<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 October 31, 2000
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 December 11, 2000, there were 6,168,270 shares of the registrant's shares
outstanding.
<PAGE> 2
ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED OCTOBER 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 Financial statements
Condensed balance sheets - October 31, 2000 and July 31, 2000 3-4
Condensed statements of operations for the three months ended
October 31, 2000 and 1999 5
Condensed statements of cash flows for the three months ended
October 31, 2000 and 1999 6
Notes to unaudited condensed financial statements 7
Item 2 Management's discussion and analysis of financial condition and
results of operations 7-15
PART II - OTHER INFORMATION
Item 6 Exhibits and reports on Form 8-K 16
Signatures
</TABLE>
2
<PAGE> 3
ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 31 JULY 31
ASSETS 2000 2000
---------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 299 $ 563
Trade receivables, less allowance for doubtful accounts of $746
at October 31, 2000 and $697 at July 31, 2000 3,585 3,282
Prepaid expenses and other 106 109
------- -------
Total current assets 3,990 3,954
Equipment and leasehold improvements:
Computer equipment 4,394 4,389
Leasehold improvements 239 239
Furniture and equipment 967 846
------- -------
5,600 5,474
Less accumulated depreciation and amortization 5,130 5,038
------- -------
Net equipment and leasehold improvements 470 436
Goodwill, less accumulated amortization of $1,578 at October 31,
2000 and $1,413 at July 31, 2000 1,711 1,876
Deferred financing costs, less accumulated amortization of $94 at
October 31, 2000 and $59 at July 31, 2000 316 321
Capitalized software development:
Network platform 11,467 11,467
Software products 29,749 29,317
------- -------
41,216 40,784
Less accumulated amortization 29,905 28,883
------- -------
Net capitalized software development 11,311 11,901
------- -------
TOTAL ASSETS $17,798 $18,488
======= =======
</TABLE>
3
<PAGE> 4
ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 31 JULY 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 2000
---------- --------
<S> <C> <C>
Current liabilities:
Current portion of notes payable to shareholder $ 361 $ 361
Current portion of notes payable 492 461
Accounts payable 634 836
Unearned income 3,112 3,117
Accrued payroll and related liabilities 1,325 1,182
Other accrued liabilities 1,424 1,310
Current portion of capital lease obligations 148 111
-------- --------
Total current liabilities 7,496 7,378
Long term liabilities:
Notes payable to shareholder (net of discount) 239 313
Notes payable (net of discount) 2,253 2,168
Capital lease obligations 254 214
-------- --------
Total long term liabilities 2,746 2,695
Shareholders' equity:
Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 20,350 shares issued and
outstanding at October 31, 2000 and July 31, 2000 -- --
Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,168,270 shares issued and outstanding at
October 31, 2000 and July 31, 2000 6 6
Common stock warrants and options 2,459 2,459
Additional paid-in-capital 91,781 91,781
Accumulated deficit (86,690) (85,831)
-------- --------
Total shareholders' equity 7,556 8,415
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,798 $ 18,488
======== ========
</TABLE>
See notes to unaudited condensed financial statements.
Note: The balance sheet at July 31, 2000 has been derived from the audited
balance sheet at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
4
<PAGE> 5
ARI NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31
2000 1999
------- -------
<S> <C> <C>
Net revenues:
Subscriptions, support and transaction fees $ 2,552 $ 2,500
Software licenses and renewals 1,422 427
Professional services 831 458
------- -------
4,805 3,385
Operating expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown separately below):
Subscriptions, support and transaction fees 373 318
Software licenses and renewals 88 157
Professional services 502 364
------- -------
963 839
Depreciation and amortization 1,279 1,199
Customer operations and support 404 484
Selling, general and administrative 2,233 1,805
Software development and support 845 656
------- -------
Operating expenses before amounts capitalized 5,724 4,983
Less capitalized portion (432) (372)
------- -------
Net operating expenses 5,292 4,611
------- -------
Operating loss (487) (1,226)
Other expense:
Interest expense (371) (98)
Other, net (1) (4)
------- -------
Total other expense (372) (102)
------- -------
Net loss $ (859) $(1,328)
======= =======
Average common shares outstanding 6,168 5,712
Basic and diluted net loss per share $ (0.14) $ (0.23)
======= =======
</TABLE>
See notes to unaudited condensed financial statements.
