Back to GetFilings.com
1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
--------------------
(XX) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended July 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
--------------- ----------------
Commission File No. 0-19608
ARI NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1388360
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 East Kilbourn Ave. 53202-3149
Milwaukee, Wisconsin (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (414) 278-7676
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_____]
As of October 22, 1999, aggregate market value of the Common Stock held by
non-affiliates (based on the closing price on the NASDAQ National Market System)
was approximately $11.0 million.
As of October 22, 1999, there were 5,843,304 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, 1999, for the 1999
Annual Meeting of Shareholders are incorporated by reference in Part III hereof.
================================================================================
2
================================================================================
ITEM 1. BUSINESS
BUSINESS OVERVIEW
ARI Network Services, Inc. (the "Company" or "ARI") is a provider of
business-to-business e-commerce solutions to manufacturers in selected
industries with shared service networks and distribution channels. We focus our
sales and marketing on the U.S., Canadian, European and Australian manufactured
equipment industry (the "Equipment Industry"), providing direct sales and
service in North America and operating through value-added sales and service
agents elsewhere. The Equipment Industry is made up of separate sub-markets in
which the manufacturers share common distributors, retail dealers and/or service
points. These sub-markets include: outdoor power, recreation vehicles,
motorcycles, manufactured housing, farm equipment, marine, construction, power
sports, floor maintenance and others. By "Equipment" we mean capital goods which
are repaired rather than discarded when broken and for which the repairs are
generally performed by a distributed network of independent dealers and/or
repair shops.
We also provide e-commerce services to certain non-equipment industries,
including the U.S. and Canadian agribusiness industry, the U.S. and Canadian
freight transportation industry, and the U.S. non-daily newspaper publishing
industry. The Equipment Industry has been a growing percentage of our revenue
over the past three years, representing over 57% of fiscal 1999 revenue.
Management expects this percentage to continue to increase in fiscal 2000 and
beyond.
Our products and services enable Equipment Industry manufacturers to transact
business-to-business electronic commerce with their distributors, dealers and
service points world-wide. We provide both electronic catalog and transaction
processing software and services. These products and services enable dealers and
distributors in a shared distribution and service network to electronically look
up parts, service bulletins and other technical information regarding the
products of multiple manufacturers and to exchange electronic business documents
such as purchase orders, invoices, warranty claims, and status inquiries with
those manufacturers. Our products and services use the Internet for data
transport and a combination of the World-Wide Web and CD-ROM technology for user
interfaces and data presentation. In the non-equipment industries, we also
provide electronic directory services and on-line information management
services.
Our sales and marketing process is focused primarily on manufacturers that
sponsor our products and services to their dealers, distributors and/or service
points. These manufacturers have the financial capability and business power to
implement an automation strategy throughout their service and distribution
networks. In addition to software licenses and support services, a typical
implementation for a given manufacturer will involve professional services for
project management, software customization, and roll-out management. Once
manufacturer sponsorship is obtained, we also develop a direct business
relationship with the distributors, dealers, and service points for software and
services.
Our customer base currently comprises approximately 100 manufacturers in 12
different sub-markets of the Equipment Industry, as well as over 20,000 dealers,
distributors, and repair facilities in more than 50 countries. No single
customer accounted for 10% or more of our revenues in fiscal 1999.
Our executive offices are located at 330 East Kilbourn Avenue, Milwaukee,
Wisconsin 53202 and our telephone number at that location is (414) 278-7676. ARI
is a Wisconsin corporation, incorporated in 1981. We maintain a website at
http://www.arinet.com(TM).
MISSION AND STRATEGY
Our mission is to be the leading provider of quality distribution and
service-side business-to-business e-commerce services in selected manufacturing
industry segments with shared distribution channels and service networks. Our
vision is that whenever a manufacturer in one of our target markets does
business electronically with a distributor, dealer or service location, it will
use at least some of our products and services to do so. To achieve this vision,
our strategy is to concentrate on a few vertical markets and to lead with two
services: (i) distributor/dealer communications and (ii) electronic product
catalogs. After establishing a position in a market, we will then bring
2
3
other products and services to bear in order to expand our presence and solidify
our competitive position. Our goal is to provide a complete array of
high-quality services that industry participants will adopt and use effectively.
Our strategy includes driving growth in our targeted markets through three
distinct programs: (i) sales; (ii) strategic alliances; and (iii) acquisitions.
Our external sales team focuses on large manufacturers and distributors in the
targeted industry sectors, while internal telesales representatives sell to
dealers and small to medium sized distributors. Through our COMPASS Partners(TM)
program, we have a strategic alliance relationship with over 100 companies that
provide software and services to manufacturers, distributors and dealers in our
targeted industries. We seek alliance partners that provide the software and
services that complement our products, such as manufacturer warranty claim
processing software or dealer or distributor business management and point of
sale systems, which allow us to provide a complete end-to-end solution that
links the internal business systems of dealers to those of distributors and
manufacturers. These alliance relationships range from simple technical
interface agreements to value-added reseller arrangements. Outside of North
America, we sell to manufacturers directly, but use local agents to provide
sales and support to dealers. We also have an active acquisition program that
has generated four acquisitions in the last three years. We seek to acquire
businesses with complementary products or services and/or attractive market
positions in our targeted industries.
