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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________to________________
Commission file number 000-19608
ARI Network Services, Inc.
--------------------------
(Exact name of registrant as specified in its charter.)
WISCONSIN 39- 1388360
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
330 E. Kilbourn Avenue, Milwaukee, Wisconsin 53202
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(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 May 25, 2001, there were 6,184,281 shares of the registrant's shares
outstanding.
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ARI NETWORK SERVICES, INC.
NOTE REGARDING AMENDED FORM 10-Q
The Company is making this filing to show, among other things, the effect of the
restatement of our financial statements noted below. For current information on
ARI Network Services, Inc., please refer to other recent filings with the
Securities and Exchange Commission.
The Company sells licenses or license renewals and maintenance service
agreements to most of its customers for the software products sold to them. The
Company had previously recognized revenues related to the license fees at the
time of delivery and license renewals at the time of renewal. Following
discussions with the staff of the Securities and Exchange Commission, the
Company revised its revenue recognition policy for transactions entered into
after August 1, 1999, to recognize revenues resulting from these licenses and
renewals over the term of the arrangement, which is generally twelve months.
As a result of this revision, the Company has restated its financial statements
as of and for the three months ended October 31, 2000 and 1999. As a result of
this revision, the Company's revenues have decreased and net loss has increased
for the three months ended October 31, 2000 and 1999 by $663,000 or $0.11 per
share and $330,000 or $0.06 per share, respectively.
The Company has reclassified amortization of industry specific applications from
depreciation and amortization to cost of products and services sold for all
periods shown. This has no impact on earnings.
To give effect to the above restatement, the Company is amending only the
following sections of the Report on Form 10-Q:
Part I, Item. Financial Statements
Part I, Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
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ARI NETWORK SERVICES, INC.
FORM 10-Q/A
FOR THE THREE MONTHS ENDED OCTOBER 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
Page
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Item 1 Financial statements
Condensed balance sheets - October 31, 2000 and July 31, 2000 4-5
Condensed statements of operations for the three months ended
October 31, 2000 and 1999 6
Condensed statements of cash flows for the three months ended
October 31, 2000 and 1999 7
Notes to unaudited condensed financial statements 8-9
Item 2 Management's discussion and analysis of financial condition and results
of operations 9-17
Signatures 18
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ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(RESTATED AND UNAUDITED)
OCTOBER 31 JULY 31
ASSETS 2000 2000
---------- ----------
Current assets:
Cash and cash equivalents $ 299 $ 563
Trade receivables, less allowance for doubtful accounts of $746
at October 31, 2000 and $697 at July 31, 2000 3,585 3,282
Prepaid expenses and other 106 109
---------- ----------
Total current assets 3,990 3,954
Equipment and leasehold improvements:
Computer equipment 4,394 4,389
Leasehold improvements 239 239
Furniture and equipment 967 846
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5,600 5,474
Less accumulated depreciation and amortization 5,130 5,038
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Net equipment and leasehold improvements 470 436
Goodwill, less accumulated amortization of $1,578 at October 31,
2000 and $1,413 at July 31, 2000 1,711 1,876
Deferred financing costs, less accumulated amortization of $94 at
October 31, 2000 and $59 at July 31, 2000 316 321
Capitalized software development:
Network platform 11,467 11,467
Software products 29,749 29,317
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41,216 40,784
Less accumulated amortization 29,905 28,883
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Net capitalized software development 11,311 11,901
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TOTAL ASSETS $ 17,798 $ 18,488
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ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(RESTATED AND UNAUDITED)
OCTOBER 31 JULY 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 2000
---------- ----------
Current liabilities:
Current portion of notes payable to shareholder $ 361 $ 361
Current portion of notes payable 492 461
Accounts payable 634 836
Unearned income 5,031 4,373
Accrued payroll and related liabilities 1,325 1,182
Other accrued liabilities 1,424 1,310
Current portion of capital lease obligations 148 111
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Total current liabilities 9,415 8,634
Long term liabilities:
Notes payable to shareholder (net of discount) 239 313
Notes payable (net of discount) 2,253 2,168
Capital lease obligations 254 214
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Total long term liabilities 2,746 2,695
Shareholders' equity:
Cumulative preferred stock, par value $.001 per share, 1,000,000 shares
authorized; 20,350 shares issued and outstanding at October 31, 2000 and
July 31, 2000 -- --
Common stock, par value $.001 per share, 25,000,000 shares authorized;
6,168,270 shares issued and outstanding at October 31, 2000 and July 31, 2000 6 6
Common stock warrants and options 2,459 2,459
Additional paid-in-capital 91,781 91,781
Accumulated deficit (88,609) (87,087)
