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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 January 31, 2001
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 15, 2001 there were 6,168,270 shares of the registrant's shares
outstanding.
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ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JANUARY 31, 2001
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1 Financial statements
Condensed balance sheets - January 31, 2001 and July 31, 2000 3-4
Condensed statements of operations for the three and six
months ended January 31, 2001 and 2000 5
Condensed statements of cash flows for the six months ended
January 31, 2001 and 2000 6
Notes to unaudited condensed financial statements 7
Item 2 Management's discussion and analysis of financial condition and
results of operations 7-15
PART II - OTHER INFORMATION
Item 4 Submission of matters to a vote of security holders 16
Item 5 Other information 16
Item 6 Exhibits and reports on Form 8-K 16
Signatures
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ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
JANUARY 31 JULY 31
ASSETS 2001 2000
---------- -------
Current assets:
Cash and cash equivalents $ 810 $ 563
Trade receivables, less allowance for doubtful
accounts of $754 at January 31, 2001 and
$697 at July 31, 2000 3,045 3,282
Prepaid expenses and other 107 109
------- -------
Total current assets 3,962 3,954
Equipment and leasehold improvements:
Computer equipment 4,394 4,389
Leasehold improvements 239 239
Furniture and equipment 992 846
------- -------
5,625 5,474
Less accumulated depreciation and amortization 5,193 5,038
------- -------
Net equipment and leasehold improvements 432 436
Goodwill, less accumulated amortization of $1,742 at
January 31, 2001 and $1,413 at July 31,2000 1,547 1,876
Deferred financing costs, less accumulated amortization
of $126 at January 31, 2001 and $59 at July 31, 2000 293 321
Capitalized software development:
Network platform 11,467 11,467
Software products 30,257 29,317
------- -------
41,724 40,784
Less accumulated amortization 30,841 28,883
------- -------
Net capitalized software development 10,883 11,901
------- -------
TOTAL ASSETS $17,117 $18,488
======= =======
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ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
JANUARY 31 JULY 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
---------- --------
Current liabilities:
Current portion of notes payable to shareholder $ 361 $ 361
Current portion of notes payable 422 461
Accounts payable 651 836
Unearned income 3,600 3,117
Accrued payroll and related liabilities 1,730 1,182
Other accrued liabilities 1,331 1,310
Current portion of capital lease obligations 151 111
-------- --------
Total current liabilities 8,246 7,378
Long term liabilities:
Notes payable to shareholder (net of discount) 164 313
Notes payable (net of discount) 2,360 2,168
Capital lease obligations 214 233
-------- --------
Total long term liabilities 2,757 2,695
Shareholders' equity:
Cumulative preferred stock, par value $.001 per
share, 1,000,000 shares authorized;
20,350 shares issued and outstanding at
January 31, 2001 and July 31, 2000 - -
Common stock, par value $.001 per share,
25,000,000 shares authorized; 6,168,270 shares
issued and outstanding at January 31, 2001 and
July 31, 2000 6 6
Common stock warrants and options 2,459 2,459
Additional paid-in-capital 91,781 91,781
Accumulated deficit (88,132) (85,831)
-------- --------
Total shareholders' equity 6,114 8,415
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,117 $ 18,488
======== ========
See notes to unaudited condensed financial statements.
Note: The balance sheet at July 31, 2000 has been derived from the audited
balance sheet at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
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ARI NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 JANUARY 31
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues:
Subscriptions, support and transaction fees $ 2,550 $ 2,479 $ 5,102 $ 4,979
Software licenses and renewals 616 733 2,038 1,160
Professional services 694 637 1,525 1,095
-------- -------- -------- --------
3,860 3,849 8,665 7,234
Operating expenses:
Cost of products and services sold:
Subscriptions, support and transaction fees 317 403 690 721
Software licenses and renewals * 907 981 1,874 1,893
Professional services 402 408 904 772
-------- -------- -------- --------
1,626 1,792 3,468 3,386
Depreciation and amortization (exclusive of
amortization of software products included
in cost of sales) 370 412 770 856
Customer operations and support 409 541 813 1,025
Selling, general and administrative 2,200 2,115 4,433 3,920
Software development and support 830 822 1,675 1,478
-------- -------- -------- --------
Operating expenses before amounts capitalized 5,435 5,682 11,159 10,665
Less capitalized portion (508) (447) (940) (819)
-------- -------- -------- --------
Net operating expenses 4,927 5,235 10,219 9,846
-------- -------- -------- --------
Operating loss (1,067) (1,386) (1,554) (2,612)
Other expense:
Interest expense (396) (180) (767) (278)
Other, net 21 (2) 20 (6)
-------- -------- -------- --------
Total other expense (375) (182) (747) (284)
-------- -------- -------- --------
Net loss $ (1,442) $ (1,568) $ (2,301) $ (2,896)
======== ======== ======== ========
Average common shares outstanding 6,168 5,974 6,168 5,843
Basic and diluted net loss per share ($0.23) ($0.26) ($0.37) ($0.50)
======== ======== ======== ========
See notes to unaudited condensed financial statements.