Through our sales, alliance and acquisition programs, we expect to expand our
business by both growing market share in our current Equipment sectors and
entering new sectors.
PRODUCTS AND SERVICES
We offer two basic kinds of electronic commerce services to our customers in the
Equipment Industry: (i) electronic catalogs for publishing and viewing technical
reference information about the equipment and (ii) electronic communications for
exchanging documents such as purchase orders, invoices, and warranty claims. The
following table shows the software products and services that we offer, a brief
description of the products and the industries where they are currently in use.
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC CATALOG PRODUCTS AND SERVICES
- ------------------------------------------------------------------------------------------------------------------------
PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY
- ------------------------------------------------------------------------------------------------------------------------
PartSmart(TM) Electronic parts catalog for equipment dealers Equipment - all sub-markets except
RV and manufactured housing
- ------------------------------------------------------------------------------------------------------------------------
EMPARTpublisher(TM) Electronic parts catalog creation software Equipment - all sub-markets
- ------------------------------------------------------------------------------------------------------------------------
EMPARTviewer(TM) Electronic parts catalog viewing software Equipment - RV and manufactured
Available in CD-ROM housing only
- ------------------------------------------------------------------------------------------------------------------------
ARIwebcat(TM) Web based electronic parts catalog based upon the Equipment -all sub-markets
EMPART database technology
- ------------------------------------------------------------------------------------------------------------------------
Electronic publishing Project management, data conversion, editing, Equipment - all sub-markets
services production, and distribution services for
manufacturers who wish to outsource catalog
production operations
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMMUNICATIONS PRODUCTS AND SERVICES
- ------------------------------------------------------------------------------------------------------------------------
PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY
- ------------------------------------------------------------------------------------------------------------------------
TradeRoute(R) Document handling and communications for product Equipment - all sub-markets
ordering, warranty claims and other business documents
- ------------------------------------------------------------------------------------------------------------------------
Meppel(R) EDI software for product movement reporting Agribusiness
- ------------------------------------------------------------------------------------------------------------------------
Professional services Project management, software customization, roll-out All Industries
management, and help desk support services
- ------------------------------------------------------------------------------------------------------------------------
3
4
The following table shows complementary products and services which we also
offer. In fiscal 1999, these products and services accounted for 31% of our
total revenue. We expect these products to contribute a declining percentage of
our revenues in the future.
- ------------------------------------------------------------------------------------------------------------------------
OTHER PRODUCTS AND SERVICES
- ------------------------------------------------------------------------------------------------------------------------
PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY
- ------------------------------------------------------------------------------------------------------------------------
ARISE(R) Field sales and service automation software Agribusiness
- ------------------------------------------------------------------------------------------------------------------------
Electronic Commerce Centrally managed, industry-common databases of Transportation and Agribusiness
Directories electronic commerce participant locations
- ------------------------------------------------------------------------------------------------------------------------
Newsfinder(R) Database of key-worded news stories Publishing
- ------------------------------------------------------------------------------------------------------------------------
ACQUISITIONS
Since December 1995, ARI has had a formal and aggressive business development
program aimed at identifying, evaluating and closing acquisitions which augment
and strengthen our market position, product offerings, and personnel resources.
Since the program's inception, more than 200 acquisition candidates have been
evaluated, resulting in four completed acquisitions.
On November 4, 1996, we completed the acquisition of cd\*.IMG, Inc. ("CDI"). CDI
was in the business of publishing electronic parts catalogs and the software
that dealers and repair shops in the Equipment Industry use to read the
catalogs. CDI's PLUS1(R) electronic parts catalog featured parts information
from over 20 manufacturers in the outdoor power equipment, marine, motorcycles
and power sports sub-markets. We have recently announced that PartSmart(TM),
which we acquired as part of the NDI acquisition, described below, will replace
PLUS1(R) in these sub-markets.
On September 30, 1997, we acquired Empart Technologies, Inc. ("Empart"). Empart
was a Silicon Valley-based developer of software for electronic parts catalogs.
Empart's products included EMPARTpublisher(TM), a software tool used to convert
data from a variety of forms into an electronic format, and EMPARTviewer(TM), a
high-end configurable electronic parts catalog software package. The EMPART(TM)
software is being used in the recreation vehicles and manufactured housing
sub-markets. We intend to deploy the EMPARTpublisher(TM) software in all
segments of the Equipment Industry. The EMPART(TM) database is also the
underlying technology upon which our Web-based electronic catalog product,
ARIwebcat(TM), is based.
On September 15, 1998, we acquired POWERCOM-2000, a Colorado Springs,
Colorado-based division of Briggs & Stratton Corporation ("Powercom"). Powercom
provided electronic cataloging and communications software and services to
companies in the North American, European and Australian outdoor power, power
tools and power sports industries.