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Total shareholders' equity 5,637 7,159
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,798 $ 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)
(RESTATED AND UNAUDITED)
THREE MONTHS ENDED
OCTOBER 31
2000 1999
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Net revenues:
Subscriptions, support and transaction fees $ 2,552 $ 2,500
Software licenses and renewals 759 97
Professional services 831 458
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4,142 3,055
Operating expenses:
Cost of products and services sold:
Subscriptions, support and transaction fees 373 318
Software licenses and renewals * 967 912
Professional services 502 364
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1,842 1,594
Depreciation and amortization (exclusive of amortization of
software products included in cost of sales) 400 444
Customer operations and support 404 484
Selling, general and administrative 2,233 1,805
Software development and support 845 656
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Operating expenses before amounts capitalized 5,724 4,983
Less capitalized portion (432) (372)
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Net operating expenses 5,292 4,611
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Operating loss (1,150) (1,556)
Other expense:
Interest expense (371) (98)
Other, net (1) (4)
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Total other expense (372) (102)
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Net loss $ (1,522) $ (1,658)
========== ==========
Average common shares outstanding 6,168 5,712
Basic and diluted net loss per share $ (0.25) $ (0.29)
========== ==========
See notes to unaudited condensed financial statements.
*includes amortization of software products of $879 and $755 and excludes other
depreciation and amortization shown separately.
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ARI NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(RESTATED AND UNAUDITED)
THREE MONTHS ENDED
OCTOBER 31
2000 1999
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OPERATING ACTIVITIES
Net loss $ (1,522) $ (1,658)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of network platform 143 174
Amortization of software products 879 755
Amortization of goodwill 165 163
Amortization of deferred financing costs and debt discount 240 --
Depreciation and other amortization 92 107
Net change in receivables, prepaid expenses and other (300) 1,489
Net change in accounts payable, unearned income and
accrued liabilities 713 119
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Net cash provided by (used in) operating activities 410 1,149
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (18) (6)
Development of software products (432) (373)
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Net cash provided by (used in) investing activities (450) (379)
FINANCING ACTIVITIES
Net payments under line of credit -- (202)
Net payments under notes payable (163) (10)
Deferred financing costs (30) --
Payments of capital lease obligations (31) (33)
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Net cash provided by (used in) financing activities (224) (245)
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Net increase (decrease) in cash (264) 525
Cash at beginning of period 563 127
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Cash at end of period $ 299 $ 652
========== ==========
Cash paid for interest $ 61 $ 98
========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for:
Furniture and equipment $ 108 $ --
Issuance of common stock as payment of line of credit -- 1,000
See notes to unaudited condensed financial statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(RESTATED AND UNAUDITED)
OCTOBER 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared and reviewed
in accordance with accounting principles generally accepted in the United States
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for fiscal year end financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended October 31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending July 31, 2001. For further information,
refer to the financial statements and footnotes thereto included in the
Company's annual report on Form 10-K/A for the year ended July 31, 2000.
2. BASIC AND DILUTED NET LOSS PER SHARE
Dilutive earnings per share is not shown as the impact is antidilutive.
3. PREFERRED STOCK
The Series A preferred stock accrues dividends on a quarterly basis,
cumulatively, at a rate per annum equal to the product of the stated value
thereof and 2% above the prime rate (minimum dividend rate of 10% and maximum of
14%). All Series A preferred stock must be redeemed at $100 per share plus
accrued and unpaid dividends prior to any payment of dividends on, or
repurchases by the Company of, the Company's common stock. Prior to August 1,
2002, dividends, if declared by the Board of Directors, can be paid in either
cash or additional shares of Series A preferred stock. The total amount of
dividends in arrears on the Series A preferred stock is $804,000 at October 31,
2000.
4. NOTES PAYABLE
The convertible debentures, issued on April 27, 2000, and accrued interest
thereon are convertible into common stock at a rate of $4 per share, subject to
certain adjustments. Concurrent with the issuance of the debentures, the Company
issued the investors 600,000 common stock purchase warrants expiring April 27,
2005 and 800,000 investment options expiring October 27, 2001. Each of the
warrants and options are exercisable for one share of common stock at a price of
$6 per share. The warrants and options, which were originally estimated to have
a value of $2,354,000, less accumulated amortization, reduce the carrying amount
of the debt.
