<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, 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 March 13, 2000, there were 6,155,549 shares of the registrant's shares
outstanding.
<PAGE> 2
ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED January 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 Financial statements
Condensed balance sheets - January 31, 2000 and July 31, 1999 3
Condensed statements of operations for the three and six months
ended January 31, 2000 and 1999 4
Condensed statements of cash flows for the six months ended
January 31, 2000 and 1999 5
Notes to unaudited condensed financial statements 6
Item 2 Management's discussion and analysis of financial condition and results
of operations 7-12
PART II - OTHER INFORMATION
Item 2 Changes in securities and use of proceeds 13
Item 4 Submission of matters to a vote of security holders 13
Item 5 Other Information 13
Item 6 Exhibits and reports on Form 8-K 13
Signatures 14
</TABLE>
2
<PAGE> 3
ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31 JULY 31
2000 1999
ASSETS (UNAUDITED) (AUDITED)
-----------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 396 $ 127
Trade receivables, less allowance for doubtful accounts of $300
at January 31, 2000 and $278 at July 31, 1999 3,304 3,175
Prepaid expenses 47 126
----------- -----------
Total Current Assets 3,747 3,428
Equipment & leasehold improvements:
Network system hardware 4,274 4,246
Leasehold improvements 239 239
Furniture and equipment 525 513
----------- -----------
5,038 4,998
Less accumulated depreciation and amortization 4,755 4,574
----------- -----------
Net equipment and leasehold improvements 283 424
Intangibles 3,289 3,289
Less accumulated amortization 1,082 755
----------- -----------
Net intangibles 2,207 2,534
Network system:
Network platform 11,467 11,467
Industry-specific applications 28,407 27,588
----------- -----------
39,874 39,055
Less accumulated amortization 26,926 25,003
----------- -----------
Net network system 12,948 14,052
----------- -----------
TOTAL ASSETS $ 19,185 $ 20,438
=========== ===========
<CAPTION>
LIABILITIES & SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Line of credit payable to shareholder $ 500 $ 246
Current portion of notes payable 684 385
Accounts payable 1,062 1,204
Unearned income 3,008 3,307
Other accrued liabilities 2,538 1,680
Current portion of capital lease obligations 28 82
----------- -----------
Total Current Liabilities 7,820 6,904
Line of credit payable to shareholder 1,000 2,754
Notes payable 1,105 734
Unearned income 115 267
Capital lease obligations 21 23
Shareholders' equity:
Cummulative preferred stock, par value $.001 per share, 1,000,000 shares
authorized; 20,350 shares issued and
outstanding at both January 31, 2000 and July 31, 1999 0 0
Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,146,145 and 5,097,432 shares issued and
outstanding at January 31, 2000 and July 31, 1999, respectively 6 5
Common stock to be issued - 2,406
Additional paid-in-capital 91,499 86,830
Accumulated deficit (82,381) (79,485)
----------- -----------
Total Shareholders' Equity 9,124 9,756
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 19,185 $ 20,438
=========== ===========
</TABLE>
See notes to unaudited condensed financial statements.
