such acquisition, of the Company's then
outstanding common stock; or
(2) any merger or consolidation of the Company
with any other corporation, other than a merger or
consolidation which results in more than 60% of the
outstanding shares of the common stock, and voting
securities representing more than 60% of the combined
voting power of the then outstanding voting securities
entitled to vote in the election of directors, of the
surviving or consolidated corporation being then
beneficially owned, directly or indirectly, by the
persons who were the Company's shareholders immediately
prior to such acquisition in substantially the same
proportions as their ownership, immediately prior to
such acquisition, of the Company's then outstanding
common stock; or
(3) any liquidation or dissolution of the Company
or the sale or other disposition of all or substantially
all of the assets of the Company; provided, however,
that the transfer of substantially all of the Company's
assets to a wholly owned Subsidiary in connection with
any corporate reorganization of the Company shall not be
deemed to be a Triggering Event for purposes of the
Plan; or
A-2
<PAGE> 3
(4) the Company shall enter into any agreement
(whether or not conditioned on shareholder approval)
providing for or contemplating, or the Board of
Directors shall approve and recommend that the
shareholders of the Company accept, or approve or adopt,
or the shareholders of the Company shall approve, any
acquisition that would be a Triggering Event under
clause (1), above, or a merger or consolidation that
would be a Triggering Event under clause (2), above, or
a liquidation or dissolution of the Company or the sale
or other disposition of all or substantially all of the
assets of the Company; or
(5) whether or not conditioned on shareholder
approval, the issuance by the Company of common stock
representing a majority of the outstanding common stock,
or voting securities representing a majority of the
combined voting power of the outstanding voting
securities of the Company entitled to vote in the
election of directors, after giving effect to such
transaction.
Following the occurrence of an event which is not a Triggering Event
whereby there is a successor holding company to the Company, or, if
there is no such successor, whereby the Company is not the surviving
corporation in a merger or consolidation, the surviving corporation or
successor holding company (as the case may be), for purposes of this
definition, shall thereafter be referred to as the Company.
3. ADMINISTRATION
The Plan shall be administered by the Administrator. The terms and
conditions under which Options may be granted are set forth in Paragraph 6. The
Administrator shall have the authority to interpret the provisions of the Plan,
to establish such rules and procedures as may be necessary or advisable to
administer the Plan and to make all determinations necessary or advisable for
the administration of the Plan; provided, however, that no such interpretation
or determination shall change or affect the eligibility of Directors to receive
Options, the number of Shares covered by or the timing of any Option grant under
the Plan or the terms and conditions thereof.
4. SHARES RESERVED UNDER PLAN
The aggregate number of Shares which may be issued or sold under the
Plan and which are subject to outstanding Options at any time shall not exceed
one hundred fifty thousand (150,000) Shares, which may be treasury Shares or
authorized but unissued Shares, or a combination of the two, subject to
adjustment as provided in Paragraph 10 hereof. Any Shares subject to an Option
which expires or terminates for any reason (whether by voluntary surrender,
lapse of time or otherwise) and is unexercised as to such Shares may again be
the subject of an Option under the Plan subject to the limits set forth above. A
Director shall be entitled to the rights and privileges of ownership with
respect to the Shares subject to the Option only after actual purchase and
issuance of such Shares pursuant to exercise of all or part of an Option.
5. PARTICIPATION
Only Directors shall be eligible to receive Options under the Plan.
A-3
<PAGE> 4
6. OPTIONS: TERMS AND CONDITIONS
Each Option granted under the Plan shall be evidenced by a written
Option Agreement which shall comply with and be subject to the following terms
and conditions:
(a) Number of Option Shares Granted; Grant Date.
(i) Initial Options. Each Director initially elected to
the Board of Directors after the Effective Date shall
be granted an Option to purchase such number of
Shares as shall be determined by the Board of
Directors, on the date of such initial election (the
"Initial Options").
(ii) Annual Option Grants. On the first business day of
each calendar year, each Director who has not within
the prior twelve months received an Initial Option
under Subparagraph 6(a)(i), above, shall be granted
an Option to purchase one hundred twenty five (125)
Shares.
(iii) Attendance Grants. Each Director shall
be granted an Option to purchase two hundred fifty
(250) Shares for each meeting of the Board of
Directors attended by such Director and eighty seven
(87) Shares for each meeting of a committee of the
Board attended by such Director. Such Options shall
be granted as of the day of the meeting. .
(iv) Other Grants. Each Director shall be
entitled to receive an option to purchase such number
of Shares for performing other services for the
Company if and as shall be determined from time to
time by the Board of Directors.
In the event that the number of Shares available for grant
under the Plan is insufficient to make all grants hereby
specified on the relevant date, then all Directors who are
entitled to a grant on such date shall share ratably in the
number of Shares then available for grant under the Plan.
(b) Option Exercise Price. The per share purchase price of the
Shares purchasable under each Option shall be equal to one
hundred percent (100%) of the fair market value per Share. The
fair market value per Share referred to in the preceding
sentences shall be the Market Price for the date of grant of
such Option.
