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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, 1997
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. [ ]
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As of October 7, 1997, aggregate market value of the Common Stock held by
non-affiliates (based on the closing price on the NASDAQ National Market
System) was approximately $14.5 million.
As of October 7, 1997, there were 15,420,974 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, 1997, for the 1997
Annual Meeting of Shareholders are incorporated by reference in Part III
hereof.
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PART 1
ITEM 1. BUSINESS
BUSINESS OVERVIEW
ARI Network Services, Inc. (the "Company" or " ARI") provides standards-based
Internet-enabled electronic commerce services to companies in selected industry
sectors with shared distribution channels. These services use
telecommunications and computer technology to help customers conduct business
electronically, computer-to-computer, with minimal changes to their internal
business systems.
Currently, the Company provides electronic commerce services to four industry
sectors: the U.S. and Canadian agribusiness industry ("Agribusiness"), the
U.S. and Canadian equipment industry ("Equipment"), the U.S. and Canadian
freight transportation industry ("Transportation"), and the U.S. non-daily
newspaper publishing industry ("Publishing"). The Agribusiness and Equipment
industries are each made up of separate sub-markets in which the manufacturers
share common distributors and/or retail dealers. The Agribusiness sector
includes Agricultural and Specialty Chemicals, Fertilizer, Livestock
Pharmaceuticals, Feed and Seed. The Equipment sector comprises several
vertical markets including: Outdoor Power, Marine, Power Sports, Motorcycles,
Recreational Vehicles, Farm Equipment and others. By "Equipment," the Company
means capital goods which are repaired rather than discarded when broken and
for which the repairs are generally performed by a distributed network of
independent dealers and/or repair shops. In prior periods, the Company
included Equipment within the Agribusiness Industry. With the acquisition of
the PLUS1(R) and Empart(TM) product lines and a focus on those vertical
channels, management has elected to report the Equipment Industry separately.
See "Other Items."
The Company's services include: telecommunication networking, incompatible
computer systems connectivity, electronic mail messaging, electronic data
interchange translation, product and participant directories and databases
(on-line or on CD-ROM), information exchange and retrieval, and a wide range of
customer specified electronic commerce and transaction processing applications.
ARI also provides end user software applications related to its electronic
commerce services and a range of professional services, including consulting,
customer application development, installation, product customization,
education and support.
The Company's electronic commerce services may be broadly categorized as either
transaction management or data management services. Transaction management
services include the provision of applications where transaction data are
exchanged between participants (e.g., manufacturers, distributors, dealers and
sales representatives) in a distribution channel. Such applications include
product availability inquires, sales automation, sales reporting, warranty
claim processing, batch or immediate response product ordering, and invoicing.
Data management services include the provision of reference databases used in
electronic commerce. Such databases include directories of ship-to and bill-to
locations, on-line or CD-ROM product catalogs, and, in the case of the
publishing sector, on-line newspaper articles. Where possible, the Company
seeks to provide integrated solutions involving both types of services. Both
transaction and data management services are provided to the Agribusiness and
Equipment sectors, while only data management services are provided to the
Transportation and Publishing sectors.
The Company focuses its marketing efforts in the Agribusiness and Equipment
sectors 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. In the Transportation sector, the data management services are
sold to the Association of American Railroads under a long-term contract. In
the Publishing sector, the services are sold under an exclusive long-term,
contract with the Associated Press.
The Company has two customers that exceed 10% of total revenues. One is the
Association of American Railroads which retained the Company under a five year
agreement dated July 25, 1994, to be the file maintainer of a database of
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ship-to and bill-to locations. The second is Roche Vitamins, Inc., a sales
force automation customer in the Agribusiness industry.
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. The
Company maintains a website at http://www.arinet.com.
STRATEGY
The Company's mission is to be the dominant provider of customer-side
Internet-enabled business-to-business electronic commerce 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 products or 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 services: (i) distributor/dealer communications
and (ii) product/participant directory. After having obtained a position in a
given market, the Company will then bring other products and services to bear
in order to expand its presence and solidify its competitive position. 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 process and technical competency in each of its
targeted business sectors: Agribusiness, Equipment, 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 the long term.
See "Competition".
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PRODUCTS AND SERVICES
The Company offers a variety of electronic commerce services to its customers.
These various services are typically provided using some combination of
networking, on-line and off-line databases, software products, and
support/professional services. The following table shows the software products
offered by the Company, a brief description of the product and the industries
where they are currently in use.
ARI Network Services, Inc. Products and Services
- -----------------------------------------------------------------------------------------------------
Software Description Primary Vertical Channels
- -----------------------------------------------------------------------------------------------------
Meppel(TM) EDI software for product movement reporting Agribusiness
- -----------------------------------------------------------------------------------------------------
ARISE(TM) Sales automation software Agribusiness
- -----------------------------------------------------------------------------------------------------
PLUS1(R) Electronic parts catalog for Equipment dealers Equipment
- -----------------------------------------------------------------------------------------------------
Empart(TM)* Electronic parts catalog creation and viewing Equipment
software
- -----------------------------------------------------------------------------------------------------
TradeRoute(TM) Document handling and communications for Equipment
product ordering and warranty claims
- -----------------------------------------------------------------------------------------------------
Newsfinder(R) Database of key-worded news stories Publishing
- -----------------------------------------------------------------------------------------------------
Electronic Commerce Centrally managed databases of industry
Directories common electronic commerce locations Transportation and Agribusiness
- -----------------------------------------------------------------------------------------------------
Multi-protocol, Internet-connected server
Network providing such services as messaging,
Communications database access and data translation All
- -----------------------------------------------------------------------------------------------------
*Acquired September 30, 1997. See"Other Items."
NETWORK TECHNOLOGY INFRASTRUCTURE
The Company's network technology infrastructure consists of a variety of
computer platforms including a 20 MIPS IBM Model 9121-311 mainframe running
OS/390, a series of Sun Sparc servers, and a fault tolerant IBM System 88
serving as a communications front end processor. Data is stored on both Oracle
and DB2 relational databases with transaction processing services provided by
IBM's CICS. Trading partner connectivity is provided over a multi-protocol
network supporting Internet, SNA/SNI, terminal, and proprietary protocols
transported over X.25, Asynchronous, Synchronous, and Bisynchronous
connections. The Company protects company and customer data through daily
backups, off site vaulting and a rehearsed business recovery plan. An
uninterruptable power supply protects customers from a loss of service due to a
loss of electrical service. A thorough Year 2000 project is underway with an
estimated effort of three work years of in-house labor and software and
services costs that are not expected to exceed $350,000.
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.
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COMPETITION
The electronic commerce services industry is highly competitive. Several
companies, including GE Information Services, AT&T, MCI, EDS, BT Tymnet, Inc.,
Sterling Commerce, Inc., Advantis Inc., Dun & Bradstreet, Harbinger, Inc., and
others offer electronic commerce services that are similar to those offered by
the Company. There are also many companies, such as Siebel Systems, Inc.,
Arum Software, Inc., and Bell & Howell, and others, that sell software that
competes with the Company's products. Many of these competing companies have
substantially greater resources than ARI. Certain manufacturers and
distributors operate their own private computer networks for transacting
business with their dealers and distributors. Briggs and Stratton, through its
wholly owned subsidiary, Powercomm 2000, offers a competing network to dealers
and equipment manufacturers in the outdoor power equipment industry. It is
possible that companies within the Company's target markets, may develop and
implement private computer-to-computer networks, thereby reducing the demand
for the Company's services. The pace of technological change, such as
developments in Internet commerce, is so great that new competitors may emerge
quickly based on new technologies.
The Company's primary competitive advantage is 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.
EMPLOYEES
As of September 30, 1997, the Company had 77 full-time equivalent employees.