5
<PAGE> 6
ARI NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31
2000 1999
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (859) $(1,328)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of network platform 143 174
Amortization of software products 879 755
Amortization of goodwill 165 163
Amortization of deferred financing costs and debt discount 240 --
Depreciation and other amortization 92 107
Net change in receivables, prepaid expenses and other (300) 1,489
Net change in accounts payable, unearned income and
accrued liabilities 50 (211)
------- -------
Net cash provided by (used in) operating activities 410 1,149
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (18) (6)
Development of software products (432) (373)
------- -------
Net cash provided by (used in) investing activities (450) (379)
FINANCING ACTIVITIES
Net payments under line of credit -- (202)
Net payments under notes payable (163) (10)
Deferred financing costs (30) --
Payments of capital lease obligations (31) (33)
------- -------
Net cash provided by (used in) financing activities (224) (245)
------- -------
Net increase (decrease) in cash (264) 525
Cash at beginning of period 563 127
------- -------
Cash at end of period $ 299 $ 652
======= =======
Cash paid for interest $ 61 $ 98
======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for:
Furniture and equipment $ 108 $ --
Issuance of common stock as payment of line of credit -- 1,000
</TABLE>
See notes to unaudited condensed financial statements.
6
<PAGE> 7
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared and reviewed
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 three months ended
October 31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending July 31, 2001. 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, 2000.
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 stated 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 $100 per share 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 $804,000 at October 31,
2000.
4. NOTES PAYABLE
The convertible debentures, issued on April 27, 2000, and accrued interest
thereon are convertible into common stock at a rate of $4 per share, subject to
certain adjustments. Concurrent with the issuance of the debentures, the Company
issued the investors 600,000 common stock purchase warrants expiring April 27,
2005 and 800,000 investment options expiring October 27, 2001. Each of the
warrants and options are exercisable for one share of common stock at a price of
$6 per share. The warrants and options, which were originally estimated to have
a value of $2,354,000, less accumulated amortization, reduce the carrying amount
of the debt.
5. DERIVATIVES
Effective August 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended, requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position measured at
fair value. The impact of the adoption of SFAS 133 was immaterial to the
Company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the quarter ended October 31, 2000 increased $1,420,000 or 42%
compared to the same period last year, representing the highest quarterly
revenue in the history of the Company and the eighteenth of the past nineteen
consecutive quarters of year-over-year revenue improvement. All of the
improvement was in the manufactured equipment industry. Management expects total
revenue for the full fiscal 2001 year to increase by between 20% and 30% from
fiscal 2000. EBITDA (earnings before interest, taxes, depreciation and
amortization) increased from negative $31,000 for the quarter ended October 31,
1999 to positive $791,000 for the quarter ended October 31, 2000. Earnings
improved 35% from a net loss of $1,328,000, or $0.23 per share for the quarter
ended October 31, 1999 to a net loss of $859,000 or $0.14 per share for the
quarter ended October 31, 2000. Management believes that, due to amortization of
goodwill and other intangibles from its acquisitions and continued investment in
sales and marketing, full profitability will not be achieved until fiscal 2003.
Should the Company complete additional acquisitions, non-cash amortization of
intangibles could further delay full profitability. See "Forward Looking
Statements."
7
<PAGE> 8
REVENUES
The Company is a leading provider of Partner Relationship Management and
business-to-business Internet e-Commerce solutions for sales, service and
life-cycle product support in the manufactured equipment market. The Company
currently serves over 100 manufacturers and 20,000 dealers in more than 100
countries in 12 segments of the worldwide manufactured equipment market
including outdoor power, recreation vehicles, auto and truck parts aftermarket,
marine, construction, power sports, floor maintenance and others. The Company
builds and supports a full suite of multi-media electronic catalog publishing
and viewing software for the Web or CD/DVD. The Company's communications systems
provide a global electronic pathway for parts orders, product registrations,
warranty claims and other transactions between manufacturers and their networks
of sales and service points.