3
<PAGE> 4
ARI NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
January 31 January 31
2000 1999 2000 1999
---------- ---------- ------------ ------------
Net revenues:
<S> <C> <C> <C> <C>
Network and other services $ 2,577 $ 2,472 $ 5,192 $ 4,548
Software 734 277 1,161 561
Development 538 307 881 497
---------- ---------- ------------ ------------
3,849 3,056 7,234 5,606
Operating expenses:
Variable cost of products and services
sold (exclusive of depreciation and
amortization shown separately below):
Network and other services 479 346 831 728
Software 161 147 318 232
Development 332 366 662 504
---------- ---------- ------------ ------------
972 859 1,811 1,464
Depreciation and amortization 1,232 950 2,431 1,713
Network operations 541 189 1,025 373
Selling, general and administrative 2,115 1,787 3,920 3,413
Network construction and expansion 822 708 1,478 1,509
---------- ---------- ------------ ------------
Operating expenses before amounts capitalized 5,682 4,493 10,665 8,472
Less capitalized portion (447) (426) (819) (1,008)
---------- ---------- ------------ ------------
Net operating expenses 5,235 4,067 9,846 7,464
---------- ---------- ------------ ------------
Operating loss (1,386) (1,011) (2,612) (1,858)
Other expense:
Interest expense (180) (78) (278) (140)
Other, net (2) - (6) -
---------- ---------- ------------ ------------
Total other expense (182) (78) (284) (140)
---------- ---------- ------------ ------------
Net loss $ (1,568) $ (1,089) $ (2,896) $ (1,998)
========== ========== ============ ============
Average common shares outstanding 5,974 5,090 5,843 4,879
Basic and diluted net loss per share $ (0.26) $ (0.21) $ (0.50) $ (0.41)
========== ========== ============ ============
</TABLE>
See notes to unaudited condensed financial statements.
* In accordance with FASB 86, includes a portion of network and product
development expense and other operating expenses directly related to the
development process.
4
<PAGE> 5
ARI NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
January 31
2000 1999
----------- ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (2,896) $ (1,998)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of network platform 348 348
Amortization of industry specific applications 1,575 880
Amortization of intangibles 327 259
Depreciation and other amortization 181 226
Net change in receivables, prepaid expenses and other (50) (80)
Net change in accounts payable, unearned income and
accrued liabilities 265 495
----------- ------------
Net cash provided by (used in) operating activities (250) 130
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (40) (44)
Industry specific application costs capitalized (819) (1,008)
Other - (142)
----------- ------------
Net cash used in investing activities (859) (1,194)
FINANCING ACTIVITIES
Borrowings under line of credit 500 1,140
Repayments under notes payable (330) -
Payments of capital lease obligations (56) (16)
Proceeds from issuance of common stock 1,264 17
----------- ------------
Net cash provided by financing activities 1,378 1,141
----------- ------------
Net increase (decrease) in cash 269 77
Cash at beginning of period 127 194
----------- ------------
Cash at end of period $ 396 $ 271
=========== ============
Cash paid for interest $ 278 $ 140
=========== ============
NONCASH INVESTING AND FINANCING ACTIVITIES
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.
5
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JANUARY 31, 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 six months ended January 31, 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 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 $575,084 at January 31, 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 six
months ended January 31, 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 SIX MONTHS
ENDED ENDED
JANUARY 31 JANUARY 31
1999 1999
------------ -------------
<S> <C> <C>
Net revenues $ 3,675 $ 7,270
Net loss (1,408) (2,636)
Net loss per share (0.25) (0.49)
</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
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the quarter ended January 31, 2000 increased $793,000 or 26%
compared to the same period last year, representing the Company's sixteenth
consecutive quarter of year-over-year revenue improvement. Most of the
improvement was attributable to the NDI and Powercom acquisitions. Management
expects total revenue for the full fiscal 2000 year to increase by between 30%
and 40% from fiscal 1999. Primarily due to lower than expected revenues and
non-cash amortization expenses relating to the NDI acquisition, net loss for the
second quarter increased from $1,089,000 in fiscal 1999 to $1,568,000 in fiscal
2000. Management believes that, due to amortization of goodwill and other
intangibles from its acquisitions, full profitability will not be achieved until
fiscal 2001. 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 our 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 supplementary 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 69% of total second 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.
