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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 April 30, 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 June 12, 2000, there were 6,168,020 shares of the registrant's shares
outstanding.
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ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED APRIL 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial statements
Condensed balance sheets - April 30, 2000 and July 31, 1999 3-4
Condensed statements of operations for the three and nine
months ended April 30, 2000 and 1999 5
Condensed statements of cash flows for the nine months ended
April 30, 2000 and 1999 6
Notes to unaudited condensed financial statements 7-8
Item 2 Management's discussion and analysis of financial condition and
results of operations 9-15
PART II - OTHER INFORMATION
Item 2 Changes in securities and use of proceeds 16
Item 6 Exhibits and reports on Form 8-K 16
Signatures 17
2
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ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30 JULY 31
2000 1999
ASSETS (UNAUDITED) (AUDITED)
----------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,145 $ 127
Trade receivables, less allowance for doubtful accounts of $315
at April 30, 2000 and $278 at July 31, 1999 3,457 3,175
Prepaid expenses and other 71 126
------- -------
Total Current Assets 4,673 3,428
Equipment & leasehold improvements:
Network system hardware 4,283 4,246
Leasehold improvements 239 239
Furniture and equipment 518 513
------- -------
5,040 4,998
Less accumulated depreciation and amortization 4,880 4,574
------- -------
Net equipment and leasehold improvements 160 424
Intangibles 3,619 3,289
Less accumulated amortization 1,280 755
------- -------
Net intangibles 2,339 2,534
Network system:
Network platform 11,467 11,467
Industry-specific applications 28,976 27,588
------- -------
40,443 39,055
Less accumulated amortization 28,009 25,003
------- -------
Net network system 12,434 14,052
------- -------
TOTAL ASSETS $19,606 $20,438
======= =======
</TABLE>
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ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30 JULY 31
2000 1999
LIABILITIES & SHAREHOLDERS' EQUITY (UNAUDITED) (AUDITED)
----------- ---------
<S> <C> <C>
Current liabilities:
Line of credit payable to shareholder $ -- $ 246
Current portion of notes payable to shareholder 333 --
Current portion of notes payable other 325 385
Accounts payable 741 1,204
Unearned income 3,295 3,307
Other accrued liabilities 2,652 1,680
Current portion of capital lease obligations 12 82
-------- --------
Total Current Liabilities 7,358 6,904
Long term liabilities:
Line of credit payable to shareholder -- 2,754
Notes payable to shareholder 472 734
Notes payable other (net of discount) 1,687 --
Unearned income -- 267
Capital lease obligations -- 23
-------- --------
Total Long Term Liabilities 2,159 3,778
Shareholders' equity:
Cumulative preferred stock, par value $.001 per share, 1,000,000 shares
authorized; 20,350 shares issued and outstanding at both April 30, 2000
and July 31, 1999 -- --
Common stock, par value $.001 per share, 25,000,000 shares authorized;
6,167,776 and 5,097,432 shares issued and outstanding at April 30, 2000
and July 31, 1999, respectively 6 5
Common stock to be issued -- 2,406
Common stock warrants & options 2,459 --
Additional paid-in-capital 91,598 86,830
Accumulated deficit (83,974) (79,485)
-------- --------
Total Shareholders' Equity 10,089 9,756
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 19,606 $ 20,438
======== ========
</TABLE>
See notes to unaudited condensed financial statements.
4
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ARI NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30 APRIL 30
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Network and other services $ 2,424 $ 1,520 $ 7,616 $ 6,068
Software 624 868 1,785 1,428
Development 358 604 1,239 1,102
-------- -------- -------- --------
3,406 2,992 10,640 8,598
Operating expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown separately below):
Network and other services 577 372 1,408 1,100
Software 17 107 335 339
Development 224 357 886 861
-------- -------- -------- --------
818 836 2,629 2,300
Depreciation and amortization 1,357 873 3,788 2,586
Network operations 515 193 1,540 566
Selling, general and administrative 1,957 1,791 5,877 5,204
Network construction and expansion 761 531 2,239 2,040
-------- -------- -------- --------
Operating expenses before amounts capitalized 5,408 4,224 16,074 12,696
Less capitalized portion (569) (418) (1,388) (1,426)
-------- -------- -------- --------
Net operating expenses 4,839 3,806 14,685 11,270
-------- -------- -------- --------
Operating loss (1,433) (814) (4,045) (2,672)
Other income expense
Interest expense (160) (75) (438) (215)
Other, net -- -- (6) --
-------- -------- -------- --------
Total other expense (160) (75) (444) (215)
-------- -------- -------- --------
Net loss $ (1,593) $ (889) $ (4,489) $ (2,887)
======== ======== ======== ========
Average common shares outstanding 6,156 5,097 5,946 4,950
Basic and diluted net loss per share ($ 0.26) ($ 0.17) ($ 0.76) ($ 0.58)
======== ======== ======== ========
</TABLE>
See notes to unaudited condensed financial statements.
