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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(XX) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended July 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from ............... to ...............
Commission File No. 0-19608
ARI NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1388360
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
330 East Kilbourn Ave. 53202-3149
Milwaukee, Wisconsin (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (414) 278-7676
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 12 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 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of October 23, 2000, aggregate market value of the Common Stock held by
non-affiliates (based on the closing price on the NASDAQ National Market System)
was approximately $6.7 million.
As of October 23, 2000, there were 6,168,270 shares of Common Stock of the
registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, to be filed with the Securities and
Exchange Commission no later than 120 days after July 31, 2000, for the 2000
Annual Meeting of Shareholders are incorporated by reference in Part III hereof.
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ITEM 1. BUSINESS
BUSINESS OVERVIEW
ARI Network Services, Inc. (the "Company" or "ARI") is a provider of partner
relationship management ("PRM") and business-to-business ("B2B") e-Commerce
solutions to manufacturers in selected industries with shared service networks
and distribution channels. We focus our sales and marketing on the U.S.,
Canadian, European and Australian manufactured equipment industry (the
"Equipment Industry"), providing direct sales and service in North America and
operating through value-added sales and service agents elsewhere. Sales for
these manufacturers are driven by their dealers' needs for parts for repair,
warranty, and maintenance services. The Equipment Industry is made up of
separate sub-markets in which the manufacturers share common distributors,
retail dealers and/or service points. These sub-markets include: outdoor power,
recreation vehicles, motorcycles, manufactured housing, farm equipment, marine,
construction, power sports, floor maintenance, auto parts aftermarket and
others. By "Equipment" we mean capital goods which are repaired rather than
discarded when broken and for which the repairs are generally performed by a
distributed network of independent dealers and/or repair shops. The Equipment
Industry has been a growing percentage of our revenue over the past three years,
representing 67% of fiscal 2000 revenue. We expect this percentage to continue
to increase in fiscal 2001 and beyond.
Our products and services enable Equipment Industry manufacturers to automate
business communications with their trading partners world wide (which include
distributors, dealers, and service points) and transact B2B e-Commerce with
these partners. We supply two types of PRM/e-Commerce software and services:
robust Web and CD-ROM electronic parts catalogs and partner transaction
processing. The electronic cataloging products and services enable partners in a
shared distribution and service network to electronically look up technical
reference information such as illustrated parts lists, service bulletins, price
files, repair instructions and other technical information regarding the
products of multiple manufacturers. The partner transaction processing products
and services allow the manufacturers and their distribution and service partners
to exchange electronic business documents such as purchase orders, invoices,
warranty claims, and status inquiries. Our products and services use the
Internet for data transport and a combination of the World-Wide Web and CD-ROM
technology for user interfaces and data presentation.
Our sales and marketing process is focused primarily on Equipment Industry
manufacturers that sponsor our products and services to their dealers,
distributors and/or service points. These manufacturers have the financial
capability and business power to implement an automation strategy throughout
their service and distribution networks. We believe that the implementation of
our products can increase partner loyalty and productivity as well as
end-customer satisfaction. In addition to software licenses and support
services, a typical implementation for a given manufacturer will involve
professional services for project management, software customization, and
roll-out management. Once manufacturer sponsorship is obtained, we also develop
a direct business relationship with the distributors, dealers, and service
points for software and services.
An important aspect of our business is the relationships we have developed with
over 100 dealer business management system providers. A dealer business
management system is used to manage inventory, maintain accounting records, bill
customers and focus marketing efforts. Our software's ability to interface with
these systems provides the end-user with a more robust, informative, and
cost-effective e-Commerce solution.
Our customer base currently comprises approximately 100 manufacturers in 12
different sub-markets of the Equipment Industry, as well as over 20,000 dealers,
distributors, and repair facilities in more than 100 countries. No single
customer accounted for 10% or more of our revenues in fiscal 2000.
As part of our historical business practice, we continue to provide e-Commerce
services to certain non-equipment industries, including the U.S. and Canadian
agribusiness industry, the U.S. and Canadian freight transportation industry,
and the U.S. non-daily newspaper publishing industry. In these non-equipment
industries, we provide electronic directory and transaction services as well as
on-line information management services. In fiscal 2000, these products and
services accounted for 33% of our total revenue.
Our executive offices are located at 330 East Kilbourn Avenue, Milwaukee,
Wisconsin 53202 and our telephone number at that location is (414) 278-7676. ARI
is a Wisconsin corporation, incorporated in 1981. We maintain a website at
http://www.arinet.com(TM).
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MISSION AND STRATEGY
Our mission is to be the leading provider of PRM/e-Commerce for sales, services
and products in selected manufacturing industry segments with shared
distribution channels and service networks. Our vision is that whenever a
manufacturer in one of our target markets communicates or does business
electronically with a distributor, dealer or service location, it will use at
least some of our products and services to do so. To achieve this vision, our
strategy is to concentrate on a few vertical markets and to lead with two
services: (i) electronic product catalogs and (ii) distributor/dealer
communications. After establishing a position in a market, we will then bring
other products and services to bear in order to expand our presence and solidify
our competitive position. Our goal is to provide a complete array of
high-quality software and services that industry participants will adopt and use
effectively.
Our strategy includes driving growth in our targeted markets through three
distinct programs: (i) sales; (ii) strategic alliances; and (iii) acquisitions.
Our external sales team focuses on large manufacturers and distributors in the
targeted industry sectors, while internal telesales representatives sell to
dealers and small to medium sized distributors. Outside of North America, we
sell to manufacturers directly, but use local agents to provide sales and
support to dealers. Through our COMPASS Partners(TM) program, we have strategic
alliance relationships with over 100 companies that provide software and
services to manufacturers, distributors and dealers in our targeted industries.
We seek alliance partners that provide the software and services that complement
our products, such as dealer or distributor business management and point of
sale systems, which allow us to provide a complete end-to-end solution that
links the internal business systems of dealers to those of distributors and
manufacturers. These alliance relationships range from simple technical
interface agreements to value-added reseller arrangements. We have recently
implemented a program under which we are searching out targets for strategic
alliances that can help us reach new customers and expand our product offering
to the manufacturers in our target markets. We also have an active acquisition
program that has generated four acquisitions in the last four years. We seek to
acquire businesses with market positions in our targeted markets, additional
products that we can provide to our customer base, and/or talent which
supplements our current staff.
Through our sales, alliance and acquisition programs, we expect to expand our
business both by growing market share in our current Equipment sectors and by
entering new sectors.
PRODUCTS AND SERVICES
We offer two basic kinds of PRM/e-Commerce services to our customers in the
Equipment Industry: (i) electronic catalogs for publishing and viewing technical
reference information about the equipment and (ii) electronic communications for
exchanging documents such as purchase orders, invoices, and warranty claims. The
following table shows the software products and services that we offer, a brief
description of the products and the industries where they are currently in use.
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC CATALOG PRODUCTS AND SERVICES
- -------------------------- ------------------------------------------------------- -------------------------------------
PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY
- -------------------------- ------------------------------------------------------- -------------------------------------
EMPARTweb(TM) Web-based electronic parts catalog based upon the Equipment - outdoor power, auto
EMPART database technology parts aftermarket, marine and
motorcycle
- -------------------------- ------------------------------------------------------- -------------------------------------
PartSmart(TM) Electronic parts catalog for equipment dealers Equipment - all sub-markets except
RV and manufactured housing
- -------------------------- ------------------------------------------------------- -------------------------------------
EMPARTviewer(TM) Electronic parts catalog viewing software Equipment - RV and manufactured
housing only
- -------------------------- ------------------------------------------------------- -------------------------------------
EMPARTpublisher(TM) Electronic parts catalog creation software used to Equipment - all sub-markets
produce catalogs for viewing on EMPARTweb, PartSmart,
and EMPARTviewer
- -------------------------- ------------------------------------------------------- -------------------------------------
Electronic publishing Project management, data conversion, editing, Equipment - all sub-markets
services production, and distribution services for
manufacturers who wish to outsource catalog
production operations
- -------------------------- ------------------------------------------------------- -------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMMUNICATIONS PRODUCTS AND SERVICES
- -------------------------- ------------------------------------------------------- -------------------------------------
PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY
- -------------------------- ------------------------------------------------------- -------------------------------------
TradeRoute(R)web Web-based e-Commerce system to support transactions Equipment - outdoor power
such as product ordering, warranty claims and other
business processes
- -------------------------- ------------------------------------------------------- -------------------------------------
TradeRoute(R) Document handling and communications for product Equipment - all sub-markets
ordering, warranty claims and other business documents
- -------------------------- ------------------------------------------------------- -------------------------------------
Professional services Project management, software customization, Equipment - all sub-markets
roll-out management, and help desk
support services
- -------------------------- ------------------------------------------------------- -------------------------------------
ACQUISITIONS
Since December 1995, ARI has had a formal and aggressive business development
program aimed at identifying, evaluating and closing acquisitions which augment
and strengthen our market position, product offerings, and personnel resources.
Since the program's inception, more than 300 acquisition candidates have been
evaluated, resulting in four completed acquisitions. The following table shows
selected information regarding these 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 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 electronic
Williamsburg, VA catalog which was used by over 10,000 dealers
to view catalogs from 50 different manufacturers
in 6 sectors of the Equipment Industry.
- ------------------------- ----------------------------------------------- ---------------------------------------------------
Our acquisitions have been successful, allowing us to increase our growth rate
by adding new products, expanding into new markets, increasing our penetration
of existing markets and adding new talent.
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COMPETITION
Competition for ARI's products and services in the Equipment Industry varies by
product and by sub-market. No single competitor today competes with us in each
of our targeted vertical Equipment Industry sub-markets. In electronic catalog
software and services, our direct competitors include Bell & Howell, Enigma, and
NetVendor Inc. and a variety of small companies focused on specific industries.
Many of these smaller companies may also represent acquisition targets for us.
There are also other companies that provide more general e-Catalog services such
as Saqqara Systems, Inc. and Requisite Technology, Inc. that may in the future
directly compete with us in our target markets. In addition, there are also a
number of larger companies which have targeted Web-based catalogs for
procurement, such as Ariba, Commerce One, and i2 Technologies, Inc., which could
expand their offerings to address the needs of our markets and become
competitors in the future. In the communications part of our business, the
primary competition comes from in-house information technology groups who may
prefer to build their own Web-based proprietary systems, rather than use our
industry-common solutions. There are also large, general market e-Commerce
companies like SBC Technologies Inc., Click Commerce, Inc. and Peregrine
Systems, Inc., which offer products and services which could address some of our
customers needs. These general e-Commerce companies do not typically compete
with us directly, but they could decide to do so in the future. In addition, as
in the catalog side of our business, there are a variety of small companies
focused on specific industries which compete with us and which may also
represent acquisition targets. Another potential source of competition in the
future is the group of companies attempting to build so-called "net
communities," such as Chemdex or VerticalNet, which could expand their offerings
to target our served markets. Finally, given the high level of interest in
Internet-related investment opportunities and the current pace of technological
change, it is possible that as yet unidentified well-capitalized competitors
could emerge, that existing competitors could merge and/or obtain additional
capital thereby making them more formidable, or that new technologies could come
on-stream that could threaten our position.