REVENUE BY INDUSTRY SECTOR
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
Industry Sector: 2000 1999 CHANGE 2000 1999 CHANGE
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Equipment Industry
Recurring $ 1,508 $ 825 83% $ 2,967 $ 1,289 130%
Non-recurring 1,153 1,007 14% 1,804 1,572 15%
---------- ----------- ------------- ------------
Subtotal 2,661 1,832 45% 4,771 2,861 67%
Other Revenues
Recurring 1,181 1,131 4% 2,323 2,373 (2%)
Non-recurring 7 93 (92%) 140 372 (62%)
---------- ----------- ------------- ------------
Subtotal 1,188 1,224 (3%) 2,463 2,745 (10%)
Total Revenue
Recurring 2,689 1,956 37% 5,290 3,662 44%
Non-recurring 1,160 1,100 5% 1,944 1,944 0%
---------- ----------- ------------- ------------
Grand Total $ 3,849 $ 3,056 26% $ 7,234 $ 5,606 29%
========== =========== ============= ============
</TABLE>
7
<PAGE> 8
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 65% to 73% for the six months ended
January 31, 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
six month periods ended January 31, 2000 compared to the same periods last year
were 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 15% while total non-recurring revenues remained the same for the
six month period ended January 31, 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. TradeRoute(R) was installed at over 2,000
dealers by the end of the second quarter, which should allow new sales to again
increase in the second half of the 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 six month periods ended January
31, 2000, compared to the same period 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
six month periods ended January 31, 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 six month periods ended January 31, 2000, recurring revenues increased
slightly and non-recurring revenues decreased from 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 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.
8
<PAGE> 9
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 SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 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) $ 972 $ 859 13% $ 1,811 $ 1,464 24%
Network operations 541 189 186% 1,025 373 175%
Selling, general & administrative 2,115 1,787 18% 3,920 3,413 15%
Network construction and expansion 822 708 16% 1,478 1,509 (2%)
----------- ---------- ----------- ----------
Gross cash expenses 4,450 3,543 26% 8,234 6,759 22%
Depreciation and amortization 1,232 950 30% 2,431 1,713 42%
Less capitalized portion (447) (426) 5% (819) (1,008) (19%)
----------- ---------- ----------- ----------
Net operating expenses $ 5,235 $ 4,067 29% $ 9,846 $ 7,464 32%
=========== ========== =========== ==========
</TABLE>
The increase in operating expenses for the three and six month periods ended
January 31, 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 as a percentage of revenue was
25% and 26% for the six months ended January 31, 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 six month
periods ended January 31, 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
six month periods ended January 31, 2000, compared to the same period 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 month period
ended January 31, 2000 increased, compared to the same period last year, due to
increased year 2000 compliance efforts in November and December but decreased
for the six month period ended January 31, 2000, compared to the same period
last year, primarily due to a shift of resources from software development of
TradeRoute(R) and Plus1(R) to customization projects for our customers in the
recreational vehicle and outdoor power markets, which are included in cost of
sales.
9
<PAGE> 10
The increase in depreciation and amortization expense for the three and six
month periods ended January 31, 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.
The decrease in capitalized development costs for the six month period ended
January 31, 2000, compared to the same period last year, reflects the fact that
the Company's development resources were focused on software customization
products and Year 2000 remediation projects, both of which are expensed.
OTHER ITEMS
Interest expense increased $138,000 for the six month period ended January 31,
2000, compared to the same period last year. The increase reflects 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.
Net loss increased $479,000 and $898,000 for the three and six month periods
ended January 31, 2000, respectively, compared to the same periods last year,
primarily due to lower than expected revenues resulting from delays in product
delivery, 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 has 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 PLUS1(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 PLUS1(R) in these
industries.
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.
10
<PAGE> 11
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.
CASH FLOW INFORMATION
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 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 $ (336) $ (139) 142% $ (465) $ (285) 63%
Net cash used in investing activities (480) (486) (1%) (859) (1,194) (28%)
----------- ----------- ---------- ----------
Subtotal (816) (625) 31% (1,324) (1,79) (10%)
Effect of net changes in working capital (1,063) 212 601% 215 415 48%
----------- ----------- ---------- ----------
Net cash used in operating and investing
activities $ (1,879) $ (413) 355% $ (1,109) $ (1,064) 4%
=========== =========== ========== ==========
</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. 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 January 31, 2000, the Company had cash and cash equivalents of approximately
$396,000 compared to approximately $127,000 at July 31, 1999.