On May 13, 1999, we acquired Network Dynamics Incorporated, based in
Williamsburg, Virginia ("NDI"). NDI's PartSmart(TM) electronic catalog software
is now our primary catalog software in all of the Equipment Industry sub-markets
we serve other than recreation vehicles and manufactured housing. PartSmart(TM)
was used by over 10,000 dealers to view catalogs from over 50 different
manufacturers in six sectors of the Equipment Industry.
Our acquisitions have been successful, allowing us to increase our growth rate
by adding new products, expanding into new markets, increasing our penetration
of existing markets and adding new talent. In each case the financial
performance of the acquired business has met or exceeded our expectations.
4
5
COMPETITION
Competition for ARI's products and services in the Equipment Industry varies by
product and by sub-market. No single competitor today competes with us in each
of our targeted vertical Equipment Industry sub-markets. In electronic catalog
software and services, competitors include Bell & Howell, which provides
electronic catalog services in the motorcycle, marine, and auto markets, and a
variety of small companies focused on specific industries. Many of these smaller
companies may also represent acquisition targets for us. There are also a number
of larger companies which have targeted Web-based catalogs for procurement, such
as Ariba, Commerce One, and Aspect Development, which could expand their
offerings to address the needs of our markets and become competitors in the
future. In the communications part of our business, the primary competition
comes from in-house information technology groups who may prefer to build their
own Web-based proprietary systems, rather than use our industry-common
solutions. There are also large, general market e-commerce companies like
Sterling Commerce and Harbinger, which offer products and services similar to
ours. These e-commerce companies do not typically compete with us directly, but
they could decide to do so in the future. In addition, as in the catalog side of
our business, there are a variety of small companies focused on specific
industries which compete with us and which may also represent acquisition
targets. Another potential source of competition in the future is the group of
companies attempting to build so-called "net communities," such as Chemdex or
VerticalNet, which could expand their offerings to target our served markets.
Finally, given the high level of interest in Internet-related investment
opportunities and the current pace of technological change, it is possible that
as yet unidentified well-capitalized competitors could emerge, that existing
competitors could merge and/or obtain additional capital thereby making them
more formidable, or that new technologies could come on-stream that could
threaten our position.
ARI's primary competitive advantages are the industry knowledge and customer
relationships we have developed. When combined with products and services that
are designed for our targeted industries, we believe that our industry knowledge
and customer relationships will enable us to compete effectively and sustainably
in these markets.
EMPLOYEES
As of September 30, 1999, we had 145 full-time equivalent employees. Of these,
26 are engaged in maintaining or developing software and providing software
customization services, 20 are in sales and marketing, 36 are engaged in catalog
creation and maintenance or database management, 41 are involved in customer
implementation and support and 22 are involved in administration and finance.
None of these employees is represented by a union.
ITEM 2. PROPERTIES
ARI occupies approximately 23,000 square feet in an office building in
Milwaukee, Wisconsin, under a lease expiring July 31, 2002. This facility houses
our headquarters and data center. In Colorado Springs, Colorado, we occupy
approximately 5,500 square feet of office space under a lease expiring January
31, 2001 and an additional 1,500 square feet under a lease that expires in March
2000. In Williamsburg, Virginia we occupy approximately 3,000 square feet of
office space under a lease that expires November 30, 1999 and another
approximately 3,000 square feet of office space under a lease that expires
November 30, 2002 which we are actively attempting to assign to a third party.
In November 1999, we will consolidate the Virginia offices into a single office
in Williamsburg with 5,100 square feet under a lease that expires in October,
2004.
ITEM 3. LEGAL PROCEEDINGS
ARI is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
6
EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names of ARI's executive officers as of September
30, 1999. The officers serve at the discretion of the Board.
Name Age Capacities in Which Serving
---- --- ---------------------------
Brian E. Dearing 44 Chairman of the Board of Directors, CEO, President, Acting CFO
and Treasurer
Mark L. Koczela 45 Executive Vice President of Business Development and
Administration and Secretary
John C. Bray 42 Vice President of Sales
Michael E. McGurk 51 Vice President of Technology Operations
Frederic G. Tillman 37 Vice President of Technology Development
- --------------------
BRIAN E. DEARING. Mr. Dearing, Chief Executive Officer and a director since
1995, is Chairman of the Board of Directors, CEO, President, and Acting Chief
Financial Officer and Treasurer. Prior to joining ARI, Mr. Dearing held a series
of electronic commerce executive positions at Sterling Software, Inc. in the
U.S. and in Europe. Prior to joining Sterling in 1990, Mr. Dearing held a number
of marketing management positions in the EDI business of General Electric
Information Services since 1986. Mr. Dearing holds a Masters Degree in
Industrial Administration from Krannert School of Management at Purdue
University and a BA in Political Science from Union College.
MARK L. KOCZELA. Mr. Koczela is Executive Vice President of Business Development
and Administration and Secretary. Prior to joining ARI 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 ARI. 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 ARI, 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 E. MCGURK. Mr. McGurk was appointed Vice President of Technology in
January 1997 and became Vice President of Technology Operations in August 1999.