The Company also has a supplemental business that provides a variety of
electronic commerce services to non-Equipment industries such as transportation,
agribusiness and publishing. The non-Equipment industries generate positive cash
flows for the Company but have not shown significant growth over the past three
years.
Management reviews the Company's recurring vs. non-recurring revenue in the
aggregate and within the U.S. and Canadian Equipment, International Equipment
and non-Equipment markets.
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's unaudited financial statements.
REVENUE BY INDUSTRY SECTOR
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
INDUSTRY SECTOR OCTOBER 31 PERCENT
2000 1999 CHANGE
------ ------
<S> <C> <C> <C>
EQUIPMENT INDUSTRY
U.S. and Canadian
Recurring $1,883 $1,385 36%
Non-recurring 1,382 567 144%
------ ------
Subtotal 3,265 1,952 67%
International
Recurring 305 74 312%
Non-recurring 17 84 (80)%
------ ------
Subtotal 322 158 104%
Total Equipment Industry
Recurring 2,188 1,459 50%
Non-recurring 1,399 651 115%
------ ------
Subtotal 3,587 2,110 70%
NON-EQUIPMENT INDUSTRY
Recurring 1,174 1,142 3%
Non-recurring 44 133 (67)%
------ ------
Subtotal 1,218 1,275 (4)%
TOTAL REVENUE
Recurring 3,362 2,601 29%
Non-recurring 1,443 784 84%
------ ------
Grand Total $4,805 $3,385 42%
====== ======
</TABLE>
8
<PAGE> 9
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. Non-recurring revenues
are derived from initial software license fees and professional services fees.
Recurring revenue, as a percentage of total revenue, decreased from 77% to 70%
for the three months ended October 31, 1999 and 2000, respectively, due to
higher new software license revenues in the Equipment Industry. This is more in
line with management's belief that 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 is expected to
fluctuate from quarter to quarter and year to year, depending on the size and
timing of new business.
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power, recreation vehicles, motorcycles, auto and truck parts after-market,
manufactured housing, farm equipment, marine, construction, power sports, floor
maintenance and others primarily in the U.S., Canada, Europe and Australia.
Management's strategy is to expand the Company's electronic parts catalog and
dealer communications software and services business with manufacturers and
distributors and their dealers in the existing vertical markets and to expand to
other similar markets in the future.
U.S. and Canada
Recurring revenues in the U.S. and Canadian Equipment Industry increased for
the three month period ended October 31, 2000, compared to the same period
last year, primarily due to increased catalog license, maintenance and
subscription renewals from the Company's growing base of customers.
Non-recurring revenues in the U.S. and Canadian Equipment Industry increased
for the three month period ended October 31, 2000, compared to the same
period last year, due to increased new software licenses and professional
services sold to dealers and manufacturers. One customer, a newly signed
private-label reseller of the Company's software, accounted for
approximately 20% of total revenues in the Equipment Industry for the three
months ended October 31, 2000. Revenues in the U.S. and Canadian Equipment
Industry increased, as a percentage of total revenues, from 58% for the
three months ended October 31, 1999 to 68% for the three months ended
October 31, 2000. Management expects recurring and non-recurring revenues in
the U.S. and Canadian Equipment Industry to increase at a higher rate than
total revenues for the remainder of fiscal 2001, as management continues to
focus attention and resources in this industry.
International (Europe and Australia)
Recurring revenues in the International Equipment Industry increased for the
three month period ended October 31, 2000, compared to the same period last
year, primarily due to catalog license, maintenance and subscription
renewals from new business added last year. Non-recurring revenues in the
International Equipment Industry decreased for the three month period ended
October 31, 2000 compared to the same period last year, due to a lack of new
software sales in the first quarter of fiscal 2001. Revenues in the
International Equipment Industry increased, as a percentage of total
revenues, from 5% for the three months ended October 31, 1999 to 7% for the
three months ended October 31, 2000. Management expects recurring and
non-recurring revenues in the International Equipment Industry to increase
at a higher rate than total revenues for the remainder of fiscal 2001, as
management continues to focus attention and resources in this industry.