5. DERIVATIVES
Effective August 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended, requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position measured at
fair value. The impact of the adoption of SFAS 133 was immaterial to the
Company's financial statements.
6. RESTATEMENT
As a result of discussions with the Securities and Exchange Commission that
concluded on May 21, 2001, the Company has restated its financial statements as
of and for the three months ended October 31, 2000 and 1999 to defer revenue
recognition allocable to software licenses in multiple element arrangements
under SOP 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP
98-9. SOP 98-9, which included more restrictive requirements for establishing
vendor specific objective evidence of fair value in multiple element
arrangements, was effective for transactions entered into by the Company
beginning August 1, 1999. The net effect of the restatement for the three months
ended October 31, 2000 and 1999 was to decrease software revenue and increase
net loss by $663,000 or $0.11 per share and $330,000 or $0.06 per share,
respectively. The effect on the balance sheet as of October 31, 2000 and July
31, 2000 was an increase in unearned income and an increase in accumulated
deficit of $1,919,000 and $1,256,000, respectively.
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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
OCTOBER 31, 2000
7. SUBSEQUENT EVENTS
On March 29, 2001, the Company received a letter from the Nasdaq National Market
(Nasdaq) stating that the Company's common stock failed to maintain a minimum
market value of public float of $5 million over 30 consecutive trading days. The
Company has been provided 90 days to become compliant with this Nasdaq
requirement. On May 15, 2001, the Company received a letter from Nasdaq stating
that the Company's common stock failed to maintain a minimum bid price of $1.00
over 30 consecutive trading days. The Company has been provided 90 days to
become compliant with this Nasdaq requirement. Unless the Company demonstrates
compliance with the requirements or appeals the decisions, the Company's common
stock will be delisted from Nasdaq and trading in the Company's common stock
would thereafter be conducted in the over-the-counter markets such as the OTC
Bulletin Board.
The RGC International Investors Debenture (see liquidity) requires the Company
to maintain the listing of its common stock on Nasdaq, the Nasdaq Small Cap
Market, the New York Stock Exchange or the American Stock Exchange. Failure to
cure a violation under the Debenture within 10 days is considered a default
which would result in the subordinated debenture becoming due and payable at
130% of the outstanding principal and accrued interest balances, as well as, an
increase in the stated interest rate from 7% to 17%.
The Company's loan agreement with a shareholder (see liquidity) requires
maintenance of a minimum net worth of $5.3 million at all times. As of January
31, 2001, the Company is in violation of this covenant, resulting in the note
payable to shareholder and line of credit payable to shareholder being due and
payable. The line of credit expires December 31, 2001. The Company is in
discussions with the shareholder to reduce the net worth requirement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the quarter ended October 31, 2000 increased $1,087,000 or 36%
compared to the same period last year, representing the eighteenth of the past
nineteen consecutive quarters of year-over-year revenue improvement. All of the
improvement was in the manufactured equipment industry. Earnings improved 8%
from a net loss of $1,658,000, or $0.29 per share for the quarter ended October
31, 1999 to a net loss of $1,522,000 or $0.25 per share for the quarter ended
October 31, 2000.
REVENUES
The Company is a leading provider of Partner Relationship Management and
business-to-business Internet e-Commerce solutions for sales, service and
life-cycle product support in the manufactured equipment market. The Company
currently serves over 100 manufacturers and 20,000 dealers in more than 100
countries in 12 segments of the worldwide manufactured equipment market
including outdoor power, recreation vehicles, auto and truck parts aftermarket,
marine, construction, power sports, floor maintenance and others. The Company
builds and supports a full suite of multi-media electronic catalog publishing
and viewing software for the Web or CD/DVD. The Company's communications systems
provide a global electronic pathway for parts orders, product registrations,
warranty claims and other transactions between manufacturers and their networks
of sales and service points.
The Company also has a supplemental business that provides a variety of
electronic commerce services to non-Equipment industries such as transportation,
agribusiness and publishing. The non-Equipment industries generate positive cash
flows for the Company but have not shown significant growth over the past three
years.