Prior to joining ARI, Mr. McGurk developed and operated a large format printing
services business for customers involved in business process re-engineering
projects. Before opening the printing service, Mr. McGurk had a twelve year
career in information technology management at 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.
FREDERIC G. TILLMAN. Mr. Tillman was appointed Vice President of Technology
Development in August 1999. He joined ARI in September 1998 as part of our
acquisition of Powercom where he had been Vice President of Software
Development. Prior to joining Powercom in May 1998, Mr. Tillman was Director of
New Product Development for ADAC Healthcare Information Systems in Houston,
Texas, a producer of information systems for hospital laboratories and radiology
departments. Before joining ADAC in 1990, Mr. Tillman spent six years at General
Dynamics as a software engineer. Mr. Tillman holds an MBA from Texas Christian
University and a BS in Computer Science from Oklahoma State University.
6
7
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ARI's common stock is traded on the National Association of Securities Dealers,
Inc. Automated Quotation National Market System ("NASDAQ-NMS") under the symbol
ARIS. The following table sets forth the high and low bid prices on the
NASDAQ-NMS for the periods indicated as adjusted for ARI's one-for-four reverse
stock split implemented in 1997.
Fiscal Quarter Ended High Low
October 31, 1997.......................... $4.500 $2.750
January 31, 1998.......................... $3.000 $1.250
April 30, 1998............................ $4.250 $1.625
July 31, 1998............................. $3.500 $2.000
October 31, 1998.......................... $2.375 $1.500
January 31, 1999.......................... $2.750 $1.750
April 30, 1999............................ $8.250 $1.875
July 31, 1999............................. $7.313 $3.250
As of October 26, 1999, there were approximately 216 holders of record of ARI's
common stock. ARI has not paid cash dividends to date and has no present
intention to pay cash dividends.
On September 30, 1999, in connection with restructuring and amending our line of
credit with WITECH Corporation, we converted $1.0 million of debt to shares of
common stock at $5.125 per share and issued a seven year warrant to WITECH for
the purchase of 30,000 shares of common stock at $5.125 per share. The
transaction was exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 4(1) thereof.
7
8
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial information with respect to ARI
as of and for each of the five years in the period ended July 31, 1999, which
was derived from audited Financial Statements and Notes thereto of ARI. Audited
Financial Statements and Notes as of July 31, 1999 and 1998 and for each of the
three years in the period ended July 31, 1999, and the report of Ernst & Young
LLP thereon are included elsewhere in this Report. The selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere herein.
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31
----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ----------- ---------- ----------
Network and other services revenues $ 8,616 $ 5,811 $ 5,235 $ 4,484 $ 3,880
Software revenues 2,822 1,431 888 418 538
Development revenues 1,450 722 790 350 917
---------- ---------- ----------- ---------- ----------
Total revenues 12,888 7,964 6,913 5,252 5,335
Operating expenses:
Variable cost of network & other services sold 1,431 1,327 1,035 925 1,087
Variable cost of software sold 486 212 168 85 100
Variable cost of development sold 1,234 407 484 203 49
Depreciation and amortization 3,830 2,142 1,722 1,800 2,388
Network operations 1,017 708 1,004 919 1,171
Selling, general and administrative 6,995 4,586 4,819 4,585 4,756
Network construction and expansion 2,786 2,198 1,897 1,897 1,788
---------- ---------- ----------- ---------- ----------
Operating expenses before amounts capitalized 17,779 11,580 11,129 10,414 11,339
Less capitalized portion (1,802) (1,546) (1,155) (1,230) (1,616)
---------- ---------- ----------- ---------- ----------
Net operating expenses 15,977 10,034 9,974 9,184 9,723
---------- ---------- ----------- ---------- ----------
Operating loss (3,089) (2,070) (3,061) (3,932) (4,388)
Other income (expense) (326) (70) (214) (274) 49
========== ========== =========== ========== ==========
Net loss $ (3,415) $ (2,140) $ (3,275) $ (4,206) $ (4,339)
========== ========== =========== ========== ==========
Weighted average common shares outstanding 5,061 4,119 3,611 3,114 3,018
Basic and diluted net loss per share $ (0.67) $ (0.52) $ (0.91) $ (1.35) $ (1.44)
SELECTED BALANCE SHEET DATA:
Working capital (deficit) $ (3,476) $ 762 $ (689) $ (3,412) $ (1,564)
Capitalized network system (net) 8,844 9,122 8,957 9,264 9,277
Total assets 20,438 12,808 11,416 11,479 11,683
Current portion of long-term debt and capital
lease obligations 713 58 64 63 68
Total long-term debt and capital lease obligations 3,511 1,653 8 22 73
Total shareholders' equity 9,756 8,962 8,947 6,182 8,524
8
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
ARI achieved strong growth in revenue during fiscal 1999 compared to 1998,
driven by organic growth and acquisitions in the Equipment Industry. While all
expense categories increased from fiscal 1998 to 1999, only depreciation and
amortization increased at a faster rate than revenue. All expenses declined as a
percentage of revenue except variable cost of sales, which remained constant,
and depreciation and amortization expense, which increased by three percentage
points. Even so, total operating expenses declined as a percentage of revenue.