Non-Equipment Industry
The Company'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
base of customers with long-term relationships with the Company. Revenues in the
non-Equipment Industry decreased for the three month period ended October 31,
2000, compared to the same period last year, due to the Company's focus in the
Equipment Industry. Management expects revenues in the non-Equipment Industry
will decline for the remainder of fiscal 2001. The Company's five-year contract
with the Association of American Railroads will expire on December 31, 2000 and
will not be renewed. Per quarter, the Association of American Railroads
represented approximately $250,000 of non-Equipment Industry recurring revenues.
The Company's five year contract with the Associated Press, on which its
business in the non-daily newspaper publishing industry depends, is up for
renewal in January 2001. The Company has maintained good relations with the
Associated Press, and, based on discussions with the Associated Press,
management believes that it is likely that the contract will be renewed,
although there is no assurance that this will be the case.
9
<PAGE> 10
VARIABLE COST OF PRODUCTS AND SERVICES SOLD
The following table sets forth, for the periods indicated, certain revenue and
variable cost of products and services sold information derived from the
Company's unaudited financial statements.
VARIABLE COST OF PRODUCTS AND SERVICES SOLD AS A PERCENT OF REVENUE
BY REVENUE TYPE
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31 PERCENT
2000 1999 CHANGE
------- -------
<S> <C> <C> <C>
Subscriptions, support and transaction fees
Revenue $2,552 $2,500 2%
Variable cost of revenue 373 318 17%
Variable cost of revenue as a percent 15% 13%
Software licenses and renewals
Revenue 1,422 427 233%
Variable cost of revenue 88 157 (44)%
Variable cost of revenue as a percent 6% 37%
Professional services
Revenue 831 458 81%
Variable cost of revenue 502 364 38%
Variable cost of revenue as a percent 60% 79%
Total
Revenue $4,805 $3,385 42%
Variable cost of revenue 963 839 15%
Variable cost of revenue as a percent 20% 25%
</TABLE>
Variable cost of subscriptions, support and transaction fees consists primarily
of royalties, telecommunications and catalog replication and distribution costs.
Variable cost of subscriptions, support and transaction fees as a percentage of
revenue increased for the three month period ended October 31, 2000, compared to
the same period last year, primarily due to the completion of the recognition of
deferred revenues last year associated with the Powercom acquisition which had
minimal corresponding costs associated with them, thereby inflating the margin
for the prior period. Management expects gross margins from subscriptions,
support and transaction fees to fluctuate from quarter to quarter based on the
mix of products and services sold.
Variable cost of software licenses and renewals consists primarily of royalties,
and software distribution costs. Variable cost of software licenses and renewals
as a percentage of revenue decreased for the three month period ended October
31, 2000, compared to the same period last year, primarily due to the sale of
software licenses with no associated royalties. Management expects gross margins
from software licenses and renewals to fluctuate from quarter to quarter based
on the mix of products and services sold.
Variable cost of professional services consists of customization and catalog
production labor. Variable cost of professional services as a percentage of
revenue decreased for the three month period ended October 31, 2000, compared to
the same period last year, primarily due to the delivery of customized software
that had estimated costs accrued in the fourth quarter of fiscal 2000 that were
in excess of actual costs needed to complete the customizations. These
over-accruals were reversed in this quarter. Management expects variable cost of
professional services to be between 60% and 80%, depending on the mix of
services sold.
10
<PAGE> 11
OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's unaudited financial statements.
OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31 PERCENT
2000 1999 CHANGE
------- -------
<S> <C> <C> <C>
Variable cost of products and services sold (exclusive
of depreciation and amortization shown below) $ 963 $ 839 15%
Customer operations and support 404 484 (17)%
Selling, general and administrative 2,233 1,805 24%
Software development and support 845 656 29%
------- -------
Gross cash expenses 4,445 3,784 17%
Depreciation and amortization 1,279 1,199 7%
Less capitalized portion (432) (372) 16%
------- -------
Net operating expenses $ 5,292 $ 4,611 15%
======= =======
</TABLE>
The increase in net operating expenses for the three month period ended October
31, 2000, compared to the same period last year, was primarily due to an
increase in sales and marketing expense in order to facilitate an increase in
sales.
