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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 [Fee Required]
for the fiscal year ended July 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
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. 53202-3166
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. [ ]
---
As of October 24, 1996, the aggregate market value of the Common Stock
held by non-affiliates (based on the closing price on the NASDAQ National
Market System) was approximately $23 million.
As of October 24, 1996, there were 14,201,815 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, 1996,
for the 1996 Annual Meeting of Shareholders are incorporated by reference in
Part III hereof.
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PART 1
ITEM 1. BUSINESS
OVERVIEW
ARI Network Services, Inc. (the "Company" or "ARI") provides
customer-side Internet-enabled electronic commerce ("EC") services to companies
in selected industry sectors and distribution channels. Currently, the Company
provides two types of EC Services that enable its customers in turn to do
business electronically with their customers: (i) transaction management
services and (ii) data management services. These two types of services are
sold into three vertical markets: (i) Agribusiness, which includes
Agricultural and Specialty Chemicals ("Chemical"), Farm and Outdoor Power
Equipment ("Equipment") and Livestock Pharmaceuticals, Feed and Seed ("Animal
Health"); (ii) Freight Transportation ("Transportation"); and (iii) Newspaper
Publishing ("Publishing"). At present, the Company focuses its marketing
efforts on companies operating in the United States and Canada.
The Company uses telecommunications and computer technology to help
customers conduct business electronically, computer to computer, with minimal
changes to their internal business systems. The Company's services include:
telecommunication networking; incompatible computer systems connectivity;
electronic mail messaging; electronic data interchange (EDI) translation;
product and participant directories and databases; information exchange and
retrieval; sales automation and a wide range of customer specified electronic
commerce and transaction processing applications. The Company also provides
end user application software related to its EC services and a range of
professional services, including consulting, custom application development,
installation, education and support. The Company focuses its marketing efforts
on major manufacturers and distributors that have the financial resources and
business motivation to convert their distribution systems from paper-based to
electronic commerce, thereby reducing processing expenses and time to market.
Customers use the Company's transaction management services for
electronic commerce applications such as product availability inquiries, batch
and immediate response ordering, sales reporting and sales force automation.
On the data management side, the Company also creates and manages electronic
databases, including electronic commerce directories of industry participants
and products and a directory of ship-to and bill-to locations used by the
Transportation industry. Through its "Newsfinder(R)" service, the Company
edits and manages a database of over 20,000 Associated Press ("AP") news
stories that are accessed by non-daily newspapers. Other online databases
managed by the Company include "Custom Comply(TM)", a database of Material
Safety Data Sheets used by the chemical industry, and "DocuLink", a database of
UCC lien filings used by commercial lenders. Data management services are sold
to industry participants, in the case of the electronic commerce directories,
and to non-daily newspapers, in the case of Newsfinder(R). The Company has two
customers which exceed 10% of the total revenue. See Note 8 of Notes to
Consolidated Financial Statements. One is the Association of American
Railroads (AAR) in which the Company signed a five year agreement, July 1994,
to be the file maintainer of a database of ship-to and bill-to locations. The
AAR will continue to be a significant customer of the Company. The second is
Hoffmann La Roche (HLR) from the Agribusiness and other related industries
sector. In fiscal 1996, HLR converted from the Company's DOS sales force
automation application to the Windows(R) version. Revenue was generated from
software license fees, customized development, professional services and
network traffic and support fees. Although HLR will continue to be a key
customer of the Company, they are not expected to represent 10% of the
Company's revenue in fiscal 1997.
The Company's executive offices are located at 330 East Kilbourn
Avenue, Milwaukee, Wisconsin 53202 and its telephone number at that location is
(414) 278-7676. The Company is a Wisconsin corporation, incorporated in 1981.
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STRATEGY
The Company's mission is to be the preeminent provider of customer-side
Internet-enabled business-to-business EC services in selected industry sectors.
The Company's vision is that whenever a company in one of the Company's
target markets does business electronically with its customers, it will use
at least some of the Company's services to do so. To achieve this vision, the
Company's strategy is to concentrate on a few vertical markets and to lead with
two product thrusts: (i) dealer systems (transaction management) and (ii)
EC-ID(TM) (data management) services.
The Company's dealer systems connect manufacturers to their dealers
and distributors and enable parts ordering, product registration, and warranty
registration; EC-ID(TM) services are marketed jointly by the Company and Dun &
Bradstreet Information Services. ("D&B") to provide a unique location ID for
use in electronic commerce transactions. After having obtained a position in a
given market, the Company will then bring other products and services to bear
to expand its presence and solidify its stance vs. the competition. The
Company's goal is to provide a complete array of high-quality services that
industry participants will adopt and use effectively.
The Company has built business processes and technical competency in
each of its targeted business sectors: Agribusiness, Transportation and
Publishing. Major customers in each sector participate in defining product
requirements. This ensures that completed products are technically sound and
will address the business problems participants are trying to solve through
electronic commerce. The Company expects to expand its business by (i) growing
market share in these sectors; (ii) entering new subsectors of these target
markets; and (iii) entering selected new vertical markets over time. As this
is a forward looking statement, future actual results may differ. See
"Competition" and "Forward Looking Statements."
SERVICES
The Company's services include transaction management services and
data management services, as well as professional services related to each.
Transaction management services take the form of customer specified EC
applications tailored to the needs of the industry sector served. These
applications currently include: (i) batch and immediate response electronic
product ordering; (ii) warranty claims processing; (iii) inventory and sales
reporting and (iv) sales force automation. Additional applications are planned
for future release.
Data management services include: (i) building and maintaining
electronic directories of participants (i.e., ship-to and bill-to locations)
and products; (ii) assisting individual companies with managing their customer
and/or product lists; and (iii) managing an online database of news stories
from the Associated Press which the Company organizes by key words and sells to
non-daily and specialty newspapers. The Company also manages an online
database of UCC lien filings for access by commercial lenders and a database of
Material Safety Data Sheets for the Chemical industry.
The Company's professional services are designed to assist customers
with the implementation of electronic commerce applications. Services include:
(i) custom software development for proprietary network services applications;
(ii) electronic commerce strategy and implementation consultation; (iii)
application configuration and installation; and (iv) user education, training
and ongoing support.
COMPETITION
The Company's competitors vary by product line and vertical market.
Many of these competing companies have substantially greater resources than
ARI. Sterling Commerce is established in the human pharmaceutical sector, in
which manufacturers overlap with Animal Health product manufacturers. The
network services industry is highly competitive. Several companies, including
GE Information Services, AT&T, MCI, EDS, BT Tymnet, Inc., Sterling Commerce,
Advantis Inc., Harbinger, Inc., and others offer electronic commerce services
that are similar to those offered by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Agribusiness
and Related Industry Revenues". Sterling Commerce provides certain sales
reporting services to these companies, including services that report sales
activity on some Animal Health drugs. Certain manufacturers of agricultural
equipment operate their own private computer networks for transacting business
with their dealers. Briggs
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and Stratton, through its wholly owned subsidiary, Powercomm 2000, offers a
competing network to dealers and equipment manufacturers in the outdoor power
equipment industry. There are also many companies, including Sales Kit
Software Corporation, Inc., Saratoga Systems, Inc. and Aurum Software, Inc.
that market sales force automation software that competes with the Company's
sales force automation products. Sales Technologies, Inc. sells its sales
force automation software to the pharmaceutical industry, which overlaps with
Animal Health. Although the Company has an exclusive relationship with the
Associated Press for the delivery of AP copy to non-daily newspapers for
re-publication, these papers can obtain alternative copy from other news
services, such as Reuters. Customers could also obtain some of the Company's
data management services from D&B or American Business Information, Inc.,
although though the Company's relationship with D&B is primarily cooperative
rather than competitive.
The Company's primary competitive advantage is in the industry
knowledge and customer relationships it has developed. When combined with
services that meet the needs of the Company's customers, management believes
that its industry knowledge and customer relationships will enable it to
compete effectively in its chosen markets.
TECHNOLOGY
At the hub of the Company's network is an IBM Model 9121-311 mainframe
and a series of Sun Sparc servers. The Sun Sparc servers are used as a
communications front-end to the IBM mainframe, as well as, to provide a
platform for applications in their own right. An Oracle database and message
switching software provide the communications infrastructures. This network
architecture is designed to allow cost effective integration of new products
and services. The IBM MVS/XA operating system provides the software operating
environment for the IBM mainframe. Mainframe databases are created and managed
using IBM's DB2 relational database system. The Sun Sparc servers operate
under UNIX with Oracle as the relational database engine. Physical storage is
provided through a direct access storage device and tape cartridge for archive
and routine backup.
Synchronous host connections are employed to link mainframe computer
users. Dial up asynchronous links through AT&T's X.25 network or direct 1-800
calls are used for most other existing connections. Dial up TCP/IP (PPP) is
being provided with the Company's new Windows(R) based applications.
Communication is provided by AT&T T1 circuits augmented by a fault-tolerant
local fiber-optic loop. A fault tolerant "front-end" computer is also employed
in the capture of time-sensitive news wire information from the Associated
Press.
During 1996, the Company invested considerable resources in developing
its Internet knowledge and capabilities. As of October 15, 1996, the Company's
transaction and data management services are accessible via the Internet, and
its new Windows(R) applications are Internet-enabled. Management expects that
Internet products and services will generate an increasing proportion of the
Company's revenue during the next several years. As this is a forward looking
statement, future actual results may differ. See "Forward Looking Statements".