During the three month period ended January 31, 2000, the Company's closing
stock price, which is listed on The Nasdaq Stock Market(R) under the symbol
ARIS, ranged from $3.375 to $14.000. As a result of the increase in the
Company's stock price, some of the Company's employees and directors exercised
options that were granted under the Company's Incentive Stock Option Plan and
Director Stock Option Plan during the three month period ended January 31, 2000.
The result of these activities was an increase of approximately $1.08 Million to
the Company's paid in capital for the three month period ended January 31, 2000.
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
$5.125 per share. The exercise price under the warrants is reduced if ARI issues
stock at less than the then current exercise price. WITECH also purchased 20,000
shares of non-voting cumulative preferred stock on July 15, 1997.
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 bears interest a
prime plus 2.0%. In the event that the Bridge Loan is not repaid by April 1,
2000, the unpaid amount will bear interest at prime plus 6.0%. As consideration
for the Bridge Loan, ARI has agreed to pay WITECH a closing fee of $50,000,
which is accrued at January 31, 2000. If the Company is unable to raise
sufficient capital to repay the Bridge Loan by April 1, 2000, the Company will
attempt to renegotiate the terms of the Bridge Loan with WITECH. However, there
can be no assurrance that such negotiations would be successful.
11
<PAGE> 12
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 January 31, 2000
was $243,000. Due to lower than expected revenues in the quarter and cash
receipts of unpurchased receivables used to expire the balance, the Company has
not been able to fully utilize the RFC Facility. Efforts are under way to
reconstruct the mechanics of the facility to allow for increased funding for the
remainder of the term.
Management believes that funds generated from operations may not be adequate to
fund the Company's operations through the remainder of fiscal 2000. In order to
meet the Company's requirements for operations and development investments,
management believes that additional financing will be necessary in Fiscal 2000.
Additionally, the Company will consider the sale of additional securities as a
source of funding. On a long-term basis, management believes that cash flow from
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.
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 DOS versions of software, the Company's ability to release new
software applications and upgrades on a timely basis, the Company's ability to
establish and maintain strategic alliances, the Company's ability to manage its
costs, the Company's ability to manage its business in a rapidly changing
environment, the Company's ability to finance capital investments, and the
Company's ability to implement its acquisition strategy to increase growth.
Projected revenues are difficult to estimate because the Company's revenues and
operating results may vary substantially from quarter to quarter. The primary
cause of the variation is attributed to non-recurring revenues from software
license and customization fees. License fee revenues are based on contracts
signed and product delivered. Non-recurring revenues are affected by the time
required to close large license fee and development agreements, which cannot be
predicted with any certainty due to customer requirements and decision-making
processes.
Recurring revenues are also difficult to estimate. Recurring revenues from
maintenance and subscription fees may be estimated based on the number of
subscribers to the Company's services but will be affected by the renewal ratio,
which cannot be determined in advance. Recurring revenues from network traffic
fees and transaction fees are difficult to estimate as they are determined by
usage. Usage is a function of the number of subscribers and the number of
transactions per subscriber. Transactions include product ordering, warranty
claim processing, inventory and sales reporting, parts number updates and price
updates. The Company cannot materially affect or predict the volume of
transactions per customer.
Although the Company has recently introduced and plans to expand its
Internet-enabled Windows portfolio of products, the marketplace is highly
competitive and there can be no assurance that a customer will select the
Company's software and services over that of a competitor. The environment in
which the Company competes is characterized by rapid technological changes,
dynamic customer demands, and frequent product enhancements and product
introductions. Some of the Company's current and potential competitors have
greater financial, technical, sales, marketing and advertising resources than
the Company.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 3, 1999, the Company issued 35,417 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 1999 Annual Meeting of Shareholders on December 9,
1999.