Customer operations and support consists primarily of data center operations,
software maintenance agreements for the Company's core network, catalog data
maintenance and customer support costs. Customer operations and support costs
for the three month period ended October 31, 2000 decreased over the same period
last year due to classifying direct labor costs, which were not tracked prior to
the integration of the NDI acquisition, to direct cost of sales in the catalog
production area.
The increase in selling, general and administrative expenses ("SG&A") for the
three month period ended October 31, 2000, compared to the same period last
year, was primarily due to increased bonuses and commissions associated with the
increased sales and to the addition of a senior level financial consultant.
SG&A, as a percentage of revenue, decreased from 53% for the three month period
ended October 31, 1999 to 46% for the three month period ended October 31, 2000.
Management expects costs to continue to increase in SG&A for the remainder of
fiscal 2001, as the Company's revenues grow, but the increase is expected to be
at a slower rate than revenues.
The Company's technical staff (in-house and contracted) is allocated between
software development and support 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. Software development and support costs increased for the
three month period ended October 31, 2000, compared to the same period last
year, primarily due to an increase in resources focused on development of
Web-based communications and cataloging software. Management expects software
development and support costs to continue to increase for the remainder of
fiscal 2001, but at a slower rate than revenues.
Depreciation and amortization expense increased slightly for the three month
period ended October 31, 2000, compared to the same period last year. Management
expects depreciation and amortization to remain relatively consistent for the
remainder of fiscal 2001, barring any additional acquisitions.
Capitalized software development costs represented 51% of software development
and support for the three month period ended October 31, 2000, compared to 57%
for the same period last year, due to the fact that the Company's development
resources were focused more on software customization projects.
11
<PAGE> 12
OTHER ITEMS
The following table sets forth, for the periods indicated, certain earnings
information derived from the Company's unaudited financial statements.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31 PERCENT
2000 1999 CHANGE
----------- --------
<S> <C> <C> <C>
Net loss $ (859) $ (1,328) 35%
Interest (cash) 61 98 (38)%
Interest (non-cash) 310 -- 100%
Depreciation and amortization 1,279 1,199 7%
--------- -------
Earnings before interest, taxes, depreciation
and amortization $ 791 $ (31) 2,652%
========= ========
</TABLE>
Net loss decreased for the three month period ended October 31, 2000, compared
to the same period last year, due to revenues increasing at a higher rate than
costs. As the Company continues its acquisition program, non-cash amortization
of goodwill and other intangible assets from the Company's acquisitions may
cause net losses to continue even if earnings before interest, taxes,
depreciation and amortization are positive.
Cash paid for interest decreased for the three month period ended October 31,
2000, compared to the same period last year, primarily due to decreased lending
under the WITECH line. Non-cash interest expense was incurred for the three
month period ended October 31, 2000 as the Company accrued interest and
amortized debt discount in relation to the Debenture sold to Rose Glen.
Management expects cash paid for interest to decrease as the Company continues
to pay off debt and non-cash interest expense to increase, compared to the prior
year, as the Company accrues and amortizes non-cash interest expense associated
with the Debenture. See "Liquidity and Capital Resources."
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased for the three month period ended October 31, 2000, compared to the
same period last year, due primarily to the Company's improvement in earnings.
Management expects EBITDA to continue to remain positive for the remainder of
fiscal 2001, although there can be no assurance that these results will be
ultimately achieved. As the Company continues its acquisition program, non-cash
amortization of goodwill and other intangible assets from the Company's
acquisitions may cause net losses to continue even if EBITDA is positive.
We have included data with respect to EBITDA because it is commonly used as a
measurement of financial performance and by investors to analyze and compare
companies on the basis of operating performance. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and should
not be considered an alternative to operating income, as determined in
accordance with generally accepted accounting principles, as an indictor of our
operating performance, or to cash flows from operating activities, as determined
in accordance with generally accepted accounting principles, as a measure of our
liquidity. EBITDA is not necessarily comparable with similarly titled measures
for other companies.
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.