Of these, 23 are technical and engaged in maintaining or developing products
and services, 23 are sales and marketing, 21 are database management and
customer support and 10 are involved in administration and finance. None of
these employees is represented by a union.
ITEM 2. PROPERTIES
The Company occupies approximately 23,000 square feet in an office building in
Milwaukee, Wisconsin, under a lease expiring July 31, 2002. This facility
serves as the Company's headquarters and data center.
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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names of the Company's executive officers as of
October 7, 1997. The officers serve at the discretion of the Board. The
Company named a new Vice President of Sales in the first quarter of fiscal
1997. The Company named a new Vice President of Technology in the second
quarter of fiscal 1997.
Name Age Capacities in Which Serving
---- --- ---------------------------
Brian E. Dearing 42 President and CEO and a Director
Mark L. Koczela 43 Executive Vice President of
Business Development and
Administration and Secretary
John C. Bray 40 Vice President of Sales
Michael R. McGurk 48 Vice President of Technology
- -------------------------
BRIAN E. DEARING. 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. A Phi Beta Kappa
graduate of Union College, Dearing also holds a Master of Science in Industrial
Engineering from Purdue University.
MARK L. KOCZELA. Mr. Koczela is Executive Vice President of Business
Development and Administration 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 in the field of mergers and
acquisitions 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 September,
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, 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.
MICHAEL R. MCGURK. Mr. McGurk was appointed Vice President of Technology in
January, 1997. Prior to joining the Company, Mr. McGurk developed and operated
a large format printing services business for customers involved in business
process re-engineering projects. Before opening the printing service, Mr.
McGurk had a twelve year career in information technology management at General
Electric, including Manager of Global Information Technology for GE Medical
Systems, Program Manager for GE Corporate and Manager of Data Management for GE
Aircraft Engines. Mr. McGurk's early career included sales and technology
positions at Cullinet and CinCom Systems. Mr. McGurk holds an MBA and BS from
Miami University in Ohio.
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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, 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
October 31, 1996 . . . . . . . . . $2.75 $1.875
January 31, 1997 . . . . . . . . . $2.625 $1.5625
April 30, 1997 . . . . . . . . . . $2.125 $1.125
July 31, 1997 . . . . . . . . . . . $1.375 $0.6875
As of October 7, 1997, there were approximately 182 holders of record and
approximately 1,580 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.
On November 4, 1996, the Company issued an aggregate of 117,647 shares of
common stock in connection with its acquisition of cd\*.IMG, Inc. ("CDI"). The
sale was exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to Section 4(2) thereof.
On December 13, 1996, the Company sold a total of 444,444 shares of common
stock to Quaestus Limited Partnership ("QLP") and WITECH Corporation ("WITECH")
for an aggregate of $1.0 million. Both QLP and WITECH are "accredited
investors," financially sophisticated and affiliated with the Company. No
general advertising or solicitation was used in connection with the sales. The
offering was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
On July 28, 1997, the Company sold 20,000 shares of nonconvertible, Series A
Preferred Stock to WITECH for $2.0 million. No general advertising or
solicitation was used in connection with the sale. The sale was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
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,
1997, which was derived from audited Consolidated Financial Statements and
Notes thereto of the Company. Audited Financial Statements and Notes as of
July 31, 1997 and 1996 and for each of the three years in the period ended July
31, 1997, and the report of Ernst & Young LLP thereon are included elsewhere in
this Report. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere
herein.
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Year Ended July 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Network & other services revenues.......................... $ 5,235 $ 4,484 $ 3,880 $ 3,498 $ 3,032
Software & development revenue............................. 1,678 768 1,455 1,752 1,979
---------- ----------- ---------- ----------- --------
Total revenues........................................ 6,913 5,252 5,335 5,250 5,011
OPERATING EXPENSES:
Variable cost of network & other services sold........ 1,035 925 1,087 1,208 1,036
Variable cost of software & development sold.......... 652 288 149 214 236
Depreciation and amortization......................... 1,722 1,800 2,388 11,514(1) 2,986
Network operations.................................... 1,004 919 1,171 1,281 1,329
Selling, general & administrative..................... 4,819 4,585 4,756 6,411 6,362
Restructuring costs................................... 0 0 0 500(2) 0
Network construction and expansion.................... 1,897 1,897 1,788 2,745 2,833
---------- ----------- ---------- ----------- --------
Gross operating expenses.............................. 11,129 10,414 11,339 23,873 14,782
Less capitalized portion.............................. (1,155) (1,230) (1,616) (2,602) (3,645)
---------- ----------- ---------- ----------- --------
Net operating expenses................................ 9,974 9,184 9,723 21,271 11,137
---------- ----------- ---------- ----------- --------
Operating loss............................................. (3,061) (3,932) (4,388) (16,021) (6,126)
Other income............................................... 9 12 114 51 473
Interest expense........................................... (223) (286) (65) (97) (225)
---------- ----------- ---------- ----------- --------
Loss before extraordinary item & minority interest.... (3,275) (4,206) (4,339) (16,067) (5,878)
Minority interest in (earnings) loss of subsidiary......... ----- ----- ----- 41 (41)
Extraordinary item......................................... ----- ----- ----- 937(3) -----
---------- ----------- ---------- ----------- --------
Net loss................................................... $ (3,275) $ (4,206) $ (4,339) $ (15,089) $ (5,919)
========== =========== ========== ========== ========
Income (loss) per common share:
Loss before extraordinary item........................ $ (0.23) $ (0.34) $ (0.36) $ (1.47) $ (0.57)
Extraordinary item.................................... ---- ----- ----- 0.09 -----
---------- ----------- ---------- ----------- --------
Net loss......................................... $ (0.23) $ (0.34) $ (0.36) $ (1.38) $ (0.57)
Weighted average number of common and common equivalent
shares..................................................... 14,445 12,455 12,071 10,904 10,328
BALANCE SHEET DATA:
- -------------------
Working capital (deficit).................................. $ (689) $ (3,412) $ (1,564) $ 485 $ 2,389
Capitalized network system (net)........................... 8,957 9,264 9,277 9,253 17,273
Total assets............................................... 11,416 11,479 11,683 13,258 23,479
Current portion of long-term debt and capital lease
obligations................................................ 64 63 68 76 539
Total long-term debt and capital lease obligations......... 8 22 73 101 742
Total shareholders' equity................................. 8,947 6,182 8,524 11,215 20,966
- ----------------------------------
(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 costs comprised 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, 1997 increased $1,661,000 or 32%
compared to last year. Total year-over-year quarterly revenue has increased
for six consecutive quarters. Management expects the year-over-year quarterly
increases to continue into fiscal 1998. See "Forward Looking Statement".
The Company has a strategy of building sustainable recurring revenues 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 financial statements:
RECURRING VS. NON-RECURRING REVENUE
Year Ended July 31,
(Dollars in Thousands)
----------------------------
1997 1996 1995
Recurring Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,807 $ 4,084 $ 3,591
Non-recurring Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,106 1,168 1,744
-------- -------- --------
$ 6,913 $ 5,252 $ 5,335
======== ======== ========
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 revenues have increased each
of the last two years. Fiscal 1997 recurring revenues increased by 18% over
fiscal 1996, which was an increase of 14% over fiscal 1995. The increase in
recurring revenues is due to growth in maintenance and support fee revenues in
the Agribusiness and Transportation industries and increases in both the number
of users and the number of transactions being transmitted over the network by
Equipment manufacturers, and distributors and dealers in the Agribusiness and
Equipment industries. In fiscal 1997, recurring revenues constituted 70% of
total revenues compared to 78% in fiscal 1996 and 67% in fiscal 1995.