(c) Exercise Period. Subject to acceleration as provided below, or
unless accelerated earlier by the Board of Directors, an
Option shall become exercisable for all of the Shares covered
thereby one year after the date of grant. If a Director's
tenure ends during the applicable one-year period due to death
or Disability, each Option of such Director shall become
immediately exercisable as to 100% of the Shares covered
thereby. If a Director's tenure ends during such period for
any reason other than death or Disability (i) any Initial
Options or granted during such period shall become immediately
exercisable as to 100% of the Shares covered thereby; and (ii)
all other Options granted during such period shall lapse
immediately as to one twelfth (1/12th) of the Shares covered
by such Options for each month or portion of a month remaining
in such one year period at the time of the termination.
A-4
<PAGE> 5
Upon the occurrence of a Triggering Event, each Option
outstanding under this Plan shall become immediately
exercisable as to 100% of the Shares covered thereby. Once any
portion of an Option becomes exercisable, it shall remain
exercisable for the shortest period of (i) 10 years after the
date of grant; (ii) one year (or such longer period permitted
by the Board of Directors) after a Director's tenure on the
Board of Directors terminates due to death or Disability; or
(iii) three months (or such longer period permitted by the
Board of Directors) after a Director's tenure on the Board of
Directors terminates for any reason other than death or
Disability.
(d) Payment of Exercise Price. The purchase or exercise price
shall be payable in whole or in part in cash or Shares; and
such price shall be paid in full at the time that an Option is
exercised. If a Director elects to pay all or a part of the
purchase or exercise price in Shares, such Director shall make
such payment by delivering to the Company a number of Shares
already owned by the Director equal in value to the purchase
or exercise price. All Shares so delivered shall be valued at
their Market Price on the business day immediately preceding
the day on which such Shares are delivered.
7. TRANSFERABILITY
Except as otherwise provided herein, or permitted by the Board of
Directors, an Option granted to a Director under this Plan shall not be
transferable or subject to execution, attachment or similar process, and during
the lifetime of the Director shall be exercisable only by the Director. A
Director shall have the right to transfer the Option upon such Director's death,
either by the terms of such Director's will, trust agreement or under the laws
of descent and distribution, and all such distributees shall be subject to all
terms and conditions of this Plan to the same extent as would the Director,
except as otherwise expressly provided herein.
8. EXERCISE
An Option shall be exercisable by a Director's giving written notice
of exercise to the Secretary of the Company specifying the number of Shares to
be purchased accompanied by payment in full of the required exercise price or
other arrangements satisfactory to the Company have been made to assure payment
of the exercise price. The Company shall have the right to delay the issue or
delivery of any Shares under the Plan until (a) the completion of such
registration or qualification of such Shares under any federal or state law,
ruling or regulation as the Company shall determine to be necessary or
advisable, and (b) receipt from the Director of such documents and information
as the Company may deem necessary or appropriate in connection with such
registration or qualification.
9. SECURITIES LAWS
Each Option Agreement shall contain such representations, warranties
and other terms and conditions as shall be necessary in the opinion of counsel
to the Company to comply with all applicable federal and state securities laws.
10. ADJUSTMENT PROVISIONS
In the event of any stock dividend, split-up, recapitalization, merger,
consolidation, combination or exchange of shares, or the like, as a result of
which shares of any class shall be issued with respect to the outstanding
Shares, or the Shares shall be changed into the same or a different number of
the same or another class of stock, or into securities of another person, cash
or other property (not including a regular
A-5
<PAGE> 6
cash dividend), the total number of Shares authorized to be offered in
accordance with Paragraph 4, the number of Shares subject to each outstanding
Option, the exercise price applicable to each such Option, and/or the
consideration to be received upon exercise of each such Option shall be
appropriately adjusted.
11. TAXES
The Company shall be entitled to pay or withhold the amount of any tax
which it believes is required as a result of the exercise of any Option under
the Plan, and the Company may defer making delivery of Shares obtained pursuant
to the exercise of an Option until arrangements satisfactory to it have been
made with respect to any such withholding obligations. If a withholding
obligation should arise, a Director exercising an Option may, at his election,
provided applicable laws and regulations are complied with, satisfy his
obligation for payment of withholding taxes either by having the Company retain
a number of Shares having an aggregate Market Price on the date the Shares are
withheld equal to the amount of the withholding tax or by delivering to the
Company Shares already owned by the Director having an aggregate Market Price on
the business day immediately preceding the day on which such Shares are
delivered equal to the amount of the withholding tax.
12. EFFECTIVENESS OF THE PLAN
The Plan, subject to shareholder approval, shall become effective on
and as of the Effective Date.
13. TERMINATION AND AMENDMENT
The Board of Directors of the Company may terminate the Plan or make
such modifications or amendments thereof or to any Option as it shall deem
advisable, including, but not limited to, such modifications or amendments as it
shall deem advisable in order to conform to any law or regulation applicable
thereto. No termination, modification or amendment of the Plan or any Option
may, without the consent of a Director, adversely affect the rights of such
Director under an outstanding Option then held by the Director.
14. TENURE
The grant of an Option pursuant to the Plan is no guarantee that a
Director will be renominated, reelected or reappointed as a Director; and
nothing in the Plan shall be construed as conferring upon a Director the right
to continue to be associated with the Company as a Director or otherwise.
A-6
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