The Company's products are developed in-house, as well as through licensing
technologies from third parties. These licensing agreements tend to be
perpetual or renewable in nature and are subject to royalty and/or maintenance
fees.
The electronic commerce industry in general is characterized by
evolving standards and technology. The Company's ability to anticipate or
guide these standards in its targeted sectors and to fund advances in computer
and telecommunications technology and software will be a significant factor in
the Company's ability to grow and remain competitive.
EMPLOYEES
As of October 15 , 1996, the Company had 70 full-time equivalent
employees. Of these, 16.5 are technical and engaged in maintaining or
developing products and services, 43.5 are sales and marketing, database
management and customer support and 10 are involved in administration and
finance. None of these employees is represented by a union.
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ITEM 2. PROPERTIES
The Company occupies approximately 45,000 square feet in an office
building in Milwaukee, Wisconsin, under a lease expiring July 31, 1997. This
facility serves as the Company's headquarters and data center. At present, the
Company is renegotiating its lease to obtain a more favorable rate and fewer
square feet. Should this effort prove unsuccessful, the Company is prepared to
relocate to less expensive facilities elsewhere in the Milwaukee area.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names of the Company's executive
officers as of October 15, 1996. The officers serve at the discretion of the
Board. The Company named a new president and chief executive officer during
the second quarter of fiscal 1996. The Company named a new Vice President of
Sales in the first quarter of fiscal 1997.
NAME AGE CAPACITIES IN WHICH SERVING
---- --- ---------------------------
Brian E. Dearing 41 President and CEO and a Director
Lynn M. Hafemeister 39 Vice President Finance and Administration and CFO and
Treasurer
Mark L. Koczela 42 Executive Vice President of Business Development and
Secretary
John C. Bray 39 Vice President Sales
- -----------
BRIAN E. DEARING, 41; Mr. Dearing, first elected to the Board by the
Board of Directors in November, 1995, is President and Chief Executive Officer
of the Company. Prior to joining the company, Mr. Dearing held the position of
Vice President - EDI Business Development in London, England, with Sterling
Software, Inc. Since 1990, Mr. Dearing held a series of electronic commerce
executive positions at Sterling including Vice President of Marketing and Vice
President of Customer Service for Sterling's North American EDI business, as
well as Vice President of European Network Services. Prior to joining
Sterling, Mr. Dearing was Manager of EDI Market Development and Manager of EDI
Product Management with General Electric Information Services. 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. He also spent a year of undergraduate studies at the London School of
Economics.
LYNN M. HAFEMEISTER. Ms. Hafemeister is Vice President of Finance and
Administration and Chief Financial Officer and Treasurer of the Company. Ms.
Hafemeister was promoted to her current position in November, 1994. She has
executive management responsibility for the Company's finance, administration
and operations departments. Prior to joining the Company in May 1994, Ms.
Hafemeister was Controller of Brady Coated Products Co., a division of W.H.
Brady, a Milwaukee, Wisconsin manufacturer where she worked since 1993. Before
joining W.H. Brady, Ms. Hafemeister was employed as Controller of Stokely USA
and Financial Analysis Manager of Appleton Papers. She holds a BBA and an MS -
Accounting from the University of Wisconsin, Whitewater.
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MARK L. KOCZELA. Mr. Koczela is Executive Vice President of Business
Development and Secretary. Prior to joining the Company in January, 1992, Mr.
Koczela was a shareholder at Godfrey & Kahn, S.C., a Milwaukee, Wisconsin law
firm where he had worked since 1983 representing a variety of businesses
including the Company. He holds a BA in History from the University of
Massachusetts and a JD from Duke University Law School.
JOHN C. BRAY. Mr. Bray was appointed Vice President of Sales in
October, 1996. Prior to joining the Company, Mr. Bray was Manager of Global
Internet Sales and Consulting at GE Information Services (GEIS) in Rockville,
Maryland. Before joining GEIS in 1996, Mr. Bray was a Regional Vice President
of Sales for AT&T's EasyLink Services marketing electronic commerce services.
Mr. Bray was employed by AT&T from 1991 through 1996. He holds a BA in
marketing from the University of Iowa.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company'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 sales prices on the composite tape for the NASDAQ-NMS for the periods
indicated.
FISCAL QUARTER ENDED HIGH LOW
October 31, 1994 . . . . . . . $4.50 $2.750
January 31, 1995 . . . . . . . $3.375 $2.375
April 30, 1995 . . . . . . . . $2.875 $2.00
July 31, 1995 . . . . . . . . $2.50 $1.75
October 31, 1995 . . . . . . . $2.875 $1.50
January 31, 1996 . . . . . . . $3.50 $1.625
April 30, 1996 . . . . . . . . $3.50 $2.125
July 31, 1996 . . . . . . . . $2.875 $1.375
As of October 15, 1996, there were approximately 162 holders of record
and approximately 1308 beneficial owners of the Company's common stock. The
Company has not paid cash dividends to date and has no present intention to pay
cash dividends.
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, 1996, which was derived from audited Consolidated Financial Statements
and Notes thereto of the Company. Audited Consolidated Financial Statements
and Notes as of July 31, 1996 and 1995 and for each of the three years in the
period ended July 31, 1996, 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 Consolidated Financial Statements
and Notes thereto included elsewhere herein.
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YEAR ENDED JULY 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Software & development revenue............... $ 768 $ 1,455 $ 1,752 $ 1,979 $ 1,046
Network & other services revenues............ 4,484 3,880 3,498 3,032 2,710
--------- -------- -------- -------- --------
Total revenues..................... 5,252 5,335 5,250 5,011 3,756
OPERATING EXPENSES:
Variable cost of software &
development sold......................... 288 149 214 236 197
Variable cost of network & other
services sold............................ 925 1,087 1,208 1,036 785
Depreciation and amortization............ 1,800 2,388 11,514(1) 2,986 2,375
Network operations....................... 919 1,171 1,281 1,329 928
Selling, general & administrative........ 4,585 4,756 6,411 6,362 5,766
Restructuring costs...................... 0 0 500(2) 0 0
Network construction and expansion....... 1,897 1,788 2,745 2,833 2,236
--------- -------- -------- -------- --------
Gross operating expenses................. 10,414 11,339 23,873 14,782 12,287
Less capitalized portion................. (1,230) (1,616) (2,602) (3,645) (2,829)
--------- -------- -------- -------- --------
Net operating expenses................... 9,184 9,723 21,271 11,137 9,458
--------- -------- -------- -------- --------
Operating loss............................... (3,932) (4,388) (16,021) (6,126) (5,702)
Other income................................. 12 115 51 473 334
Interest expense............................. (286) (66) (97) (225) (987)
--------- -------- -------- -------- --------
Loss before extraordinary credit &
minority interest...................... (4,206) (4,339) (16,067) (5,878) (6,355)
Minority interest in (earnings) loss of
subsidiary................................... -- -- 41 (41) --
Extraordinary credit......................... -- -- 937(2) -- --
--------- -------- -------- -------- --------
Net loss..................................... $ (4,206) $ (4,339) $(15,089) $(5,919) $(6,355)
========== ========= ======== ======== ========
Income (loss) per common share:
Loss before Extraordinary credit......... $(0.34) $(0.36) $(1.47) $ (0.57) $(0.72)
Extraordinary credit..................... -- -- 0.09 -- --
--------- -------- -------- -------- --------
Net loss................................ $(0.34) $(0.36) $(1.38) $(0.57) $(0.72)
Weighted average number of common and common
equivalent shares........................... 12,455 12,071 10,904 10,328 8,841
BALANCE SHEET DATA:
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Working capital (deficit)................... $(3,412) $(1,564) $485 $2,389 $9,920
Capitalized network system (net)............ 9,264 9,277 9,253 17,273 15,750
Total assets................................ 11,479 11,683 13,258 23,479 29,656
Current portion of long-term debt and capital
lease obligations........................... 63 68 76 539 550
Total long-term debt and capital lease 22 73 101 742 1,216
obligations.................................
Total shareholders' equity.................. 6,182 8,524 11,215 20,966 26,837
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(1) Includes a non-recurring amortization charge of $7.7
million as a result of management's decision to move from DOS to
Windows (R) as the principal operating system for the Company's end
users applications.
(2) Company commenced a restructuring in second quarter fiscal
1994. Restructuring charge was comprised of severance, recruiting,
relocation and related expenses.
(3) Company was released from capital lease obligations with
IBM in the fourth quarter of fiscal 1994.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REVENUES
Total revenue for the year ended July 31, 1996 decreased $83,000 or
1.6% as compared to last year. This was due to a decrease in non-recurring
revenues generated from the sale of DOS software applications and related
professional services revenue in the Chemical sector of the Agribusiness
industry for fiscal 1996. The Company shipped a new Internet enabled
Windows(R) based version of its software for this market in October, 1996.
Recurring revenues for the Company did increase by 14% compared to last year.
Total revenue increased by 9% in each of the quarters ending April 30, 1996 and
July 31, 1996 compared to last year after decreasing by 10% and 17% for the
quarters ending October 31, 1995 and January 31, 1996. Management expects the
year-over-year quarterly increases to continue into the new year, though there
can be no assurances that this will happen. As this is a forward-looking
statement, future actual results may differ. See "Forward Looking Statements".
The Company has a strategy of building a sustainable recurring revenue
stream in selected vertical markets for each of its primary services.