Management reviews the Company's recurring vs. non-recurring revenue in the
aggregate and within the U.S. and Canadian Equipment, International Equipment
and non-Equipment markets.
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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
INDUSTRY SECTOR OCTOBER 31 PERCENT
2000 1999 CHANGE
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EQUIPMENT INDUSTRY
U.S. and Canadian
Recurring $ 1,631 $ 1,279 28%
Non-recurring 875 415 111%
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Subtotal 2,506 1,694 48%
International
Recurring 278 74 276%
Non-recurring 127 26 388%
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Subtotal 405 100 305%
Total Equipment Industry
Recurring 1,909 1,353 41%
Non-recurring 1,002 441 127%
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Subtotal 2,911 1,794 62%
NON-EQUIPMENT INDUSTRY
Recurring 1,184 1,131 5%
Non-recurring 47 130 (64%)
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Subtotal 1,231 1,261 (2%)
TOTAL REVENUE
Recurring 3,093 2,484 25%
Non-recurring 1,049 571 84%
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Grand Total $ 4,142 $ 3,055 36%
========== ==========
Recurring revenues are derived from catalog subscription fees, software
maintenance and support fees, software license renewals, network traffic and
support fees and other miscellaneous subscription fees. Non-recurring revenues
are derived from initial software license fees and professional services fees.
Recurring revenue, as a percentage of total revenue, decreased from 81% to 75%
for the three months ended October 31, 1999 and 2000, respectively, due to
higher new software license revenues in the Equipment Industry. This is more in
line with management's belief that a relationship of approximately two thirds
recurring revenue to one third non-recurring revenue is desirable in order to
establish an appropriate level of base revenue while continuing to add new sales
to drive future increases in recurring revenue. This revenue is expected to
fluctuate from quarter to quarter and year to year, depending on the size and
timing of new business.
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Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power, recreation vehicles, motorcycles, auto and truck parts after-market,
manufactured housing, farm equipment, marine, construction, power sports, floor
maintenance and others primarily in the U.S., Canada, Europe and Australia.
Management's strategy is to expand the Company's electronic parts catalog and
dealer communications software and services business with manufacturers and
distributors and their dealers in the existing vertical markets and to expand to
other similar markets in the future.
U.S. and Canada
Recurring revenues in the U.S. and Canadian Equipment Industry
increased for the three month period ended October 31, 2000, compared
to the same period last year, primarily due to increased catalog
license, maintenance and subscription renewals from the Company's
growing base of customers. Non-recurring revenues in the U.S. and
Canadian Equipment Industry increased for the three month period ended
October 31, 2000, compared to the same period last year, due to
increased new software licenses and professional services sold to
dealers and manufacturers. One customer, a newly signed private-label
reseller of the Company's software, accounted for approximately 10% of
total revenues in the Equipment Industry for the three months ended
October 31, 2000. Revenues in the U.S. and Canadian Equipment Industry
increased, as a percentage of total revenues, from 55% for the three
months ended October 31, 1999 to 61% for the three months ended October
31, 2000. Management expects recurring and non-recurring revenues in
the U.S. and Canadian Equipment Industry to increase at a higher rate
than total revenues for the remainder of fiscal 2001, as management
continues to focus attention and resources in this industry.
International (Europe and Australia)
Recurring revenues in the International Equipment Industry increased
for the three month period ended October 31, 2000, compared to the same
period last year, primarily due to catalog license, maintenance and
subscription renewals from new business added last year. Non-recurring
revenues in the International Equipment Industry increased for the
three month period ended October 31, 2000 compared to the same period
last year, due to the proportional recognition of software licenses
sold in fiscal 2000. Revenues in the International Equipment Industry
increased, as a percentage of total revenues, from 3% for the three
months ended October 31, 1999 to 10% for the three months ended October
31, 2000. Management expects recurring and non-recurring revenues in
the International Equipment Industry to increase at a higher rate than
total revenues for the remainder of fiscal 2001, as management
continues to focus attention and resources in this industry.