* includes amortization of software products of $793, $820, $1,672 and $1,575
and excluding other depreciation and amortization shown separately
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ARI NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JANUARY 31
2001 2000
-------- --------
OPERATING ACTIVITIES
Net loss $ (2,301) $ (2,896)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of network platform 286 348
Amortization of software products 1,672 1,575
Amortization of goodwill 329 327
Amortization of deferred financing costs and debt discount 476 -
Depreciation and other amortization 155 181
Net change in receivables, prepaid expenses and other 239 (50)
Net change in accounts payable, unearned income and
accrued liabilities 867 265
-------- --------
Net cash provided by (used in) operating activities 1,723 (250)
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (10) (40)
Software products capitalized (940) (819)
-------- --------
Net cash provided by (used in) investing activities (950) (859)
FINANCING ACTIVITIES
Net borrowings under line of credit - 500
Repayments under notes payable (405) (330)
Deferred financing costs (39) -
Payments of capital lease obligations (82) (56)
Proceeds from issuance of common stock - 1,264
-------- --------
Net cash provided by (used in) financing activities (526) 1,378
-------- --------
Net increase (decrease) in cash 247 269
Cash at beginning of period 563 127
-------- --------
Cash at end of period $ 810 $ 396
======== ========
Cash paid for interest $ 291 $ 278
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for:
Furniture and equipment $ 141 $ -
Issuance of common stock as payment of line of credit - 1,000
Conversion of line of credit to note payable - 1,000
See notes to unaudited condensed financial statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JANUARY 31, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared and reviewed
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for fiscal
year end financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended January 31, 2001 are not necessarily indicative of the results that may be
expected for the fiscal year ending July 31, 2001. For further information,
refer to the financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended July 31, 2000.
2. BASIC AND DILUTED NET LOSS PER SHARE
Dilutive earnings per share is not shown as the impact is antidilutive.
3. PREFERRED STOCK
The Series A preferred stock accrues dividends on a quarterly basis,
cumulatively, at a rate per annum equal to the product of the stated value
thereof and 2% above the prime rate (minimum dividend rate of 10% and maximum of
14%). All Series A preferred stock must be redeemed at $100 per share plus
accrued and unpaid dividends prior to any payment of dividends on, or
repurchases by the Company of, the Company's common stock. Prior to August 1,
2002, dividends, if declared by the Board of Directors, can be paid in either
cash or additional shares of Series A preferred stock. The total amount of
dividends in arrears on the Series A preferred stock is $887,000 at January 31,
2001.
4. NOTES PAYABLE
The convertible debentures, issued on April 27, 2000, and accrued interest
thereon are convertible into common stock at a rate of $4 per share, subject to
certain conditions and 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 to have a value of $2,354,000 at the time of issuance, less
accumulated amortization, reduce the carrying amount of the debt.
5. DERIVATIVES
Effective August 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended, requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position measured at
fair value. The impact of the adoption of SFAS 133 was immaterial to the
Company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the quarter ended January 31, 2001 increased less than 1% from
$3,849,000 in fiscal 2000 to $3,860,000 in fiscal 2001, representing the
nineteenth of the past twenty consecutive quarters of year-over-year revenue
improvement. Management expects total revenue for the full fiscal 2001 year to
increase between 20% and 30% from fiscal 2000. Earnings improved by 9%, from a
net loss of $1,568,000, or $0.26 per share for the quarter ended January 31,
2000 to a net loss of $1,442,000 or $0.23 per share for the quarter ended
January 31, 2001. Management believes that, due to non-cash amortization of
goodwill and other intangibles from its acquisitions, full profitability will
not be achieved until fiscal 2003. Should the Company complete additional
acquisitions, non-cash amortization of intangibles could further delay full
profitability. See "Forward Looking Statements."
REVENUES
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The Company is a leading provider of Partner Relationship Management and
business-to-business Internet e-Commerce solutions for sales, service and
life-cycle product support in the manufactured equipment market. The Company
currently serves over 100 manufacturers and 20,000 dealers in more than 100
countries in 12 segments of the worldwide manufactured equipment market
including outdoor power, recreation vehicles, auto and truck parts aftermarket,
marine, construction, power sports, floor maintenance and others. The Company
builds and supports a full suite of multi-media electronic catalog publishing
and viewing software for the Web or CD. The Company's communications systems
provide a global electronic pathway for parts orders, product registrations,
warranty claims and other transactions between manufacturers and their networks
of sales and service points.