5
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ARI NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30
2000 1999
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,489) $(2,887)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of network platform 515 521
Amortization of industry specific applications 2,491 1,292
Amortization of goodwill 495 424
Amortization of deferred finance costs 30 --
Depreciation and other amortization 287 349
Net change in receivables, prepaid expenses and other (227) 135
Net change in accounts payable, unearned income and
accrued liabilities 230 277
------- -------
Net cash provided by (used in) operating activities (668) 111
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (23) (47)
Industry specific application costs capitalized (1,388) (1,426)
Other 0 (124)
------- -------
Net cash used in investing activities (1,411) (1,597)
FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit (1,000) 1,330
Net borrowings under notes payable 3,157 --
Deferred finance costs (330) --
Payments of capital lease obligations (93) (23)
Proceeds from issuance of common stock 1,363 17
------- -------
Net cash provided by financing activities 3,097 1,324
------- -------
Net increase (decrease) in cash 1,018 (162)
Cash at beginning of period 127 194
------- -------
Cash at end of period $ 1,145 $ 32
======= =======
Cash paid for interest $ 438 $ 215
======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of detachable common stock warrants and options
in connection with issuance of debt $ 2,459 $ --
Issuance of common stock for acquisitions -- 1,785
Issuance of common stock as payment of line of credit 1,000 --
Conversion of line of credit to note payable 1,000 --
</TABLE>
See notes to unaudited condensed financial statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
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 nine months ended April 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 31, 2000. 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, 1999.
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 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 $641,000 at April 30, 2000.
4. ACQUISITIONS
On September 15, 1998, the Company acquired certain assets used in the operation
of Briggs & Stratton Corporation's Powercom 2000 division ("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.
On May 13, 1999, the Company acquired all of the issued and outstanding common
stock of Network Dynamics Incorporated ("NDI") in consideration for 550,019
shares of the Company's common stock, which were issued in August, 1999, and the
assumption of certain liabilities totaling $3,623,000. The purchase price
allocation for NDI made in the July 31, 1999 financial statements was
preliminary and the final purchase price allocation has now been made, for which
$5,433,000 has been allocated to industry-specific applications with an
amortization period of five years.
The following unaudited pro forma results of operations for the three and nine
months ended April 30, 1999 assume the acquisition of the Powercom and NDI
businesses occurred at the beginning of that period:
<TABLE>
<CAPTION>
PROFORMA RESULTS
(IN THOUSANDS)
THREE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30 APRIL 30
1999 1999
----------------------------------
<S> <C> <C>
Net Equipment industry revenues $ 2,232 $ 6,758
Non-Equipment industry revenues 1,379 4,123
Net loss (1,208) (3,844)
Net loss per share (0.21) (0.70)
</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.
7
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5. CONVERTIBLE DEBENTURES
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 estimated at $2,354,000 and
are subject to change upon final valuation, reduced the carrying amount of the
debt.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the quarter ended April 30, 2000 increased $414,000 or 14%
compared to the same period last year, representing the Company's seventeenth
consecutive quarter of year-over-year revenue improvement. Most of the
improvement was attributable to the NDI acquisition. Management expects total
revenue for the full fiscal 2000 year to increase by between 20% and 30% from
fiscal 1999. Primarily due to lower than expected revenues and non-cash
amortization expenses relating to the NDI acquisition, net loss for the third
quarter increased from $889,000 in fiscal 1999 to $1,593,000 in fiscal 2000.