ARI's primary competitive advantages are (i) our focus on our target markets and
the industry knowledge and customer relationships we have developed in those
target markets, (ii), our robust electronic parts catalog software products, and
(iii) our relationships with over 100 dealer business management system
providers. When combined with products and services that are designed for our
targeted industries, we believe that our competitive advantages will enable us
to compete effectively and sustainably in these markets.
EMPLOYEES
As of September 30, 2000, we had 137 full-time equivalent employees. Of these,
20 are engaged in maintaining or developing software and providing software
customization services, 27 are in sales and marketing, 34 are engaged in catalog
creation and maintenance or database management, 38 are involved in customer
implementation and support and 18 are involved in administration and finance.
None of these employees is represented by a union.
ITEM 2. PROPERTIES
ARI occupies approximately 23,000 square feet in an office building in
Milwaukee, Wisconsin, under a lease expiring July 31, 2002. This facility houses
our headquarters and data center. In Colorado Springs, Colorado, we occupy
approximately 5,500 square feet of office space under a lease expiring January
31, 2006. In Williamsburg, Virginia we occupy approximately 5,100 square feet of
office space under a lease that expires October 1, 2004. In the Netherlands we
occupy approximately 450 square feet of office space under a month-to-month
lease.
ITEM 3. LEGAL PROCEEDINGS
ARI is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names of ARI's executive officers as of September
30, 2000. The officers serve at the discretion of the Board.
Name Age Capacities in Which Serving
- ---- --- ---------------------------
Brian E. Dearing 45 Chairman of the Board of Directors, CEO,
President, Acting CFO,
Secretary and Treasurer
John C. Bray 43 Vice President of Sales
Michael E. McGurk 52 Vice President of Technology Operations
Frederic G. Tillman 38 Vice President of Technology Development
- --------------------
BRIAN E. DEARING. Mr. Dearing, Chief Executive Officer and a director since 1995
and Chairman of the Board of Directors since 1997, is CEO, President, and Acting
Chief Financial Officer, Secretary and Treasurer. Prior to joining ARI, Mr.
Dearing held a series of electronic commerce executive positions at Sterling
Software, Inc. in the U.S. and in Europe. Prior to joining Sterling in 1990, Mr.
Dearing held a number of marketing management positions in the EDI business of
General Electric Information Services since 1986. Mr. Dearing holds a Masters
Degree in Industrial Administration from Krannert School of Management at Purdue
University and a BA in Political Science from Union College.
JOHN C. BRAY. Mr. Bray was appointed Vice President of Sales in September 1996.
Prior to joining ARI, Mr. Bray was Manager of Global Internet Sales and
Consulting at GE Information Services (GEIS) in Rockville, Maryland. Before
joining GEIS, Mr. Bray had a six year sales career at AT&T, culminating in his
appointment as Regional Vice President of Sales for AT&T's EasyLink Services,
where he was responsible for marketing electronic commerce services. He holds a
BA in marketing from the University of Iowa.
MICHAEL E. MCGURK. Mr. McGurk was appointed Vice President of Technology in
January 1997 and became Vice President of Technology Operations in August 1999.
Prior to joining ARI, Mr. McGurk developed and operated a large format printing
services business for customers involved in business process re-engineering
projects. Before opening the printing service, Mr. McGurk had a twelve year
career in information technology management at various divisions of General
Electric, including GE Medical Systems, GE Corporate and GE Aircraft Engines.
Mr. McGurk's early career included sales and technology positions at Cullinet
and CinCom Systems. Mr. McGurk holds an MBA and BS in general business from
Miami University in Ohio.
FREDERIC G. TILLMAN. Mr. Tillman was appointed Vice President of Technology
Development in August 1999. He joined ARI in September 1998 as part of the
acquisition of Powercom where he had been Vice President of Software
Development. Prior to joining Powercom in May 1998, Mr. Tillman was Director of
New Product Development for ADAC Healthcare Information Systems in Houston,
Texas, a producer of information systems for hospital laboratories and radiology
departments. Before joining ADAC in 1990, Mr. Tillman spent six years at General
Dynamics as a software engineer. Mr. Tillman holds an MBA from Texas Christian
University and a BS in Computer Science from Oklahoma State University.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ARI's common stock is traded on the National Association of Securities Dealers,
Inc. Automated Quotation - National Market System ("NASDAQ-NMS") under the
symbol ARIS. The following table sets forth the high and low bid quotations
(which are not necessarily the closing sales price) on the NASDAQ-NMS for the
periods indicated.
Fiscal Quarter Ended High Low
October 31, 1998 . . . . . . . . . . . . . $2.375 $1.500
January 31, 1999 . . . . . . . . . . . . . $2.750 $1.750
April 30, 1999 . . . . . . . . . . . . . . $8.250 $1.875
July 31, 1999. . . . . . . . . . . . . . . $7.313 $3.250
October 31, 1999. . . . . . . . . . . . . $6.375 $3.500
January 31, 2000 . . . . . . . . . . . . . $18.625 $3.250
April 30, 2000. . . . . . . . . . . . . . $12.750 $3.500
July 31, 2000 . . . . . . . . . . . . . . $6.000 $2.000
As of October 23, 2000, there were approximately 229 holders of record of the
Company's common stock. The Company has not paid cash dividends to date and has
no present intention to pay cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial information with respect to the
Company as of and for each of the five years in the period ended July 31, 2000,
which was derived from audited Financial Statements and Notes thereto of ARI
Network Services, Inc. Audited Financial Statements and Notes as of July 31,
2000 and 1999 and for each of the three years in the period ended July 31, 2000,
and the report of Ernst & Young LLP thereon are included elsewhere in this
Report. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere
herein.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ----------- ---------- ----------
Network and other services revenues $ 9,743 $ 8,616 $ 5,811 $ 5,235 $ 4,484
Software revenues 2,545 2,822 1,431 888 418
Professional services revenues 2,272 1,450 722 790 350
---------- ---------- ----------- ---------- ----------
Total revenues 14,560 12,888 7,964 6,913 5,252
Operating expenses:
Variable cost of network and other services sold 1,415 1,431 1,327 1,035 925
Variable cost of software sold 390 486 212 168 85
Variable cost of professional services sold 1,965 1,234 407 484 203
Depreciation and amortization 5,002 3,830 2,142 1,722 1,800
Network operations 2,048 1,017 708 1,004 919
Selling, general and administrative 8,214 6,995 4,586 4,819 4,585
Network construction and expansion 2,779 2,786 2,198 1,897 1,897
---------- ---------- ----------- ---------- ----------
Operating expenses before amounts capitalized 21,813 17,779 11,580 11,129 10,414
Less capitalized portion (1,729) (1,802) (1,546) (1,155) (1,230)
---------- ---------- ----------- ---------- ----------
Net operating expenses 20,084 15,977 10,034 9,974 9,184
---------- ---------- ----------- ---------- ----------
Operating loss (5,524) (3,089) (2,070) (3,061) (3,932)
Other income (expense) (822) (326) (70) (214) (274)
---------- ---------- ----------- ---------- ----------
Net loss $ (6,346) $(3,415) $ (2,140) $(3,275) $(4,206)
========== ========== =========== ========== ==========
Weighted average common shares outstanding 6,002 5,061 4,119 3,611 3,114
Basic and diluted net loss per share $ (1.06) $ (0.67) $ (0.52) $ (0.91) $ (1.35)
SELECTED BALANCE SHEET DATA
Working capital (deficit) $ (3,424) $ (3,476) $ 762 $ (689) $(3,412)
Capitalized network system (net) * 11,901 14,052 9,122 8,957 9,264
Total assets 18,488 20,438 12,808 11,416 11,479
Current portion of long-term debt and capital
lease obligations 933 713 58 64 63
Total long-term debt and capital lease obligations 2,695 3,511 1,653 8 22
Total shareholders' equity 8,415 9,756 8,962 8,947 6,182
* Fiscal 1999 includes a reclassification of $5,208 from goodwill as a result
of the finalization of the purchase price allocation for the NDI acquisition.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
Total revenue grew 13% during fiscal 2000 compared to fiscal 1999, while
revenues in the Equipment Industry grew 31%. Management attributes the less than
expected increase in total revenue to late delivery of the Company's
communications software and to a 12% decline in non-Equipment Industry revenues.
The development delays negatively affected our expected recurring revenues by
delaying deployment of the software to customers who had already signed with us.
The delay also affected non-recurring revenues because the existing accounts
could not be referenced as a fully deployed account and because the development
team was assigned to existing accounts, and therefore was not available to work
on newly signed accounts. Earnings before Interest, Taxes, Depreciation and
Amortization ("EBITDA") declined from $727,000 in 1999 to negative $551,000 in
2000 and net loss grew as the Company spent money, without the corresponding
increase in revenues, to address the software development issues and position us
to resume our expected growth rate of between 20% and 30% in fiscal 2001. Based
on the Company's current forecasts, management expects EBITDA to be positive in
fiscal 2001 and does not anticipate requiring any additional cash beyond our
existing reserves and credit facilities. Due to non-cash amortization of
goodwill and other intangibles from the Company's acquisitions, management does
not expect to reach full profitability until fiscal 2003. See "Forward Looking
Statements."
REVENUES
Management reviews the Company's recurring vs. non-recurring revenue in the
aggregate and within the Equipment Industry and all other industries. The
Equipment Industry has been a growing percentage of our revenue over the past
three years, representing about two thirds of the Company's revenue in fiscal
2000.