Accordingly, the Company reviews its revenue by two distinct classifications:
(i) recurring vs. non-recurring revenue and (ii) revenue by vertical market.
The following tables set forth, for the periods indicated, certain
revenue information derived from the Company's consolidated financial
statements:
RECURRING VS. NON-RECURRING REVENUE
Year Ended July 31,
(Dollars in Thousands)
--------------------------------------
1996 1995 1994
Recurring Revenue . . . . . . . . . . . . . . . . . . . . . . . . . $4,084 $3,591 $3,221
Non-recurring Revenue . . . . . . . . . . . . . . . . . . . . . . . 1,168 1,744 2,029
----- ----- -----
$5,252 $5,335 $5,250
===== ===== =====
The Company's revenues are both recurring and non-recurring.
Recurring revenues are derived from network traffic fees, maintenance and
support fees, transaction fees and subscription fees. Recurring revenue has
increased each of the last two years. Fiscal 1996 recurring revenue increased
by 14% over fiscal 1995, which in itself was an increase of 12% over fiscal
1994. The increase in recurring revenues is due to increases in the number of
transactions being transmitted over the network by the Company's base of
agrichemical manufacturers and distributors from the Agribusiness industry,
increased usage by the Newsfinder(R) customers and the initiation of
maintenance and support services in the Transportation industry. In fiscal
1996, recurring revenues constituted 78% of total revenues compared to 67% in
fiscal 1995 and 61% in fiscal 1994. Management expects the percentage of
recurring revenues to decrease in fiscal 1997 as more software sales are made,
though there can be no assurance that such sales will occur. As this is a
forward-looking statement, future actual results may differ. See "Forward
Looking Statements".
Non-recurring revenues are derived from the sale of software and
professional services. Non-recurring revenue has decreased in each of the last
two years. Fiscal 1996 non-recurring revenue decreased by 33% compared to
fiscal 1995. The decrease is a result of a decrease in sales of DOS software
applications and related professional services revenue in the Agribusiness
industry. The decrease is also due to the completion of file creation and
set-up in the Transportation industry, resulting in lower non-recurring
revenues but an increase in recurring revenues from maintenance and support
fees. The decrease of 14% in fiscal 1995 compared to fiscal 1994 was a result
of decreased sales of DOS software applications and related professional
services revenue in the Animal Health sector of the Agribusiness industry and
decreased revenue from discontinued product lines. Anticipating the customers'
desire for Windows(R) applications over
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DOS products, management decided to develop an Internet enabled Windows(R)
sales force automation application, known as ARISE(TM) and an Internet enabled
Windows(R) EDI transaction management product, known as Meppel(TM), which
includes a sales reporting module. Both products are currently available for
sale. The Company is also in the process of developing an Internet enabled
Windows(R) parts ordering application to be known as Tradewind(TM). In fiscal
1996, non-recurring revenue constituted 22% of total revenue compared to 33% in
fiscal 1995 and 39% in fiscal 1994. Management expects the percentage of
non-recurring revenue to increase in fiscal 1997, as more software and
professional services sales are made, though there can be no assurances that
such sales will occur. As this is a forward-looking statement, future actual
results may differ. See "Forward Looking Statements".
REVENUE BY VERTICAL MARKET
Year Ended July 31,
(Dollars in Thousands)
----------------------------------------
1996 1995 1994
Agribusiness and related industry revenues.............. $3,026 $3,164 $2,862
Transportation revenue.................................. 618 584 432
Publishing revenue...................................... 1,243 1,228 1,169
Other revenues.......................................... 365 359 787
--- --- ---
Total revenues $5,252 $5,335 $5,250
====== ====== =======
As part of the Restructuring described below, the Company discontinued
certain of its product lines. Revenue from continuing product lines was
$5,249,000, in fiscal 1996, $5,308,000 in fiscal 1995 and $4,767,000 in fiscal
1994.
Agribusiness and Related Industry Revenue
Revenues in this area are derived from network traffic fees,
maintenance and support fees, subscription fees, software sales and
professional services fees charged to the Company's customers marketing outdoor
power and agricultural equipment, seed, agricultural chemical, animal health,
and other related products. Agribusiness and related industry revenues
represent 58% of the total revenue in fiscal 1996, compared to 59% in fiscal
1995 and 55% in fiscal 1994.
Recurring revenue in the Agribusiness Industry increased 10% from
$2,044,000 in fiscal 1995 to $2,241,000 in fiscal 1996 and 32% from $1,552,000
in fiscal 1994 to $2,044,000 in fiscal 1995 as the number of transactions being
transmitted over the network increased. Non-recurring revenue decreased 30%
from $1,120,000 in fiscal 1995 to $785,000 in fiscal 1996 and 15% from
$1,310,000 in fiscal 1994 to $1,120,000 in fiscal 1995. The decrease in fiscal
1996 was due mainly to the decrease in the number of new DOS software
applications in the Agribusiness Industry. Revenue in the Agribusiness
sector is expected to increase in fiscal 1997 with the release of the Internet
enabled Windows(R) portfolio of products for equipment parts ordering, sales
reporting and sales force automation, however, there can be no assurance that
these sales will occur. As this is a forward-looking statement, future actual
results may differ. See "Forward Looking Statements". The sales force
automation application, known as ARISE(TM) was released in March, 1996.
ARISE(TM) revenue this year included the conversion of Hoffmann La Roche, a
leading manufacturer in the Animal Health industry, from the DOS product.
Meppel(TM), an EDI transaction management product which includes a sales
reporting module, was released in the first quarter of fiscal 1997, and
development of an Internet enabled Windows(R) application for equipment parts
ordering to be known as Tradewind(TM) will begin in fiscal 1997.
The manufacturers in the Agribusiness Industry have formed a jointly
owned company known as "RAPID" to develop an "allied industry" network which
includes a directory of physical locations and electronic commerce trading
partners in the "allied industry". The plans for the RAPID network contemplate
a PC subscriber interface, communications connectivity, electronic mail, file
transfer, bulletin board services, Internet access, EDI/EFT and connectivity to
third party value added services providers, such as the Company. EDS has been
retained by RAPID to develop the end user software and network. The Company
and RAPID have reached an agreement for a 3-year
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commitment by the Company to create and maintain this "allied directory" for
the "allied industry" network. This will result in non-recurring revenues from
file conversion and recurring revenues from file maintenance. Management
believes that the Company has developed a positive relationship with RAPID and
that the Company will be able to grow its revenue in the Agribusiness industry.
However, there can be no assurances that the Company's relationship with RAPID
will be entirely or primarily cooperative rather than competitive. As these
are forward looking statements, future actual results may differ. See "Forward
Looking Statements."
In July 1996, the Company formed an alliance with Dun & Bradstreet
Information Services to market a standard electronic commerce identification
number ("EC-ID(TM)") that will allow companies to precisely identify each
business location involved in an electronic commerce transaction and will be
used by the Company in its data management services in the Agribusiness and
Transportation industries.
In April, 1996, the Toro Company, whose product is carried by more
than 8,000 dealers in the U.S. and Canada, joined the Company's outdoor power
equipment dealer network, called "OPEN" (Original Parts and Equipment Network).
As of July 31, 1996, 139 TORO dealers were connected to the network. Using the
OPEN services, dealers can electronically order parts, register sales, make
warranty claims, and otherwise communicate with manufacturers. With the
growing trend towards electronic business-to-business commerce worldwide, the
Company views this as a potential opportunity in fiscal 1997, though there can
be no assurances that such revenues will materialize.
Publishing Revenue
Revenues in the publishing sector are derived from connect time fees
and subscription fees charged to the Company's Newsfinder(R) and AP Alert
customers. These products serve the non-daily publication marketplace.
Newsfinder(R) manages the approximately 20,000 news stories per week output of
the AP, providing access to some 800 publishers with nearly 1,300 weekly and
monthly newspapers. In February, 1996 the Company renewed its contract with
the AP to provide Newsfinder(R), to these non-daily publications for an
additional five year term. Publishing revenues remained relatively flat at
$1,243,000 in fiscal 1996 compared to $1,228,000 in fiscal 1995 and increased
5% from $1,169,000 in fiscal 1994 to $1,228,000 in fiscal 1995. The increase
in fiscal 1995 was the result of a price increase instituted in January 1995
and a slight increase in the number of subscribers. Publishing revenues
represent 24% of the Company's total revenue in fiscal 1996 compared to 23% in
fiscal 1995 and 22% in fiscal 1994. Close to 90% of the revenue in this
industry is recurring.
During fiscal 1996, the Company developed and is pilot testing an
Internet-accessible version of its Newsfinder(R) data management service.
Management expects the Internet to make access and use of the service faster
and easier for Newsfinder(R) customers.
Transportation Industry Revenue
In July, 1994, the Company was selected by the Association of American
Railroads ("AAR") to be the file maintainer of a database of ship-to and
bill-to locations for the Transportation industry known as the Customer
Identification File ("CIF"). Revenues in this area are derived from
maintenance and support fees, transaction fees and professional service fees.
Revenues during fiscal 1995 came primarily from business and systems analysis
and file creation services. Fiscal 1996 revenues from the CIF came primarily
from monthly management fees and other recurring fees from usage and
maintenance of the database. Transportation industry revenue represents 12% of
the Company's total revenue in fiscal 1996, compared to 11% in fiscal 1995 and
8% in fiscal 1994. Revenue in this industry has converted from 90%
non-recurring to 74% recurring revenue over this three year comparative period.