Management expects recurring revenues, as a percentage of total revenues, to
decrease in fiscal 1998 as the Company generates license and customization fees
from new customers. See "Forward Looking Statement".
Non-recurring revenues are derived from software licenses and professional
services. Fiscal 1997 non-recurring revenues increased by 80% compared to
fiscal 1996. The increase resulted from an increase in licenses of the
Company's new software applications and related professional services revenue
in the Agribusiness and Equipment industries. Non-recurring revenues decreased
33% in fiscal 1996 compared to fiscal 1995 due to a decrease in licenses of DOS
software applications and related professional services revenues in the
Agribusiness industry and decreased revenues from discontinued product lines.
The Company's new generation of software applications are all Windows(R)-based.
ARISE(TM), the Company's new sales force automation application, was
introduced in March, 1996. Meppel(TM), an EDI sales and product movement
reporting tool, was introduced in October, 1996. PLUS1(R) for Windows(R), the
Company's electronic parts catalog software, was shipped to beta sites in
September, 1997. Full rollout of PLUS1(R) is expected in October, 1997. The
Company is also in the process of developing a Windows(R) communications and
document management application known as TradeRoute(TM) to be used by equipment
dealers for product registration, parts ordering and warranty claims.
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REVENUE BY VERTICAL MARKET
Year Ended July 31,
(Dollars in Thousands)
--------------------------------------------------------
1997 1996 1995
Agribusiness Industry.......................... $ 3,753 $ 2,610 $ 2,811
Equipment Industry............................. 918 463 353
Transportation Industry........................ 822 618 584
Publishing Industry............................ 1,262 1,243 1,228
Other.......................................... 158 318 359
----------- ------------ ------------
Total revenues $ 6,913 $ 5,252 $ 5,335
=========== ============ ============
Agribusiness Industry
The Agribusiness Industry comprises several vertical markets including
agricultural and specialty chemicals, livestock pharmaceuticals, feed and seed.
Revenues from the Agribusiness Industry are derived from software licenses,
maintenance and support fees, subscription fees, network traffic fees and
professional services fees. Revenues from Agribusiness Industry represented
54% of total revenue in fiscal 1997, compared to 50% in fiscal 1996 and 53% in
fiscal 1995.
Recurring revenues in the Agribusiness Industry increased 11% from $2,019,000
in fiscal 1996 to $2,232,000 in fiscal 1997 and 12% from $1,802,000 in fiscal
1995 to $2,019,000 in fiscal 1996. The increases in recurring revenues were
the result of more transactions being transmitted over the Company's network
and an increase in the Company's base of manufacturers, distributors and
dealers leading to more recurring maintenance and subscription fees.
Non-recurring revenues in the Agribusiness industry increased 157% from
$591,000 in fiscal 1996 to $1,521,000 in fiscal 1997 and decreased 41% from
$1,009,000 in fiscal 1995 to $591,000 in fiscal 1996. The increase in fiscal
1997 was due to increased license revenue as customers upgraded to the
Company's new generation of software applications. These new software
applications also led to an expansion of the Company's customer base. The
decrease in fiscal 1996 was due to the decrease in new DOS software licenses.
Management expects that both recurring and non-recurring revenues in the
Agribusiness Industry will continue to grow at a greater rate than compared to
total revenues. See "Forward Looking Statements."
Some of the manufacturers in the AgriChemical/Crop Protection sector of the
Agribusiness Industry have formed a jointly owned company known as "RAPID" to
promote electronic commerce within the industry. RAPID has endorsed the
Company as a "Preferred Provider" of electronic commerce software and services
to the agricultural industry. RAPID's endorsement was primarily the result of
the Agrichemical industry's favorable reaction to the release of the Company's
electronic commerce software, Meppel(TM). Among RAPID's projects is the
development of a directory of physical locations and electronic commerce
trading partners in the "allied industries," which include crop protection and
specialty chemicals, seed, feed and fertilizer. The Company and RAPID have
reached an understanding pursuant to which the Company has created and will
maintain this new directory (the "allied directory") for three years. The
Company's creation and maintenance of the allied directory will result in
non-recurring revenues from file conversion and recurring revenues from file
maintenance. See "Forward Looking Statements."
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power equipment, outboard marine, motorcycle and recreational vehicles.
Management's strategy is to expand its dealer communications and electronic
parts catalog software and services in these existing vertical markets and to
expand to other similar channels in the future. See "Forward Looking
Statements." The Company's entry in July, 1997 into the recreational vehicles
industry is an
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illustration of the implementation of this strategy. In July, 1997,
Coachmen Recreational Vehicle Company, a division of Coachmen Industries signed
a contract for the license of TradeRoute(TM), the Company's new Windows(R)
based dealer communications software. Coachmen, one of the country's largest
manufacturers of recreational vehicles, will use TradeRoute(TM) to facilitate
communications with its 350 dealers nationwide. The Coachmen contract gives
the Company a strategic account in a new vertical equipment segment,
Recreational Vehicles. Management expects to expand revenues in this market
during fiscal 1998. See "Forward Looking Statements." Revenues from the
Equipment Industry are derived from software licenses, maintenance and support
fees, subscription fees, network traffic fees and professional services fees.
Revenues from the license of PLUS1(R), the Company's recently acquired
electronic parts cataloging software, are included in the Equipment Industry
revenues. See "Other Items." Revenues from the Equipment Industry represented
13% of total revenue in fiscal 1997 compared to 9% in fiscal 1996 and 7% in
fiscal 1995.
Recurring revenues in the Equipment Industry increased 119% from $222,000 in
fiscal 1996 to $486,000 in fiscal 1997 and decreased 8% from $242,000 in Fiscal
1995 to $222,000 in fiscal 1996. The increase in recurring revenues in fiscal
1997 was due to the initiation of annual maintenance and support fees to the
Company's dealer communications software customers and the addition of
PLUS1(R). Non-recurring revenues increased 79% from $241,000 in fiscal 1996 to
$432,000 in fiscal 1997 and 117% from $111,000 in fiscal 1995 to $241,000 in
fiscal 1996. The increases were due to increased software license revenues as
the Company's customer base grew. Management expects that both recurring and
non-recurring revenues in the Equipment Industry will continue to grow at a
greater rate than total revenues. See "Froward Looking Statements."
Transportation Industry
Revenues from the Transportation Industry are derived from maintenance and
support fees, transaction fees and professional service fees charged to the
Association of American Railroads for the creation and maintenance of the
Customer Identification File. Revenues in the Transportation Industry
increased 33% from $618,000 in fiscal 1996 to $822,000 in fiscal 1997 and 6%
from $584,000 in fiscal 1995 to $618,000 in fiscal 1996. The increase in
revenues was due to growth in recurring maintenance and support fee revenues as
the project went into production. Transportation Industry revenues represented
12% of total revenue in fiscal 1997 and fiscal 1996 and 11% in fiscal 1995.
Management believes that revenues in the Transportation Industry, 87% of which
are recurring, will continue at approximately the same level for fiscal 1998
and over time will become a decreasing percentage of the Company's total
revenue. While relatively flat, this revenue is profitable on the margin and
helps to fund the Company's growth in other areas. See "Forward Looking
Statement."
Publishing Industry
Revenues from the Publishing Industry are derived from recurring connect time
and subscription fees and non-recurring service initiation fees charged to the
Company's Newsfinder(R) customers. Newsfinder(R) manages the approximately
20,000 news stories per week output of the Associated Press, providing access
to some 800 publishers with more than 1,300 weekly and monthly newspapers.