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's financial statements:
REVENUE BY INDUSTRY
(IN THOUSANDS)
YEAR ENDED JULY 31
--------------------------------------------------------------------------
PERCENT PERCENT
2000 1999 CHANGE 1999 1998 CHANGE
---- ---- ------- ---- ---- -------
INDUSTRY:
Equipment Industry
Recurring $ 5,794 $ 3,243 79% $ 3,243 $ 606 435%
Non-recurring 3,914 4,157 (6%) 4,157 1,588 162%
---------- --------- ---------- ---------
Subtotal 9,708 7,400 31% 7,400 2,194 237%
Other Revenues
Recurring 4,520 4,841 (7%) 4,841 4,600 5%
Non-recurring 332 647 (49%) 647 1,170 (45%)
---------- --------- ---------- ---------
Subtotal 4,852 5,488 (12%) 5,488 5,770 (5%)
Total Revenue
Recurring 10,314 8,084 28% 8,084 5,206 55%
Non-recurring 4,246 4,804 (12%) 4,804 2,758 74%
---------- --------- ---------- ---------
Grand Total $ 14,560 $ 12,888 13% $ 12,888 $ 7,964 62%
========== ========= ========== =========
Recurring revenues are derived from catalog subscription fees, software
maintenance and support fees, software license renewals, network traffic and
support fees and other miscellaneous subscription fees. Recurring revenues
increased in fiscal 2000 and fiscal 1999, compared to the prior year, primarily
due to increases in the Equipment Industry revenues driven by the Powercom and
NDI acquisitions. Recurring revenue, as a percentage of total revenue, increased
from 65% in fiscal 1998 and 63% in fiscal 1999 to 71% in fiscal 2000 primarily
due to increases in the customer base in the Equipment Industry caused by the
Powercom and NDI acquisitions and to a drop in non-recurring revenues.
Management believes a ratio of approximately two thirds recurring revenue to one
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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 mix may fluctuate from quarter to
quarter or year to year.
Non-recurring revenues are derived from initial software license fees and
professional services fees. Non-recurring revenues increased in fiscal 1999,
compared to the prior year, primarily due to increased new business in the
Equipment Industry. These new sales decreased in fiscal 2000, compared to fiscal
1999, as the Company experienced delays in the development of customized
communications software. The Company has installed its TradeRoute(R) software at
over 3,000 dealer locations as of the end of fiscal 2000. Management believes
that non-recurring revenues will increase during fiscal 2001 because most of the
development issues have been solved.
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power, recreation vehicles, motorcycles, manufactured housing, farm equipment,
marine, construction, power sports, floor maintenance, auto parts after market
and others. Management's strategy is to expand the Company's electronic parts
catalog software and services and dealer communication business with
manufacturers and distributors and their dealers in the existing vertical
markets and to expand to other similar markets in the future. Revenues from all
of the Company's acquisitions are included in the Equipment Industry revenues.
Recurring revenues in the Equipment Industry increased in fiscal 2000 and fiscal
1999, compared to the prior year, primarily due to the acquisitions of Powercom
and NDI, both of which had substantial recurring revenue bases. Non-recurring
revenues in the Equipment Industry decreased in fiscal 2000, compared to the
prior year, primarily due to delays in the delivery of the Company's customized
communications software. Non-recurring revenues in the Equipment Industry
increased in fiscal 1999, compared to the prior year, due to increased software
and professional services sold to new and existing manufacturer customers,
primarily in the recreation vehicle market. Management expects recurring and
non-recurring revenues in the Equipment Industry to increase at a higher
percentage of total revenues in fiscal 2001, as management continues to focus
attention and resources in this industry.
Non-Equipment Industry Business
The Company's business outside of the Equipment Industry includes sales of
database management services to the agricultural inputs and railroad industries,
electronic communications services to the agricultural inputs industry, and the
on-line provision of information for republication to the non-daily newspaper
publishing industry. Other than a slight increase in recurring revenues in
fiscal 1999 due to a price increase, both recurring and non-recurring revenues
in this business decreased over the prior year in fiscal 2000 and in fiscal
1999. Management believes the decline in non-recurring revenues may signal that
the Company is approaching saturation of the available market for the products
and services offered by the Company in these industries and that consolidation
in the agricultural customer base is the primary reason for the decline in
recurring revenues. Management expects revenues in the non-Equipment Industry
business will decline in fiscal 2001.
Our five-year contract with the Association of American Railroads, on which our
business in the railroad industry depends, will expire in December, 2000. We
have maintained our relationship with the Association of American Railroads and
management expects that a new contract will be negotiated before December 2000,
although there is no assurance that this will be the case. Management believes
that the revenue from any new contract will be significantly less than the
revenue recognized under the current contract. Our five-year contract with the
Associated Press, on which our business in the non-daily newspaper publishing
industries depends, is also up for renewal in December 2000. We have maintained
good relations with the Associated Press, and, based on discussions we have had,
management believes that it is likely that the contract will be renewed,
although there is no assurance that this will be the case.
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OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's financial statements:
OPERATING EXPENSES
(IN THOUSANDS)
YEAR ENDED JULY 31
---------------------------------------------------------------------
PERCENT PERCENT
2000 1999 CHANGE 1999 1998 CHANGE
--------- ---------- --------- ---------
Variable cost of products and services sold
(exclusive of depreciation and amortization
shown below) $ 3,770 $ 3,151 20% $ 3,151 $ 1,946 62%
Network operations 2,048 1,017 101% 1,017 708 44%
Selling, general & administrative 8,214 6,995 17% 6,995 4,586 53%
Network construction and expansion 2,779 2,786 0% 2,786 2,198 27%
--------- ---------- --------- ---------
Gross cash expenses 16,811 13,949 21% 13,949 9,438 48%
Depreciation and amortization 5,002 3,830 31% 3,830 2,142 79%
Less capitalized portion (1,729) (1,802) (4%) (1,802) (1,546) 17%
--------- ---------- --------- ---------
Net operating expenses $ 20,084 $ 15,977 26% $ 15,977 $ 10,034 59%
========= ========== ========= =========
All categories of operating expense increased over the past two fiscal years
primarily as a result of the Powercom and NDI acquisitions completed on
September 15, 1998 and May 13, 1999, respectively.
Variable cost of products and services sold consists primarily of royalties,
telecommunications, customization and catalog production labor and temporary
help fees. Variable cost of products and services sold increased in fiscal 2000
and fiscal 1999, compared to the prior year, primarily as a result of increased
revenues. Variable cost of products and services sold as a percentage of total
revenue increased slightly to 26% in fiscal 2000, from 24% in fiscal 1999 and
fiscal 1998 due to development cost overruns. Variable cost of professional
services sold as a percentage of professional services revenue was 86% in fiscal
2000 compared to 85% in fiscal 1999 and 56% in fiscal 1998. The increases in
fiscal 2000 and fiscal 1999, compared to fiscal 1998, were due to cost overruns
on several major software customization projects in the Equipment Industry. Most
of these projects have been completed or will be completed by the first quarter
of fiscal 2001. Network and other services cost of sales as a percentage of
network and other services revenue was 15% in fiscal 2000 compared to 17% in
fiscal 1999 and 23% in fiscal 1998. Software cost of sales as a percentage of
software revenue was 15% in fiscal 2000, compared to 17% in fiscal 1999 and 15%
in fiscal 1998. Management expects gross margins to remain approximately between
74% and 76% in fiscal 2001 and to fluctuate slightly from quarter to quarter
based on the mix of products and services sold.
Network operations costs consist primarily of data center operations, software
maintenance agreements for the Company's core network, catalog data maintenance
and customer support. Network operations costs increased significantly in fiscal
2000 compared to fiscal 1999 and fiscal 1998 due to increased staffing in the
catalog data maintenance area from the May 13, 1999 acquisition of NDI.
Management expects these costs to continue to increase, but at a slower rate
than revenues.
Selling, general and administrative expenses ("SG&A") increased in fiscal 2000,
compared to fiscal 1999 and fiscal 1998, due to additional costs absorbed in the
Powercom and NDI acquisitions. SG&A, as a percentage of revenue, increased to
56% in fiscal 2000 from 54% in fiscal 1999 after having steadily decreased for
each of the four previous fiscal years due to additional costs absorbed from the
acquisition of NDI without a corresponding increase in revenue. Management
expects SG&A to decline as a percentage of sales in the future.
The Company's technical staff (in-house and contracted) is allocated between
network construction and expansion and software customization services for
customer applications. Therefore, management expects fluctuations between
software customization services and development expenses from quarter to
quarter, as the mix of development and customization activities will change
based on customer requirements. During fiscal 2000, our technical resources were
focused primarily on customization projects for our customers in the recreation
11
12
vehicles market that are in the process of implementing our TradeRoute(R) dealer
communications system, development of Web-based communications and cataloging
software and increased year 2000 compliance efforts in November and December
1999. During fiscal 1999 development resources were focused primarily on the
development of TradeRoute(R) and PLUS1(R). We expect our technical resources to
continue to focus on software customization and development of Web-based
software in fiscal 2001, although the mix may fluctuate quarter to quarter based
on customer requirements. We expect software customization and development
expenses to increase during fiscal 2001 due to additional focus on the
development of our Web-based products.
Depreciation and amortization expenses increased substantially in fiscal 2000
compared to fiscal 1999 and fiscal 1998 due primarily to increased goodwill
recognized in connection with our acquisitions and from amortization of
completed software products. As a percentage of total revenue, depreciation and
amortization was 34% in fiscal 2000, 30% in fiscal 1999 and 27% in fiscal 1998.
Management expects depreciation and amortization expenses to continue at the
current rate in fiscal 2001, barring any additional acquisitions.
Capitalized development costs represented 62% of network construction and
expansion expense in fiscal 2000, compared to 65% and 70% in fiscal 1999 and
fiscal 1998, respectively. Capitalized expenses decreased from fiscal 1998 and
fiscal 1999 to fiscal 2000, as a percentage of network construction and
expansion expense, due to the fact that the Company's development resources were
focused on software customization projects and Year 2000 compliance projects,
both of which are expensed.
OTHER ITEMS
Interest expense increased $481,000 in fiscal 2000, compared to fiscal 1999, due
to additional financing by the Company under its RFC facility (described below)
and the Debenture sold to Rose Glen (also described below). Interest expense
increased $187,000 in fiscal 1999, compared to fiscal 1998, due to additional
borrowings under the Company's line of credit with WITECH. The Company expects
interest expense to increase in fiscal 2001, as the Company amortizes non-cash
interest expense associated with the Debenture. See "Liquidity and Capital
Resources".
Net loss increased $2,931,000 in fiscal 2000, compared to the prior year,
primarily due to lower than expected revenues and increased costs from delays in
development and to the increase in non-cash amortization expense resulting from
the Company's acquisition of NDI. Net loss increased $1,275,000 in fiscal 1999,
compared to the prior year, primarily due to the increase in non-cash
amortization expense resulting from the two acquisitions completed in fiscal
1999. 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.