Management believes that, due to amortization of goodwill and other intangibles
from its acquisitions and a planned investment in sales and marketing, full
profitability will not be achieved until fiscal 2002. Should the Company
complete additional acquisitions, non-cash amortization of intangibles could
further delay full profitability. See "Forward Looking Statements."
REVENUES
The Company provides business-to-business electronic commerce solutions to
manufacturers in selected industries with shared service networks and
distribution channels. The Company focuses its sales and marketing on the U.S.,
Canadian, European and Australian manufactured equipment industry (the
"Equipment Industry"). The Equipment Industry is made up of separate sub-markets
in which the manufacturers share common distributors, retail dealers and/or
service points. These sub-markets include: outdoor power, recreation vehicles,
motorcycles, manufactured housing, farm equipment, marine, construction, power
sports, floor maintenance and others.
The Company also has a supplemental business that provides a variety of
electronic commerce services to non-Equipment industries. The non-Equipment
industries generate positive cash flows for the Company but have not shown
significant growth over the past three years and are not expected to do so in
the future. Management reviews the Company's recurring vs. non-recurring revenue
in the aggregate and within the Equipment and non-Equipment markets. The
Equipment Industry has been a growing percentage of our revenue over the past
three years, representing over 66% of total third quarter 2000 revenue.
Management expects this percentage to continue to increase over time.
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's unaudited financial statements.
<TABLE>
<CAPTION>
REVENUE BY INDUSTRY SECTOR
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30 PERCENT APRIL 30 PERCENT
INDUSTRY SECTOR: 2000 1999 CHANGE 2000 1999 CHANGE
---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Equipment Industry
Recurring $ 1,275 $ 732 74% $ 4,242 $ 2,021 110%
Non-recurring 976 881 11% 2,780 2,453 13%
---------- ----------- ------------ -------------
Subtotal 2,251 1,613 40% 7,022 4,474 57%
Other Revenues
Recurring 1,084 1,246 (13%) 3,407 3,619 (6%)
Non-recurring 71 133 (47%) 211 505 (58%)
---------- ----------- ------------ -------------
Subtotal 1,155 1,379 (16%) 3,618 4,124 (12%)
Total Revenue
Recurring 2,359 1,978 19% 7,649 5,640 36%
Non-recurring 1,047 1,014 3% 2,991 2,958 1%
---------- ----------- ------------ -------------
Grand Total $ 3,406 $ 2,992 14% $ 10,640 $ 8,598 24%
========== =========== ============ =============
</TABLE>
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Recurring revenues are derived from catalog subscription fees, software
maintenance and support fees, software license renewals, network traffic and
support fees and other miscellaneous subscription fees. Recurring revenue, as a
percentage of total revenue, increased from 66% to 72% for the nine months ended
April 30, 1999 and 2000, respectively, primarily due to the revenue mix assumed
by the Company in the NDI acquisition. 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. The
increase in total recurring revenues for the three and nine month periods ended
April 30, 2000, compared to the same periods last year, was primarily due to
increases in Equipment Industry revenues driven by the Powercom and NDI
acquisitions.
Non-recurring revenues are derived from initial software license fees and
professional services fees. In the Equipment Industry, non-recurring revenues
increased by 13%, while total non-recurring revenues remained approximately the
same for the nine month period ended April 30, 2000, compared to the same period
last year, due to a decline in new sales in the Company's non-Equipment Industry
business. The increase in non-recurring revenues in Equipment was less than
management's expectation because new sales were adversely affected by late
delivery of the Company's communication software. The Company has installed its
TradeRoute(R) software at over 2,000 dealer locations through the end of the
third quarter. Management believes that TradeRoute(R) sales should increase
during the last quarter of the fiscal year.