Therefore, the increase in loss can be attributed to an increase in non-cash
amortization charges resulting primarily from our acquisitions of Powercom and
NDI. See "Operating Expenses."
REVENUES
Total revenue for the year ended July 31, 1999 increased $4,924,000 or 62%
compared to last year. Total year-over-year quarterly revenue has increased for
fourteen consecutive quarters. Management expects the year-over-year quarterly
increases to continue through fiscal 2000. See "Forward Looking Statements."
ARI provides business-to-business electronic commerce products and services to
customers in selected vertical markets within the Equipment Industry. Each of
the targeted vertical markets in the Equipment Industry has a shared
distribution and/or service channel, meaning that the manufacturers share common
distributors, dealers and/or service points. Our strategy is to build
sustainable, recurring revenues in the Equipment Industry by providing
business-to-business e-commerce solutions tailored to address the business
problems of each of the targeted markets. We also have a legacy business that
provides a variety of electronic commerce services to non-Equipment industries.
The non-Equipment industries generate positive cash flows for ARI but have not
shown significant growth over the past three years and are not expected to do so
in the future. Management reviews ARI's recurring vs. non-recurring revenue in
the aggregate and within the Equipment Industry and all other industries.
The following table sets forth, for the periods indicated, certain revenue
information derived from ARI's financial statements:
REVENUE BY INDUSTRY
(IN THOUSANDS)
YEAR ENDED JULY 31
--------------------------------------------------------------------------
PERCENT PERCENT
INDUSTRY: 1999 1998 CHANGE 1998 1997 CHANGE
---- ---- ------ ---- ---- -------
Equipment Industry
Recurring $ 3,243 $ 606 435% $ 606 $ 486 25%
Non-recurring 4,157 1,588 162% 1,588 432 268%
------- ------ ------- ------
Subtotal 7,400 2,194 237% 2,194 918 139%
Other Revenues
Recurring 4,841 4,600 5% 4,600 4,321 6%
Non-recurring 647 1,170 (45%) 1,170 1,674 (30%)
------- ------ ------- ------
Subtotal 5,488 5,770 (5%) 5,770 5,995 (4%)
Total Revenue
Recurring 8,084 5,206 55% 5,206 4,807 8%
Non-recurring 4,804 2,758 74% 2,758 2,106 31%
------- ------ ------- ------
Grand Total $12,888 $7,964 62% $ 7,964 $ 6,913 15%
======= ====== ======= =======
9
10
Recurring revenues are derived from catalog subscription fees, software
maintenance and support fees, software license renewals, network traffic and
support fees and other miscellaneous subscription fees. Recurring revenues
increased in fiscal 1999 and fiscal 1998, compared to the prior year, primarily
due to increases in the customer base in the Equipment Industry caused in part
by the Powercom and NDI acquisitions. Recurring revenues, as a percentage of
total revenue, decreased from 70% in fiscal 1997 and 65% in fiscal 1998 to 63%
in fiscal 1999 due to increases in sales to new customers and
longer-than-expected new customer implementation cycles. Management believes a
ratio of approximately two thirds recurring revenues to one third non-recurring
revenues is desirable in order to establish an appropriate level of base revenue
while continuing to add new sales to drive future recurring revenues. This
revenue mix may fluctuate from quarter to quarter or year to year.
Non-recurring revenues are derived from initial software license fees and
professional services fees. Non-recurring revenues increased in fiscal 1999 and
fiscal 1998, compared to the prior year, primarily due to increased new business
in the Equipment Industry offset, in part, by reduced new business in all other
industries.
Equipment Industry
The Equipment Industry comprises several vertical sub-markets including outdoor
power, recreation vehicles, motorcycles, manufactured housing, farm equipment,
marine, construction, power sports, floor maintenance and others. Management's
strategy is to expand our electronic parts catalog software and services and
dealer communication business with manufacturers and distributors in the
existing vertical sub-markets and to expand to other similar sub-markets in the
future. Revenues from all of our acquisitions are included in the Equipment
Industry revenues. Fiscal 1999 recurring revenues in the Equipment Industry
increased, compared to 1998, primarily due to the acquisitions of Powercom and
NDI, both of which had substantial recurring revenue bases, and to increased
revenue from subscription fees and maintenance and support fees from our growing
base of manufacturers and dealers. The increase in fiscal 1998 recurring
revenues in the Equipment Industry over fiscal 1997 was primarily due to
increased revenues from subscription fees and maintenance and support fees from
an increased base of manufacturers and dealers. Fiscal 1999 non-recurring
revenues in the Equipment Industry increased over fiscal 1998 due to increased
software and professional services sold to new and existing manufacturer
customers. Fiscal 1998 non-recurring revenues in the Equipment Industry
increased, compared to fiscal 1997, due to increased sales of software licenses
and professional services as a result of ARI's entry into the recreation vehicle
market. Management expects recurring and non-recurring revenues in the Equipment
Industry to increase at a higher rate than total revenues in fiscal 2000, as we
continue to focus our attention and resources in this industry.