The Company's Year 2000 readiness program was completed on schedule. All of the
Company's products have either been discontinued or have Year 2000 compliant
versions, which were shipped prior to December 31, 1999, with some minor
exceptions that were addressed prior to December 31, 1999 with distribution of
patches to a small number of customers to enable them to continue to use the
Company's software until the complete Year 2000 compliant version had been
implemented. Over the last two years, the Company has spent $420,000 on the Year
2000 program out of a total expected expenditure of $550,000. The Company has
not been a party to any litigation or arbitration proceeding to date involving
its products or services related to Year 2000 compliance issues. However, there
can be no assurance that we will not in the future be required to defend our
products or services in such proceedings, or to negotiate resolutions of claims
based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, regardless of the merits of such disputes, and any
potential liability on the Company's part for Year 2000-related damages,
including consequential damages, could have an adverse effect on the Company's
business and financial results.
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13
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, certain cash flow
information derived from the Company's financial statements.
CASH FLOW INFORMATION
(IN THOUSANDS)
YEAR ENDED JULY 31
----------------------------------------------------------------
PERCENT PERCENT
2000 1999 CHANGE 1999 1998 CHANGE
---- ---- ---- ----
Net cash provided by (used in) operating
activities before changes in working capital $ (1,060) $ 415 n/a $ 415 $ 2 n/a
Net cash used in investing activities (1,792) (1,815) 1% (1,815) (1,601) (13%)
--------- --------- --------- ---------
Subtotal (2,852) (1,400) (104%) (1,400) (1,599) 12%
Effect of net changes in working capital (103) (74) (39%) (74) (702) 89%
--------- --------- --------- ---------
Net cash used in operating and investing
activities $ (2,955) $ (1,474) (100%) $ (1,474) $ (2,301) 36%
========= ========= ========== ==========
Net cash provided by (used in) operating activities before changes in working
capital decreased in fiscal 2000, compared to the prior year, primarily due to
lower than expected revenues and increased costs as a result of delays in
development. Net cash provided by operating activities before changes in working
capital increased in fiscal 1999, compared to the prior year, due to increased
revenues and tight cost controls. Net cash used in investing activities
increased in fiscal 2000 and fiscal 1999, compared to fiscal 1998, due to
increased costs attributable to the development of the Company's Web-based
communications and catalog software in fiscal 2000 and a new release of the
Company's TradeRoute(R) software in fiscal 1999. The effect of net changes in
working capital is dependent on the timing of payroll and other cash
disbursements and may vary significantly from year to year. The Company expects
that positive cash flow from operations will resume in the first quarter of
fiscal 2001, but that operating losses will continue in fiscal 2001 due to
non-cash amortization expenses. The Company expects to fund research and
development costs in fiscal 2001 with excess cash from operations and the
proceeds of its current financing instruments described below.
At July 31, 2000, the Company had cash and cash equivalents of approximately
$563,000 compared to approximately $127,000 at July 31, 1999.
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14
The following table sets forth, for the periods indicated, certain information
related to the Company's debt derived from the Company's audited financial
statements.
DEBT SCHEDULE
(IN THOUSANDS)
JULY 31 JULY 31 NET
2000 1999 CHANGE
----------------- --------------- ----------------
Debt to Shareholder:
Current portion of line of credit $ - $ 246 $ (246)
Current portion of notes payable 361 - 361
Long-term portion of line of credit payable - 2,754 (2,754)
Long-term portion of notes payable 389 - 389
Debt Discount (common stock warrants) (76) - (76)
---------------- ---------------- -----------------
Total Debt to Shareholder 674 3,000 (2,326)
Subordinated Debenture:
Long-term notes payable other 4,000 - 4,000
Debt discount (common stock warrants and options) (2,158) - (2,158)
------------------ ---------------- ----------------
Total Subordinated Debenture 1,842 - 1,842
Other Debt:
Current portion of notes payable other 461 385 76
Long-term notes payable other (net of discount) 326 734 (408)
------------------ ----------------- ----------------
Total Other Debt 787 1,119 (332)
------------------ ----------------- ----------------
Total Debt $ 3,303 $ 4,119 $ (816)
================== ================ ================
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 $4,000,000 due on April 27, 2003 (the "Debenture"),
and convertible into shares of the Company's common stock, (ii) warrants to
purchase 600,000 shares of Common Stock (the "Warrants"), and (iii) an
investment option to purchase 800,000 shares of Common Stock (the "Investment
Option"). The Investment Option expires on October 27, 2001 and the Warrants
expire on April 27, 2005. The Debenture is convertible into Common Stock at $4
per share and the Warrants and Investment Option are exercisable at $6 per
share. At any time after October 27, 2000, the Company can require the Investor
to convert the amount owed under the Debenture into Common Stock at $4.00 per
share provided that: (i) the closing bid price of the Common Stock has been
greater than $6.60 for twenty (20) consecutive trading days and (ii) the
Company's resale registration statement has been effective for at least three
(3) months. At any time after April 27, 2001, the Company can require the
Investor to exercise the Investment Option if the closing bid price of the
Common Stock is greater than $9.90 for twenty (20) consecutive trading days and
the Company's resale registration statement has been effective for at least
three (3) months. As long as $500,000 or more principal amount of the Debenture
is outstanding, the Company agreed not to: (i) pay any dividends or make any
other distribution on our common stock, other than stock dividends and stock
splits; (ii) repurchase or redeem any shares of our capital stock, except in
exchange for common stock or preferred stock; (iii) incur or assume any
liability for borrowed money, except our existing debt, debt from a bona fide
financial lending institution, indebtedness to trade creditors, borrowings used
to repay the debenture, indebtedness assumed or incurred in connection with the
acquisition of a business, product, license or other asset, refinancings of any
of the above, and indebtedness that is subordinate to the debenture; (iv) sell
or otherwise dispose of assets outside the normal course of business, except the
sale of a business, product, license or other asset that our board of directors
determines is in the best interests of us and our shareholders, and sales of
assets with a value not exceeding $500,000 in any 12-month period following the
issuance of the debenture; (v) lend money or make advances to any person not in
the ordinary course of business, except loans to subsidiaries or joint ventures
approved by a majority of our independent directors, guarantee another person's
liabilities, except, among other things, guarantees made in connection with the
acquisition of a business, product, license or other asset. If exercised, the
Investment Option would contribute an additional $4,800,000 of working capital
to the Company.
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15
ARI has a line of credit with WITECH that has been in place since October 4,
1993 (the "WITECH Credit Facility"). On September 30, 1999, ARI and WITECH
restructured the $3.0 million outstanding under the WITECH Credit Facility to
provide for (i) a $1.0 million revolving line of credit (the "WITECH Line")
which expires on December 31, 2001; (ii) a $1.0 million term loan (the "WITECH
Term Loan") payable in equal monthly principal installments over three years,
commencing November 1, 1999; and (iii) WITECH's purchase of $1.0 million of
ARI's common stock at $5.125 per share. The WITECH Line bears interest at prime
plus 2.0% and the WITECH Term Loan bears interest at prime plus 3.25%. In
conjunction with obtaining the WITECH Credit Facility, since 1993, ARI has
issued to WITECH 350 shares of its non-voting cumulative preferred stock and
total warrants for the purchase of up to 280,000 shares of its common stock,
including (i) warrants for the purchase of 250,000 shares at $2.125 per share
and (ii) warrants for the purchase of 30,000 shares of its common stock at $4.00
per share. The exercise price under the warrants is reduced if ARI issues stock
at less than the then current exercise price. WITECH also purchased 20,000
shares of non-voting cumulative preferred stock on July 15, 1997. Of the 280,000
warrants to purchase shares of Common Stock that were 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.
On December 21, 1999, the Company and WITECH amended the WITECH Line to enable
the Company to borrow an additional Five Hundred Thousand Dollars ($500,000)
under the WITECH Line (the "Bridge Loan"). The Bridge Loan bore interest at
prime plus 2.0%. As consideration for the Bridge Loan, ARI paid a closing fee of
$50,000 to WITECH.
On April 27, 2000, the Company used a part of the proceeds from the sale of the
Debenture to (i) pay down the outstanding amount due under the WITECH Line and
(ii) repay the Bridge Loan and the interest and closing fee associated
therewith. ARI's ability to borrow up to $1,000,000 under the WITECH Line will
remain in place until December 31, 2001. As of September 30, 2000 there are no
amounts outstanding under the WITECH Line.
The only financial covenant in the WITECH Credit Facility is that ARI must
maintain a net worth (calculated in accordance with generally accepted
accounting principles) of at least $5.3 million. ARI has been, and is currently,
in compliance with the financial covenant in the Agreement and currently expects
to comply with such covenant or obtain any required waivers or raise additional
equity, if necessary.
As part of ARI's acquisition of Powercom from Briggs & Stratton Corporation
("Briggs") in September 1998, Briggs agreed to provide ARI with a working
capital line of credit in the amount of $250,000 (the "Briggs Line"). ARI agreed
to exhaust all available credit under the WITECH Line before borrowing any
amounts under the Briggs Line. The Briggs Line bore interest at prime plus 2%
and was secured by a first position lien against all accounts receivable
generated from customers of Powercom that were assigned to ARI as part of the
acquisition. The Briggs Line was repaid in full and cancelled on October 7,
1999.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three-year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each $1.0
million increase. Under the Sale Agreement, RFC purchases 90% of eligible
receivables. In connection with the Sale Agreement ARI was required to pay a
Commitment Fee of $45,000 on September 28, 1999, $30,000 on September 28, 2000,
and $15,000 on September 28, 2001. In addition, ARI is obligated to pay a
monthly program fee equal to the greater of (a) $3,000 or (b) the amount of the
purchased but uncollected receivables times the prime rate plus 2%. ARI may
terminate the Sale Agreement prior to three year term by paying 2.0% of the
Purchase Commitment during the second year, and 1.0% of the Purchase Commitment
during the third year. Initial funding was actually $1,045,000, of which
$182,000 was immediately used to pay off the Briggs Line. As of September 30,
2000, the balance of the RFC Facility was $621,000.
Management believes that funds generated from operations, the Debenture and the
WITECH Line will be adequate to fund the Company's operations and investments
through fiscal 2001. Management may consider the acquisition of strategic
investment partners and the sale of additional securities as sources of funding
for investment opportunities that may arise. On a long-term basis, management
believes that cash for operations as well as capital expenditures will come
principally from cash generated from operations.
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FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-K are forward looking statements.
Expressions such as "believes," "anticipates," "expects," and similar
expressions are intended to identify such forward looking statements. Several
important factors can cause actual results to materially differ from those
stated or implied in the forward looking statements. Such factors include, but
are not limited to the growth rate of ARI's selected market segments, the
positioning of ARI's products in those segments, consequences of year 2000
issues, variations in demand for and cost of customer services and technical
support, customer adoption of Internet-enabled applications and their
willingness to upgrade from earlier versions of software, ARI's ability to
release new software applications and upgrades on a timely basis, ARI's ability
to establish and maintain strategic alliances, ARI's ability to manage its
costs, ARI's ability to manage its business in a rapidly changing environment,
ARI's ability to finance capital investments, and ARI's ability to implement its
acquisition strategy to increase growth.