The Company also has a supplemental business that provides a variety of
electronic commerce services to non-Equipment industries such as:
transportation, agribusiness and publishing. The non-Equipment industries
generate positive cash flows for the Company but have not shown significant
growth over the past three years.
Management reviews the Company's recurring vs. non-recurring revenue in the
aggregate and within the U.S. and Canadian Equipment, International Equipment
and non-Equipment markets.
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's unaudited financial statements.
REVENUE BY INDUSTRY SECTOR
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
INDUSTRY SECTOR JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
------- -------- ------- ------- ------- -------
EQUIPMENT INDUSTRY
U.S. and Canadian
Recurring $ 2,273 $ 1,398 63% $ 4,156 $ 2,783 49%
Non-recurring 320 895 (64%) 1,702 1,462 16%
------- ------- ------- -------
Subtotal 2,593 2,293 13% 5,858 4,245 38%
International
Recurring 359 110 226% 664 184 261%
Non-recurring - 258 (100%) 17 342 (95%)
------- ------- ------- -------
Subtotal 359 368 (2%) 681 526 29%
Total Equipment Industry
Recurring 2,632 1,508 75% 4,820 2,967 62%
Non-recurring 320 1,153 (72%) 1,719 1,804 (5%)
------- ------- ------- -------
Subtotal 2,952 2,661 11% 6,539 4,771 37%
NON-EQUIPMENT INDUSTRY
Recurring 908 1,181 (23%) 2,082 2,323 (10%)
Non-recurring - 7 (100%) 44 140 (69%)
------- ------- ------- -------
Subtotal 908 1,188 (24%) 2,126 2,463 (14%)
TOTAL REVENUE
Recurring 3,540 2,689 32% 6,902 5,290 30%
Non-recurring 320 1,160 (72%) 1,763 1,944 (9%)
------- ------- ------- -------
Grand Total $ 3,860 $ 3,849 0% $ 8,665 $ 7,234 20%
======= ======= ======= =======
Recurring revenues are derived from catalog subscription fees, software
maintenance and support fees, software license renewals, network traffic and
support fees and other miscellaneous subscription fees. Non-recurring revenues
are derived from initial software license fees and professional services fees.
Recurring revenue, as a percentage of total revenue, increased from
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70% to 92% for the three months ended January 31, 2000 and 2001, respectively,
due to an increase in annual renewal revenues and lower than expected new
software license revenues in the Equipment Industry. The decrease in recurring
revenue in the U.S. and Canadian markets were primarily due to heavy turnover in
the Company's sales force and a "lag time" to hire new salespeople. The lack of
recurring revenues in the International markets was primarily due to the
Company's shift from the Equipment markets to other more lucrative markets and
the establishment of new sales leads. On a year to date basis, recurring revenue
is 80% of total revenue compared to 73% of total revenue for the same period
last year. Management believes that the remainder of the year will be more in
line with the Company's ideal relationship of approximately two thirds recurring
revenue to one third non-recurring revenue. Management believes that this
"target" ratio establishes an appropriate level of base revenue while the
Company continues to add new sales to drive future increases in recurring
revenue. This ratio is expected to fluctuate from quarter to quarter and year to
year, depending on the size and timing of new business.
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power, recreation vehicles, motorcycles, auto and truck parts after-market,
manufactured housing, farm equipment, marine, construction, power sports, floor
maintenance and others primarily in the U.S., Canada, Europe and Australia.
Management's strategy is to expand the Company's electronic parts catalog and
dealer communications software and services business with manufacturers and
distributors and their dealers in the existing vertical markets and to expand to
other similar markets in the future.
U.S. and Canada
Recurring revenues in the U.S. and Canadian Equipment Industry increased for
the three and six month periods ended January 31, 2001, compared to the same
periods last year, primarily due to increased catalog license, maintenance
and subscription renewals from the Company's growing base of customers and
the renegotiation of prior agreements from a fixed price structure to the
Company's time and materials based business model. Non-recurring revenues in
the U.S. and Canadian Equipment Industry decreased for the three month
period ended January 31, 2001, compared to the same period last year, due to
lower than expected new software license revenues, but increased for the six
month period ended January 31, 2001 compared to the same period last year,
due to new software licenses and professional services sold to dealers and
manufacturers in the first quarter of this fiscal year. Revenues in the U.S.
and Canadian Equipment Industry increased, as a percentage of total
revenues, from 59% for the six months ended January 31, 2000 to 68% for the
six months ended January 31, 2001. Management expects recurring and
non-recurring revenues in the U.S. and Canadian Equipment Industry to
increase at a higher rate than total revenues for the remainder of fiscal
2001, as management continues to focus attention and resources in this
industry.