(b) Votes cast for the election of a director to serve until the 2002 Annual
Shareholder's Meeting were as follows:
Nominee Votes For Votes Against
Francis Brzezinski 5,057,793 75,599
Directors whose terms of office continue past the 1999 Annual Meeting of
Shareholders are: Gordon J. Bridge, George D. Dalton, Brian E. Dearing, and
Richard W. Weening.
Votes cast to ratify the appointment of Ernst & Young LLP as the Company's
auditors for the year ending July 31, 2000 were as follows:
For 5,114,348
Against 5,820
Abstained 13,224
ITEM 5. OTHER INFORMATION
On December 22, 1999, the Board of Directors voted unanimously to increase the
size of the Company's audit committee to three members and appointed Gordon J.
Bridge to the audit committee.
On January 21, 2000, the Board of Directors voted unanimously to appoint Ted C.
Feierstein to the Company's Board of Directors to serve through the Company's
2002 Annual Shareholder's Meeting or until a successor has been appointed by the
Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) Exhibits
10.1 Amendment Number 16 to Loan Agreement dated December 21,
1999 between the Company and WITECH Corporation
10.2 Website Development Agreement dated December 9, 1999
between the Company and Gordon J. Bridge
27 Financial Data Schedule
b) Reports on Form 8-K. No reports on Form 8-K were filed during
the fiscal quarter.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARI Network Services, Inc.
(Registrant)
Date: March 16, 2000 /s/ Brian E. Dearing
--------------------
Brian E. Dearing, Chairman of the Board
(and acting CFO)
14
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NUMBER SIXTEEN 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 December 21, 1999.
B A C K G R O U N D:
This Amendment to the Loan Agreement reflects the mutual understanding
and agreement of the parties to amend the Loan Agreement regarding the provision
by WITECH of a credit facility to ARI.
NOW, THEREFORE, the parties agree as follows:
1. For a period commencing on the date hereof and ending on April
1, 2000, the amount stated in Paragraph 2.2 shall be increased from One
Million Dollars ($1,000,000) to One Million Five Hundred Thousand
Dollars ($1,500,000). The difference of Five hundred Thousand Dollars
($500,000) plus all interest accruing thereon at the rates stated in
the Loan Agreement shall be referred to herein as the "Bridge Loan."
2. The parties acknowledge that at any time during the term
hereof, WITECH may exercise any of the Warrants to purchase ARI Common
Stock that have been granted to WITECH by ARI and are outstanding at
the time of the exercise. At WITECH's election, the proceeds of such
exercise shall be used by ARI to repay any outstanding balance due and
owing under the Bridge Loan together with any accrued but unpaid
interest thereon. In any event the Bridge Loan shall be repaid by ARI
no later than April 1, 2000. In the event that any amount of the Bridge
Loan remains outstanding after April 1, 2000, such unpaid amount shall
bear interest at a rate per annum equal to the Prime Rate plus 6.0%
from the date of such nonpayment until the Bridge Loan is paid in full.
3. In Exhibit 1.1 to the Loan Agreement, in the definition of
"Total Loan Commitment," the reference to "One Million Dollars
($1,000,000)" is deleted and "One Million Five Hundred Thousand Dollars
($1,500,000)" is substituted therefor.
4. In Exhibit 2.2(a), the reference to "One Million Dollars
($1,000,000)" is deleted and "One Million Five Hundred Thousand Dollars
($1,500,000)" is substituted therefor.
5. As further consideration for this Agreement, ARI agrees to pay
WITECH a closing fee equal to 10% of the Bridge Loan, or Fifty Thousand
Dollars ($50,000).
6. Subject to the amendments described herein, the Loan
Agreement, as amended, and associated documents and agreements remain in full
force and effect and the Bridge Loan shall be subject to all of the terms and
conditions of such documents.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered by their respective officers as of the date
first above written.