Revenues in the Publishing Industry remained relatively flat at $1,262,000 in
fiscal 1997 compared to $1,243,000 in fiscal 1996 and $1,228,000 in fiscal
1995. Publishing Industry revenues represented 18% of total revenue in fiscal
1997 compared to 24% in fiscal 1996 and 23% in fiscal 1995. Management
believes that revenues in the Publishing Industry, 97% of which are recurring,
will continue at approximately the same level as this year for fiscal 1998 and
over time will become a decreasing percentage of the Company's total revenue.
While relatively flat, this revenue is profitable on the margin and helps to
fund the Company's growth in other areas. See "Forward Looking Statements."
11
12
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)
----------------------
1997 1996 1995
Variable cost of products and
services sold (exclusive of
depreciation and amortization
shown below)............................. $1,687 $1,213 $1,236
Network operations....................... 1,004 919 1,171
Selling, general and administrative...... 4,819 4,585 4,756
Network and product development.......... 1,897 1,897 1,788
------ ------ ------
Gross cash expenses................... 9,407 8,614 8,951
Depreciation and amortization............ 1,722 1,800 2,388
Less capitalized expenses................ (1,155) (1,230) (1,616)
------ ------ ------
Net operating expenses................ $9,974 $9,184 $9,723
====== ====== ======
While revenues were up 32%, net operating expenses increased $790,000 or 9% in
fiscal 1997 compared to fiscal 1996 mainly due to increased variable cost of
products and services sold and selling, general and administrative expenses
attributed to increased sales.
Variable cost of products and services sold consists primarily of royalties,
telecommunications and data processing fees, customization labor and temporary
help fees. Temporary help is used by the Company in connection with its
database management services. Variable cost of products and services sold
increased $474,000 or 39% in fiscal 1997 compared to fiscal 1996 as a direct
result of increased revenues. Variable cost of products and services sold as a
percentage of revenue was 24% in fiscal 1997 and 23% in fiscal 1996 and fiscal
1995. Variable cost of products and services sold as a percentage of revenue
may vary from year to year due to the product sales mix. Management expects
margins in fiscal 1998 to be similar to the margins in fiscal 1997 assuming a
revenue mix of approximately two-thirds recurring and one-third non-recurring.
See "Forward Looking Statements."
Selling, general and administrative expenses increased only $234,000 or 5% in
fiscal 1997 compared to fiscal 1996 despite a 32% increase in revenues. The
increase is due to filling open positions in sales and administration and
higher commissions and selling expenses as a result of the increase in
revenues. Selling, general and administrative expenses decreased $171,000 or
4% in fiscal 1996 compared to fiscal 1995 due to delays in filling open
positions and additional expense cutting as a result of slow software license
revenues.
Depreciation and amortization expense decreased by $78,000 or 4% in fiscal 1997
compared to fiscal 1996. The decrease in depreciation and amortization expense
is due to Management's decision in fiscal 1994 to accelerate the useful lives
of the Company's remaining DOS products. Capitalized expenses represented 61%,
65% and 90% of network and product development cost in fiscal 1997, 1996 and
1995, respectively. Capitalized expenses decreased as a percentage of network
and product development costs as a result of management's decision to refocus
various staff members from
12
13
capitalized development to selling and administrative activities and
customization of software, which is expensed as variable cost of products and
services sold.
OTHER ITEMS
Interest expense decreased $63,000 or 22% in fiscal 1997 compared to fiscal
1996. The decrease in interest expense reflects the conversion of portions of
debt financing under the Company's lines of credit with shareholders into
shares of the Company's Common Stock. See "Liquidity and Capital Resources."
Interest expense increased $221,000 or 340% in fiscal 1996 compared to fiscal
1995 due to the Company's cash fundings under lines of credit rather than
through the sale of securities. See "Liquidity and Capital Resources."
Interest expense will fluctuate depending on the use and timing of financing
through lines of credit and/or additional equity funding.
Net loss decreased $931,000 or 22% in fiscal 1997 compared to fiscal 1996 and
$133,000 or 3% in fiscal 1996 compared to fiscal 1995.
Management is pursuing a strategy of supplementing its internal growth with
strategic and synergistic acquisitions. On November 4, 1996, the Company
completed the acquisition of cd\*.IMG, Inc. ("CDI") in a stock transaction.
CDI was in the business of publishing electronic parts catalogs and the
software that dealers and repair shops use to read the catalogs. CDI had the
parts catalogs of over 20 manufacturers in the Outdoor Power Equipment.,
Outboard Marine and Motorcycles and Power Sports industries. Its customer base
included Toro, Arctic Cat, Kohler, Tecumseh, Mercury Marine, Harley Davidson
and Outboard Marine Corporation. CDI's operations have been consolidated into
the Company's. As a result of the acquisition, the Company recognized goodwill
in the amount of $434,000 which is being amortized over a five year period.
The acquisition of CDI has not otherwise had a material effect on the Company's
current financial position.
On September 30, 1997, the Company completed the acquisition of Empart
Technologies, Inc., in an asset purchase transaction. Empart Technologies,
Inc. was a California-based developer of software for electronic parts
catalogs. Empart's products included Empart Publisher(TM), which converts data
from a variety of forms into an electronic format, and Empart Viewer(TM), a
high-end configurable parts catalog. Empart's customers included ABB Power
Generation, Inc., Yamaha Electronics of America, the auto dealer service group
of Automatic Data Processing, Inc. (ADP) and Coachmen Recreational Vehicle
Company. Empart Technologies is the Company's second acquisition in less than
12 months. The acquisition is not expected to have a material impact on the
Company's financial position. See "Forward Looking Statements."
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating and investing activities decreased by 20% or $770,000
for the year ended July 31, 1997. Net cash used in operating and investing
activities, excluding changes in operating assets and liabilities, decreased by
24% or $860,000 for the year ended July 31, 1997 compared to the same period in
fiscal 1996. The Company expects to continue to incur operating losses for the
fiscal year ending July 31, 1998 and there can be no assurance that
profitability will be achieved thereafter. Management believes that, based on
current trends, the Company will achieve positive cash flow from operations
excluding changes in working capital in the quarter ending July 31, 1998. The
Company also expects to incur significant expenditures for software development
and network construction and expansion. The Company expects to fund software
development and network construction and expansion costs and negative cash flow
from operations in fiscal 1998 from the sale of securities. See "Forward
Looking Statement."
At July 31, 1997, the Company had cash of approximately $64,000 compared to
approximately $372,000 at July 31, 1996. During fiscal 1997, the Company
raised $3,790,000 from the sale of common stock and $2,000,000 from the sale of
"paid in kind" preferred stock. The proceeds were used to fund operations and
retire portions of the outstanding revolving credit lines.
On December 13, 1996, the Company repaid borrowings from WITECH Corporation
("WITECH") and QUAESTUS Limited Partnership under a previously existing secured
line of credit (the "Senior Line"). Of the $1,465,000 outstanding under the
Senior Line at December 13, 1996, $1,000,000 was repaid by conversion of such
amount into
13
14
shares of the Company's common stock at a rate of $2.25 per share. The
remaining $465,000 was borrowed under the WITECH Line described below.
The Company has a line of credit with WITECH, (the "WITECH" Line) that has
been in place since October 4, 1993. The WITECH Line was amended on May 30,
1997 to include a bridge loan of $500,000, bringing the line up to $2,500,000.
The bridge loan was canceled September 30, 1997 and the balance of the WITECH
Line is due on December 31, 1997. Interest due on the WITECH Line is at the
rate of prime plus 2%. On July 28, 1997, the Company repaid $2,000,000 of the
Senior Line by conversion of such amount into 20,000 shares of the Company's
PIK preferred stock at a rate of $100 per share. This preferred stock is
non-voting, non-convertible to common stock, and dividends may be paid, at the
Company's election, in shares of preferred stock. Under the WITECH Line, the
Company has issued a commitment warrant to WITECH for the purchase of up to
500,000 shares of its common stock at a price of $2.00 per share and 100,000
shares of its common stock at a price of $2.25 per share pursuant to an
amendment dated November 5, 1996. The Company has also issued a usage warrant
to WITECH for a maximum of 100,000 shares of its common stock at a price of
$2.25. The exercise price of the warrants is reduced if the Company issues
common stock at less than the then current exercise price. As of September 30,
1997 there were $1,159,000 of borrowings outstanding under the WITECH Line.