CASH FLOW INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31 PERCENT
2000 1999 CHANGE
----- ------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities
before changes in working capital $ 660 $ (129) 612%
Net cash provided by (used in) investing activities (450) (379) (19)%
----- ------
Subtotal 210 (508) 141%
Effect of net changes in working capital (250) 1,278 (120)%
----- ------
Net cash provided by (used in) operating and
Investing activities $ (40) $ 770 (105)%
===== ======
</TABLE>
12
<PAGE> 13
Net cash provided by operating activities before changes in working capital
increased for the three months ended October 31, 2000, compared to the same
period last year, due to revenues increasing at a higher rate than expenses. Net
cash used in investing activities increased for the three months ended October
31, 2000, compared to the same period last year, primarily due to increased
costs attributable to the development of the Company's Web-based software. The
effect of net changes in working capital is dependent on the timing of payroll
and other cash disbursements and accruals and may vary significantly from
quarter to quarter. Management expects cash provided by operating activities to
remain positive for the remainder of fiscal 2001, however, there can be no
assurance that these results will be ultimately achieved.
The Company expects to continue to incur operating losses for the fiscal year
ending July 31, 2001 due to non-cash expenses. Although there can be no
assurance that profitability will be achieved thereafter, management expects to
achieve full profitability before the end of fiscal 2003, barring additional
acquisitions.
At October 31, 2000, the Company had cash and cash equivalents of approximately
$299,000 compared to approximately $563,000 at July 31, 2000.
The following table sets forth, for the periods indicated, certain information
related to the Company's debt derived from the Company's unaudited financial
statements.
DEBT SCHEDULE
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31 JULY 31
2000 2000 NET
(UNAUDITED) (AUDITED) CHANGE
------- ------- -------
<S> <C> <C> <C>
Debt to Shareholder:
Current portion of notes payable $ 361 $ 361 $ --
Long-term portion of notes payable 306 389 (83)
Debt discount (common stock warrants) (67) (76) 9
------- ------- -------
Total Debt to Shareholder 600 674 (74)
Subordinated Debenture:
Long-term notes payable other 4,000 4,000 --
Debt discount (common stock warrants and options) (1,962) (2,158) 196
------- ------- -------
Total Subordinated Debenture 2,038 1,842 196
Other Debt:
Current portion of notes payable other 492 461 31
Long-term notes payable other 215 326 (111)
------- ------- -------
Total Other Debt 707 787 (80)
------- ------- -------
Total Debt $ 3,345 $ 3,303 $ 42
======= ======= =======
</TABLE>
On April 27, 2000, the Company issued and sold pursuant to a Securities Purchase
Agreement, dated as of April 25, 2000, by and among the Company and RGC
International Investors, LDC (the "Investor"), (i) a convertible subordinated
debenture in the amount of Four Million Dollars ($4,000,000) due on April 27,
2003 (the "Debenture"), and convertible into shares of the Company's common
stock, $.001 par value per share (the "Common Stock"), (ii) warrants to purchase
Six Hundred Thousand (600,000) shares of Common Stock (the "Warrants"), and
(iii) an investment option to purchase Eight Hundred Thousand (800,000) shares
of Common Stock (the "Investment Option"). The Investment Option expires on
October 27, 2001 and the Warrants expire on April 27, 2005. The Debenture is
convertible into Common Stock at $4 per share and the Warrants and Investment
Option are exercisable at $6 per share. At any time after October 27, 2000, the
Company can require the Investor to convert the amount owed under the Debenture
into Common Stock at $4.00 per share provided that: (i) the closing bid price of
the Common Stock has been greater than $6.60 for twenty (20) consecutive trading
days and (ii) the Company's resale registration statement has been effective for
at least three (3) months. The resale registration became effective on September
1, 2000. At any time after April 27, 2001, the Company can require the Investor
to exercise the Investment Option if the closing bid price of the Common Stock
is greater than $9.90 for twenty (20) consecutive trading days and the Company's
resale registration statement has been effective for at least three (3) months.
If exercised, the Investment Option would contribute an additional Four Million
Eight Hundred Thousand Dollars ($4,800,000) of working capital to the Company.