Projected revenues and, therefore, profitability and cash flows are difficult to
estimate because ARI's revenues and operating results may vary substantially
from quarter to quarter, driven primarily by variations in non-recurring
revenues from software license and customization fees. License fee revenues are
based on contracts signed and products delivered. Non-recurring revenues are
affected by the time required to close large license fee and development
agreements, which cannot be predicted with any certainty due to customer
requirements and decision-making processes.
Recurring revenues are also difficult to estimate. Recurring revenues from
maintenance and subscription fees may be estimated based on the number of
subscribers to ARI's services but will be affected by the renewal ratio, which
cannot be determined in advance. Recurring revenues from network traffic fees
and transaction fees are difficult to estimate as they are determined by usage.
Usage is a function of the number of subscribers and the number of transactions
per subscriber. Transactions include product ordering, warranty claim
processing, inventory and sales reporting, parts number updates and price
updates. ARI cannot materially affect or predict the volume of transactions per
customer.
Although ARI has recently introduced and plans to expand its Internet-enabled
Windows products, the marketplace is highly competitive and there can be no
assurance that a customer will select ARI's software and services over that of a
competitor. The environment in which ARI competes is characterized by rapid
technological changes, dynamic customer demands, and frequent product
enhancements and product introductions. Some of ARI's current and potential
competitors have greater financial, technical, sales, marketing and advertising
resources than ARI. The widespread acceptance of the Internet may increase the
usage of ARI's product applications but may dramatically change the manner in
which ARI charges for its services.
For a discussion of additional risks and uncertainties which may impact the
Company please look at the section titled "Risk Factors" in the Company's
Registration Statement on Form S-3 filed on May 12, 2000, as amended.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ARI is subject to market risks pertaining to interest rate movements and
collectibility of accounts receivable. ARI's only expenses subject to interest
rate risk are (i) interest expense on the WITECH Line and the WITECH Term Loan
and (ii) monthly program fees owed with respect to the RFC Facility. See
"Liquidity and Capital Resources." The WITECH Line and Term Loan bear interest
tied to prevailing market rates. The monthly program fees under the RFC Facility
are also tied to prevailing market interest rates. An increase or decrease of
one percent in the prime interest rate would affect ARI's net loss by
approximately plus or minus $13,000, annualized, based on the outstanding
balances under the WITECH and RFC Facilities at September 30, 2000. As a result,
ARI believes that the market risk relating to interest rate movements is
minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARI's Financial Statements and related notes for the fiscal years ended July 31,
2000, 1999 and 1998 together with the report thereon of ARI's independent
auditors, Ernst & Young LLP, are attached hereto as Exhibit A-1.
ITEM 9 . CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ARI
Information regarding the directors of ARI and compliance with Section
16(a) of the Exchange Act is included in ARI's definitive 2000 Annual Meeting
Proxy Statement, and is incorporated herein by reference. See "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance."
Information with respect to ARI's executive officers is shown at the end of Part
I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation, Employment Agreements,
Compensation of Directors, Employee Stock Options and other compensation plans
is included in ARI's definitive 2000 Annual Meeting Proxy Statement, and is
incorporated herein by reference. See "Executive Compensation" and "Election of
Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of ARI's common stock is
included in ARI's definitive 2000 Annual Meeting Proxy Statement and is
incorporated herein by reference. See "Security Ownership of Certain Beneficial
Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information related to Certain Relationships and Related Transactions
is included in ARI's definitive 2000 Annual Meeting Proxy Statement, and is
incorporated herein by reference. See "Certain Transactions."
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PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a)1.
FINANCIAL STATEMENTS
Report of independent auditors on Financial Statements and Financial Statement
Schedule.
Balance sheets - July 31, 2000 and 1999.
Statements of operations for each of the three years in the period ended July
31, 2000.
Statements of shareholders' equity for each of the three years in the period
ended July 31, 2000.
Statements of cash flows for each of the three years in the period ended July
31, 2000.
Notes to financial statements - July 31, 2000.
The Financial Statements are located immediately following the signature pages.
(a)2.
FINANCIAL STATEMENT SCHEDULES
Schedule II
Valuation and qualifying accounts for the years ended July 31, 2000, 1999, and
1998.
The Financial Statement Schedule is located immediately following the Financial
Statements. All other schedules to which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a)3.
EXHIBITS:
See (c) below.
(b) REPORTS ON FORM 8-K:
On May 2, 2000 ARI filed a Form 8-K (dated April 27, 2000) with respect to Item
5 of Form 8-K.
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(c)
EXHIBITS:
EXHIBIT
NUMBER
DESCRIPTION
3.1
Articles of Incorporation of the Company, as amended, incorporated herein by
reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 1999.
3.2
By-laws of the Company incorporated herein by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (Reg. No. 33-43148).
4.1
The Company agrees to furnish to the Commission upon request copies of any
agreements with respect to long term debt not exceeding 10% of the Company's
consolidated assets.
10.1*
1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.2 of
the Company's Form 10-Q for the quarter ended January 31, 1999.
10.2*
1993 Director Stock Option Plan, as amended, incorporated herein by reference to
Exhibit 10.3 of the Company's Form 10-Q for the quarter ended January 31, 1999.
10.3*
2000 Stock Option Plan.
10.4*
Loan Agreement by and between the Company and WITECH Corporation dated October
4, 1993, incorporated herein by reference to Exhibit 10.10 of the Company's Form
10-K for the fiscal year ended July 31, 1993.
10.5
Amendment to Loan Agreement dated May 19, 1994 between the Company and WITECH
Corporation, incorporated herein by reference to Exhibit 10.22 of the Company's
Registration Statement on Form S-3 (Reg. No. 33-75760).
10.6
Amendment No. 2 to Loan Agreement dated July 28, 1994 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.22 of the
Company's Registration Statement on Form S-1 (Reg. No. 33-80914).
10.7
Consent and Amendment No. 3 to Loan Agreement dated December 2, 1994 between the
Company and WITECH Corporation, incorporated herein by reference to Exhibit 10.1
of the Company's Form 10-Q for the quarter ended October 31, 1994.
10.8
Amendment No. 4 to Loan Agreement dated October 18, 1995 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.14 of the
Company's Form 10-K for the fiscal year ended July 31, 1995.
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20
10.9
Amendment No. 5 to Loan Agreement dated December 20, 1995 between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.31 of the
Company's Form 10-K for the fiscal year ended July 31, 1996.
10.10
Amendment No. 6 to Loan Agreement dated January 23, 1996, between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.32 of the
Company's Form 10-K for the fiscal year ended July 31, 1996.
10.11
Amendment No. 7 to Loan Agreement dated April 20, 1996 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended April 30, 1996.
10.12
Amendment No. 8 to Loan Agreement dated May 31, 1996 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.2 of the
Company's Form 10-Q for the quarter ended April 30, 1996.
10.13
Amendment No. 9 to Loan Agreement dated November 5, 1996, between the Company
and WITECH Corporation, including Forms of Amended and Restated Commitment
Warrant and Usage Warrant, incorporated herein by reference to Exhibit 10.1 of
the Company's Form 10-Q for the quarter ended October 31, 1996.
10.14
Amendment No. 10 to Loan Agreement dated May 30, 1997, between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended April 30, 1997.
10.15
Amendment No. 11 to Loan Agreement dated January 21, 1998 between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the fiscal quarter ended April 30, 1998.
10.16
Amendment No. 12 to Loan Agreement dated May 27, 1998 between the Company and
WITECH Corporation incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the fiscal quarter ended April 30, 1998.
10.17
Amendment No. 13 to Loan Agreement dated September 14, 1998 between the Company
and WITECH Corporation incorporated herein by reference to Exhibit 10.16 of the
Company's Form 10-K for the fiscal year ended July 31, 1998.
10.18
Consent of WITECH Corporation, dated September 15, 1998, incorporated herein by
reference to Exhibit 10.1 of the Company's Form 10-Q for the fiscal quarter
ended October 31, 1998.
10.19
Amendment No. 14 to Loan Agreement dated January 29, 1999, between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's 10-Q for the fiscal quarter ended January 31, 1999.
10.20
Consent of WITECH Corporation, dated April 19, 1999, incorporated herein by
reference to Exhibit 4.1 of the Company's Form 10-Q for the fiscal quarter ended
April 30, 1999.
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21
10.21
Amendment No. 15 to Loan Agreement dated September 23, 1999, between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.20 of the
Company's Form 10-K for the fiscal year ended July 31, 1999.
10.22
Amendment Number 16 to Loan Agreement dated December 21, 1999 between the
Company and WITECH Corporation, incorporated herein by reference to Exhibit 10.1
of the Company's Form 10-Q for the fiscal quarter ended January 31, 2000.
10.23
Receivables Sales Agreement, dated September 28, 1999, between the Company and
RFC Capital Corporation, incorporated herein by reference to Exhibit 10.21 of
the Company's Form 10-K for the fiscal year ended July 31, 1999.
10.24*
Form of Change of Control Agreement between the Company and each of Brian E.
Dearing, John C. Bray, Michael E. McGurk and Frederic G. Tillman, incorporated
herein by reference to Exhibit 10.25 of the Company's Form 10-K for the fiscal
year ended July 31, 1999.
10.25*
Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.26 of
the Company's Form 10-K for the fiscal year ended July 31, 1999.
10.26*
Deferred Bonus Plan, incorporated herein by reference to Exhibit 10.27 of the
Company's Form 10-K for the fiscal year ended July 31, 1999.
10.27
Preferred Stock Purchase Agreement dated July 15, 1997, between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-2 (Reg. No. 333-31295) filed on July
15, 1997.
10.28
Revolving Credit Agreement dated September 15, 1998 between the Company and
Briggs & Stratton Corporation, incorporated herein by reference to Exhibit 2.3
of the Company's Current Report on Form 8-K filed September 25, 1998.
10.29
Amendment 1 to Revolving Credit Agreement dated May 25, 1999 between the Company
and Briggs & Stratton Corporation, incorporated herein by reference to Exhibit
10.1 of the Company's Form 10-Q for the fiscal quarter ended April 30, 1999.
10.30*
Website Development Agreement dated December 9, 1999 between the Company and
Gordon J. Bridge, incorporated herein by reference to Exhibit 10.2 of the
Company's Form 10-Q for the fiscal quarter ended January 31, 2000.
10.31
Securities Purchase Agreement, dated as of April 25, 2000, by and among the
Company and RGC International Investors, LDC, incorporated herein by reference
to Exhibit 99.1 of the Company's Report on Form 8-K filed May 2, 2000.