The only financial covenant in the WITECH Line is that the Company must
maintain a net worth (calculated in accordance with generally accepted
accounting principles) of at least $5.3 million. The Company has been, and is
currently, in compliance with the financial covenant in the Agreement and
currently expects to comply with such covenant or obtain any required waivers
or raise additional equity, if necessary. See "Forward Looking Statements."
In addition, in connection with the sale of PIK preferred stock to WITECH, the
Company agreed that it would not incur any debt (including capitalized lease
obligations), other than debt in favor of WITECH or debt (up to $250,000)
representing the deferred purchase price or lease of assets.
The Company will require additional financing during fiscal 1998 in order to
meet its requirements for operations and development investments. Management
believes that sufficient financing for Fiscal 1998 will be available from the
sale of additional securities. The Company has a registration statement in
effect for the sale of up to 2,000,000 shares of common stock. Management
believes that, based on current trends, the Company will achieve positive cash
flow from operations (excluding changes in working capital items) in the
quarter ended July 31, 1998. See "Forward Looking 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. See "Forward Looking Statements."
FORWARD LOOKING STATEMENTS
Certain statements contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward looking statements.
Several important factors can cause actual results to materially differ from
those stated or implied in the forward looking statements. Such factors
include, but are not limited to the growth rate of the Company's selected
market segments, the positioning of the Company's products in those segments,
variations in demand for and cost of customer services and technical support,
customer adoption of Internet-enabled Windows(R) applications and their
willingness to upgrade from DOS versions of software, the Company's ability to
release new software applications and upgrades on a timely basis, the Company's
ability to establish and maintain strategic alliances, the Company's ability to
manage its costs, the Company's ability to manage its business in a rapidly
changing environment, the Company's ability to finance capital investments, and
the Company's ability to implement its acquisition strategy to increase growth.
Projected revenues are difficult to estimate because the Company's revenues and
operating results may vary substantially from quarter to quarter. The primary
cause of the variation is attributed to non-recurring revenues from software
license and customization fees. License fee revenues are based on contracts
signed and product delivered. Non-recurring revenues are affected by the time
required to close large license fee and development agreements, which cannot be
predicted with any certainty due to customer requirements and decision-making
processes.
14
15
Recurring revenues are also difficult to estimate. Recurring revenues from
maintenance and subscription fees may be estimated based on the number of
subscribers to the Company's services but will be affected by the renewal
ratio, which cannot be determined in advance. Recurring revenues from network
traffic fees and transaction fees are difficult to estimate as they are
determined by usage. Usage is a function of the number of subscribers and the
number of transactions per subscriber. Transactions include product ordering,
warranty claim processing, inventory and sales reporting, parts number updates
and price updates. The Company cannot materially affect or predict the volume
of transactions per customer.
Although the Company has recently introduced and plans to expand its
Internet-enabled Windows(R) portfolio of products, the marketplace is highly
competitive and there can be no assurance that a customer will select the
Company's software and services over that of a competitor. The environment in
which the Company competes is characterized by rapid technological changes,
dynamic customer demands, and frequent product enhancements and product
introductions. Some of the Company's current and potential competitors have
greater financial, technical, sales, marketing and advertising resources than
the Company. The widespread acceptance of the Internet may increase the usage
of the Company's product applications and may change the manner in which the
Company charges for its services.
ITEM 8. Financial Statements and Supplementary Data
The Company's Financial Statements and related notes for the fiscal years ended
July 31, 1997, 1996 and 1995 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
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 1997 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 1997 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 1997 Annual Meeting Proxy Statement and is
incorporated herein by reference. See "Security Ownership of Certain Beneficial
Owners".
15
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information related to Certain Relationships and Related Transactions is
included in the Company's definitive 1997 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
Schedule.
Balance sheets - July 31, 1997 and 1996.
Statements of operations for each of the three years in the period ended July
31, 1997.
Statements of shareholders' equity for each of the three years in the period
ended July 31, 1997.
Statements of cash flows for each of the three years in the period ended July
31, 1997.
Notes to financial statements - July 31, 1997.
The Financial Statements are located immediately following the signature pages.
(a)2.
FINANCIAL STATEMENT SCHEDULES
Schedule II
Valuation and qualifying accounts for the years ended July 31, 1997, 1996 and
1995.
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.
16
17
(b)
REPORTS ON FORM 8-K:
On May 23, 1997, the Company filed a Report on Form 8-K with respect to Item 5
thereof.
(c)
EXHIBITS:
EXHIBIT
NUMBER
DESCRIPTION
2.1
Asset Purchase Agreement dated September 25, 1997, among the Company, Empart
Technologies, Inc. and Michael S. Jarrett, incorporated herein by reference to
Exhibit 2.1 of the Company's Report on Form 8-K filed October 10, 1997.
3.1
Articles of Incorporation of the Company, as amended, incorporated herein by
reference to Exhibit 4.1 of the Company's Amendment No. 1 to Registration
Statement on Form S-2/A (Reg. No. 333-31295).
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, incorporated by reference to Exhibit 10.4
of the Company's Form 10-Q for the Quarter ended October 31, 1996.
10.2*
1993 Director Stock Option Plan, as amended, incorporated herein by reference
to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended October 31,
1996.
10.3*
Employment Agreement between the Company and Richard Weening dated as of August
1, 1991, incorporated herein by reference to Exhibit 10.25 of the Company's
Registration Statement on Form S-1 (Reg. No. 33-43148).
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's Form 10-K for the 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's Form 10-K for the fiscal year ended July 31, 1994.
17
18
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's Form 10-K for the fiscal year ended July 31, 1995.
10.7*
Amendment to Consulting Agreement dated August 1, 1996 between the Company and
Richard Weening.
10.8
Loan Agreement by and between the Company and WITECH Corporation dated October
4, 1993, incorporated herein by reference to Exhibit 10.10 of the Company's Form
10-K for the fiscal year ended July 31, 1993.
10.9
Amendment to Loan Agreement dated May 19, 1994 between the Company and WITECH
Corporation, incorporated herein by reference to Exhibit 10.22 of the Company's
Registration Statement on Form S-3 (Reg. No. 33-75760).
10.10
Amendment No. 2 to Loan Agreement dated July 28, 1994 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.22 of the
Company's Registration Statement on Form S-1 (Reg. No. 33-80914).
10.11
Consent and Amendment No. 3 to Loan Agreement dated December 2, 1994 between the
Company and WITECH Corporation, incorporated herein by reference to Exhibit 10.1
of the Company's Form 10-Q for the quarter ended October 31, 1994.
10.12
Amendment No. 4 to Loan Agreement dated October 18, 1995 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.14 of the
Company's Form 10-K for the fiscal year ended July 31, 1995.
10.13
Amendment No. 5 to Loan Agreement dated December 20, 1995 between the Company
and WITECH Corporation, incorporated herein by reference of Exhibit 10.31 of
the Company's Form 10-K for the fiscal year ended July 31, 1996.
10.14
Amendment No. 6 to Loan Agreement dated January 23, 1996, between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.32 of
the Company's Form 10-K for the fiscal year ended July 31, 1996.
10.15
Amendment No. 7 to Loan Agreement dated April 20, 1996 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended April 30, 1996.