International (Europe and Australia)
Recurring revenues in the International Equipment Industry increased for the
three and six month periods ended January 31, 2001, compared to the same
periods last year, primarily due to catalog license, maintenance and
subscription renewals from new business added last year. Non-recurring
revenues in the International Equipment Industry decreased for the three and
six month periods ended January 31, 2001 compared to the same periods last
year, due to a lack of new software sales in the first half of fiscal 2001.
Revenues in the International Equipment Industry increased, as a percentage
of total revenues, from 7% for the six months ended January 31, 2000 to 8%
for the six months ended January 31, 2001. Management expects recurring and
non-recurring revenues in the International Equipment Industry to increase
at a higher rate than total revenues for the remainder of fiscal 2001, as
management continues to focus attention and resources in this industry.
Non-Equipment Industry
The Company's business outside of the Equipment Industry includes sales of
database management services to the agricultural inputs and railroad industries,
electronic communications services to the agricultural inputs industry, and the
on-line provision of information for republication to the non-daily newspaper
publishing industry. The non-Equipment Industry business is characterized by a
base of customers with long-term relationships with the Company. Revenues in the
non-Equipment Industry decreased for the three and six month periods ended
January 31, 2001, compared to the same periods last year, due to the Company's
focus in the Equipment Industry. Management expects revenues in the
non-Equipment Industry will decline for the remainder of fiscal 2001. Management
expects that consolidation in the agricultural customer base is the reason for
the decline in recurring revenues from the agricultural inputs industry and
management believes that revenue from this market will continue to decrease in
the future as the Company reaches saturation in this market. The Company's
five-year contract with the Association of American Railroads expired on
December 31, 2000. Per quarter, the Association of American Railroads
represented approximately $250,000 of non-Equipment Industry recurring revenues.
The Company's five year contract with the Associated Press, on which its
business in the non-daily newspaper publishing industry depends, was up for
renewal in January 2001 and is currently operating on a short term renewal while
contract renegotiations are taking place.
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The Company has maintained good relations with the Associated Press, and, based
on discussions with the Associated Press, management believes that it is likely
that the contract will be renewed, although there is no assurance that this will
be the case.
COST OF PRODUCTS AND SERVICES SOLD
The following table sets forth, for the periods indicated, certain revenue and
cost of products and services sold information derived from the Company's
unaudited financial statements.
COST OF PRODUCTS AND SERVICES SOLD AS A PERCENT OF REVENUE BY REVENUE TYPE
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
------- --------- ------- ------- ------- -------
Subscriptions, support and transaction
fees
Revenue $ 2,550 $ 2,479 3% $ 5,102 $ 4,979 2%
Cost of revenue 317 403 (21%) 690 721 (4%)
Cost of revenue as a percent of revenue 12% 16% 14% 14%
Software licenses and renewals
Revenue 616 733 (16%) 2,038 1.160 76%
Cost of revenue 907 981 (8%) 1,874 1,893 (1%)
Cost of revenue as a percent of revenue 147% 134% 92% 163%
Professional services
Revenue 694 637 9% 1,525 1,095 39%
Cost of revenue 402 408 (1%) 904 772 17%
Cost of revenue as a percent of revenue 58% 64% 59% 71%
Total
Revenue $ 3,860 $ 3,849 0% $ 8,665 $ 7,234 20%
Cost of revenue 1,626 1,792 (9%) 3,468 3,386 2%
Cost of revenue as a percent of revenue 42% 47% 40% 47%
Cost of subscriptions, support and transaction fees consists primarily of
Associated Press royalties, telecommunications and catalog replication and
distribution costs. Cost of subscriptions, support and transaction fees as a
percentage of revenue decreased for the three month period ended January 31,
2001, compared to the same period last year, primarily due to lower
telecommunications costs and remained relatively consistent for the six month
period ended January 31, 2001, compared to the same period last year. Management
expects gross margins from subscriptions, support and transaction fees to
fluctuate somewhat from quarter to quarter based on the mix of products and
services sold.