Other Revenues
Other revenues increased 2% from $359,000 in fiscal 1995 to $365,000
in fiscal 1996 and decreased 54% from $787,000 in fiscal 1994 to $359,000 in
fiscal 1995. The decrease in other revenue from 1994 to 1995 is due to the
discontinuation of certain non-strategic product lines as a result of the
fiscal 1994 restructuring and a slowing of new product sales on the continuing
product line of DocuLink, while the year to year increase from 1995 to 1996 is
within the normal fluctuations of a basically flat business.
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OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain
operating expenses derived from the Company's consolidated financial
statements:
Year Ended July 31,
(Dollars in Thousands)
-------------------------
1996 1995 1994
Variable cost of products and services sold (exclusive of depreciation
and amortization shown below)........................................... $1,213 $1,236 $1,422
Network operations...................................................... 919 1,171 1,281
Selling, general and administrative..................................... 4,585 4,756 6,411
Restructuring costs..................................................... 0 0 500
Network and product development......................................... 1,897 1,788 2,745
------ ------ ------
Gross cash expenses.................................................. 8,614 8,951 12,359
Depreciation and amortization........................................... 1,800 2,388 11,514
Less capitalized expenses............................................... (1,230) (1,616) (2,602)
------ ------ ------
Net operating expenses $9,184 $9,723 $21,271
====== ====== =======
Gross cash expenses decreased $337,000 in fiscal 1996 compared to fiscal 1995,
due to decreased payroll related expenses resulting from increased operating
efficiencies. Fiscal 1995 gross cash expenses decreased $2,908,000, excluding
the $500,000 restructuring charge, compared to fiscal 1994. Expense reductions
in fiscal 1995 were a result of the restructuring begun in fiscal 1994, which
included a 50% staff reduction, renegotiated maintenance contracts,
renegotiated insurance agreements and various cost cutting measures to reduce
overhead expenses.
Variable cost of products and services sold consist primarily of royalties,
telecommunications and data processing and temporary help fees paid to third
parties in connection with providing database services and customized
development labor for ARISE(TM) customers. Variable costs of products and
services sold, as a percent of sales, were 23%, 23% and 27% in fiscal 1996,
1995, and 1994, respectively. The variation is due to changes in the mix of
applications and services sold. Higher margin network traffic revenues as a
percentage of total revenues were greater in fiscal 1996 and fiscal 1995 than
in fiscal 1994, due to a decreased number of DOS software sales and related
professional services.
Network operations cost has decreased 22% in fiscal 1996 and 9% in fiscal 1995
due to increased efficiency and cost reductions in the areas of payroll and
hardware and software maintenance agreements. During the first quarter of
fiscal 1997, the Company invested approximately $100,000 in a new IBM Model
9121-311 mainframe which has approximately 20% more horsepower, is
environmentally safer and costs approximately 30% less in ongoing maintenance
and utilities than the old mainframe.
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Selling, general and administrative expenses decreased by $171,000 in fiscal
1996 compared to fiscal 1995. The decrease in expense was due to delays in
filling open positions and additional expense cutting as a result of slow
software sales. Management does expect these expenses to increase in fiscal
1997 as sales and staff positions are filled, due to the release of the
Windows(R) applications and the increased focus on sales and marketing.
Selling, general and administrative expenses decreased significantly in fiscal
1995 due to the restructuring and staff reductions begun in fiscal 1994.
Depreciation and amortization decreased significantly in fiscal 1996 and fiscal
1995 due to the non-recurring amortization charge of $7.7 million incurred in
fiscal 1994 as a result of management's decision to move from DOS to Windows(R)
as the principal operating system for the Company's end user applications. The
fiscal 1994 non-recurring amortization charge and accelerated useful life
estimate on remaining DOS products have resulted in lower amortization expense
in fiscal 1996.
Capitalized expenses represented 65%, 90% and 95% of network and product
development cost in fiscal 1996, 1995 and 1994, respectively. Capitalized
expenses decreased as a percentage of network and product development costs in
fiscal 1996 and fiscal 1995 as a result of management's decision to refocus
various staff members from capitalized development to selling and
administrative expenses. Capitalized expenses decreased additionally in fiscal
1996 due to the increased usage of the development staff to handle
customization of ARISE(R) software for Hoffmann La Roche and FIserv.
Customization work for a particular customer is expensed and not capitalized.
RESTRUCTURING
In the second quarter of fiscal 1994, the Company commenced a restructuring
(the "Restructuring") designed to focus resources on the core electronic
commerce opportunity, strengthen the Company's management team, increase
internal productivity, reduce overhead and increase sales and marketing
activities. During the quarters ended January 31, 1994, April 30, 1994 and
July 31, 1994, the Company incurred charges in the amount of $400,000, $75,000
and $25,000, respectively, for a total of $500,000 comprising severance,
recruiting, relocation and related expenses of the Restructuring.
As of July 31, 1996, the Company had reduced the number of its full time
equivalent employees to 70, from 152 in July 1993. The Company believes that
the staff reductions were necessary and that the business can be sustained at a
level of approximately 80 people until the Company's revenue base increases
significantly. The Company does not believe that the reductions will have a
material adverse effect on it's future competitiveness or operations.
Another element of the Restructuring involved eliminating or consolidating
unprofitable products. The Company closed down the facility of its subsidiary,
Dynatec, located in Buffalo Grove, Illinois, as of May 13, 1994. The Company
continues to operate Dynatec's sales force automation product for existing
customers who participate in the Company's electronic commerce network. Future
sales of the Company's sales force automation service will be of ARISE(TM), the
Company's new Internet enabled Windows(R) based application. In addition, the
Company discontinued certain of its online information products because they
were unprofitable and non-strategic.
The primary effect to date of the Restructuring is that the Company has been
able to reduce ongoing expenses. Primarily through reductions in staff levels,
the Company has reduced annual cash operating expenses by approximately $3.0
million, the full impact of which was realized between fiscal 1995 and fiscal
1996. Having led the Company through the Restructuring, Don Knudsen resigned
his position as President and Chief Executive Officer in July, 1995. The Board
of Directors appointed Brian E. Dearing, President and Chief Executive Officer
in November, 1995.
EXTRAORDINARY CREDIT
The Company recognized an extraordinary gain during the fourth quarter of
fiscal 1994 as a result of the release by IBM of the Company's obligations
under certain capital leases. See Note 3 of Notes to Consolidated Financial
Statements.
13
14
OTHER ITEMS
Interest expense increased $220,000 in fiscal 1996 due to the Company's cash
fundings under the lines of credit rather than through the sale of securities.
Company common stock was sold in the second and fourth quarters of fiscal 1996,
as well as in the first quarter of fiscal 1997. See" Liquidity and Capital
Resource" section. In fiscal 1995, interest expense decreased $31,000 from
fiscal 1994 as a result of the Company's release from capital leases with IBM.
See Note 3 of Notes to Consolidated Financial Statement.
Net loss of $4,206,000 in fiscal 1996 is favorable to fiscal 1995 by $133,000
due to expense reductions explained previously. The expense savings were
partially offset by an increase in interest expense of $220,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant negative cash flows from its operating
activities. The Company will require significant increases in revenues to
cover fixed operating costs and to achieve a profitable level of operations.
The Company expects to continue to incur operating losses for the fiscal year
ending July 31, 1997 and there can be no assurance that profitability will be
achieved thereafter. The Company also expects to continue to incur significant
expenditures for network construction and expansion. The Company's network
construction and expansion costs and negative cash flow from operations
historically have been funded primarily from the sale of securities and from
the lines of credit with shareholders.
At July 31, 1996, the Company had cash and cash equivalents of approximately
$372,000 compared to approximately $236,000 at July 31, 1995 and $1,030,000 at
July 31, 1994. On November 13, 1995 the Company filed a registration statement
with the Securities and Exchange Commission for the sale of up to two million
shares of the Company's common stock. Between January 31, 1996 and September
13, 1996 all two million shares were sold with net proceeds to the Company of
$4,625,000. The proceeds were used to fund operations and repay portions of
outstanding revolving credit lines.
On December 2, 1994 the Company executed a Loan Agreement with WITECH
Corporation ("WITECH") and QUAESTUS Limited Partnership ("QLP") providing the
Company with a $1,500,000 senior secured revolving line of credit facility (the
"Senior Line"), which expires on December 31, 1996 (extended from December 31,
1995 by amendment dated October 18, 1995). Interest on the Senior Line accrues
at the rate of 2% over the prime rate.
The Company also has a line of credit with WITECH, (the "WITECH Line") that has
been in place since October 4, 1993. The WITECH Line is in the amount of $1.5
million. On April 20, 1996 the WITECH Line was amended to provide a Bridge
Loan of $500,000 accruing at the same rate as the other lines through June 30,
1996. In the event the Bridge Loan was not repaid by June 30, 1996 the unpaid
balance was to bear an annual interest rate of prime plus 6%. The WITECH Line
will expire on December 31, 1996 (extended from December 31, 1995 by amendment
dated October 18, 1995). Under the WITECH Line, the Company has issued a
warrant to WITECH for the purchase of up to 500,000 shares of its Common Stock
at a price of $2.00 per share. As of July 31, 1996, the entire $3,500,000 had
been drawn against the lines of credit. Proceeds from the sale of securities
in the first quarter of fiscal 1997 were used to repay the WITECH Lines of
Credit. As of October 25, 1996, there were no borrowings under the WITECH line
or the WITECH Bridge Loan and $1.5 million of borrowings under the Senior line.