10.16
Amendment No. 8 to Loan Agreement dated May 31, 1996 between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.2 of the
Company's Form 10-Q for the quarter ended April 30, 1996.
10.17
Amendment No. 9 to Loan Agreement dated November 5, 1996, between the Company
and WITECH Corporation, including Forms of Amended and Restated Commitment
Warrant and Usage Warrant, incorporated herein by reference to Exhibit 10.1 of
the Company's Form 10-Q for the quarter ended October 31, 1996.
18
19
10.18
Amendment No. 10 to Loan Agreement dated May 30, 1997, between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended April 30, 1997.
10.19
Engagement letter with QUAESTUS Management Corporation, dated November 19, 1996.
10.20
Warrant dated July 15, 1994 issued by the Company to QUAESTUS L.P., incorporated
herein by reference to Exhibit 10.19 of the Company's Form 10-K for the fiscal
year ended July 31, 1994.
10.21
Warrant dated July 15, 1994 issued by the Company to Richard W. Weening,
incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K for
the fiscal year ended July 31, 1994.
10.22
Purchase Agreement, dated May 19, 1994 between the Company and Vulcan Ventures
Incorporated, incorporated herein by reference to Exhibit 10.21 of the Company's
Registration Statement on Form S-3.
10.23
Purchase Agreement dated December 22, 1994 between the Company and Vulcan
Ventures Incorporated, incorporated herein by reference to Exhibit 10.3 of the
Company's Form 10-Q for the quarter ended January 31, 1995.
10.24*
Employment letter dated October 20, 1995 from the Company to Brian Dearing,
incorporated herein by reference to Exhibit 10.35 of the Company's Form 10-K
for the fiscal year ended July 31, 1996.
10.25
Preferred Stock Purchase Agreement dated July 15, 1997, between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-2 (Reg. No. 333-31295) filed on July
15, 1997.
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.
27.1
Financial Data Schedule
*
Management Contract or Compensatory Plan.
- ---------------
19
20
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 17th day of October, 1997.
ARI NETWORK SERVICES, INC.
By: ____________________________
Brian E. Dearing
President & CEO & Acting CFO & Acting CAO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Brian E. Dearing and Mark L. Koczela 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 _________________,1997
Brian E. Dearing & Acting CFO & Acting CAO
(Principal Executive Officer)
_________________________ Chairman of the Board and Director _________________,1997
Richard W. Weening
_________________________ Director ________________, 1997
William H. Alverson
_________________________ Director ________________, 1997
Francis Brzezinski
_________________________ Director ________________, 1997
Gordon J. Bridge
_________________________ Director ________________, 1997
Eric P. Robison
_________________________ Director ________________, 1997
George D. Dalton
20
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 17th day of October, 1997.
ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
------------------------
Brian E. Dearing,
President & CEO & Acting CFO & Acting CAO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Brian E. Dearing and Mark L. Koczela 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 17, 1997
- ------------------------ & Acting CFO & Acting CAO
Brian E. Dearing (Principal Executive Officer)
/s/ Richard W. Weening Chairman of the Board and Director October 17, 1997
- ------------------------
Richard W. Weening
/s/ William H. Alverson Director October 17, 1997
- ------------------------
William H. Alverson
/s/ Gordon J. Bridge Director October 17, 1997
- ------------------------
Gordon J. Bridge
/s/ Francis Brzezinski Director October 17, 1997
- ------------------------
Francis Brzezinski
/s/ Eric P. Robison Director October 17, 1997
- ------------------------
Eric P. Robison
/s/ George D. Dalton Director October 17, 1997
- ------------------------
George D. Dalton
21
22
FINANCIAL STATEMENTS
ARI NETWORK SERVICES, INC.
Years ended
July 31, 1997, 1996 and 1995
23
ARI Network Services, Inc.
Financial Statements
Years ended July 31, 1997, 1996 and 1995
CONTENTS
Report of Ernst & Young LLP, Independent Auditors ................... 1
Financial Statements
Balance Sheets ...................................................... 2
Statements of Operations ............................................ 4
Statements of Shareholders' Equity .................................. 5
Statements of Cash Flows ............................................ 6
Notes to Financial Statements ....................................... 8
24
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders
ARI Network Services, Inc.
We have audited the accompanying balance sheets of ARI Network Services, Inc.
(the Company) as of July 31, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended July 31, 1997. 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Company at July 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended July 31, 1997, 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.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
September 19, 1997,
except for Note 10 as to
which the date is September 30, 1997
1
25
ARI Network Services, Inc.
Balance Sheets
(Dollars in thousands, except per share data)
JULY 31
1997 1996
-------------------
ASSETS (NOTE 2)
Current assets:
Cash $ 64 $ 372
Receivables:
Trade, less allowance for doubtful accounts of $132 in 1997 and
$83 in 1996 1,549 1,263
Other 19 43
Prepaid expenses and other 140 185
-------------------
Total current assets 1,772 1,863
Equipment and leasehold improvements:
Network system hardware 3,579 2,802
Leasehold improvements 239 239
Furniture and equipment 374 1,000
-------------------
4,192 4,041
Less accumulated depreciation and amortization 3,877 3,689
-------------------
Net equipment and leasehold improvements 315 352
Other assets 372 -
Network system:
Network platform 11,467 11,467
Industry-specific applications 17,925 16,770
-------------------
29,392 28,237
Less accumulated amortization 20,435 18,973
-------------------
8,957 9,264
-------------------
$11,416 $11,479
===================
2
26
JULY 31
1997 1996
-------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit payable to shareholder $ 500 $ 3,500
Notes payable 46 -
Accounts payable 650 818
Unearned income 543 384
Accrued payroll and related expenses 493 333
Other accrued expenses 165 177
Current portion of capital lease obligations 64 63
-------------------
Total current liabilities 2,461 5,275
Capital lease obligations 8 22
Commitments (Note 3)
Shareholders' equity:
Preferred stock, par value $.001 per share, 1,000,000 shares
authorized; 20,000 shares issued and outstanding in 1997
- -
Common stock, par value $.001 per share, 25,000,000 shares
authorized; 14,767,017 and 12,937,109 shares issued and outstanding
in 1997 and 1996, respectively 15 13
Additional paid-in capital 82,862 76,824
Accumulated deficit (73,930) (70,655)
-------------------
Total shareholders' equity 8,947 6,182
-------------------
$ 11,416 $ 11,479
===================
See accompanying notes.
3
27
ARI Network Services, Inc.
Statements of Operations
(Dollars in thousands, except per share data)
YEAR ENDED JULY 31
1997 1996 1995
-----------------------------
Net revenues:
Network and other services $ 5,235 $ 4,484 $ 3,880
Software and development 1,678 768 1,455
---------------------------
6,913 5,252 5,335
Operating expenses:
Variable cost of products and services sold
(exclusive of depreciation and amortization
shown separately below):
Network and other services 1,035 925 1,087
Software and development 652 288 149
---------------------------
1,687 1,213 1,236
Depreciation and amortization 1,722 1,800 2,388
Network operations 1,004 919 1,171
Selling, general and administrative 4,819 4,585 4,756
Network construction and expansion 1,897 1,897 1,788
---------------------------
11,129 10,414 11,339
Less capitalized portion (1,155) (1,230) (1,616)
---------------------------
Total operating expenses 9,974 9,184 9,723
---------------------------
Operating loss (3,061) (3,932) (4,388)
Other income (expense):
Interest expense (223) (286) (65)
Interest income 3 6 22
Other, net 6 6 92
---------------------------
(214) (274) 49
---------------------------
Net loss $(3,275) $(4,206) $(4,339)
===========================
Net loss per share of common stock $ (.23) $ (.34) $ (.36)
===========================
See accompanying notes.
4
28
ARI Network Services, Inc.