Non-Equipment Industry Business
ARI's business outside of the Equipment Industry includes sales of database
management services to the agricultural inputs and railroad industries,
electronic communications services to the agricultural inputs industry, and the
on-line provision of information for republication to the non-daily newspaper
publishing industry. The non-Equipment Industry business is characterized by a
stable base of customers with long-term relationships with ARI. Recurring
revenues in this business increased slightly over the prior year in fiscal 1999
and fiscal 1998 primarily due to price increases and some increased usage of our
services by existing customers, while non-recurring revenues declined
significantly over the prior year in both fiscal 1999 and fiscal 1998 because of
a lack of significant new customers or application development projects.
Management believes the decline in non-recurring revenues may signal that we are
approaching saturation of the available market for the products and services
offered by ARI in these industries. Management expects revenues in the
non-Equipment Industry business will remain relatively flat between fiscal 1999
and fiscal 2000. These revenues are profitable on the margin and help to fund
ARI's growth in the Equipment Industry. Our five-year contracts with the
Association of American Railroads and the Associated Press, on which our
business in the railroad and non-daily newspaper publishing industries depends,
are up for renewal in December 2000. We have maintained good relations with the
Association of American Railroads and the Associated Press, and, based on
discussions we have had with these customers, we believe that it is likely that
each contract will be renewed.
10
11
OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from ARI's financial statements:
OPERATING EXPENSES
(IN THOUSANDS)
YEAR ENDED JULY 31
--------------------------------------------------------------------
PERCENT PERCENT
1999 1998 CHANGE 1998 1997 CHANGE
-------- -------- ------- -------
Variable cost of products and services sold
(exclusive of depreciation and amortization
shown below) $ 3,151 $ 1,946 62% $ 1,946 $ 1,687 15%
Network operations 1,017 708 44% 708 1,004 (29%)
Selling, general & administrative 6,995 4,586 53% 4,586 4,819 (5%)
Network construction and expansion 2,786 2,198 27% 2,198 1,897 16%
------- ------- ------- -------
Gross cash expenses 13,949 9,438 48% 9,438 9,407 0%
Depreciation and amortization 3,830 2,142 79% 2,142 1,722 24%
Less capitalized portion (1,802) (1,546) 17% (1,546) (1,155) 34%
------- ------- ------- -------
Net operating expenses $15,977 $10,034 59% $10,034 $ 9,974 1%
======= ======= ======= =======
All categories of operating expense declined as a percentage of revenue from
fiscal 1998 to fiscal 1999 except variable cost of sales, which remained
constant, and depreciation and amortization expense, which increased by three
percentage points. Total operating expenses declined as a percentage of revenue.
Fiscal 1998 operating expenses remained relatively flat, compared to fiscal
1997, due to tight control of cash expenses.
Variable cost of products and services sold consists primarily of royalties,
telecommunications and data processing fees, customization labor and temporary
help fees. Variable cost of products and services sold increased in fiscal 1999
and fiscal 1998, compared to the prior year, as a direct result of increased
revenues. Variable cost of products and services sold as a percentage of total
revenue remained at 24% in fiscal 1999, as it had been in fiscal 1997 and fiscal
1998. Cost of development services sold as a percentage of development revenue
was 85% in fiscal 1999 compared to 56% in fiscal 1998 and 61% in fiscal 1997.
The increase in fiscal 1999 was due to cost overruns on several major software
customization projects in the Equipment Industry. Non-development cost of sales
as a percentage of non-development revenues was 17% in fiscal 1999 compared to
21% in fiscal 1998 and 20% in fiscal 1997. Management expects gross margins to
remain at approximately the same level in fiscal 2000 and to fluctuate slightly
from quarter to quarter based on the mix of products and services sold.
Network operations costs are derived primarily from data center operations,
software maintenance agreements for ARI's core network, catalog data maintenance
and customer support. Network operations costs increased in fiscal 1999 compared
to fiscal 1998 due to increased staffing in the catalog data maintenance area
from the May 13, 1999 acquisition of NDI. Network operations costs decreased
significantly in fiscal 1998, compared to fiscal 1997, as we successfully
negotiated reduced software maintenance contracts and completed a restructuring
in the customer support area, increasing efficiency and reducing costs, while at
the same time improving service levels.
Selling, general and administrative expenses increased in fiscal 1999, compared
to fiscal 1998, due to additional costs absorbed in the Powercom and NDI
acquisitions. These expenses decreased in fiscal 1998 compared to fiscal 1997
due to lower rent, payroll expense and management consulting fees. Selling,
general and administrative expenses, as a percentage of revenue, have steadily
decreased for each of the past five years.
The costs attributable to ARI's technical staff (both in-house and contracted)
are allocated between software development projects that are capitalized,
customization projects that are included in cost of sales and projects that
11
12
are part of operating expenses. During fiscal 1999, our technical resources were
focused primarily on customization projects for our customers in the recreation
vehicles market that are in the process of implementing our TradeRoute(R) dealer
communications system and on adjusting our various software products to bring
them into year 2000 compliance. During fiscal 1998 development resources were
focused primarily on the development of TradeRoute(R) and PLUS1(R). During
fiscal 1997, ARI's technical resources were focused on software customization
projects in the Agribusiness Industry. We expect our technical resources to
continue to focus on software customization in fiscal 2000, although the mix may
fluctuate quarter to quarter based on customer requirements.