The only financial covenant in the Senior line and the WITECH line is that the
Company must maintain a net worth (calculated in accordance with general
accepted accounting principles) of at least $5.3 million (reduced from $6.5
million effective May 3, 1996). The Company has been, and is currently, in
compliance with the finanacial convenant in the Agreements and currently
expects that it will be able to continue to comply with such covenant or obtain
any required waivers or raise additonal equity, if necessary.
The Company will require additional financing during fiscal 1997 in order to
meet its requirements for operations and development investments and to
refinance the Senior line and WITECH line of credit. Management is currently
negotiating with WITECH to amend the expiration dates on the WITECH line and
the WITECH portion of the Senior line to July 31, 1997 from December 31, 1996.
Management believes that sufficient financing for fiscal 1997 will be available
from the sale of additional securities and from additional borrowings from
14
15
existing shareholders. See Note 9 of Notes to Consolidated Financial
Statements. On a long term basis, management believes that financing for the
Company's operations, including capital expenditures, will come principally
from cash generated from operations, the sale of additional equity or other
third party financing, capital leases, additional borrowings from shareholders
and other sources of capital if available. There can be no assurances that
these financing arrangements will occur.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward looking statements.
Several important factors can cause actual results to materially differ from
those stated or implied in the forward looking statements. Such factors
include, but are not limited to, the growth rate of the Company's selected
market segments, the positioning of the Company's products in those segments,
variations in demand for and cost of customer services and technical support,
customer adoption of Internet enabled Windows(R) applications and their
willingness to upgrade from DOS versions of software, the Company's ability to
establish and maintain strategic alliances, the Company's ability to manage its
business in a rapidly changing environment and the Company's ability to finance
capital investments.
Projected revenues are difficult to estimate because the Company's revenues and
operating results may vary substantially from quarter to quarter. The
recurring revenues of maintenance and subscription fees may be estimated based
on the number of subscribers to the Company's services but will be greatly
impacted by the renewal ratio which cannot be determined in advance. Recurring
revenues from network traffic fees and transaction fees are difficult to
estimate prior to the end of the quarter as it is determined by usage. The
number of transactions processed by the Company is a function of the number of
subscribers and the quantity of reportable events per subscriber. Reportable
events include product ordering, warranty claim processing, inventory and sales
reporting, parts number updates and price updates. The Company cannot impact
or predict the volume of transactions per customer.
Non-recurring revenue is also difficult to estimate. This revenue is generated
from software license fees, customized development and related professional
services. License fee revenue is based on contracts signed and product
delivered within the quarter. Nonrecurring revenue is impacted 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.
Although the Company has recently introduced and plans to expand its Internet
enabled Windows(R) portfolio of products, this marketplace is highly
competitive and there can be no assurances that a customer will select the
Company's software and services over that of a competitor. The environment in
which the Company competes is characterized by rapid technological changes,
dynamic customer demands, and frequent product enhancements and product
introductions. The Company's current and potential competitors have greater
financial, technical, sales, marketing and advertising resources than the
Company. The widespread acceptance of the Internet may increase the usage of
the Company's product applications but exert pricing pressures on the network
traffic revenue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and related notes for the
fiscal years ended July 31, 1996, 1995 and 1994 together with the report
thereon of the Company'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
15
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding the directors of the Company is included in the Company's
definitive 1996 Annual Meeting Proxy Statement, and is incorporated herein by
reference. See "Election of Directors". Information with respect to the
Company'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 the Company's definitive 1996 Annual Meeting Proxy Statement,
and is incorporated herein by reference. See "Executive Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of the Company's common stock is
included in the Company's definitive 1996 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 the Company's definitive 1996 Annual Meeting Proxy Statement, and
is incorporated herein by reference. See "Certain Transactions".
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
Schedules.
Consolidated Balance sheets - July 31, 1996 and 1995.
Consolidated Statements of operations for each of the three years in the period
ended July 31, 1996.
Consolidated Statements of shareholders' equity for each of the three years in
the period ended July 31, 1996.
Consolidated Statements of cash flows for each of the three years in the period
ended July 31, 1996.
Notes to consolidated financial statements - July 31, 1996.
The Consolidated Financial Statement is located immediately following the
signature pages.
16
17
(A)2.
FINANCIAL STATEMENT SCHEDULES
Schedule II
Valuation and qualifying accounts for the years ended July 31, 1996,
1995 and 1994.
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:
No reports on Form 8-K have been filed during the last quarter of the period
covered by this Report.
(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 Form 10-Q for the quarter ended October
31, 1994.
3.2
By-laws of the Company incorporated herein by reference to Exhibit 3.1 of
the Company Registration Statement on Form S-1 (Reg. No. 33-43148).
10.1*
1991 Stock Option Plan as amended dated May 11, 1994, incorporated by
reference to Exhibit 10.1 of the Company Form 10-Q for the quarter ended
January 31, 1995.
10.2*
1993 Director Stock Option Plan as amended dated July 15, 1994,
incorporated herein by reference to Exhibit 10.2 of the Company Form 10-Q for
the quarter ended January 31, 1995.
17
18
10.3*
Employment Agreement between the Company and Richard Weening dated as of
September 30, 1993, incorporated herein by reference to Exhibit 10.25 of the
Company Registration Statement on Form S-1 (Reg. No. 33-80914).
10.4*
Amendment to Employment Agreement between the Company and Richard Weening
dated as of September 30, 1993, incorporated herein by reference to Exhibit
10.9 of the Company Form 10-K for fiscal year ended July 31, 1993.
10.5*
Amendment to Consulting Agreement dated August 1, 1994 between the Company
and Richard Weening, incorporated herein by reference to Exhibit 10.7 of the
Company Form 10-K for fiscal year ended July 31, 1994.
10.6*
Amendment to Consulting Agreement dated August 1, 1995 between the Company
and Richard Weening, incorporated herein by reference to Exhibit 10.6 of the
Company Form 10-K for fiscal year ended July 31, 1995.
10.7*
Agreement dated May 11, 1994 between the Company and Don Knudsen,
incorporated herein by reference to Exhibit 10.20 of the Company Registration
Statement on Form S-1 (Reg. No. 33-80914).
10.8*
Agreement dated August 2, 1995 between the Company and Don Knudsen,
incorporated herein by reference to Exhibit 10.8 of the Company Form 10-K for
fiscal year ended July 31, 1995.
10.9*
Agreement dated March 14, 1994 between the Company and Mark L. Koczela,
incorporated herein by reference to Exhibit 10.21 of the Company Registration
Statement on Form S-1 (Reg. No. 33-80914).
10.10
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 Form 10-K for fiscal year ended July 31, 1993.
10.11
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 Registration Statement on Form S-3 (Reg. No. 33-75760).
10.12
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 Registration Statement on Form S-1 (Reg. No. 33-80914).
10.13
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 Form 10-Q for quarter ended October 31, 1994.
10.14
Amendment No. 4 to Loan Agreement dated March 6, 1995 between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.14 of
the Company Form 10-K for fiscal year ended July 31, 1995.
10.15
Amended and Restated Commitment Warrant issued by the Company to WITECH
Corporation dated October 18th, 1995, incorporated herein by reference to
Exhibit 10.15 of the Company Form 10-K for fiscal year ended July 31, 1995.
10.16
Loan Agreement dated December 2, 1994, between the Company and WITECH and
QUAESTUS L.P.,incorporated herein by reference to Exhibit 10.2 of the Company
Form 10-Q for the quarter ended October 31, 1994.
18
19
10.17
Security Agreement dated December 2, 1994, between the Company and WITECH
and QUAESTUS L.P., incorporated herein by reference to Exhibit 10.3 of the
Company Form 10-Q for the quarter ended October 31, 1994.
10.18
Amendment No. 1 to Loan Agreement between the Company and WITECH and
QUAESTUS, L.P. dated October 18, 1995, incorporated herein by reference to
Exhibit 10.18 of the Company Form 10-K for fiscal year ended July 31, 1995.
10.19
Standard Office Building Lease between the Company and JMB/Plaza East
Associates, Ltd., dated as of August 1, 1984, incorporated herein by reference
to Exhibit 10.23 of the Company Registration Statement of Form S-1 (No.
33-43148).
10.20
Lease Amendment between the Company and JMB/Plaza East Associates, Ltd.,
dated as of December 24, 1993, incorporated herein by reference to Exhibit
10.20 of the Company's Registration Statement on Form S-3 (Reg. 33-75760).
10.21
Lease Amendment between the Company and JMB/Plaza East Associates, Ltd.,
dated as of March 2, 1995, incorporated herein by reference to Exhibit 10.21 of
the Company Form 10-K for fiscal year ended July 31, 1995.
10.22
Engagement Letter with QUAESTUS L.P., dated September 30, 1993,
incorporated herein by reference to Exhibit 10.11 of the Company Form 10-K for
fiscal year ended July 31, 1993.
10.23
Engagement letter with QUAESTUS L.P., dated August 1, 1994, incorporated
herein by reference to Exhibit 10.18 of the Company Form 10-K for fiscal year
ended July 31, 1994.