10.32
Convertible Subordinated Debenture dated as of April 27, 2000, incorporated
herein by reference to Exhibit 99.2 of the Company's Report on Form 8-K filed
May 2, 2000.
21
22
10.33
Stock Purchase Warrant dated as of April 27, 2000, incorporated herein by
reference to Exhibit 99.3 of the Company's Report on Form 8-K filed May 2, 2000.
10.34
Investment Option dated as of April 27, 2000, incorporated herein by reference
to Exhibit 99.4 of the Company's Report on Form 8-K filed May 2, 2000.
10.35
Registration Rights Agreement, dated as of April 27, 2000, by and among the
Company and RGC International Investors, LDC, incorporated herein by reference
to Exhibit 99.5 of the Company's Report on Form 8-K filed May 2, 2000.
23.1
Consent of Ernst & Young LLP.
24.1
Powers of Attorney appear on the signature page hereof.
27.1
Financial Data Schedule
* Management Contract or Compensatory Plan.
22
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee, State of Wisconsin on this 30th day of October, 2000.
ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
-----------------------------
Brian E. Dearing,
Chairman, President & CEO & Acting CFO,
& Acting CAO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brian E. Dearing, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any
and all amendments to this report and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/s/ Brian E. Dearing Chairman, President, CEO & Director October 30, 2000
- ------------------------------ Acting CFO & Acting CAO
Brian E. Dearing (Principal Executive Officer)
/s/ Gordon J. Bridge Director October 30, 2000
- -------------------------------
Gordon J. Bridge
/s/ Francis Brzezinski Director October 25, 2000
- ------------------------------
Francis Brzezinski
/s/ George D. Dalton Director October 30, 2000
- -----------------------------
George D. Dalton
Director
- ------------------------------
Ted C. Feierstein
/s/ D. Bruce Merrifield, Jr. Director October 30, 2000
- ----------------------------
D. Bruce Merrifield, Jr.
/s/ Richard W. Weening Director October 30, 2000
- ---------------------------
Richard W. Weening
23
24
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders
ARI Network Services, Inc.
We have audited the accompanying balance sheets of ARI Network Services, Inc.
(the Company) as of July 31, 2000 and 1999, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended July 31, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at July 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended July 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Milwaukee, Wisconsin
September 15, 2000
25
ARI Network Services, Inc.
Balance Sheets
(Dollars in Thousands, Except Per Share Data)
JULY 31
2000 1999
----------------------------------
ASSETS (Note 3)
Current assets:
Cash $ 563 $ 127
Trade receivables, less allowance for doubtful accounts of
$697 in 2000 and $278 in 1999 3,282 3,175
Prepaid expenses and other 109 126
----------------------------------
Total current assets 3,954 3,428
Equipment and leasehold improvements:
Network system hardware and software 4,389 4,246
Leasehold improvements 239 239
Furniture and equipment 846 513
----------------------------------
5,474 4,998
Less accumulated depreciation and amortization 5,038 4,574
----------------------------------
Net equipment and leasehold improvements 436 424
Goodwill, less accumulated amortization of $1,413 in 2000 and
$755 in 1999 1,876 2,534
Deferred financing costs, less accumulated amortization of $59 in
2000 321 --
Network system:
Network platform 11,467 11,467
Industry-specific applications 29,317 27,588
----------------------------------
40,784 39,055
Less accumulated amortization 28,883 25,003
----------------------------------
11,901 14,052
----------------------------------
Total assets $18,488 $20,438
==================================
2
26
JULY 31
2000 1999
----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit payable to shareholder $ - $ 246
Current portion of notes payable to shareholder 361 -
Current portion of notes payable 461 385
Accounts payable 836 1,204
Unearned income 3,117 3,307
Accrued payroll and related liabilities 1,182 1,091
Other accrued liabilities 1,310 589
Current portion of capital lease obligations 111 82
----------------------------------
Total current liabilities 7,378 6,904
Line of credit payable to shareholder - 2,754
Notes payable to shareholder 313 -
Notes payable 2,168 734
Unearned income - 267
Capital lease obligations 214 23
----------------------------------
Total noncurrent liabilities 2,695 3,778
Commitments (Note 5)
Shareholders' equity:
Cumulative preferred stock, par value $.001 per share, 1,000,000 shares
authorized; 20,350 shares issued and
outstanding - -
Common stock, par value $.001 per share, 25,000,000 shares authorized;
6,168,270 and 5,097,432 shares issued and outstanding in 2000 and
1999, respectively 6 5
Common stock warrants and options 2,459 -
Common stock to be issued - 2,406
Additional paid-in capital 91,781 86,830
Accumulated deficit (85,831) (79,485)
----------------------------------
Total shareholders' equity 8,415 9,756
----------------------------------
Total liabilities and shareholders' equity $18,488 $ 20,438
==================================
See accompanying notes.
3
27
ARI Network Services, Inc.
Statements of operations
(Dollars in Thousands, Except Per Share Data)
YEAR ENDED JULY 31
2000 1999 1998
------------------------------------------------------
Net revenues:
Network and other services $ 9,743 $ 8,616 $ 5,811
Software 2,545 2,822 1,431
Professional services 2,272 1,450 722
------------------------------------------------------
14,560 12,888 7,964
Operating expenses:
Variable cost of products and services
sold (exclusive of depreciation and
amortization shown separately below):
Network and other services 1,415 1,431 1,327
Software 390 486 212
Professional services 1,965 1,234 407
------------------------------------------------------
3,770 3,151 1,946
Depreciation and amortization 5,002 3,830 2,142
Network operations 2,048 1,017 708
Selling, general and administrative 8,214 6,995 4,586
Network construction and expansion 2,779 2,786 2,198
------------------------------------------------------
21,813 17,779 11,580
Less capitalized portion (1,729) (1,802) (1,546)
------------------------------------------------------
Total operating expenses 20,084 15,977 10,034
------------------------------------------------------
Operating loss (5,524) (3,089) (2,070)
Other income (expense):
Interest expense (793) (312) (125)
Other, net (29) (14) 55
------------------------------------------------------
(822) (326) (70)
------------------------------------------------------
Net loss $ (6,346) $ (3,415) $ (2,140)
======================================================
Net loss per share $ (1.06) $ (.67) $ (.52)
======================================================
See accompanying notes.
4
28
ARI Network Services, Inc.
Statements of Shareholders' Equity
(Dollars in Thousands)
Number of Shares Issued and
Outstanding
---------------------------------
Preferred Common
Stock Stock
---------------------------------
Balance July 31, 1997 20,000 3,691,754
Issuance of common stock (net of offering costs of $54) - 387,500
Issuance of common stock in connection with acquisition of Empart
Technologies, Inc. - 163,523
Issuance of common stock under stock purchase plan - 4,683
Net loss - -
---------------------------------
Balance July 31, 1998 20,000 4,247,460
Issuance of preferred stock 350 -
Issuance of common stock in connection with acquisitions - 840,000
Issuance of common stock under stock purchase plan and from exercise
of stock options - 9,972
Net loss - -
---------------------------------
Balance July 31, 1999 20,350 5,097,432
Issuance of common stock in connection with acquisitions - 550,019
Issuance of common stock as payment on line of credit - 195,122
Issuance of common stock for professional services received - 58,270
Issuance of common stock under stock purchase plan and from exercise
of stock options - 267,427
Issuance of common stock warrants and options in connection with notes
payable - -
Net loss - -
---------------------------------
Balance July 31, 2000 20,350 6,168,270
=================================
5
29
Common Stock to be
Issued Par Value Common
- --------------------------------------------------------- Stock Additional
Number of Preferred Common Warrants Paid-in Accumulated
Shares Amount Stock Stock and Options Capital Deficit
- -------------------------------------------------------------------------------------------------------------
- $ - $ - $4 $ - $82,873 $(73,930)
- - - - - 1,496 -
- - - - - 654 -
- - - - - 5 -
- - - - - - (2,140)
- -------------------------------------------------------------------------------------------------------------
- - - 4 - 85,028 (76,070)
- - - - - - -
550,019 2,406 - 1 - 1,784 -
- - - - - 18 -
- - - - - - (3,415)
- -------------------------------------------------------------------------------------------------------------
550,019 2,406 - 5 - 86,830 (79,485)
(550,019) (2,406) - 1 - 2,405 -
- - - - - 1,000 -
- - - - - 211 -
- - - - - 1,335 -
- - - - 2,459 - -
- - - - - - (6,346)
- -------------------------------------------------------------------------------------------------------------
- $ - $ - $6 $2,459 $91,781 $(85,831)
=============================================================================================================
See accompanying notes.
6
30
ARI Network Services, Inc.
Statements of cash flows
(In Thousands)
YEAR ENDED JULY 31
2000 1999 1998
-----------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (6,346) $ (3,415) $ (2,140)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of network platform 656 695 695
Amortization of industry-specific applications 3,224 2,057 1,121
Amortization of goodwill 658 584 100
Amortization of debt discount and deferred financing fees 284 - -
Depreciation and other amortization 464 494 226
Net change in receivables, prepaid expenses and other
current assets (90) 431 (714)
Net change in accounts payable, unearned income and accrued
liabilities (13) (505) 12
-----------------------------------------------------
Net cash provided by (used in) operating activities (1,163) 341 (700)
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (63) (56) (55)
Cash received in acquisitions - 43 -
Industry-specific applications costs capitalized (1,729) (1,802) (1,546)
-----------------------------------------------------
Net cash used in investing activities (1,792) (1,815) (1,601)
FINANCING ACTIVITIES
Borrowings (repayments) under line of credit (1,000) 1,380 1,120
Borrowings under notes payable 4,000 80 -
Payments of capital lease obligations and notes payable (690) (71) (190)
Debt issuance costs incurred (254) - -
Proceeds from issuance of common stock 1,335 18 1,501
-----------------------------------------------------
Net cash provided by financing activities 3,391 1,407 2,431
-----------------------------------------------------
Net increase (decrease) in cash 436 (67) 130
Cash at beginning of year 127 194 64
-----------------------------------------------------
Cash at end of year $ 563 $ 127 $ 194
=====================================================
Cash paid for interest $ 437 $ 310 $ 129
=====================================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for -
Network system hardware $ 328 $ - $ 55
Issuance of common stock for acquisitions - 4,191 654
Issuance of common stock as payment on line of credit 1,000 - -
Conversion of line of credit to notes payable to shareholder 1,000 - -
Issuance of common stock warrants and options 2,459 - -
Issuance of common stock for professional services:
Network system hardware and software 85 - -
Deferred financing costs 126 - -
See accompanying notes.
7
31
ARI Network Services, Inc.