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power, recreation vehicles, motorcycles, manufactured housing, farm equipment,
marine, construction, power sports, floor maintenance and others. Management's
strategy is to expand the Company's electronic parts catalog software and
services and dealer communication business with manufacturers and distributors
and their dealers in the existing vertical markets and to expand to other
similar markets in the future. Revenues from all of the Company's acquisitions
are included in the Equipment Industry revenues. Recurring revenues in the
Equipment Industry increased for the three and nine month periods ended April
30, 2000, compared to the same periods last year, primarily due to the
acquisitions of Powercom and NDI, both of which had substantial recurring
revenue bases, and due to increased revenue from subscription fees and
maintenance and support fees from the Company's growing base of manufacturers
and dealers. Non-recurring revenues in the Equipment Industry for the three and
nine month periods ended April 30, 2000 increased over the same period last year
due to increased software and professional services sold to dealers and
manufacturer customers. Management expects recurring and non-recurring revenues
in the Equipment Industry to increase at a higher rate than total revenues for
the remainder of fiscal 2000, as management continues to focus attention and
resources in this industry.
Non-Equipment Industry Business
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
stable base of customers with long-term relationships with the Company. For the
three and nine month periods ended April 30, 2000, recurring and non-recurring
revenues decreased, compared to the same periods last year. Management believes
the decline in non-recurring revenues may signal that the Company is approaching
saturation of the available market for the products and services offered by the
Company in these industries. Management also believes that consolidation in the
agricultural customer base is the primary reason for the decline in recurring
revenues. Management expects revenues in the non-Equipment Industry will remain
flat or decline for the remainder of fiscal 2000. These revenues have profitable
margins and help to fund ARI's growth in the Equipment Industry. The Company's
five-year contracts with the Association of American Railroads and the
Associated Press, on which its business in the railroad and non-daily newspaper
publishing industries depends, are up for renewal in December 2000. The Company
has maintained good relations with the Association of American Railroads and the
Associated Press, and, based on discussions with these customers, management
believes that it is likely that each contract will be renewed, although there is
no assurance that this will be the case.
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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>
OPERATING EXPENSES
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30 PERCENT APRIL 30 PERCENT
2000 1999 CHANGE 2000 1999 CHANGE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Variable cost of products and services sold (exclusive
of depreciation and amortization shown below) $ 818 $ 836 (2%) $ 2,629 $ 2,300 14%
Network operations 515 193 167% 1,540 566 172%
Selling, general & administrative 1,957 1,791 9% 5,877 5,204 13%
Network construction and expansion 761 531 43% 2,239 2,040 10%
----------- ---------- ----------- ----------
Gross cash expenses 4,051 3,351 21% 12,285 10,110 22%
Depreciation and amortization 1,357 873 55% 3,788 2,586 46%
Less capitalized portion (569) (418) 36% (1,388) (1,426) (3%)
----------- ---------- ----------- ----------
Net operating expenses $ 4,839 $ 3,806 27% $ 14,685 $ 11,270 30%
=========== ========== =========== ==========
</TABLE>
The increase in operating expenses for the three and nine month periods ended
April 30, 2000, 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 and NDI acquisitions
completed on September 15, 1998 and May 13, 1999, respectively.
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 decreased slightly for the
three month period ended April 30, 2000, compared to the same period last year,
primarily due to the reversal of accrued software royalties which were cancelled
in the renegotiations of contracts associated with the NDI acquisition. Variable
cost of products and services sold as a percentage of revenue was 25% and 27%
for the nine month periods ended April 30, 2000 and 1999, 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, catalog production and
customer support costs. Network operations expense for the three and nine month
periods ended April 30, 2000 increased significantly over the same periods last
year due to increased customer support and catalog production costs resulting
from the NDI acquisition.
The increase in selling, general and administrative expenses for the three and
nine month periods ended April 30, 2000, compared to the same periods last year,
was due to the addition of the Company's new Williamsburg, Virginia offices and
other expenses arising out of the NDI acquisitions. 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. Network construction and expansion cost for the three and nine
month periods ended April 30, 2000 increased, compared to the same periods last
year, primarily due to an increase in resources focused on development of
Web-based communications and cataloging software and increased year 2000
compliance efforts in November and December. Management expects network
construction and expansion costs to continue to increase as a result of
management's decision to focus on development of the Company's Web-based
communications and catalog software.
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The increase in depreciation and amortization expense for the three and nine
month periods ended April 30, 2000, compared to the same periods last year, was
due primarily to increased goodwill and other intangible asset amortization
resulting from the Powercom and NDI acquisitions and from amortization of
completed software products.