Non-Equipment Industry
The Company's business outside of the Equipment Industry includes sales of
database management services to the agricultural inputs and railroad industries,
electronic communications services to the agricultural inputs industry, and the
on-line provision of information for republication to the non-daily newspaper
publishing industry. The non-Equipment Industry business is characterized by a
base of customers with long-term relationships with the Company. Revenues in the
non-Equipment Industry decreased for the three month period ended October 31,
2000, compared to the same period last year, due to the Company's focus in the
Equipment Industry. Management expects revenues in the non-Equipment Industry
will decline for the remainder of fiscal 2001. The Company's five-year contract
with the Association of American Railroads expired on December 31, 2000. Per
quarter, the Association of American Railroads represented approximately
$250,000 of non-Equipment Industry recurring revenues. Our five-year contract
with the Associated Press, on which our business in the non-daily newspaper
publishing industries depends, expired in December 2000 and was extended to
September 14, 2001. Management is currently negotiating with the Associated
Press to renew the contract, and, based on discussions we have had, management
believes that if the contract is renegotiated, margins are likely to decline,
although there is no assurance that the contract will be renewed.
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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
OCTOBER 31 PERCENT
2000 1999 CHANGE
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Subscriptions, support and transaction fees
Revenue $ 2,552 $ 2,500 2%
Variable cost of revenue 373 318 17%
Variable cost of revenue as a percent of revenue 15% 13%
Software licenses and renewals
Revenue 759 97 682%
Variable cost of revenue 967 912 6%
Variable cost of revenue as a percent of revenue 127% 940%
Professional services
Revenue 831 458 81%
Variable cost of revenue 502 364 38%
Variable cost of revenue as a percent of revenue 60% 79%
Total
Revenue $ 4,142 $ 3,055 36%
Variable cost of revenue 1,842 1,594 16%
Variable cost of revenue as a percent of revenue 44% 52%
Cost of subscriptions, support and transaction fees consists primarily of
royalties, telecommunications and catalog replication and distribution costs.
Cost of subscriptions, support and transaction fees as a percentage of revenue
increased for the three month period ended October 31, 2000, compared to the
same period last year, primarily due to the completion of the recognition of
deferred revenues last year associated with the Powercom acquisition which had
minimal corresponding costs associated with them, thereby inflating the margin
for the prior period. Management expects gross margins from subscriptions,
support and transaction fees to fluctuate from quarter to quarter based on the
mix of products and services sold.
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 and relatively fixed cost of sales,
which comprises primarily amortization of software products. Cost of software
licenses and renewals as a percentage of revenue decreased for the three month
period ended October 31, 2000, compared to the same period last year, primarily
due to the sale of software licenses . Management expects gross margins from
software licenses and renewals to fluctuate from quarter to quarter based on the
mix of products and services 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 month period ended October 31, 2000, compared to the same period last
year, primarily due to the delivery of customized software that had estimated
costs accrued in the fourth quarter of fiscal 2000 that were in excess of actual
costs needed to complete the customizations. These over-accruals were reversed
in this quarter. Management expects variable cost of professional services to be
between 60% and 80%, depending on the mix of services sold.
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OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's unaudited financial statements.
OPERATING EXPENSES
(IN THOUSANDS)
THREE MONTHS ENDED
OCTOBER 31 PERCENT
2000 1999 CHANGE
---------- ----------
Cost of products and services sold $ 1,842 $ 1,594 16%
Customer operations and support 404 484 (17%)
Selling, general and administrative 2,233 1,805 24%
Software development and support 845 656 29%
Depreciation and amortization (exclusive of
amortization of software products included in cost of sales) 400 444 (10%)
Less capitalized portion (432) (372) 16%
---------- ----------
Net operating expenses $ 5,292 $ 4,611 15%
========== ==========
The increase in net operating expenses for the three month period ended October
31, 2000, compared to the same period last year, was primarily due to an
increase in sales and marketing expense in order to facilitate an increase in
sales.
Customer operations and support consists primarily of data center operations,
software maintenance agreements for the Company's core network, catalog data
maintenance and customer support costs. Customer operations and support costs
for the three month period ended October 31, 2000 decreased over the same period
last year due to classifying direct labor costs, which were not tracked prior to
the integration of the NDI acquisition, to direct cost of sales in the catalog
production area.
The increase in selling, general and administrative expenses ("SG&A") for the
three month period ended October 31, 2000, compared to the same period last
year, was primarily due to increased bonuses and commissions associated with the
increased sales and to the addition of a senior level financial consultant.
SG&A, as a percentage of revenue, decreased from 59% for the three month period
ended October 31, 1999 to 54% for the three month period ended October 31, 2000.
Management expects costs to continue to increase in SG&A for the remainder of
fiscal 2001, as the Company's revenues grow, but the increase is expected to be
at a slower rate than revenues.