Cost of software licenses and renewals consists primarily of amortization of
software products, royalties, and software distribution costs. Cost of software
licenses and renewals as a percentage of revenue varies significantly due to the
variability of new software license revenues with relatively fixed cost of
sales, primarily amortization of software costs. Cost of software licenses and
renewals as a percentage of revenue increased for the three month period ended
January 31, 2001, compared to the same period last year, primarily due to lower
software license revenues with relatively consistent amortization costs, but
decreased for the six month period ended January 31, 2001, compared to the same
period last year, due to higher software license revenues in the first quarter
of fiscal 2001. Management expects gross margins from software licenses and
renewals to fluctuate significantly from quarter to quarter based on the number
of licenses sold.
Cost of professional services consists of customization and catalog production
labor. Cost of professional services as a percentage of revenue decreased for
the three and six month periods ended January 31, 2001, compared to the same
periods last year, primarily because professional services revenue increased
from the conversion of old "fixed bid" contracts to time and materials contracts
without a corresponding increase in the cost needed to provide those services.
Management expects cost of
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professional services to fluctuate from quarter to quarter depending on the mix
of services sold and on the Company's performance towards the estimate given to
customers for customization projects.
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)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
------- -------- ------- ------- ------- -------
Cost of products and services sold $ 1,626 $ 1,792 (9%) $ 3,468 $ 3,386 2%
Customer operations and support 409 541 (24%) 813 1,025 (21%)
Selling, general and administrative 2,200 2,115 4% 4,433 3,920 13%
Software development and support 830 822 1% 1,675 1,478 13%
------- -------- ------- -------
5,065 5,270 (4%) 10,389 9,809 6%
Depreciation and amortization 370 412 (10%) 771 856 (10%)
Less capitalized portion (508) (447) 14% (940) (819) 15%
------- -------- ------- -------
Net operating expenses $ 4,927 $ 5,235 (6%) $10,220 $ 9,846 4%
======= ======== ======= =======
Customer operations and support consists primarily of data center operations,
software maintenance agreements for the Company's core network, catalog data
maintenance and customer support costs. Customer operations and support costs
decreased for the three and six month periods ended January 31, 2001, compared
to the same periods last year, due to classifying direct labor costs, which were
not tracked prior to the integration of the NDI acquisition, to direct cost of
sales in the catalog production area of professional services.
The increase in selling, general and administrative expenses ("SG&A") for the
three and six month periods ended January 31, 2001, compared to the same periods
last year, was primarily due to increased bonuses and commissions associated
with the increased sales and to the addition of a senior level financial
consultant. SG&A, as a percentage of revenue, decreased from 54% for the six
month period ended January 31, 2000 to 51% for the six month period ended
January 31, 2001. Management expects costs to continue to increase in SG&A for
the remainder of fiscal 2001, as the Company's revenues grow, but the increase
is expected to be at a slower rate than revenues.
The Company's technical staff (in-house and contracted) performs both software
development and support and software customization services for customer
applications. Therefore, management expects fluctuations between software
customization services and development expenses quarter to quarter, as the mix
of development and customization activities will change based on customer
requirements. Software development and support costs increased for the six month
period ended January 31, 2001, compared to the same period last year, primarily
due to an increase in resources focused on development of Web-based
communications and cataloging software. Management expects software development
and support costs to continue to increase for the remainder of fiscal 2001, but
at a slower rate than revenues.
Depreciation and amortization expense decreased slightly for the three and six
month periods ended January 31, 2001, compared to the same periods last year.
Management expects depreciation and amortization to remain relatively consistent
for the remainder of fiscal 2001, providing there are no additional
acquisitions.
Capitalized software development costs represented 56% of software development
and support for the six month period ended January 31, 2001, compared to 55% for
the same period last year. Management expects capitalized software development
to fluctuate from quarter to quarter depending on the deployment of the
Company's resources between software development available for capitalization
and customer customizations.
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OTHER ITEMS
Net loss decreased for the three and six month periods ended January 31, 2001,
compared to the same periods last year, due to revenues increasing at a higher
rate than costs. As the Company continues its acquisition program, non-cash
amortization of goodwill and other intangible assets from the Company's
acquisitions may cause net losses to continue even if net cash provided by
operations and used in investing activities is positive.
Cash paid for interest increased for the three and six month periods ended
January 31, 2001, compared to the same periods last year, primarily due to
increased utilization of the RFC Facility. Non-cash interest expense was
incurred for the three and six month periods ended January 31, 2001 as the
Company accrued interest and amortized debt discount for the Debenture sold to
Rose Glen in April 2000. Management expects cash paid for interest to decrease
as the Company continues to pay off debt and non-cash interest expense to
increase, compared to the prior year, as the Company accrues and amortizes
non-cash interest expense associated with the Debenture. See "Liquidity and
Capital Resources."