Capitalized development costs for the first six months of the year was down,
compared to the same period last year, due to the fact that the Company's
development resources were focused on software customization projects and Year
2000 remediation projects, both of which are expensed. Capitalized development
costs for the three months ended April 30, 2000 increased, compared to the same
period last year, as the Company shifted its resources to the development of its
Web-based software products.
OTHER ITEMS
Interest expense increased $85,000 for the three month period and $223,000 for
the nine month period ended April 30, 2000, compared to the same periods last
year. The increases reflect additional financing by the Company under its RFC
facility and the WITECH Line, as well as additional debt assumed in the NDI
acquisition. Interest expense will fluctuate depending on the use and timing of
financing through lines of credit and/or additional equity financing.
See "Liquidity and Capital Resources."
Net loss increased $704,000 and $1,602,000 for the three and nine month periods
ended April 30, 2000, respectively, compared to the same periods last year,
primarily due to lower than expected revenues resulting from delays in product
delivery, as well as, non-cash amortization expenses resulting from the Powercom
and NDI acquisitions and from amortization of completed software products. 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 while earnings before interest, taxes, depreciation and amortization
become positive.
The Company's Year 2000 readiness program was completed on schedule. All of the
Company's products have either been discontinued or have Year 2000 compliant
versions, which were shipped prior to December 31, 1999, with some minor
exceptions that were addressed prior to December 31, 1999 with distribution of
patches to a small number of customers to enable them to continue to use the
Company's software until the complete Year 2000 compliant version had been
implemented. The Company has spent $420,000 on the Year 2000 program out of a
total expected expenditure of $550,000. The Company may in the future be subject
to claims based on Year 2000 problems in others' products, or issues arising
from the integration of multiple products within an overall system. Although the
Company has not been a party to any litigation or arbitration proceeding to date
involving its products or services and related to Year 2000 compliance issues,
there can be no assurance that we will not in the future be required to defend
our products or services in such proceedings, or to negotiate resolutions of
claims based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, regardless of the merits of such disputes, and any
potential liability on the Company's part for Year 2000-related damages,
including consequential damages, could have an adverse effect on the Company's
business and financial results.
ACQUISITIONS
Since December 1995, the Company has had a formal and aggressive business
development program aimed at identifying, evaluating and closing acquisitions,
which 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.
CD\*.IMG, INC.
On November 4, 1996, the Company completed the acquisition of cd\*.IMG, Inc.
("CDI"). CDI was in the business of publishing electronic parts catalogs and the
software that dealers and repair shops in the Equipment Industry use to read the
catalogs. CDI's PLUS(1)(R) electronic parts catalog featured parts information
from over 20 manufacturers in the outdoor power equipment, marine, motorcycles
and power sports industries. PartSmart(TM), which the Company acquired as part
of the NDI transaction, described below, will replace PLUS(1)(R) in these
industries.
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EMPART TECHNOLOGIES, INC.
On September 30, 1997, the Company acquired Empart Technologies, Inc.
("Empart"). Empart was a Silicon Valley-based developer of software for
electronic parts catalogs. Empart's products included EMPARTpublisher(TM), a
software tool used to convert data from a variety of forms into an electronic
format, and EMPARTviewer(TM), a high-end configurable electronic parts catalog
software package. The EMPART(TM) software is being used in the recreation
vehicles and manufactured housing industries. The Company intends to deploy the
EMPARTpublisher(TM) software in all segments of the Equipment Industry by
developing the capability for this product to generate PartSmart(TM) viewable
catalogs. The EMPART(TM) database is also the underlying technology upon which
the Company's Web-based electronic catalog product is based.
POWERCOM 2000, A DIVISION OF BRIGGS & STRATTON CORPORATION
On September 15, 1998, the Company acquired POWERCOM 2000, a Colorado Springs,
Colorado-based division of Briggs & Stratton Corporation ("Powercom"). Powercom
provided electronic cataloging and communications software and services to
companies in the North American, European and Australian outdoor power, power
tools and power sports industries. PartSmart(TM), which the Company acquired as
part of the NDI transaction described below, will replace the Powercom
electronic cataloging software in these industries.