Notes to Financial Statements
July 31, 2000
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ARI Network Services, Inc. (the Company) operates in one business segment and
provides business-to-business e-commerce solutions to manufacturers in selected
industries with shared service networks and distribution channels. The Company's
e-commerce services use telecommunications technology and software to help
customers conduct business electronically, computer-to-computer, with minimal
changes to their internal business systems. The Company focuses on the U.S.,
Canadian, European and Australian manufactured equipment industry as well as
certain non-equipment industries, including the U.S. and Canadian agribusiness
industry, the U.S. and Canadian freight transportation industry and the U.S.
non-daily newspaper publishing industry. The Company provides both electronic
catalog and transaction processing software and services, enabling dealers and
distributors in a shared distribution and service network to electronically look
up parts, service bulletins and other technical reference information, and to
exchange electronic business documents such as purchase orders, invoices,
warranty claims and status inquiries with the manufacturers. The Company's
customers are located primarily in the United States, Europe and Canada.
REVENUE RECOGNITION
Revenue for use of the network and for information services is recognized in the
period such services are utilized.
Revenue from annual or periodic maintenance fees is recognized over the period
the maintenance is provided. Revenue from catalog subscriptions is recognized
over the subscription term.
The Company recognizes the revenue allocable to software licenses and specified
upgrades upon delivery of the software product or upgrade to the end user,
unless the fee is not fixed or determinable or collectibility is not probable.
The Company considers all arrangements with payment terms extending beyond 12
months and other arrangements with payment terms longer than normal not to be
fixed or determinable. If the fee is not fixed or determinable, revenue is
recognized as payments become due from the customer. Arrangements that include
acceptance terms beyond the Company's standard terms are not recognized until
acceptance has occurred. If collectibility is not considered probable, revenue
is recognized when the fee is collected.
8
32
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Arrangements that include professional services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When professional services are considered essential, revenue
under the arrangement is recognized using contract accounting. When professional
services are not considered essential, the revenue allocable to the professional
services is recognized as the services are performed.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed under the straight-line method for financial reporting
purposes and under accelerated methods for income tax purposes. Depreciation and
amortization have been provided over the estimated useful lives of the assets as
follows:
Years
---------
Network system hardware and software 2 - 10
Leasehold improvements 10
Furniture and equipment 2 - 5
NETWORK CONSTRUCTION AND EXPANSION AND SOFTWARE DEVELOPMENT
The Company has developed a basic network and telecommunications platform which
is the foundation of its network. The platform can be used on different hardware
and is not subject to the frequency of technological changes that sometimes
occur with hardware or industry-specific applications.
9
33
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company also develops and purchases industry-specific software applications
for personal computers and mainframes which, when utilized with the platform,
give rise to the Company's products and services tailored to its targeted
industries.
Certain software development costs and network construction and expansion costs
are capitalized when incurred. Capitalization of these costs begins upon the
establishment of technological feasibility. The establishment of technological
feasibility and the ongoing assessment of recoverability of software and network
system costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technologies.
The annual amortization of the platform and the industry-specific software
applications is the greater of the amount computed using (a) the ratio that
current gross revenues for the network or an industry-specific product bear to
the total of current and anticipated future gross revenues for the network or an
industry-specific product or (b) the straight-line method over the estimated
economic life of the product (20 years - platform, 3 years - industry-specific
software applications). Amortization starts when the product is available for
general release to customers.
All other network construction and expansion expenditures are charged to expense
in the period incurred.
GOODWILL
Goodwill, representing the excess of cost over net assets of businesses
acquired, is stated at cost and is amortized on a straight-line basis over five
years.
IMPAIRMENT OF LONG-LIVED ASSETS
Equipment and leasehold improvements, network system costs and goodwill are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets.
10
34
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Such analyses necessarily involve judgment. The Company evaluated the ongoing
value of its long-lived assets as of July 31, 2000 and 1999, and determined that
there was no significant impact on the Company's results of operations.
DEFERRED FINANCING COSTS
Costs incurred to obtain long-term financing are amortized using the interest
method over the term of the related debt.
CAPITALIZED INTEREST COSTS
In 2000, 1999 and 1998, interest costs of $76,000, $56,000 and $19,000,
respectively, were capitalized and included in the network system.
OTHER ACCRUED LIABILITIES
Other accrued liabilities include accrued royalties of $486,000 and $319,000 at
July 31, 2000 and 1999, respectively.
COMPREHENSIVE INCOME
Net loss for 2000, 1999 and 1998 is the same as comprehensive income defined
pursuant to Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income."
NET LOSS PER SHARE
The basic and diluted weighted-average shares used in the net loss per share
calculation are 6,002,000, 5,061,000 and 4,119,000, respectively, in 2000, 1999
and 1998. Basic and diluted net loss per share is the same for all periods as
the impact of all dilutive securities is antidilutive.
RECLASSIFICATIONS
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
11
35
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, which establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133, which will be
effective for the Company beginning August 1, 2000, requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company does not expect the
potential effect of adopting the provisions of SFAS No. 133, as amended, to have
a significant impact on its financial statements.
2. ACQUISITIONS
In September 1998, the Company acquired certain assets used in the operation of
Briggs & Stratton Corporation's Powercom-2000 business (Powercom). Aggregate
consideration for the acquisition consisted of 840,000 shares of the Company's
common stock and the assumption of certain liabilities totaling $2,291,000.
In May 1999, the Company acquired the assets of Network Dynamics, Inc. (NDI).
Aggregate consideration for the acquisition consisted of 550,019 shares of the
Company's common stock, which were issued in September 1999, and the assumption
of certain liabilities totaling $3,623,000.
The acquisitions were accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based upon their respective fair values at the date of acquisition. The
financial statements include the operating results of the acquisitions from
their respective dates of acquisition. The excess of the purchase price over the
fair value of net assets acquired of $2,782,000 for Powercom has been recorded
as goodwill.
The following unaudited pro forma results of operations for the year ended July
31, 1999, assumes that the acquisitions had occurred on August 1, 1998 (in
thousands, except per share data):
1999
------------------
Net revenues $15,482
Net loss (4,533)
Basic and diluted net loss per share (0.81)
12
36
ARI Network Services, Inc.
Notes to Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
The pro forma results do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred on
August 1, 1998, nor are they necessarily indicative of future operating results.
3. LINE OF CREDIT AND NOTES PAYABLE TO SHAREHOLDER
At July 31, 1999, the Company had a $3,000,000 revolving line of credit
agreement with a shareholder that was to expire on December 31, 2001. On
September 30, 1999, the Company and the shareholder restructured and amended the
line of credit agreement in order to reduce the line of credit from $3,000,000
to $1,000,000, establish a $1,000,000 term loan payable and convert $1,000,000
of the line of credit into 195,122 shares of common stock. The term loan is
payable in equal monthly installments over three years commencing November 1,
1999, and bears interest at prime (9.5% at July 31, 2000) plus 3.25%. The line
of credit expires December 31, 2001. The Company is required to pay a fee of
.025% per month on the unused portion of the line of credit. Borrowings under
the line of credit bear interest at prime plus 2%. No amounts are outstanding
under the line of credit at July 31, 2000. In connection with this amendment,
the Company issued a warrant to purchase 30,000 shares of the Company's common
stock at $4 per share. These warrants are exercisable at any time through
September 2006 and have been valued at $105,000 for financial statement
purposes. The unamortized balance of the debt discount at July 31, 2000 was
$76,000. The entire agreement is secured by substantially all assets of the
Company other than accounts receivable sold under the receivable sales agreement
described in Note 4. The agreement contains various restrictive covenants
including maintenance of a minimum level of net worth and restrictions on
additional indebtedness.
On December 21, 1999, the Company and shareholder amended the line of credit
agreement to provide the Company with an additional borrowing of $500,000 as a
bridge loan. The bridge loan bore interest at prime plus 3.25%. On April 27,
2000, the Company paid the balance outstanding under the bridge loan.
13
37
ARI Network Services, Inc.
Notes to Financial Statements (continued)
3. LINE OF CREDIT AND NOTES PAYABLE TO SHAREHOLDER (CONTINUED)
Future maturities of notes payable to shareholder as of July 31, 2000, are as
follows (in thousands):
Fiscal year ending
------------------
2001 $361
2002 333
2003 56
---------
$750
=========
In connection with the origination of the line of credit agreement with the
shareholder and various extensions of the agreement, in addition to the warrants
discussed above, the Company has issued the shareholder warrants for the
purchase of up to 250,000 shares of its common stock at $2.125 per share. On
September 30, 2000, 175,000 warrants will expire and on December 31, 2001,
75,000 warrants will expire as to any shares of common stock not issued.
4. NOTES PAYABLE
Notes payable consist of the following at July 31 (in thousands):
2000 1999
-------------------------------------
Term loan $ 266 $ 360
Note payable to bank 479 602
Note payable to Briggs & Stratton Corporation,
paid in 2000 - 80
Convertible subordinated debenture 4,000 -
Less debt discount for convertible subordinated debenture (2,158) -
Other 42 77
-------------------------------------
2,629 1,119
Less current maturities 461 385
-------------------------------------
$2,168 $ 734
=====================================
14
38
ARI Network Services, Inc.
Notes to Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
On April 27, 2000, the Company issued RGC International Investors, LDC (RGC) (i)
a convertible subordinated debenture (the Debenture) for $4,000,000 due on April
27, 2003, (ii) warrants to purchase 600,000 shares of common stock at $6 per
share (the Warrants), and (iii) an investment option to purchase 800,000 shares
of common stock at $6 per share (the Investment Option). The Investment Option
expires on October 27, 2001, and the Warrants expire on April 27, 2005. A debt
discount was recorded for the fair value of the Warrants and Investment Option
of $2,354,000. The Debenture bears interest at 7% and is convertible into common
stock at $4 per share. At any time after October 27, 2000, the Company can
require RGC to convert the amount owed under the Debenture into common stock at
$4 per share provided that the closing bid price of the Company's common stock
has been greater than $6.60 for 20 consecutive trading days. At any time after
April 27, 2002, the Company can require RGC to exercise the Investment Option if
the closing bid price of the Company's common stock is greater than $9.90 for 20
consecutive trading days.
Under the terms of the Debenture and the related Investment Option and Warrants,
the Debenture is convertible and the Investment Option and Warrants are
exercisable by RGC only to the extent that the number of shares of common stock
issuable, together with the number of shares of common stock owned by RGC and
its affiliates, generally would not exceed 4.9% of the Company's outstanding
common stock at the time of conversion or exercise. In certain circumstances
where the Company has the right to force conversion of the Debenture and
exercise of the Investment Option, RGC's percentage ownership may exceed 4.9%
but cannot exceed 9.9%.