10.24
Engagement letter with QUAESTUS Management Corporation, dated August 1,
1995, incorporated herein by reference to Exhibit 10.24 of the Company Form
10-K for fiscal year ended July 31, 1995.
10.25
Warrant dated July 15, 1994 issued by the Company to QUAESTUS L.P.,
incorporated herein by reference to Exhibit 10.19 of the Company Form 10-K for
fiscal year ended July 31, 1994.
10.26
Warrant dated July 15, 1994 issued by the Company to Richard W. Weening,
incorporated herein by reference to Exhibit 10.20 of the Company Form 10-K for
fiscal year ended July 31, 1994.
10.27
Purchase Agreement, dated May 19, 1994 between the Company and Vulcan
Ventures Incorporated, incorporated herein by reference to Exhibit 10.21 of the
Company Registration Statement on Form S-3 (Reg. No. 33-75760).
10.28
Purchase Agreement dated December 22, 1994 between the Company and Vulcan
Ventures Incorporated, incorporated herein by reference to Exhibit 10.3 of the
Company Form 10-Q for the quarter ended January 31, 1995.
10.29
Amendment No. 2 to Loan Agreement dated December 20, 1995 between the Company,
WITECH Corporation and QUAESTUS Limited Partnership.
20
10.30
Amendment No. 3 to Loan Agreement dated May 31, 1996 between the Company,
WITECH Corporation and QUAESTUS Limited Partnership, incorporated herein by
reference to Exhibit 10.3 of the Company 10-Q for the quarter ended April 30,
1996.
10.31
Amendment No. 5 to Loan Agreement dated December 20, 1995 between the Company
and WITECH Corporation.
10.32
Amendment No. 6 to Loan Agreement dated January 23, 1996 between the Company
and WITECH Corporation.
10.33
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 10-Q for the quarter ended April 30, 1996.
10.34
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 10-Q for the quarter ended April 30, 1996.
10.35*
Employment letter dated October 20, 1995 from the Company to Brian Dearing.
10.36*
Agreement dated August 8, 1996 between the Company and Pat Bergamasco.
11.1
Computation of per share loss.
23.1
Consent of Ernst & Young LLP
24.1
Powers of Attorney appear on the signature page hereof.
*
Management Contract or Compensatory Plan.
- ---------------------------------------
21
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 ____day of ________, 1996.
ARI NETWORK SERVICES, INC.
By:
---------------------------
Brian E. Dearing
President & CEO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lynn M. Hafemeister and Brian E. Dearing
and each of them, 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
___________________ President & CEO & Director ___________, 1996
Brian E. Dearing (Principal Executive Officer)
____________________ Vice President Finance & Administration ___________, 1996
Lynn M. Hafemeister (Principal Financial and Accounting Officer)
22
________________________ Chairman of the Board and Director ___________, 1996
Richard W. Weening
________________________ Director ___________, 1996
William H. Alverson
_________________________ Director ___________, 1996
Francis Brzezinski
_________________________ Director ___________, 1996
Gordon J. Bridge
_________________________ Director ___________, 1996
Eric P. Robison
_________________________ Director ___________, 1996
George D. Dalton
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 27 day of October, 1996.
ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
---------------------------
Brian E. Dearing,
President & CEO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lynn M. Hafemeister and Brian E. Dearing
and each of them, 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 President, CEO & Director October 27, 1996
- ------------------------------- (Principal Executive Officer)
Brian E. Dearing
/s/ Lynn M. Hafemeister Vice President Finance & Administration October 27, 1996
- ------------------------------ (Principal Financial Officer and Principal
Lynn M. Hafemeister Accounting Officer)
24
/s/ Richard W. Weening Chairman of the Board and Director October 27, 1996
- ------------------------------
Richard W. Weening
/s/ William H. Alverson Director October 27, 1996
- -------------------------------
William H. Alverson
/s/ Gordon G. Bridge Director October 27, 1996
- -------------------------------
Gordon G. Bridge
/s/ Francis Brzezinski Director October 27, 1996
- ---------------------------------
Francis Brzezinski
/s/ Eric P. Robison Director October 27, 1996
- ----------------------------------
Eric P. Robison
/s/ George D. Dalton Director October 27, 1996
- --------------------------------
George D. Dalton
25
CONSOLIDATED FINANCIAL STATEMENTS
ARI NETWORK SERVICES, INC.
Years ended
July 31, 1996, 1995 and 1994
26
ARI Network Services, Inc.
Consolidated Financial Statements
Years ended July 31, 1996, 1995 and 1994
CONTENTS
Report of Ernst & Young LLP, Independent Auditors ............ 1
Consolidated Financial Statements
Balance Sheets ............................................... 2
Statements of Operations ..................................... 4
Statements of Shareholders' Equity ........................... 5
Statements of Cash Flows ..................................... 6
Notes to Consolidated Financial Statements ................... 7
27
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders
ARI Network Services, Inc.
We have audited the accompanying consolidated balance sheets of ARI Network
Services, Inc. (the Company) as of July 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended July 31, 1996. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at July 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 1996, in conformity with generally accepted accounting principles.
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 ERNST & YOUNG LLP
August 30, 1996, except for
Note 10 as to which the
date is September 13, 1996
1
28
ARI Network Services, Inc.
Consolidated Balance Sheets
JULY 31
1996 1995
------------------------
ASSETS (NOTE 2)
Current assets:
Cash and cash equivalents $ 371,705 $ 235,928
Receivables:
Trade, less allowance for doubtful accounts of
$83,118 in 1996 and $122,305 in 1995 1,263,029 1,075,043
Other 43,033 30,052
Prepaid expenses and other 185,879 180,441
------------------------
Total current assets 1,863,646 1,521,464
Equipment and leasehold improvements:
Network system hardware 2,801,949 3,341,721
Leasehold improvements 238,526 593,284
Furniture and equipment 1,000,384 1,070,336
------------------------
4,040,859 5,005,341
Less accumulated depreciation and amortization 3,688,847 4,126,374
------------------------
Net equipment and leasehold improvements 352,012 878,967
Other assets - 4,804
Network system:
Network platform 11,466,643 11,466,643
Industry-specific applications 16,769,943 15,744,975
------------------------
28,236,586 27,211,618
Less accumulated amortization 18,972,975 17,934,193
------------------------
9,263,611 9,277,425
------------------------
$11,479,269 $11,682,660
========================
2
29
JULY 31
1996 1995
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit payable to shareholder $ 3,500,000 $ 1,400,000
Accounts payable 818,094 765,504
Unearned income 383,813 261,493
Accrued payroll and related expenses 333,207 322,490
Other accrued expenses 177,000 268,160
Current portion of capital lease obligations 63,479 67,817
--------------------------
Total current liabilities 5,275,593 3,085,464
Capital lease obligations 22,145 73,405
Commitments (Note 3)
Shareholders' equity:
Preferred stock, par value $.001 per share,
1,000,000 shares authorized; none issued - -
Common stock, par value $.001 per share,
16,525,200 shares authorized; 12,937,109 and
12,186,559 shares issued and outstanding in 1996
and 1995, respectively 12,937 12,187
Additional paid-in capital 76,823,687 74,961,162
Accumulated deficit (70,655,093) (66,449,558)
---------------------------
Total shareholders' equity 6,181,531 8,523,791
---------------------------
$ 11,479,269 $11,682,660
===========================
See accompanying notes.
3
30
ARI Network Services, Inc.
Consolidated Statements of Operations
YEAR ENDED JULY 31
1996 1995 1994
------------------------------------------
Net revenues:
Network and other services $ 4,483,978 $ 3,879,626 $ 3,498,478
Software and development 767,633 1,455,416 1,751,853
-----------------------------------------
5,251,611 5,335,042 5,250,331
Operating expenses:
Variable cost of products and services
sold (exclusive of depreciation and
amortization shown separately below):
Network and other services 925,498 1,086,605 1,208,065
Software and development 287,678 149,097 214,031
-----------------------------------------
1,213,176 1,235,702 1,422,096
Depreciation and amortization 1,799,924 2,388,028 11,513,963
Network operations 918,804 1,170,481 1,281,395
Selling, general and administrative 4,584,929 4,756,407 6,411,292
Restructuring costs - - 500,000
Network construction and expansion 1,896,773 1,788,332 2,744,568
-----------------------------------------
10,413,606 11,338,950 23,873,314
Less capitalized portion (1,230,343) (1,616,016) (2,602,024)
-----------------------------------------
Total operating expenses 9,183,263 9,722,934 21,271,290
-----------------------------------------
Operating loss (3,931,652) (4,387,892) (16,020,959)
Other income (expense):
Interest expense (286,187) (65,474) (96,883)
Interest income 6,167 22,349 52,009
Other, net 6,137 92,405 (1,137)
-----------------------------------------
(273,883) 49,280 (46,011)
-----------------------------------------
Loss before minority interest in loss
of subsidiary (4,205,535) (4,338,612) (16,066,970)
Minority interest in loss of subsidiary - - 41,117
-----------------------------------------
Loss before extraordinary credit (4,205,535) (4,338,612) (16,025,853)
Extraordinary credit - - 937,171
-----------------------------------------
Net loss $(4,205,535) $(4,338,612) $(15,088,682)
=========================================
Per share of common stock:
Loss before extraordinary credit $(.34) $(.36) $(1.47)
Extraordinary credit - - .09
-----------------------------------------
Net loss $(.34) $(.36) $(1.38)
=========================================
See accompanying notes.