Depreciation and amortization expenses increased substantially in fiscal 1999
compared to fiscal 1998 due primarily to the amortization of goodwill recognized
in connection with our acquisitions. Depreciation and amortization also
increased from fiscal 1997 to fiscal 1998 as TradeRoute(R) and PLUS1(R) for
Windows were released and amortization expense was recognized for the first
time. As a percentage of total revenue, depreciation and amortization was 30% in
fiscal 1999, 27% in fiscal 1998 and 25% in fiscal 1997.
Capitalized expenses represented 65% of network construction and expansion
expense in fiscal 1999, compared to 70% and 61% in fiscal 1998 and fiscal 1997,
respectively. Capitalized expenses decreased from fiscal 1998 to fiscal 1999, as
a percentage of network construction and expansion expense, due to labor
associated with our Year 2000 compliance program which is expensed as part of
operating overhead. Capitalized expenses increased from fiscal 1997 to fiscal
1998, as a percentage of network construction and expansion expense, due to the
shift of technical staff to capitalized development of TradeRoute(R) and
PLUS1(R) for Windows.
OTHER ITEMS
Interest expense increased $187,000 in fiscal 1999, compared to fiscal 1998, as
borrowing under our line of credit with WITECH increased. Interest expense
decreased $98,000 in fiscal 1998, compared to fiscal 1997, due to the conversion
of portions of ARI's lines of credit with shareholders into shares of ARI's
stock. We expect to incur additional expense for program fees in fiscal 2000
under the Receivables Sale facility ARI entered into with RFC Capital
Corporation in September 1999. See "Liquidity and Capital Resources".
Net loss increased $1,275,000 or 60% in fiscal 1999 after decreasing $1,135,000
or 35% in fiscal 1998, compared to the prior year. The increase in net loss is
attributable to the increase in ARI's non-cash depreciation and amortization
expense resulting from the two acquisitions completed in fiscal 1999. All other
categories of expense decreased as a percentage of revenue. As we intend to
continue our acquisition program, it is impossible to predict with certainty
when sustainable profits will be achieved. Given the level of non-cash expenses,
management expects to generate significant positive cash flow well before full
profitability is achieved.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, certain cash flow
information derived from ARI's financial statements.
CASH FLOW INFORMATION
(IN THOUSANDS)
YEAR ENDED JULY 31
-----------------------------------------------------------------
PERCENT PERCENT
1999 1998 CHANGE 1998 1997 CHANGE
------- ------- -------- --------
Net cash provided by (used in) operating
activities before changes in working capital $ 415 $ 2 n/a $ 2 $(1,553) 100%
Net cash used in investing activities (1,815) (1,601) (13%) (1,601) (1,234) (30%)
------- ------- ------- -------
Subtotal (1,400) (1,599) 12% (1,599) (2,787) 43%
Effect of net changes in working capital (74) (702) 89% (702) (202) (248%)
------- ------- ------- -------
Net cash used in operating and investing $(1,474) $(2,301) 36% $(2,301) $(2,989) 23%
activities ======= ======= ======= =======
12
13
Net cash provided by operating activities before changes in working capital
increased in fiscal 1999 and fiscal 1998, compared to the prior year, due to
increased revenues and tight cost controls. ARI achieved positive cash flow from
operations before changes in working capital in fiscal 1998 and continued this
achievement throughout fiscal 1999. Net cash used in investing activities
increased in fiscal 1999 compared to fiscal 1998 due to increased costs
attributable to the development of a new release of ARI's TradeRoute(R)
software. The effect of net changes in working capital is dependent on the
timing of payroll and other cash disbursements and may vary significantly from
year to year.
Though management expects that positive cash flow from operations will continue,
we expect to continue to incur operating losses in fiscal 2000 due to non-cash
expenses. We expect to fund research and development costs with excess cash from
operations and the WITECH and RFC facilities described below.
At July 31, 1999, ARI had cash of approximately $127,000 compared to
approximately $194,000 at July 31, 1998.
ARI has a line of credit with WITECH that has been in place since October 4,
1993 (the "WITECH Credit Facility"). On September 30, 1999, ARI and WITECH
restructured the $3.0 million outstanding under the WITECH Credit Facility to
provide for (i) a $1.0 million revolving line of credit (the "WITECH Line")
which expires on December 31, 2001; (ii) a $1.0 million term loan (the "WITECH
Term Loan") payable in equal monthly principal installments over three years,
commencing November 1, 1999; and (iii) a purchase by WITECH of shares of ARI's
common stock by conversion of $1.0 million of the principal amount owed under
the WITECH Credit Facility to equity at the rate of $5.125 per share. The WITECH
Line bears interest at prime plus 2.0% and the WITECH Term Loan bears interest
at prime plus 3.25%. In conjunction with obtaining the WITECH Credit Facility,
since 1993, ARI has issued to WITECH 350 shares of its non-voting cumulative
preferred stock and total warrants for the purchase of up to 280,000 shares of
its common stock, including (i) warrants for the purchase of 250,000 shares at
$2.125 per share and (ii) warrants for the purchase of 30,000 shares of its
common stock at $5.125 per share. The exercise price under the warrants is
reduced if ARI issues stock at less than the then current exercise price. WITECH
also purchased 20,000 shares of non-voting cumulative preferred stock on July
15, 1997.