NETWORK DYNAMICS INCORPORATED
On May 13, 1999, the Company acquired Network Dynamics Incorporated, based in
Williamsburg, Virginia ("NDI"). NDI's PartSmart(TM) electronic catalog software
is now our primary catalog software in all of the Equipment sectors we serve
other than recreation vehicles and manufactured housing. PartSmart(TM) was used
by over 10,000 dealers to view catalogs from over 50 different manufacturers in
six sectors of the Equipment Industry.
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>
CASH FLOW INFORMATION
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30 PERCENT APRIL 30 PERCENT
2000 1999 CHANGE 2000 1999 CHANGE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net cash used in operating activities
before changes in working capital $ (206) $ (16) (1188%) $ (671) $ (301) (123%)
Net cash used in investing activities (552) (403) (37%) (1,411) (1,597) 12%
---------- ---------- ---------- ---------
Subtotal (758) (419) (81%) (2,082) (1,898) (10%)
Effect of net changes in working capital (212) (3) (6967%) 3 412 (99%)
---------- ---------- ---------- ---------
Net cash used in operating and investing $ (970) $ (422) (130%) $(2,079) $(1,486) (40%)
activities ========== ========== ========== =========
</TABLE>
Net cash used in operating activities before changes in working capital
increased primarily due to lower than expected revenues and increased
expenditures related to product customization and Year 2000 compliance efforts.
Management expects increased revenues and decreased overhead in the second half
of the year, as product is implemented and Year 2000 compliance is completed, to
decrease net cash used in operations. 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, 2000 due to non-cash expenses and there can be no assurance that
profitability will be achieved thereafter.
At April 30, 2000, the Company had cash and cash equivalents of approximately
$1,145,000 compared to approximately $127,000 at July 31, 1999.
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<PAGE> 14
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.
<TABLE>
<CAPTION>
DEBT SCHEDULE
(IN THOUSANDS)
APRIL 30 JULY 31
2000 1999 NET
(UNAUDITED) (AUDITED) CHANGE
------------ ----------- ------------
<S> <C> <C> <C>
Debt to Shareholder:
Current portion of line of credit $ - $ 246 $ (246)
Current portion of notes payable 333 - 333
Long-term portion of Line of credit payable - 2,754 (2,754)
Long-term portion of notes payable 472 734 (262)
------------ ----------- ------------
Total Debt to Shareholder 805 3,734 (2,929)
Subordinated Debenture:
Long-term notes payable other 4,000 - 4,000
Debt discount (common stock warrants and options) (2,459) - (2,459)
------------ ----------- ------------
Total Subordinated Debenture 1,541 - 1,541
Other Debt:
Current portion of notes payable other 325 385 (60)
Long-term notes payable other (net of discount) 146 - 146
------------ ----------- ------------
Total Other Debt 471 385 86
------------ ----------- ------------
Total Debt $ 2,817 $ 4,119 $ (1,302)
============ =========== ============
</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. 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.
ARI has a line of credit with WITECH that has been in place since October 4,
1993 (the "WITECH Credit Facility"). On September 30, 1999, ARI and WITECH
restructured the $3.0 million outstanding under the WITECH Credit Facility to
provide for (i) a $1.0 million revolving line of credit (the "WITECH Line")
which expires on December 31, 2001; (ii) a $1.0 million term loan (the "WITECH
Term Loan") payable in equal monthly principal installments over three years,
commencing November 1, 1999; and (iii) WITECH's purchase of $1.0 million of
ARI's common stock at $5.125 per share. The WITECH Line bears interest at prime
plus 2.0% and the WITECH Term Loan bears interest at prime plus 3.25%. In
conjunction with obtaining the WITECH Credit Facility, since 1993, ARI has
issued to WITECH 350 shares of its non-voting cumulative preferred stock and
total warrants for the purchase of up to 280,000 shares of its common stock,
including (i) warrants for the purchase of 250,000 shares at $2.125 per share
and (ii) warrants for the purchase of 30,000 shares of its common stock at $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 currently owned by WITECH; (i)
warrants to purchase 175,000 shares of Common Stock at $2.125 expire 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. If fully exercised, the
warrants would contribute an additional Six Hundred Fifty One Thousand Two
Hundred Fifty Dollars ($651,250) of working capital to the Company.