The Company's technical staff (in-house and contracted) is allocated between
software development and support and software customization services for
customer applications. Therefore, management expects fluctuations between
software customization services and development expenses quarter to quarter, as
the mix of development and customization activities will change based on
customer requirements. Software development and support costs increased for the
three month period ended October 31, 2000, compared to the same period last
year, primarily due to an increase in resources focused on development of
Web-based communications and cataloging software. Management expects software
development and support costs to continue to increase for the remainder of
fiscal 2001, but at a slower rate than revenues.
Depreciation and amortization expense decreased for the three month period ended
October 31, 2000, compared to the same period last year. Management expects
depreciation and amortization to remain relatively consistent for the remainder
of fiscal 2001, barring any additional acquisitions.
Capitalized software development costs represented 51% of software development
and support for the three month period ended October 31, 2000, compared to 57%
for the same period last year, due to the fact that the Company's development
resources were focused more on software customization projects.
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OTHER ITEMS
Net loss decreased for the three month period ended October 31, 2000, compared
to the same period last year, due to revenues increasing at a higher rate than
costs. As the Company continues its acquisition program, non-cash amortization
of goodwill and other intangible assets from the Company's acquisitions may
cause net losses to continue..
Cash paid for interest decreased for the three month period ended October 31,
2000, compared to the same period last year, primarily due to decreased lending
under the WITECH line. Non-cash interest expense was incurred for the three
month period ended October 31, 2000 as the Company accrued interest and
amortized debt discount in relation to the Debenture sold to Rose Glen.
Management expects cash paid for interest to decrease as the Company continues
to pay off debt and non-cash interest expense to increase, compared to the prior
year, as the Company accrues and amortizes non-cash interest expense associated
with the Debenture. See "Liquidity and Capital Resources."
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
OCTOBER 31 PERCENT
2000 1999 CHANGE
---------- ----------
Net cash provided by (used in) operating activities
before changes in working capital $ (3) $ (459) 99
Net cash provided by (used in) investing activities (450) (379) (19%)
---------- ----------
Subtotal (453) (838) 46
Effect of net changes in working capital 413 1,608 (74%)
---------- ----------
Net cash provided by (used in) operating and
investing activities $ (40) $ 770 (105%)
========== ==========
Net cash used in operating activities before changes in working capital
decreased for the three months ended October 31, 2000, compared to the same
period last year, due to revenues increasing at a higher rate than expenses. Net
cash used in investing activities increased for the three months ended October
31, 2000, compared to the same period last year, primarily due to increased
costs attributable to the development of the Company's Web-based software. The
effect of net changes in working capital is dependent on the timing of payroll
and other cash disbursements, accruals and the timing of invoices, and may vary
significantly from quarter to quarter. Management expects cash provided by
operating activities to be positive for the fiscal year ended July 31, 2001,
however, there can be no assurance that these results will be ultimately
achieved.
The Company expects to continue to incur operating losses for the fiscal year
ending July 31, 2001 due to non-cash expenses. Although there can be no
assurance that profitability will be achieved thereafter, management expects to
achieve full profitability before the end of fiscal 2003, barring additional
acquisitions.
At October 31, 2000, the Company had cash and cash equivalents of approximately
$299,000 compared to approximately $563,000 at July 31, 2000.
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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)
OCTOBER 31 JULY 31
2000 2000 NET
(UNAUDITED) (AUDITED) CHANGE
---------- ---------- ----------
Debt to Shareholder:
Current portion of notes payable $ 361 $ 361 $ --
Long-term portion of notes payable 306 389 (83)
Debt discount (common stock warrants) (67) (76) 9
---------- ---------- ----------
Total Debt to Shareholder 600 674 (74)
Subordinated Debenture:
Long-term notes payable other 4,000 4,000 --
Debt discount (common stock warrants and options) (1,962) (2,158) 196
---------- ---------- ----------
Total Subordinated Debenture 2,038 1,842 196
Other Debt:
Current portion of notes payable other 492 461 31
Long-term notes payable other 215 326 (111)
---------- ---------- ----------
Total Other Debt 707 787 (80)
---------- ---------- ----------
Total Debt $ 3,345 $ 3,303 $ 42
========== ========== ==========
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. The Company is required to maintain listing of its common stock on the
Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange
or the American Stock Exchange; failure to meet this requirement would result in
the Debenture becoming fully due at 130% of outstanding principal and accrued
interest and an increase in the stated interest rate from 7% to 17%. 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.