WITECH CORPORATION ARI NETWORK SERVICES, INC.
By: /s/ Francis Brzezinski By: /s/ Brian E. Dearing
--------------------------------- -------------------------------------
Francis Brzezinski, President Brian E. Dearing, Chairman, President
and Chief Executive Officer
15
<PAGE> 1
Exhibit 10.2
WEBSITE DEVELOPMENT AGREEMENT
This Website Development Agreement (the "Agreement") is entered into this
9th day of December, 1999, by and between ARI Network Services, Inc. ("ARI") and
Gordon J. Bridge ("Consultant").
1. PERFORMANCE BY CONSULTANT. Consultant agrees to act as an independent
contractor for the specific project of developing a World Wide web site to
be installed on ARI's web space located at www.arinet.com. ARI has
established a separate contract with an Internet service provider (the
"ISP"). ARI hereby authorizes Consultant to access this account and
authorizes the ISP to provide Consultant with "write permission" for ARI's
web page directory, cgi-bin directory, and any other directories or
programs which need to be accessed for this project.
2. PAYMENT FOR SERVICES. ARI agrees to pay Consultant by issuing twelve
thousand five hundred (12,500) shares of ARI common stock (the "ARI
Shares") for the services provided hereunder. The issuance shall occur and
be effective December 16, 1999, provided ARI shall have received
assurances, satisfactory to it, that the issuance of ARI common stock as
contemplated hereby would not require shareholder approval, and would not
constitute a corporate governance violation, under the rules of the
National Association of Securities Dealers, Inc. applicable to ARI. If
such condition is not satisfied by January 31, 2000, the parties shall meet
to agree upon other compensation at the earliest possible time. Both ARI
and Consultant agree that the value of the services provided hereunder is
Eighty Five Thousand Dollars ($85,000).
Consultant is aware that the ARI Shares have not been registered (nor is
registration contemplated) under the Securities Act of 1933, as amended (the
"Act"), and, accordingly, that federal and state securities laws require the
such ARI shares must be held indefinitely unless they are subsequently
registered under the Act or unless exemptions from such registration are
available. Consultant is aware of the provisions of Rule 144 under the Act which
permit limited resales of shares issued in private transactions subject to the
satisfaction of certain conditions. Consultant agrees that any certificate for
the ARI Shares may bear a legend restricting the transfer thereof consistent
with the foregoing. The form of such legend may be substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SHARES MAY NOT BE SOLD,
OR OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION
WITHOUT AN EXEMPTION UNDER THE ACT, OR AN OPINION OF LEGAL COUNSEL
REASONABLY ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS
NOT REQUIRED.
ARI and its transfer agent need not register a transfer of ARI Shares,
unless the conditions specified in the foregoing legend are satisfied.
In addition, Consultant shall be reimbursed for all reasonable
out-of-pocket expenses not exceeding an allotment of $500 per month
incurred in the performance of the services provided hereunder. Consultant
shall obtain the written approval of ARI before incurring expenses in a
month in excess of this allotment.
16
<PAGE> 2
3. ADDITIONAL SERVICES. Any revisions, additions or redesign client wishes
Consultant to perform not specified in this document shall be considered
"additional" and will require a separate agreement and payment.
4. RIGHTS IN DATA AND WORKS.
a. Ownership. Consultant agrees that ARI is the exclusive owner of all
right, title and interest in the finished assembled work of the web
site produced and designed by Consultant. This ownership is to include
rights to the design, any photos or graphics supplied, source code,
work-up files, and computer programs specifically designed for this
particular web site. Furthermore, Consultant agrees to assign and does
hereby assign to ARI, is successors and /or assigns, all intellectual
property rights in and to the finished assembled work of the web site.
b. Proprietary Rights. In no way limiting to Section 4.a above, Consultant
agrees that all copyrights and other proprietary rights, including, but
not limited to, all patents, trademarks, moral rights, trade secrets
rights with respect to any work including any inventions, discoveries,
concepts, ideas or information conceived by Consultant with respect to
the web site ("Proprietary Rights") that are paid for by ARI or
designed or developed by Consultant in connection with this Agreement,
are owned by ARI and Consultant hereby irrevocably assigns to ARI all
right, title and interest in such copyrights and other Proprietary
Rights.