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)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
------- ------- ------- ------- -------- -------
Net cash provided by (used in) operating
activities before changes in working
capital $ (43) $ (336) 87% $ 617 $ (465) 347%
Net cash provided by (used in)
investing activities (500) (480) (4%) (950) (859) (11%)
------ ------- ------ -------
Subtotal (543) (816) 33% (333) (1,324) 75%
Effect of net changes in working capital 1,356 (1,063) 228% 1,106 215 414%
------ ------- ------ -------
Net cash provided by (used in)
operating and investing activities $ 813 $(1,879) 143% $ 773 $(1,109) 170%
====== ======= ====== =======
Management analyzes the Company's cash flow by breaking it down into three
components: (i) net cash provided by (used in) operating activities before
changes in working capital, which is a measure of the cash generating capability
of the Company's business; (ii) net cash used in investing activities, which is
a measure of the Company's investment in products and infrastructure for the
future; and (iii) effect of changes in working capital, which is primarily
driven by the timing of payments and invoicing relative to the end of a
reporting period.
Total cash flows from operating and investing activities improved for the
three and six month periods ending January 31, 2001, compared to the same
periods last year, because of increased cash flows from operations before
working capital changes. The analysis reveals that the primary reason for the
Company's cash flow performance is the performance of its underlying business,
rather than changes in investment or working capital timing.
Net cash provided by operating activities before changes in working capital
increased for the three and six months ended January 31, 2001, compared to the
same periods last year, due to revenues increasing at a higher rate than
expenses. Net cash used in investing activities increased for the three and six
months ended January 31, 2001, compared to the same periods last year, primarily
due to increased costs attributable to the development of the Company's
Web-based software. The effect of net changes in working capital is dependent on
the timing of payroll and other cash disbursements and accruals and may vary
significantly from quarter to quarter. Management expects cash provided by
operating activities to remain positive for the remainder of fiscal 2001,
however, there can be no assurance that these results will be ultimately
achieved.
The Company expects to continue to incur operating losses for the fiscal year
ending July 31, 2001 due to non-cash expenses. Although there can be no
assurance that profitability will be achieved thereafter, management expects to
achieve full profitability before the end of fiscal 2003, provided there are no
additional acquisitions.
At January 31, 2001, the Company had cash and cash equivalents of approximately
$810,000 compared to approximately $563,000 at July 31, 2000.
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The following table sets forth, for the periods indicated, certain information
related to the Company's debt derived from the Company's unaudited financial
statements.
DEBT SCHEDULE
(IN THOUSANDS)
JANUARY 31 JULY 31
2001 2000 NET
(UNAUDITED) (AUDITED) CHANGE
----------- --------- ------
Debt to Shareholder:
Current portion of notes payable $ 361 $ 361 $ -
Long-term portion of notes payable 222 389 (167)
Debt discount (common stock warrants) (58) (76) 18
------- ------- ------
Total Debt to Shareholder 525 674 (149)
Subordinated Debenture:
Long-term notes payable other 4,000 4,000 -
Debt discount (common stock warrants and options) (1,767) (2,158) 391
------- ------- ------
Total Subordinated Debenture 2,233 1,842 391
Other Debt:
Current portion of notes payable other 422 461 (39)
Long-term notes payable other 127 326 (199)
------- ------- ------
Total Other Debt 549 787 (238)
------- ------- ------
Total Debt $ 3,307 $ 3,303 $ 4
======= ======= ======
On April 27, 2000, the Company issued and sold pursuant to a Securities Purchase
Agreement, dated as of April 25, 2000, by and among the Company and RGC
International Investors, LDC (the "Investor"), (i) a convertible subordinated
debenture in the amount of Four Million Dollars ($4,000,000) due on April 27,
2003 (the "Debenture"), and convertible into shares of the Company's common
stock, $.001 par value per share (the "Common Stock"), (ii) warrants to purchase
Six Hundred Thousand (600,000) shares of Common Stock (the "Warrants"), and
(iii) an investment option to purchase Eight Hundred Thousand (800,000) shares
of Common Stock (the "Investment Option"). The Investment Option expires on
October 27, 2001 and the Warrants expire on April 27, 2005. The Debenture is
convertible into Common Stock at $4 per share and the Warrants and Investment
Option are exercisable at $6 per share. At any time after October 27, 2000, the
Company can require the Investor to convert the amount owed under the Debenture
into Common Stock at $4.00 per share provided that: (i) the closing bid price of
the Common Stock has been greater than $6.60 for twenty (20) consecutive trading
days and (ii) the Company's resale registration statement has been effective for
at least three (3) months. The resale registration became effective on September
1, 2000. At any time after April 27, 2001, the Company can require the Investor
to exercise the Investment Option if the closing bid price of the Common Stock
is greater than $9.90 for twenty (20) consecutive trading days and the Company's
resale registration statement has been effective for at least three (3) months.