As part of the consulting fee paid in conjunction with obtaining the RGC
financing, the Company issued warrants for the purchase of 8,000 shares of its
common stock at $7.03 per share. These warrants expire on April 27, 2005.
The term loan requires monthly principal and interest payments of approximately
$8,000 through May 2003. The note payable to bank bears interest at 9.75% which
is payable monthly through December 2001.
Future maturities of notes payable as of July 31, 2000, are as follows (in
thousands):
Fiscal year ending
------------------
2001 $ 461
2002 248
2003 4,078
---------------
$ 4,787
===============
15
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ARI Network Services, Inc.
Notes to Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
On September 28, 1999, the Company closed and commenced funding under a
Receivable Sale Agreement (the RFC Agreement) with RFC Capital Corporation (RFC)
pursuant to which RFC has agreed to purchase from the Company certain
receivables generated by the Company in the ordinary course of the Company's
business. The RFC Agreement allows for RFC to purchase up to $3,000,000 of the
Company's eligible receivables. Under the Agreement, RFC purchases 90% of the
eligible receivables from the Company from time to time upon presentation
thereof for a purchase price equal to approximately the net value of such
receivables. Net value is designed to yield RFC an effective rate of 11.5% plus
allow RFC to retain a holdback of 5% in the face amount of the receivables, net
of collections, against future collection risk. For the year ended July 31,
2000, the Company incurred $71,000 of financing expense relating to this
agreement.
Under the RFC Agreement, the Company performs certain servicing, administrative
and collection functions with respect to the receivables sold to RFC. Also,
pursuant to the terms of the RFC Agreement, the Company has granted to RFC a
security interest in and to the Company's U.S. receivables not sold to RFC and
the Company's customer base, excluding non U.S. customers, relating to the
generation of such accounts receivable.
5. CAPITAL AND OPERATING LEASES
The Company leases office space under operating lease arrangements expiring in
2001 through 2006. The Company is generally liable for its share of increases in
the landlord's direct operating expenses and real estate taxes up to 5% of the
previous years rent. Total rental expense for the operating leases was $616,000
in 2000, $400,000 in 1999 and $487,000 in 1998.
Minimum lease payments under remaining capital and operating leases are as
follows (in thousands):
Fiscal year ending Capital Leases Operating Leases
- --------------------------- ---------------------------------------------
2001 $154 $ 664
2002 151 664
2003 99 244
2004 - 244
2005 - 189
Thereafter - 89
---------------------------------------------
Total minimum lease payments 404 $2,094
=======================
Amounts representing interest and taxes 79
----------------------
Present value of minimum capital lease payments 325
Less amounts payable in one year 111
----------------------
$214
======================
16
40
ARI Network Services, Inc.
Notes to Financial Statements (continued)
6. SHAREHOLDERS' EQUITY
At July 31, 2000, the Company has 20,350 shares of Series A Preferred Stock
outstanding. The shares are entitled to cumulative annual dividends equal to the
product of $100 and prime plus 2% payable quarterly, as and when declared by the
Board of Directors. Prior to August 1, 2002, dividends payable may be paid, at
the Company's option, in lieu of cash, in additional shares of Series A
Preferred Stock. The Company may redeem outstanding shares at any time at the
redemption price of $100 per share plus accrued and unpaid dividends.
In the event of liquidation or dissolution of the Company, the holders of shares
of Series A Preferred Stock shall be entitled to receive $100 per share plus
accrued and unpaid dividends before any distribution is made to the holders of
common stock. Accumulated dividends in arrears at July 31, 2000, are $725,000.
7. STOCK PLANS
The Company's 1991 Stock Option Plan (Stock Option Plan) had 850,000 shares of
common stock authorized for issuance. Options granted under the Stock Option
Plan may be either (a) options intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended, or (b)
nonqualified stock options.
Any incentive stock option that is granted under the Stock Option Plan may not
be granted at a price less than the fair market value of the stock on the date
of grant (or less than 110% of the fair market value in the case of holders of
10% or more of the voting stock of the Company). Nonqualified stock options may
be granted at the exercise price established by the Stock Option Committee,
which may be less than, equal to or greater than the fair market value of the
stock on the date of grant.
Each option granted under the Stock Option Plan is exercisable for a period of
ten years from the date of grant (five years in the case of a holder of more
than 10% of the voting stock of the Company) or such shorter period as
determined by the Stock Option Committee and shall lapse upon the expiration of
said period, or earlier upon termination of the participant's employment with
the Company.
17
41
ARI Network Services, Inc.
Notes to Financial Statements (continued)
7. STOCK PLANS (CONTINUED)
At its discretion, the Stock Option Committee may require a participant to be
employed by the Company for a designated number of years prior to exercising any
options. The Committee may also require a participant to meet certain
performance criteria, or that the Company meet certain targets or goals, prior
to exercising any options.
Changes in option shares under the Stock Option Plan are as follows:
2000 1999 1998
----------------------------------------------
Options outstanding at beginning of year 675,849 528,715 350,685
Granted:
2000--$2.56 to $10.94 per share 181,950 - -
1999--$1.75 to $8.38 per share - 213,175 -
1998--$2.25 to $4.62 per share - - 229,499
Exercised:
2000--$2.00 to $11.48 per share (223,136) - -
1999--$2.13 to $2.25 per share - (784) -
Canceled or expired (121,443) (65,257) (51,469)
-----------------------------------------------
Options outstanding at end of year 513,220 675,849 528,715
===============================================
Options exercisable at July 31 308,774 429,763 318,282
===============================================
Options available for grant at July 31 72,210 132,717 280,635
===============================================
The Company's 1992 Employee Stock Purchase Plan (Stock Purchase Plan) has 62,500
shares of common stock reserved for issuance and 46,488 shares have been issued
through July 31, 2000. All employees of the Company, other than executive
officers, with six months of service are eligible to participate. Shares may be
purchased at the end of a specified period at the lower of 85% of the market
value at the beginning or end of the specified period through accumulation of
payroll deductions.
The Company's 1993 Director Stock Option Plan (Director Plan) has 150,000 shares
of common stock reserved for issuance to nonemployee directors. Options under
the Director Plan are granted at the fair market value of the stock on the grant
date.
18
42
ARI Network Services, Inc.
Notes to Financial Statements (continued)
7. STOCK PLANS (CONTINUED)
Each option granted under the Director Plan is exercisable one year after the
date of grant and cannot expire later than ten years from the date of grant.
Changes in option shares under the Director Plan are as follows:
2000 1999 1998
----------------------------------------------
Options outstanding at beginning of year 49,879 35,433 28,500
Granted:
2000--$3.25 to $ 11.50 per share 42,261 - -
1999--$2.13 to $4.13 per share - 14,446 -
1998--$1.78 to $2.50 per share - - 15,208
Exercised:
2000--$1.78 to $6.88 per share (16,509) - -
Expired (8,545) - (8,275)
----------------------------------------------
Options outstanding at end of year 67,086 49,879 35,433
==============================================
Options exercisable at July 31 49,879 35,433 25,229
==============================================
Options available for grant at July 31 66,405 100,121 114,567
==============================================
Certain nonemployee directors have been granted stock options aggregating 57,500
shares of common stock at $2.50 to $9 per share.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its stock option plans. Had the
Company accounted for its stock option plans based upon the fair value at the
grant date for options granted under the plan, based on the provisions of SFAS
No. 123, the Company's pro forma net loss and pro forma net loss per share would
have been as follows (for purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period):
YEAR ENDED JULY 31
2000 1999 1998
------------------------------------------------------------
Pro forma net loss (in thousands) $(7,391) $(3,996) $(2,507)
Pro forma net loss per share $ (1.23) $ (0.79) $ (0.61)
19
43
ARI Network Services, Inc.
Notes to Financial Statements (continued)
7. STOCK PLANS (CONTINUED)
Pro forma information regarding net loss and net loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options using a Black-Scholes option pricing model with the
following assumptions: risk-free interest rates ranging from 5.5% to 6%,
dividend yield of 0%; expected common stock market price volatility factors
ranging from .6 to 1.0 and an expected life of the options of ten years.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of July 31 are as follows (in thousands):
2000 1999
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $31,723 $31,336
Other 1,706 433
------------------------------------
Total deferred tax assets 33,429 31,769
Valuation allowance for deferred tax assets (30,393) (28,302)
------------------------------------
Net deferred tax asset 3,036 3,467
Deferred tax liabilities -
Network system 3,036 3,467
-------------------------------------
Net deferred taxes $ - $ -
====================================
As of July 31, 2000, the Company has unused net operating loss carryforwards for
federal income tax purposes of $37,637,000 expiring in 2007 through 2020.
In addition, the Company has unused net operating loss carryforwards for federal
income tax purposes of $10,048,000 expiring in 2001 and 2002, of which not more
than $444,000 annually can be utilized to offset taxable income. Also, the
Company has unused net operating loss carryforwards for federal income tax
purposes of $33,656,000 expiring between 2003 and 2007, of which not more than
$3,655,000 annually can be utilized to offset taxable income. Use of the net
operating loss carryforwards is restricted under Section 382 of the Internal
Revenue Code because of changes in ownership in 1987 and 1992.
20
44
ARI Network Services, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation between income tax expense and income taxes computed by
applying the statutory federal income tax rate to net loss is as follows (in
thousands):
2000 1999 1998
--------------------------------------------------
Computed income taxes at 34% $(2,158) $(1,161) $(728)
Permanent items 435 7 7
Net operating loss carryforward 1,723 1,154 721
--------------------------------------------------
Income tax expense $ - $ - $ -
==================================================
9. EMPLOYEE BENEFIT PLAN
The Company has a qualified retirement savings plan (the 401(k) Plan) covering
its employees. Each employee may elect to reduce his or her current compensation
by up to 15%, up to a maximum of $10,500 in calendar 2000 (subject to adjustment
in future years to reflect cost of living increases) and have the amount of the
reduction contributed to the 401(k) Plan. Company contributions to the 401(k)
Plan are at the discretion of the Board of Directors. The Company has not made
any contribution to the 401(k) Plan since its inception.
10. MAJOR CUSTOMERS
During fiscal 2000 and 1999, sales to any one customer did not exceed 10% of net
revenues. Sales to one customer were 12% of net revenues during 1998.
21
45
Schedule II
ARI NETWORK SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 2000, 1999 and 1998
(Dollars in Thousands)
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS END OF YEAR
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts-
accounts receivable:
2000 $ 278 $ 668 $ 249 (A) $ 697
===== ===== ===== =====
1999 $ 185 $ 307 $ 214 (A) $ 278
===== ===== ===== =====
1998 $ 132 $ 95 $ 42 (A) $ 185
===== ===== ===== =====
(A) Uncollectible accounts written off, net of recoveries.