The Company is currently not in compliance with the Nasdaq National Market
requirements, including the dollar minimum bid price, the $5 million public
float and $4 million net tangible asset test. If the Company is delisted, and if
the Company is unable to obtain waivers from the Investor or renegotiate the
Debenture, shareholders could be materially and adversely affected.
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 May 25, 2001
there were no amounts outstanding under the WITECH Line and $472,000 outstanding
under the WITECH term loan. 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
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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 was in compliance October
31, 2000 but is currently not in compliance with the financial covenant in the
Agreement and intends to seek a waiver. If the Company is unable to obtain a
waiver, the Company would lose an essential source of liquidity.
In connection with both the subordinated debenture and the WITECH Line, the
Company recognizes amortization of a debt discount, the gross amount of which is
the value of the warrants and options issued as partial consideration for the
terms of the debt instrument. The amortization of the debt discount appears as
non-cash interest expense on the income statement, and the net value of the debt
discount reduces the carrying value of the debt on the balance sheet.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each $1.0
million increase. Under the Sale Agreement, RFC purchases 90% of eligible
receivables. ARI is obligated to pay a monthly program fee equal to the greater
of (a) $3,000 or (b) the amount of the purchased but uncollected receivables
times the prime rate plus 2%. ARI may terminate the Sale Agreement prior to
three years by paying: 3.0% of the Purchase Commitment during the first year;
2.0% of the Purchase Commitment during the second year; and 1.0% of the Purchase
Commitment during the third year. The balance of the RFC Facility at May 25,
2001 was $664,000.
The RFC Facility states that the Company must be in compliance with the
covenants under the WITECH facility, which it currently is not. If the Company
is unable to obtain a waiver from RFC, the Company would lose an essential
source of liquidity.
Management believes that funds generated from operations, the RFC Facility, the
Debenture and the WITECH Line will be adequate to fund the Company's operations
and investments through fiscal 2001 if the necessary waivers are obtained. If
management is unable to obtain the necessary waivers, the Company will be in
default and owe in excess of $6 million, which would have a material adverse
effect on the Company. On a long-term basis, management believes that cash for
operations as well as capital expenditures will come principally from cash
generated from operations. Management is working diligently to obtain the
necessary waivers, but there can be no assurance that these efforts will be
successful. Management is also analyzing its anticipated cash flows under a
variety of growth scenarios ranging from no growth to modest growth. Management
believes that, provided the defaults can be avoided, either (i) sufficient cash
can be generated from the business to fund operations and a modest level of
investment or (ii) that the cash profile of the business can be restructured to
be self-funding.
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
OCTOBER 31 PERCENT
2000 1999 CHANGE
---------- ----------
Net loss $ (1,522) $ (1,658) 8%
Interest (cash) 61 98 (38%)
Interest (non-cash) 310 -- 100%
Depreciation and amortization 1,279 1,199 7%
---------- ----------
Earnings before interest, taxes, depreciation
and amortization $ 128 $ (361) 135%
========== ==========
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased for the three month period ended October 31, 2000, compared to the
same period last year, due primarily to the Company's improvement in earnings.
Management expects EBITDA to continue to remain positive for the remainder of
fiscal 2001, although there can be no assurance that these results will be
ultimately achieved. As the Company continues its acquisition program, non-cash
amortization of goodwill and other intangible assets from the Company's
acquisitions may cause net losses to continue even if EBITDA is positive.
We have included data with respect to EBITDA because it is commonly used as a
measurement of financial performance and by investors to analyze and compare
companies on the basis of operating performance. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and should
not be considered an alternative to operating income, as determined in
accordance with generally accepted accounting principles, as an indicator of our
operating performance, or to
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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.
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 Plus1(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 subsidiary of POWERCOM provided electronic catalog
Briggs & Stratton Corporation and communication services to a
Colorado Springs, CO number of manufacturers in North
America, Europe, and Australia in
the outdoor power, power tools, 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, costs, product development schedules and
future cash requirements and sources of liquidity. 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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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARI Network Services, Inc.
(Registrant)
Date: June 1, 2001 /s/ Brian E. Dearing
--------------------------
Brian E. Dearing, Chairman of the Board
(and acting CFO)
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