13
<PAGE> 14
ARI has a $1.0 million line of credit with WITECH (the "WITECH Line") that has
been in place since October 4, 1993. The WITECH Line expires on December 31,
2001. The WITECH Line bears interest at prime plus 2.0%. As of October 31, 2000
there were no amounts outstanding under the WITECH Line. In conjunction with
obtaining the WITECH Line, 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 $4.00 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. Of the 280,000 warrants to purchase
shares of Common Stock issued to WITECH; (i) warrants to purchase 175,000 shares
of Common Stock at $2.125 expired on October 1, 2000; (ii) warrants to purchase
75,000 shares of Common Stock at $2.125 expire on January 1, 2002; and (iii)
warrants to purchase 30,000 shares of Common Stock at $4.000 expire on October
1, 2006.
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.
In connection with both the subordinated debenture and the WITECH Line, the
Company recognizes amortization of a debt discount, the gross amount of which is
the value of the warrants and options issued as partial consideration for the
terms of the debt instrument. The amortization of the debt discount appears as
non-cash interest expense on the income statement, and the net value of the debt
discount reduces the carrying value of the debt on the balance sheet.
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 purchases 90% of eligible
receivables. 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. The balance of the RFC Facility at October 31,
2000 was $482,000.
Management believes that funds generated from operations and proceeds from the
Debenture, the WITECH Line and the RFC Facility will be adequate to fund the
Company's operations and investments through fiscal 2001. Management may
consider the acquisition of strategic investment partners and the sale of
additional securities as sources of funding for investment opportunities that
may arise. On a long-term basis, management believes that cash for operations as
well as for capital expenditures will come principally from cash generated from
operations.
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<PAGE> 15
ACQUISITIONS
Since December 1995, the Company has had a formal and aggressive business
development program aimed at identifying, evaluating and closing acquisitions
that augment and strengthen the Company's market position, product offerings,
and personnel resources. Since the program's inception, approximately 300
acquisition candidates have been evaluated, resulting in four completed
acquisitions.
<TABLE>
<CAPTION>
ACQUISITION DATE ACQUIRED COMPANY AND LOCATION DESCRIPTION OF ACQUIRED COMPANY
<S> <C> <C>
November 4, 1996 cd\*.IMG, Inc. ("CDI") CDI developed the Plus 1(R) electronic parts
New Berlin, WI catalog, which featured parts information
from over 20 manufacturers in the outdoor
power, marine, motorcycle and power
sports industries.
September 30, 1997 Empart Technologies, Inc. ("EMPART") EMPART provided us with the
Foster City, CA EMPARTpublisher (TM) and EMPARTviewer (TM)
software.
September 15, 1998 POWERCOM-2000 ("POWERCOM"), a POWERCOM provided electronic catalog
subsidiary of Briggs & Stratton Corporation and communication services to a
Colorado Springs, CO number of manufacturers in North America,
Europe, and Australia in the outdoor
power, power tools, power sports
industries.
May 13, 1999 Network Dynamics Incorporated ("NDI") NDI provided us with the PartSmart (TM)
Williamsburg, VA electronic catalog, which was used by
over 10,000 dealers to view catalogs from
50 different manufacturers in 6 sectors of
the Equipment Industry.
</TABLE>
FORWARD LOOKING STATEMENTS
Certain statements contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward looking statements,
including, without limitation, statements with respect to growth plans,
projected sales, revenues, earnings and costs and product development schedules
and plans. Other forward looking information includes (i) information included
or incorporated by reference in our future filings with the Commission
including, without limitation, statements with respect to growth plans,
projected sales, revenues, earnings and costs, and product development schedules
and plans and (ii) information contained in written material, releases and oral
statements issued by us, or on our behalf, including, without limitation,
statements with respect to growth plans, projected sales, revenues, earnings and
costs, and product development schedules and plans. Generally, the words
"anticipates," "believes," "expects," "intends" and similar expressions identify
forward looking statements. The Company's actual results may differ materially
from those contained in the forward looking statements identified above. Factors
which may cause such a difference to occur, include, but are not limited to,
those factors set forth in the section entitled "Risk Factors," in the Company's
registration statement on Form S-3 filed on May 12, 2000, as amended.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter.
16
<PAGE> 17
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: December 15, 2000 /s/ Brian E. Dearing
Brian E. Dearing, Chairman of the Board --------------------------
(and acting CFO)
17