Statement of Shareholder's Equity
Number of Shares Issued and
Outstanding Par Value
--------------------------------------------------------------------------
Additional
Preferred Common Preferred Common Paid-in Accumulated
Stock Stock Stock Stock Capital Deficit
--------------------------------------------------------------------------
Balance July 31, 1994 - 11,763,812 $- $12 $73,314 $(62,110)
Issuance of common stock (net of offering
costs of $16) - 400,000 - - 1,584 -
Exercise of stock options - 16,171 - - 50 -
Issuance of common stock under stock
purchase plan - 6,576 - - 13 -
Net loss - - - - - (4,339)
----------------------------------------------------------------------
Balance July 31, 1995 - 12,186,559 - 12 74,961 (66,449)
Issuance of common stock (net of offering
costs of $49) - 735,294 - 1 1,825 -
Exercise of stock options - 10,780 - - 27 -
Issuance of common stock under stock
purchase plan - 4,476 - - 11 -
Net loss - - - - - (4,206)
----------------------------------------------------------------------
Balance July 31, 1996 - 12,937,109 - 13 76,824 (70,655)
Issuance of common stock (net of offering costs
of $11) - 1,264,706 - 2 2,784 -
Issuance of common stock in connection with
acquisition of cd\*. IMG, Inc. - 117,647 - - 250 -
Issuance of common stock as payment of line
of credit - 444,444 - - 1,000 -
Issuance of common stock under stock
purchase plan - 3,111 - - 4 -
Issuance of preferred stock 20,000 - - - 2,000 -
Net loss - - - - - (3,275)
----------------------------------------------------------------------
Balance July 31, 1997 20,000 14,767,017 $- $15 $82,862 $(73,930)
======================================================================
See accompanying notes.
5
29
ARI Network Services, Inc.
Statements of Cash Flows
(In Thousands)
YEAR ENDED JULY 31
1997 1996 1995
----------------------------------
OPERATING ACTIVITIES
Net loss $(3,275) $(4,206) $(4,339)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of network system 1,462 1,244 1,591
Depreciation and other amortization 260 556 797
Other - - (147)
Net change in receivables and prepaid expenses (183) (206) 62
Net change in accounts payable, unearned income
and accrued expenses (19) 94 (195)
----------------------------------
Net cash used in operating activities (1,755) (2,518) (2,231)
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (79) (11) (58)
Collection of note receivable - - 144
Network system costs capitalized (1,155) (1,230) (1,616)
----------------------------------
Net cash used in investing activities (1,234) (1,241) (1,530)
FINANCING ACTIVITIES
Borrowings (repayments) under line of credit (2,000) 2,100 1,400
Payments of capital lease obligations and notes payable (109) (68) (80)
Proceeds from issuance of preferred stock 2,000 - -
Proceeds from issuance of common stock 2,790 1,863 1,647
----------------------------------
Net cash provided by financing activities 2,681 3,895 2,967
----------------------------------
Net increase (decrease) in cash and cash equivalents (308) 136 (794)
Cash at beginning of year 372 236 1,030
----------------------------------
Cash at end of year $ 64 $ 372 $ 236
==================================
Cash paid for interest $ 214 $ 286 $ 65
==================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for -
Network system hardware $ 28 $ 13 $ 44
Issuance of common stock for acquisition of
stock of cd\*.IMG, Inc. 250 - -
Issuance of common stock as payment of line of
credit 1,000 - -
See accompanying notes.
6
30
ARI Network Services, Inc.
Notes to Financial Statements
July 31, 1997
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ARI Network Services, Inc. (the Company) operates in one business segment and
provides standards-based Internet enabled electronic commerce services to
companies in selected industry sectors and distribution channels. These
services use telecommunications and computer technology to help customers
conduct business electronically, computer-to-computer, with minimal changes to
their internal business systems. Currently, the Company provides electronic
commerce services to four industry sectors: the U.S. and Canadian agribusiness
industry, the U.S. and Canadian equipment industry, the U.S. and Canadian
freight transportation industry, and the U.S. non-daily newspaper publishing
industry. The Company's services include: telecommunication networking,
incompatible computer systems connectivity, electronic mail messaging,
electronic data interchange translation, product and participant directories
and databases (on-line or on CD-ROM), information exchange and retrieval, and a
wide range of customer specified electronic commerce and transaction processing
applications. The Company also provides end user application related to the
electronic commerce services and a range of professional services, including
consulting, customer application development, installation, education and
support. The Company's electronic commerce services may be broadly categorized
as either transaction management or data management services. The Company's
customers are located primarily in the United States and Canada.
REVENUE RECOGNITION
The Company recognizes revenue from the license 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.
7
31
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 10
Furniture and equipment 2 - 5
NETWORK CONSTRUCTION AND EXPANSION AND SOFTWARE DEVELOPMENT
The Company has developed a basic network and telecommunications platform which
is the foundation of its network. The platform can be used on different
hardware and is not subject to the frequency of technological changes that
sometimes occur with hardware or industry-specific applications.
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
8
32
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
feasibility and the ongoing assessment of recoverability of software and
network system costs requires considerable judgment by management with respect
to certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technologies.
The annual amortization of the platform and the industry-specific software
applications is the greater of the amount computed using (a) the ratio that
current gross revenues for the network or an industry-specific product bear to
the total of current and anticipated future gross revenues for the network or
an industry-specific product or (b) the straight-line method over the estimated
economic life of the product (20 years - platform, 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.
CAPITALIZED INTEREST COSTS
In 1997, 1996 and 1995, interest costs of $35,000, $41,000, and $6,000,
respectively, were capitalized and included in the network system.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during each year.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997 and requires restatement of all prior-period earnings per
share data. Early application of SFAS No. 128 is not permitted. The Company's
adoption of the provisions of SFAS No. 128 will result in the dual presentation
of basic and diluted per share amounts on the Company's statement of
operations. Diluted per share amounts as calculated under SFAS No. 128 are not
expected to materially differ from loss per share amounts previously presented.
9
33
ARI Network Services, Inc.
Notes to Financial Statements (continued)
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 to December 31, 1996. In December 1996, the Company issued 444,444
shares of common stock as payment of $1,000,000 of the revolving line of
credit. The remaining balance under the revolving line of credit was repaid and
the line of credit was terminated.
The Company has a $2,000,000 revolving line of credit agreement with a
shareholder that was extended on November 5, 1996 to expire on December 31,
1997. 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 extensions of the agreement
on October 18, 1995 and November 5, 1996, warrants for an additional 250,000
shares of common stock at $2 per share and 100,000 shares of common stock at
$2.25 per share, respectively, were issued, which approximated fair market
value. The warrants will lapse on September 30, 2000, as to any shares of
common stock not issued. In addition, on November 5, 1996, the Company issued a
warrant that provides the shareholder the right to purchase 25,000 shares of
common stock at $2.25 per share for each $250,000 of principal drawn under the
line of credit in excess of $1,000,000. Borrowings under the line of credit
bear interest at prime plus 2%. The line of credit agreement is secured by
substantially all assets of the Company. The agreement contains various
restrictive covenants including maintenance of a minimum level of net worth and
restrictions on additional indebtedness.
On May 30, 1997, the line of credit was amended to provide a bridge loan of
$500,000 through September 30, 1997. Borrowings under the bridge loan bear
interest at prime plus 2.0%.
3. CAPITAL AND OPERATING LEASES AND RELATED-PARTY TRANSACTIONS
At July 31, 1997 and 1996, the following amounts of assets acquired in capital
lease transactions are included in the cost of equipment (in thousands):
1997 1996
--------------
Network system hardware $614 $586
Furniture and equipment 115 115
--------------
729 701
Less accumulated amortization 646 500
--------------
$ 83 $201
==============
10
34
ARI Network Services, Inc.