4
31
ARI Network Services, Inc.
Consolidated Statements of Shareholders' Equity
Common Additional Paid-in Accumulated
Stock Capital Deficit
------------------------------------------
Balance at July 31, 1993 $10,336 $67,977,907 $(47,022,264)
Issuance of warrants to purchase common stock - 62,500 -
Issuance of common stock (net of offering
costs of $338,157) 1,300 4,710,543 -
Exercise of stock options 111 362,146 -
Issuance of common stock under stock
purchase plan 17 44,248 -
Provision for compensation - stock options - 156,844 -
Net loss - - (15,088,682)
-----------------------------------------
Balance July 31, 1994 11,764 73,314,188 (62,110,946)
Issuance of common stock (net of offering
costs of $16,000) 400 1,583,600 -
Exercise of stock options 16 50,098 -
Issuance of common stock under stock
purchase plan 7 13,276 -
Net loss - - (4,338,612)
-----------------------------------------
Balance July 31, 1995 12,187 74,961,162 (66,449,558)
Issuance of common stock (net of offering
costs of $49,148) 735 1,825,117 -
Exercise of stock options 11 26,939 -
Issuance of common stock under stock
purchase plan 4 10,469 -
Net loss - - (4,205,535)
-----------------------------------------
Balance July 31, 1996 $12,937 $76,823,687 $(70,655,093)
=========================================
See accompanying notes.
5
32
ARI Network Services, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED JULY 31
1996 1995 1994
-----------------------------------------
OPERATING ACTIVITIES
Net loss $(4,205,535) $(4,338,612) $(15,088,682)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in loss of subsidiary - - (41,117)
Amortization of network system 1,244,157 1,591,238 10,622,396
Depreciation and other amortization 555,767 796,804 891,567
Provision for compensation - stock options - - 156,844
Extraordinary credit - - (937,171)
Provision (credit) for losses on note receivable - (94,350) 250,000
Other - (52,853) 19,034
Net change in receivables and prepaid expenses (206,405) 62,245 257,147
Net change in accounts payable, unearned
income and accrued expenses 94,467 (194,968) 665,419
----------------------------------------
Net cash used in operating activities (2,517,549) (2,230,496) (3,204,563)
INVESTING ACTIVITIES
Sale of short-term investments - - 1,011,189
Purchase of equipment and leasehold
improvements (11,069) (58,467) (128,594)
Collection of note receivable - 144,350 -
Network system costs capitalized (1,230,343) (1,616,016) (2,602,024)
Purchase of Dynatec Systems Corporation - - (10,000)
----------------------------------------
Net cash used in investing activities (1,241,412) (1,530,133) (1,729,429)
FINANCING ACTIVITIES
Borrowings under line of credit 2,100,000 1,400,000 -
Payments of capital lease obligations and
notes payable (68,537) (80,363) (286,217)
Proceeds from issuance of common stock 1,863,275 1,647,397 5,118,365
Deferred financing fees - - (70,000)
----------------------------------------
Net cash provided by financing activities 3,894,738 2,967,034 4,762,148
----------------------------------------
Net increase (decrease) in cash and cash
equivalents 135,777 (793,595) (171,844)
Cash and cash equivalents at beginning of year 235,928 1,029,523 1,201,367
----------------------------------------
Cash and cash equivalents at end of year $ 371,705 $ 235,928 $ 1,029,523
========================================
Cash paid for interest $ 286,187 $ 65,474 $ 96,883
========================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for -
Network system hardware $ 12,939 $ 44,465 $ 119,747
See accompanying notes.
6
33
ARI Network Services, Inc.
Notes to Consolidated Financial Statements
July 31, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ARI Network Services, Inc. (the Company) operates in one business segment and
provides customer-side Internet-enabled business to business electronic
commerce services to companies in three vertical markets: Agribusiness,
Publishing and Transportation. The Company provides two types of electronic
commerce services, transaction management and data management, that enable its
customers to do business electronically with their customers. The Company's
customers are located primarily in the United States and Canada.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Dynatec Systems Corporation (Dynatec). Accounts
and transactions between the Company and Dynatec have been eliminated in the
accompanying consolidated financial statements.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue from sales of software packages upon delivery of
the software to the customer. When significant obligations remain after the
software product has been delivered, revenue is not recognized until such
obligations have been completed or are no longer significant. The costs of any
insignificant obligations are accrued when the revenue is recognized.
Revenue for use of the network and for information services is recognized in
the period such services are utilized.
Revenue from startup fees is recognized in the period such fees become due if
the fees are not subject to refund or adjustment and when collection is
probable and the Company has no significant remaining obligation.
Revenue from annual or periodic maintenance fees is recognized over the period
the maintenance is provided.
7
34
ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 2 - 10
Leasehold improvements 1 - 10
Furniture and equipment 2 - 10
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.
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.
8
35
ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 5 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
network construction and expansion expense in the period incurred.
During the fourth quarter of fiscal 1994, the Company incurred an additional
amortization charge of $7,712,732 related to industry-specific applications
used in its network system. This charge resulted from management's decision to
move from DOS to Microsoft Windows(TM) during fiscal 1995 as the principal
operating system for customer use of the industry-specific software
applications. The Company made the decision to move from DOS to the Microsoft
Windows(TM) environment after the hiring of a new chief executive officer on
July 1, 1994. The decision was based on management's belief that Microsoft
Windows(TM) would become the operating system of choice among the users of the
Company's network and that the development tools available in the Microsoft
Windows(TM) environment provide a more efficient means of implementing
user-friendly software applications. The Company accelerated the estimated
economic lives of the DOS applications being replaced by the Microsoft
Windows(TM) versions. The net book value of these applications was adjusted to
reflect the lessor of the remaining economic life of the applications or the
future revenue streams associated with the applications.
CAPITALIZED INTEREST COSTS
In 1996, 1995 and 1994, interest costs of $40,865, $6,385 and $87,477,
respectively, were capitalized and included in the network system.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing the loss by the weighted average
number of shares of common stock outstanding during each year.
9
36
ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRUCTURING COSTS
During fiscal 1994, the Company incurred a $500,000 charge to restructure the
Company's management team, strengthen sales and marketing activities and reduce
expenses. The charge represented severance benefits and related expenses paid
to 40 terminated employees.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
is effective for fiscal years beginning after December 15, 1995. The Company
believes that the future adoption of SFAS No. 121 will have no material effect
on the results of operations or financial position.
2. REVOLVING LINES OF CREDIT
In December 1994, the Company entered into a $1,500,000 revolving line of
credit agreement with two shareholders. On October 18, 1995, the agreement was
extended and expires on December 31, 1996. Borrowings under the agreement are
subject to repayment or conversion upon future equity offerings. The revolving
line of credit will be repaid to the extent of cash proceeds received by the
Company from the sale of common stock, other than upon exercise of options,
warrants or rights. However, in the event either shareholder desires to
purchase common stock from the Company as part of such a sale, the amounts owed
to the shareholder will be reduced in lieu of the cash payment for the purchase
price of the common stock. The conversion price under the revolving line of
credit agreement is not fixed.
In addition, the Company has a $1,500,000 revolving line of credit agreement
with a shareholder that was extended on October 18, 1995 to expire on December
31, 1996. The Company is required to pay a fee of .025% per month on the unused
portion of the line of credit. In connection with this agreement, the Company
issued the shareholder a warrant to purchase 250,000 shares of common stock at
$2 per share. The value of the warrant of $62,500 was recorded as additional
paid-in capital in fiscal 1994. In connection with an extension of the
agreement on October 18, 1995, a warrant for an additional 250,000 shares of
common stock at $2 per share was issued, which approximated fair market value.
The warrants will lapse on September 30, 2000, as to any shares of common stock
10
37
ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
2. REVOLVING LINES OF CREDIT (CONTINUED)
not issued. In addition, on October 18, 1995, the shareholder agreed to
cancel the warrant it had been issued that provided the shareholder the right
to purchase one share of common stock for each dollar of the maximum
principal drawn under the line of credit agreement. On April 20, 1996, this
line of credit was amended to provide a bridge loan of $500,000. Borrowings
under the bridge loan bear interest at prime plus 2% through June 30, 1996
and at prime plus 6% thereafter.
Borrowings under the lines of credit bear interest at prime plus 2%. The
line of credit agreements are secured by substantially all assets of the
Company. The agreements contain various restrictive covenants including
maintenance of a minimum level of net worth and restrictions on additional
indebtedness.
3. CAPITAL AND OPERATING LEASES, RELATED-PARTY TRANSACTIONS AND
EXTRAORDINARY CREDIT
At July 31, 1996 and 1995, the following amounts of assets acquired in capital
lease transactions are included in the cost of equipment:
1996 1995
------------------
Network system hardware $586,086 $573,147
Furniture and equipment 115,398 115,398
------------------
701,484 688,545
Less accumulated amortization 500,453 360,156
------------------
$201,031 $328,389
==================
The Company leases its office space under an operating lease arrangement
expiring in fiscal 1997. The Company is liable for its share of increases in
the landlord's direct operating expenses and real estate taxes up to 5% of the
previous year's rent. The total rental expense for the operating lease was
$946,000 in 1996, $917,000 in 1995 and $850,000 in 1994.