If exercised, the Investment Option would contribute an additional Four Million
Eight Hundred Thousand Dollars ($4,800,000) of working capital to the Company.
ARI has a $1.0 million line of credit with WITECH (the "WITECH Line") that has
been in place since October 4, 1993. The WITECH Line expires on December 31,
2001. The WITECH Line bears interest at prime plus 2.0%. As of January 31, 2001
there were no amounts outstanding under the WITECH Line. In conjunction with
obtaining the WITECH Line, since 1993, ARI has issued to WITECH 350 shares of
its non-voting cumulative preferred stock and total warrants for the purchase of
up to 280,000 shares of its common stock, including (i) warrants for the
purchase of 250,000 shares at $2.125 per share and (ii) warrants for the
purchase of 30,000 shares of its common stock at $4.00 per share. The exercise
price under the warrants is reduced if ARI issues stock at less than the then
current exercise price. WITECH also purchased 20,000 shares of non-voting
cumulative preferred stock on July 15, 1997. Of the 280,000 warrants to purchase
shares of Common Stock issued to WITECH; (i) warrants to purchase 175,000 shares
of Common Stock at $2.125 expired on October 1, 2000; (ii) warrants to purchase
75,000 shares of Common Stock at $2.125 expire on January 1, 2002; and (iii)
warrants to purchase 30,000 shares of Common Stock at $4.000 expire on October
1, 2006.
The only financial covenant in the WITECH Credit Facility is that ARI must
maintain a net worth (calculated in accordance with generally accepted
accounting principles) of at least $5.3 million. ARI has been, and is currently,
in compliance with the financial covenant in the Agreement and currently expects
to comply with such covenant or obtain any required waivers or raise additional
equity, if necessary.
In connection with both the subordinated debenture and the WITECH Line, the
Company recognizes amortization of a debt discount, the gross amount of which is
the value of the warrants and options issued as partial consideration for the
terms of the
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debt instrument. The amortization of the debt discount appears as non-cash
interest expense on the statement of operations and the net value of the debt
discount reduces the carrying value of the debt on the balance sheet.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each $1.0
million increase. Under the Sale Agreement, RFC purchases 90% of eligible
receivables. ARI is obligated to pay a monthly program fee equal to the greater
of (a) $3,000 or (b) the amount of the purchased but uncollected receivables
times the prime rate plus 2%. ARI may terminate the Sale Agreement prior to
three years by paying: 3.0% of the Purchase Commitment during the first year;
2.0% of the Purchase Commitment during the second year; and 1.0% of the Purchase
Commitment during the third year. The balance of the RFC Facility at January 31,
2001 was $973,000.
Management believes that funds generated from operations and proceeds from the
Debenture, the WITECH Line and the RFC Facility will be adequate to fund the
Company's operations and investments through fiscal 2001. Management may
consider the acquisition of strategic investment partners and the sale of
additional securities as sources of funding for investment opportunities that
may arise. On a long-term basis, management believes that cash for operations as
well as for capital expenditures will come principally from cash generated from
operations.
The following table sets forth, for the periods indicated, certain earnings
information derived from the Company's unaudited financial statements.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
------- ------- ------- ------- ------- -------
Net loss $(1,442) $(1,568) 8% $(2,301) $(2,896) 21%
Interest (cash) 230 180 28% 291 278 5%
Interest (non-cash) 166 - 100% 476 - 100%
Amortization of software products 793 820 (3%) 1,672 1,575 6%
Other depreciation and amortization 370 412 (10%) 770 856 (10%)
-------- ------- ------- -------
Earnings before interest, taxes,
depreciation and amortization $ 117 $ (156) 174% $ 908 $ (187) 586%
======== ======= ======= =======
The Company believes that earnings before interest, taxes, depreciation and
amortization ("EBITDA") is generally accepted as providing useful information
regarding a company's ability to service and/or incur debt. EBITDA increased for
the three and six month periods ended January 31, 2001, compared to the same
periods last year, due primarily to the Company's improvement in earnings.
Management expects EBITDA to continue to remain positive for the remainder of
fiscal 2001, although there can be no assurance that these results will be
ultimately achieved. As the Company continues its acquisition program, non-cash
amortization of goodwill and other intangible assets from the Company's
acquisitions may cause net losses to continue even if EBITDA is positive.