Notes to Financial Statements (continued)
3. CAPITAL AND OPERATING LEASES AND RELATED-PARTY TRANSACTIONS (CONTINUED)
The Company leases its office space under an operating lease arrangement
expiring in fiscal 2002. 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
$645,000 in 1997, $946,000 in 1996 and $917,000 in 1995.
Minimum lease payments under remaining capital and operating leases are as
follows (in thousands):
Fiscal year ending Capital Leases Operating Lease
- ------------------ ----------------------------------
1998 $69 $ 394
1999 32 394
2000 7 394
2001 - 394
2002 - 394
-------------------------------
Total minimum lease payments 108 $1,970
============
Amounts representing interest 36
----------
Present value of minimum capital lease payments 72
Less amounts payable in one year 64
----------
$8
==========
The Company and Quaestus Limited Partnership (Quaestus), a shareholder, have an
agreement dated September 30, 1993, whereby Quaestus assists the Company with
investor relations, executive recruiting, business and strategic planning and
corporate finance matters. 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
services provided by Quaestus. 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. During fiscal 1997, the Company
expensed $20,000 in August through November 1996 and $12,000 per month for the
remainder of fiscal 1997 for services provided by Quaestus.
In September 1994, Quaestus was issued a warrant to purchase 250,000 shares of
common stock at $4.25 per share exercisable through December 1999.
11
35
ARI Network Services, Inc.
Notes to Financial Statements (continued)
4. SHAREHOLDERS' EQUITY
In July 1997, the Company issued 20,000 shares of Series A Preferred Stock for
proceeds of $2,000,000 to a shareholder. The shares are entitled to cumulative
annual dividends equal to the product of $100 and prime plus 2% payable
quarterly, as and when declared by the Board of Directors. Prior to August 1,
2002, dividends payable may be paid, at the Company's option, in lieu of cash,
in additional shares of Series A Preferred Stock. The Company may redeem
outstanding shares at any time at the redemption price of $100 per share plus
accrued and unpaid dividends.
In the event of liquidation or dissolution of the Company, the holders of
shares of Series A Preferred Stock shall be entitled to receive $100 per share
plus accrued and unpaid dividends before any distribution is made to the
holders of common stock.
In connection with 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.
5. STOCK PLANS
The Company's 1991 Stock Option Plan (Stock Option Plan) has 2,000,000 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.
12
36
ARI Network Services, Inc.
Notes to Financial Statements (continued)
5. STOCK PLANS (CONTINUED)
At its discretion, the Stock Option Committee may require a participant to be
employed by the Company for a designated number of years prior to exercising
any options. The Committee may also require a participant to meet certain
performance criteria, or that the Company meet certain targets or goals, prior
to exercising any options.
Changes in option shares under the Stock Option Plan are as follows:
1997 1996 1995
--------------------------------
Options outstanding at beginning of year 1,044,856 685,097 994,570
Granted:
1997--$1.75 to $3.00 per share 743,500 - -
1996--$1.625 to $2.50 per share - 485,600 -
1995--$2.75 per share - - 226,000
Exercised:
1996--$2.50 per share - (10,780) -
1995--$2.00 to $3.50 per share - - (16,171)
Canceled or expired (391,769) (115,061) (519,302)
--------------------------------
Options outstanding at end of year 1,396,587 1,044,856 685,097
================================
Options exercisable at July 31 721,128 487,322 384,032
================================
Options available for grant at July 31 440,813 292,544 663,087
================================
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.
The Company's 1993 Director Stock Option Plan (Director Plan) has 300,000
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 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:
13
37
ARI Network Services, Inc.
Notes to Financial Statements (continued)
5. STOCK PLANS (CONTINUED)
1997 1996 1995
------------------------
Options outstanding at beginning of year 91,800 74,500 39,000
Granted:
1997--$1.72 per share 22,200 - -
1996--$2.00 and $2.875 per share - 37,800 -
1995--$2.56 and $3.75 per share - - 35,500
Expired - (20,500) -
-------------------------
Options outstanding at end of year 114,000 91,800 74,500
=========================
Options exercisable at July 31 93,300 73,000 39,000
=========================
Options available for grant at July 31 186,000 28,200 45,500
=========================
Certain nonemployee directors have been granted stock options aggregating
160,000 shares of common stock at $2 to $4.25 per share.
The Company reports stock-based compensation expense under the intrinsic
value-based method under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The pro forma effect of applying
the fair value-based method under SFAS No. 123, "Accounting for Stock-Based
Compensation," to the Company's stock options granted during the years ended
July 31, 1997 and 1996 would not result in net loss and net loss per share
materially different from the amounts reported.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of July 31, are as follows (in
thousands):
1997 1996
----------------------
Deferred tax assets:
Net operating loss carryforwards $ 31,542 $ 30,993
Other 372 386
---------------------
Total deferred tax assets 31,914 31,379
Valuation allowance for deferred tax assets (28,403) (27,748)
---------------------
Net deferred tax asset 3,511 3,631
Deferred tax liabilities -
Network system 3,511 3,631
---------------------
Net deferred taxes $ - $ -
=====================
14
38
ARI Network Services, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
As of July 31, 1997, the Company has unused net operating loss carryforwards
for income tax purposes of $29,812,000 expiring in 2007 through 2012.
In addition, the Company has unused net operating loss carryforwards for income
tax purposes of $17,030,000 expiring between 1998 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 (in
thousands):
1997 1996 1995
----------------------------
Computed income taxes at 34% $(1,114) $(1,430) $(1,475)
Other 7 5 4
Net operating loss carryforward 1,107 1,425 1,471
---------------------------
Income tax expense $ - $ - $ -
===========================
7. EMPLOYEE BENEFIT PLAN
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 1997 (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.
15
39
ARI Network Services, Inc.
Notes to Financial Statements (continued)
8. MAJOR CUSTOMERS
Sales to one customer were 12%, 12% and 11% of net revenues during fiscal 1997,
1996 and 1995, respectively. Accounts receivable from this customer were
approximately $74,000 and $116,000 at July 31, 1997 and 1996, respectively.
Sales to one other customer were 10% and 12% of net revenues during fiscal 1997
and 1996, respectively. Accounts receivable from this customer were
approximately $52,000 and $149,000 at July 31, 1997 and 1996, respectively.
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 has an effective registration statement for the sale of up to
2,000,000 shares of its common stock for which the Company expects to receive
approximately $2,000,000. In the event the Company does not receive proceeds
of $2,000,000 from the sale of these shares of common stock, a shareholder has
indicated it will financially support the Company for the shortfall, if needed.
10. SUBSEQUENT EVENT
On September 30, 1997, the Company acquired the stock of Empart Technologies,
Inc. through the issuance of 653,957 shares of its common stock at $1 per
share. The acquisition will be accounted for as a purchase.
16
40
Schedule II
ARI NETWORK SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 1997, 1996 and 1995
(Dollars in Thousands)
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS END OF YEAR
Allowance for doubtful accounts-
accounts receivable:
1997 $ 83 $100 $ 51 (A) $132
---- ---- ----- ----
1996 $122 $ 65 $ 104 (A) $ 83
---- ---- ----- ----
1995 $ 65 $ 92 $ 35 (A) $122
---- ---- ----- ----
Allowance for doubtful accounts-
note receivable:
1997 $ - $ - $ - $ -
---- ---- ----- ----
1996 $ - $ - $ - $ -
---- ---- ----- ----
1995 $250 $(94) (B) $ 156 (B) $ -
---- ---- ----- ----
(A) Uncollectible accounts written off, net of recoveries.
(B) During fiscal 1995, $144 was collected on a note receivable of $300,
resulting in a credit to the statement of operations of $94.