On May 13, 1994, International Business Machines Corporation (IBM), a former
shareholder, sold all of its shares of the Company's common stock in an open
market transaction. Concurrently, IBM released the Company from capital lease
obligations with IBM with a remaining aggregate balance due of $937,171. The
extinguishment of these capital lease obligations has been classified as an
extraordinary credit in the accompanying statement of operations. Ownership of
the assets covered by these capital lease obligations has been transferred to
the Company.
11
38
ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
3. CAPITAL AND OPERATING LEASES, RELATED-PARTY TRANSACTIONS AND
EXTRAORDINARY CREDIT (CONTINUED)
Minimum lease payments under remaining capital and operating leases are as
follows:
Fiscal year ending Capital Leases Operating Lease
- ------------------ -------------- ---------------
1997 $68,178 $911,000
1998 19,272 -
1999 4,080 -
-----------------------------
Total minimum lease payments 91,530 $911,000
========
Amounts representing interest 5,906
-------
Present value of minimum capital
lease payments 85,624
Less amounts payable in one year 63,479
-------
$22,145
=======
Equipment lease payments to IBM by the Company were $234,000 in 1994.
Depreciation expense for the assets acquired in capital leases with IBM and
interest expense included in the equipment lease payments to IBM were $299,000
and $59,000, respectively, in 1994.
The Company licenses certain operating system and data base software from IBM
under perpetual licensing agreements. Pursuant to these agreements, the Company
paid IBM license fees and hardware maintenance charges of $387,000 in 1994.
The Company and Quaestus Limited Partnership (Quaestus), a shareholder, entered
into an agreement dated September 30, 1993, whereby Quaestus assisted the
Company in fiscal 1994 with investor relations, executive recruiting, business
and strategic planning and corporate finance matters for $10,975 per month plus
expenses. In addition, during fiscal 1994, the Company incurred approximately
$180,000 and $271,000 of additional hourly charges for consulting services
provided by Quaestus in connection with the restructuring and the common stock
offerings, respectively. During fiscal 1995, the Company expensed $20,000 per
month in the first fiscal quarter, $15,000 per month in the second fiscal
quarter and $11,000 per month in the third and fourth fiscal quarters for the
same services as in fiscal 1994. In September 1994, Quaestus was issued a
warrant to purchase 250,000 shares of common stock at $4.25 per share. During
fiscal 1996, the Company expensed $11,000 in each of August and September 1995
and $20,000 per month for the remainder of fiscal 1996 for services provided by
Quaestus.
12
39
ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
4. SHAREHOLDERS' EQUITY
In connection with the issuance of common stock in fiscal 1995, the Company
issued a shareholder a warrant to purchase an additional 125,000 shares of
common stock at $4.00 per share, exercisable through December 1997.
On January 19, 1994, the Company accepted subscriptions for the sale of
1,000,000 shares of common stock at $3.25 per share, and issued such shares in
January 1994 and April 1994. On May 20, 1994, the Company issued 300,000 shares
of common stock at $6.00 per share and the Company issued the shareholder a
warrant to purchase an additional 300,000 shares of common stock at $10.00 per
share. Total proceeds from these issuances of shares of common stock, net of
offering costs, were $4,711,843.
5. STOCK PLANS
The Company's 1991 Stock Option Plan (Stock Option Plan) has 1,500,000 shares
of common stock reserved 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.
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.
13
40
ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK PLANS (CONTINUED)
Changes in option shares under the Stock Option Plan are as follows:
1996 1995 1994
--------------------------------
Options outstanding at beginning of year 685,097 994,570 615,872
Granted:
1996--$1.625 to $2.50 per share 485,600 - -
1995--$2.75 per share - 226,000 -
1994--$2.875 to $3.875 per share - - 718,332
Exercised -
1996--$2.50 per share (10,780) - -
1995--$2.00 to $3.50 per share - (16,171) -
1994--$2.50 to $3.75 per share - - (110,401)
Canceled or expired (115,061) (519,302) (229,233)
-------------------------------
Options outstanding at end of year 1,044,856 685,097 994,570
===============================
Options exercisable at July 31 487,322 384,032 407,363
===============================
Options available for grant at July 31 292,544 663,087 369,781
===============================
The Company's Chairman of the Board has been granted a stock option for 100,000
shares of its common stock at $8 per share.
The Company's 1992 Employee Stock Purchase Plan (Stock Purchase Plan) has
50,000 shares of common stock reserved for issuance. 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. During fiscal 1996, 1995 and
1994, 4,476, 6,576 and 17,359 shares, respectively, were purchased under the
Stock Purchase Plan for proceeds of $10,473, $13,283 and $44,265, respectively.
In May 1993, the Board of Directors adopted the 1993 Director Stock Option Plan
(Director Plan), which has 120,000 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 date immediately preceding the date of
grant. Each option
14
41
ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK PLANS (CONTINUED)
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:
1996 1995 1994
------------------------
Options outstanding at beginning of year 73,000 39,000 18,000
Granted:
1996--$2.00 and $2.875 per share 37,800 - -
1995--$2.56 and $3.75 per share - 34,000 -
1994--$3.875 and $4.25 per share - - 21,000
Expired (20,500) - -
------------------------
Options outstanding at end of year 90,300 73,000 39,000
========================
Options exercisable at July 31 73,000 39,000 18,000
========================
Options available for grant at July 31 29,700 47,000 81,000
========================
Certain nonemployee directors have been granted stock options aggregating
41,500 shares of common stock at $2 to $4.25 per share.
The Company has applied Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its stock option plans.
Accordingly, because there was no intrinsic value at the date of grant, no
compensation cost has been recognized. No decision has been reached as to how
the Company will apply, beginning in fiscal 1997, SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits the Company to continue accounting for
stock options in the same manner with fair value disclosures or to measure
compensation cost by the fair value of stock options granted after August 1,
1995.
6. INCOME TAXES
Effective August 1, 1993, the Company adopted the liability method of
accounting for income taxes in accordance with SFAS No. 109. Because of the
cumulative net operating loss carryforwards, there was no cumulative effect of
adopting SFAS No. 109 as of August 1, 1993.
15
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ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
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, 1996 and 1995 are as
follows:
1996 1995
---------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 30,993,000 $ 29,570,000
Other 386,000 240,000
---------------------------------
Total deferred tax assets 31,379,000 29,810,000
Valuation allowance for deferred tax assets (27,748,000) (26,173,000)
---------------------------------
Net deferred tax asset 3,631,000 3,637,000
Deferred tax liabilities -
Network system 3,631,000 3,637,000
---------------------------------
Net deferred taxes $ - $ -
=================================
As of July 31, 1996, the Company has unused net operating loss carryforwards
for income tax purposes of $26,808,000 expiring in 2007 through 2011.
In addition, the Company has unused net operating loss carryforwards for income
tax purposes of $18,633,000 expiring between 1997 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 income tax purposes of
$33,623,000 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.
A reconciliation between income tax expense and income taxes computed by
applying the statutory federal income tax rate to net loss is as follows:
1996 1995 1994
----------------------------------------
Computed income taxes at 34% $(1,430,000) $(1,475,000) $(5,130,000)
Other 5,000 4,000 2,000
Net operating loss carryforward 1,425,000 1,471,000 5,128,000
----------------------------------------
Income tax expense $ - $ - $ -
========================================
16
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ARI Network Services, Inc.
Notes to Consolidated Financial Statements (continued)
7. INCENTIVE PROGRAMS
The Company has a tax-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 $9,500 in calendar 1996 (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.
8. MAJOR CUSTOMERS
Sales to one customer were 12% and 11% of net revenues during fiscal 1996 and
1995, respectively. Accounts receivable from this customer were approximately
$116,000 and $267,000 at July 31, 1996 and 1995, respectively. Sales to one
other customer were 12% of net revenues during fiscal 1996. Accounts receivable
from this customer were approximately $149,000 at July 31, 1996.
9. FINANCIAL CONDITION
Since its organization in 1981, the Company has experienced net losses. In
addition, the Company has experienced significant negative cash flows from its
operating activities.
The Company plans additional offerings of its common stock in fiscal 1997 to
improve liquidity and provide capital resources. In addition, the Company
believes it will be able to amend its revolving line of credit agreements to
extend the agreements to July 31, 1997. In the event the equity offerings are
not successful, a shareholder has indicated they will financially support the
Company through fiscal 1997.
10. SUBSEQUENT EVENT
From August 27, 1996 through September 13, 1996, the Company issued 1,250,000
shares of common stock for total proceeds of $2,762,500.
17
44
SCHEDULE II
ARI NETWORK SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 1996, 1995 and 1994
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS END OF YEAR
- --------------------------------------------------------------------------------------------
Allowance for doubtful accounts-
accounts receivable:
1996 $ 122,305 $ 65,382 $ 104,569(A) $ 83,118
========= ========== ========= =========
1995 $ 64,974 $ 91,907 $ 34,576(A) $ 122,305
========= ========== ========= =========
1994 $ 59,206 $ 88,395 $ 82,627(A) $ 64,974
========= ========== ========= =========
Allowance for doubtful accounts-
note receivable:
1996 $ - $ - $ - $ -
========= ========== ========= =========
1995 $ 250,000 $ (94,350)(B) $ (55,650(B) $ -
========= ========== ========= =========
1994 $ - $ 250,000 $ - $ 250,000
========= ========== ========= =========
(A) Uncollectible accounts written off, net of recoveries.
(B) During fiscal 1995, $144,350 was collected on a note receivable of
$300,000, resulting in a credit to the consolidated statement of
operations of $94,350.