We have included data with respect to EBITDA because it is commonly used as a
measurement of financial performance and by investors to analyze and compare
companies on the basis of operating performance. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and should
not be considered an alternative to operating income, as determined in
accordance with generally accepted accounting principles, as an indictor of our
operating performance, or to cash flows from operating activities, as determined
in accordance with generally accepted accounting principles, as a measure of our
liquidity. EBITDA is not necessarily comparable with similarly titled measures
for other companies.
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ACQUISITIONS
Since December 1995, the Company has had a formal and aggressive business
development program aimed at identifying, evaluating and closing acquisitions
that augment and strengthen the Company's market position, product offerings,
and personnel resources. Since the program's inception, approximately 300
acquisition candidates have been evaluated, resulting in four completed
acquisitions.
------------------------------------------------------------------------------------------------------
ACQUISITION DATE ACQUIRED COMPANY AND LOCATION DESCRIPTION OF ACQUIRED COMPANY
------------------------------------------------------------------------------------------------------
November 4, 1996 cd\*.IMG, Inc. ("CDI") CDI developed the Plus(1)(R) electronic
New Berlin, WI parts catalog, which featured parts
information from over 20
manufacturers in the outdoor power,
marine, motorcycle and power sports
industries.
------------------------------------------------------------------------------------------------------
September 30, 1997 Empart Technologies, Inc. ("EMPART") EMPART provided us with the
Foster City, CA EMPARTpublisher and EMPARTviewer
software.
------------------------------------------------------------------------------------------------------
September 15, 1998 POWERCOM-2000 ("POWERCOM"), a POWERCOM provided electronic catalog
subsidiary of Briggs & Stratton and communication services to a
Corporation number of manufacturers in North
Colorado Springs, CO America, Europe, and Australia in
the outdoor power, power tools, and
power sports industries.
------------------------------------------------------------------------------------------------------
May 13, 1999 Network Dynamics Incorporated ("NDI") NDI provided us with the PartSmart
Williamsburg, VA electronic catalog, which was used by
over 10,000 dealers to view catalogs
from 50 different manufacturers in 6
sectors of the Equipment Industry.
------------------------------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
Certain statements contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward looking statements,
including, without limitation, statements with respect to growth plans,
projected sales, revenues, earnings and costs and product development schedules
and plans. Other forward looking information includes (i) information included
or incorporated by reference in our future filings with the Commission
including, without limitation, statements with respect to growth plans,
projected sales, revenues, earnings and costs, and product development schedules
and plans and (ii) information contained in written material, releases and oral
statements issued by us, or on our behalf, including, without limitation,
statements with respect to growth plans, projected sales, revenues, earnings and
costs, and product development schedules and plans. Generally, the words
"anticipates," "believes," "expects," "intends" and similar expressions identify
forward looking statements. The Company's actual results may differ materially
from those contained in the forward looking statements identified above. Factors
which may cause such a difference to occur, include, but are not limited to,
those factors set forth in the section entitled "Risk Factors," in the Company's
registration statement on Form S-3 filed on May 12, 2000, as amended.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2000 Annual Meeting of Shareholders on December 14,
2000.
(b) Votes cast for the election of directors to serve until the 2003 Annual
Shareholder's Meeting were as follows:
Nominee Votes For Votes Against
------- --------- -------------
Gordon J. Bridge 4,893,960 0
Ted C. Feierstein 4,902,965 0
Votes cast for the ratification of the appointment of D. Bruce Merrifield,
Jr. to serve as a director until the 2002 Annual Shareholder's meeting were
as follows:
For 4,897,014
Against 0
Abstained 223,883
Broker Non-Vote 0
Directors whose terms of office continue past the 2000 Annual Meeting of
Shareholders are: Francis Brzezinski, Brian E. Dearing, D. Bruce Merrifeld,
Jr. and Richard W. Weening.
Votes cast to approve the 2000 Stock Option Plan were as follows:
For 3,154,643
Against 270,607
Abstained 19,269
Broker Non-Vote 1,676,378
Votes cast to approve the 2000 Employee Stock Purchase Plan were as
follows:
For 3,354,753
Against 71,354
Abstained 18,412
Broker Non-Vote 1,676,378
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 5,083,860
Against 15,185
Abstained 21,852
ITEM 5. OTHER INFORMATION
On January 18, 2001 Mr. Fran Brzezinski tendered his resignation as a director,
effective February 28, 2001, in light of other pressing business commitments. On
March 15, 2001, the Board appointed Mr. David C. Storm to fill the vacancy
created by Mr. Brzezinski's resignation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
b) Reports on Form 8-K.
On November 13, 2000, a Report on Form 8-K with respect to Item 9
of Form 8-K was filed.
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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 19, 2001 /s/ Brian E. Dearing
Brian E. Dearing, Chairman ----------------------------------------
of the Board (and acting CFO)
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