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<PAGE> 15
On December 21, 1999, the Company and WITECH amended the WITECH Line to enable
the Company to borrow an additional Five Hundred Thousand Dollars ($500,000)
under the WITECH Line (the "Bridge Loan"). The Bridge Loan bore interest at
prime plus 2.0%. As consideration for the Bridge Loan, ARI paid a closing fee of
$50,000 to WITECH.
On April 27, 2000, the Company used a part of the proceeds from the sale of the
Debenture to (i) pay down the outstanding amount due under the WITECH Line and
(ii) repay the Bridge Loan and the interest and closing fee associated
therewith. ARI's ability to borrow up to $1,000,000 under the WITECH Line will
remain in place until December 31, 2001. As of June 12, 2000 there are no
amounts outstanding under the WITECH Line.
The only financial covenant in the WITECH Credit Facility is that ARI must
maintain a net worth (calculated in accordance with generally accepted
accounting principles) of at least $5.3 million. ARI has been, and is currently,
in compliance with the financial covenant in the Agreement and currently expects
to comply with such covenant or obtain any required waivers or raise additional
equity, if necessary.
As part of ARI's acquisition of Powercom from Briggs & Stratton Corporation
("Briggs") in September 1998, Briggs agreed to provide ARI with a working
capital line of credit in the amount of $250,000 (the "Briggs Line"). ARI agreed
to exhaust all available credit under the WITECH Line before borrowing any
amounts under the Briggs Line. The Briggs Line bore interest at prime plus 2%
and was secured by a first position lien against all accounts receivable
generated from customers of Powercom that were assigned to ARI as part of the
acquisition. The Briggs Line was repaid in full and cancelled on October 7,
1999.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each $1.0
million increase. Under the Sale Agreement, RFC purchases 90% of eligible
receivables. In connection with the Sale Agreement ARI is required to pay a
Commitment Fee of: $45,000 on September 28, 1999, $30,000 on September 28, 2000,
and $15,000 on September 28, 2001. In addition, ARI is obligated to pay a
monthly program fee equal to the greater of (a) $3,000 or (b) the amount of the
purchased but uncollected receivables times the prime rate plus 2%. ARI may
terminate the Sale Agreement prior to three years by paying: 3.0% of the
Purchase Commitment during the first year; 2.0% of the Purchase Commitment
during the second year; and 1.0% of the Purchase Commitment during the third
year. Initial funding was actually $1,045,000, of which $182,000 was immediately
used to pay off the Briggs Line. The balance of the RFC Facility at April 30,
2000 was $865,000.
Management believes that funds generated from operations, the Debenture and the
WITECH Line 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 capital expenditures will come
principally from cash generated from operations.
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.
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<PAGE> 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 8, 2000, the Company issued 12,500 shares of Common Stock to Gordon
J. Bridge, a director of the Company, for his development of the Company's
World Wide Web site. The transaction was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
On April 10, 2000, the Company issued 10,353 shares of Common Stock to Tucker
Anthony Cleary Gull ("Tucker Anthony") for services provided as its financial
advisor. The services provided by Tucker Cleary include advisory services
connected to ARI's consummation of a working capital facility from RFC Capital
Corporation, the acquisition of substantially all of the assets of POWERCOM
2000, and the merger with Network Dynamics Incorporated. The transaction was
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 4(2) thereof.
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. At anytime 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 (see below) 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. The securities were sold as a
transaction exempted from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
Pursuant to the terms of a Registration Rights Agreement, dated as of April 27,
2000, by and among the Company and the Investor, on May 12, 2000, the Company
filed with the Securities and Exchange Commission a registration statement on
Form S-3 under the Securities Act to register for resale the shares of Common
Stock which are issuable upon conversion of the Debenture and upon exercise of
the Warrants and Investment Option.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K.
On February 22, 2000, the Company filed a Report on Form 8-K
with respect to Item 5 thereof
On May 2, 2000, the Company filed a Report on Form 8-K with
respect to Item 5 thereof.
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<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: June 14, 2000 /s/ Brian E. Dearing
Brian E. Dearing, Chairman of the Board -----------------------
(and acting CFO)
17