5. INDEMNIFICATION. ARI agrees that it shall defend, indemnify, save and hold
Consultant harmless from any and all demands, liabilities, losses, costs
and claims, including reasonable attorney's fees, ("Liabilities") asserted
against Consultant, its officers and employees, that may arise or result
from any service provided or performed or agreed to be performed or any
product sold by ARI, its agents, employees or assigns. ARI agrees to
defend, indemnify and hold harmless Consultant against any Liabilities
arising out of any injury to person or property caused by any products or
services sold or otherwise distributed in connection with Consultant's
service, any material supplied by ARI infringing on the proprietary rights
of a third party, copyright infringement, and any defective product which
ARI has sold in the web site.
6. LAWS AFFECTING ELECTRONIC COMMERCE. ARI agrees that ARI is solely
responsible for complying with such laws, taxes, and tariffs, and will hold
harmless, protect, and defend Consultant and its subcontractors from any
claim, suit, penalty, tax, or tariff arising from ARI's use of Internet
electronic commerce.
7. CONFIDENTIALITY AND NON-DISCLOSURE. "Confidential Information" means ARI's
information not generally known by non-ARI personnel, used by ARI which is
proprietary to ARI or the disclosure of which would be detrimental to ARI.
Confidential Information includes, but is not limited to; (1) ARI's
computer software, including documentation, (2) ARI's internal personnel,
financial, marketing and other business information and manner and method
of conducting business, (3) ARI's strategic, operations and other business
plans and forecasts, and (4) confidential information provided by or
regarding ARI's employees, customers, potential customers, suppliers,
subcontractors, vendors, and other contractors.
Consultant, its employees and subcontractors agree that, except as directed by
ARI, it will not at any time during or after the term of this Agreement disclose
any Confidential Information whatsoever.
17
<PAGE> 3
8. ASSIGNMENT. Consultant shall not assign or subcontract the whole or any
part of this Agreement without ARI's prior written consent. Any subcontract
made by Consultant with the consent of ARI shall incorporate by reference
all terms of this Agreement. Consultant agrees to guarantee the performance
of any subcontractor used in performance of the services provided
hereunder.
9. STATUS AS INDEPENDENT CONTRACTOR. Consultant and ARI are contractors
independent of one another and neither party's employees will be considered
employees of the other party for any purpose. This Agreement does not
create a joint venture or partnership, and neither party has the authority
to bind the other to any third party. Any personnel supplied by consultant
hereunder are not ARI's employees or agents and Consultant assumes full
responsibility for their acts. Consultant shall be solely responsible for
the payment of compensation of the personnel hired by Consultant and such
personnel shall be informed that they are not entitled to any of ARI's
benefits. Consultant is responsible for the payment of all worker's
compensation disability benefits and unemployment insurance and for
withholding and paying employment taxes for such personnel.
10. CHOICE OF LAW AND FORUM. This Agreement shall be governed and construed in
accordance with the laws of the State of Wisconsin without regard to its
conflicts of laws or principles thereof.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
ARI and Consultant. No modification of this Agreement shall be effective
unless in writing and signed by parties.
Accepted and agreed to:
ARI Network Services, Inc. Gordon J. Bridge
/s/ Brian E. Dearing /s/ Gordon J. Bridge
- - --------------------------------- ----------------------------
Signature Signature
President, Chairman & CEO 12/9/99
- - ------------------------------------ ----------------------------
Title Date
12/9/99
- - ---------------------------
Date
18
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