The only financial covenant in the WITECH Credit Facility is that ARI must
maintain a net worth (calculated in accordance with generally accepted
accounting principles) of at least $5.3 million. ARI has been, and is currently,
in compliance with the financial covenant in the agreement and currently expects
to comply with such covenant or obtain any required waivers or raise additional
equity, if necessary.
As part of ARI's acquisition of Powercom from Briggs & Stratton Corporation
("Briggs") in September 1998, Briggs agreed to provide ARI with a working
capital line of credit in the amount of $250,000 (the "Briggs Line"). ARI agreed
to exhaust all available credit under the WITECH Line before borrowing any
amounts under the Briggs Line. The Briggs Line bore interest at prime plus 2%
and was secured by a first position lien against all accounts receivable
generated from customers of Powercom that were assigned to ARI as part of the
acquisition. The Briggs Line was repaid in full and cancelled on October 7,
1999.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each $1.0
million increase. Under the Sale Agreement, RFC will purchase 90% of eligible
receivables. In connection with the Sale Agreement, ARI is required to pay a
Commitment Fee of: $45,000 on September 28, 1999, $30,000 on September 28, 2000,
and $15,000 on September 28, 2001. In addition, ARI is obligated to pay a
monthly program fee equal to the greater of (a) $3,000 or (b) the amount of the
purchased but uncollected receivables times the prime rate plus 2%. ARI may
terminate the Sale Agreement prior to three years by paying: 3.0% of the
Purchase Commitment during the first year; 2.0% of the Purchase Commitment
during the second year; and 1.0% of the Purchase Commitment during the third
year.
Management believes that funds generated from operations and the RFC Facility
will be adequate to fund the Company's operations through the remainder of
fiscal 2000. In the event the Company requires additional financing during
fiscal 2000 in order to meet its requirements for operations and development
investments,
13
14
management believes that sufficient financing will be available from the RFC
Facility and the WITECH Term Loan and WITECH Line and, if necessary, from the
sale of additional securities. On a long-term basis, management believes that
financing of operations as well as capital expenditures, will come principally
from cash generated from operations.
YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of ARI's computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We have developed and are implementing a comprehensive year 2000 program to
assess ARI's software and equipment and to develop and implement plans to
remediate any year 2000 issues that are uncovered. This program includes six
phases: Enterprise Planning, Assessment, Inventory, Compliance Development,
Post-Implementation and Business Continuity Planning. Oversight of the program
is the responsibility of the Vice President of Technology Operations with
progress reported to the other members of ARI's executive team.
Immediately following our acquisition of Empart, Powercom and NDI (the
"Acquisitions") we expanded our year 2000 program to include the products of
Empart (the "Empart Products"), the products and operations of Powercom (the
"Powercom Products and Operations") and the products and operations of NDI (the
"NDI Products and Operations"). Powercom had operations in Colorado Springs,
Colorado and NDI had operations in Williamsburg, Virginia, which were assumed by
ARI as part of the acquisitions. The same phased plan has been followed for the
Powercom and NDI Products and Operations, with independent timelines for each.
For purposes of our year 2000 program, the Empart Products have been treated as
part of the Powercom Products and Operations. None of the acquired companies had
an adequate year 2000 compliance program at the time of the acquisition.
For ARI, (excluding the Empart Products, the Powercom Products and Operations
and the NDI Products and Operations), the Enterprise Planning phase was
completed in May 1997, the Assessment Phase was completed in August 1997, and
the Inventory Phase was completed in April 1998. The Compliance Development
phase is targeted for completion by December 31, 1999. This phase includes
remediation of all non-compliant components and system testing of all ARI
supported components.
For the Powercom Products and Operations (including the Empart Products), the
Enterprise Planning phase was completed in February 1999, the Assessment Phase
was completed in March 1999, and the Inventory Phase is scheduled to be
completed by October 31, 1999. The Compliance Development phase is targeted for
completion by December 31, 1999. This phase includes remediation of all
non-compliant components and system testing of all ARI supported components.
For the NDI Products and Operations, the Enterprise Planning phase was completed
in June 1999, the Assessment Phase was completed in September 1999, and the
Inventory Phase is scheduled to be completed by October 31, 1999. The Compliance
Development phase is targeted for completion by December 31, 1999. This phase
includes remediation of all non-compliant components and system testing of all
ARI supported components.
Affected software includes software used by ARI for its own internal operations
and software that ARI has developed for its customers. Affected operating
equipment includes ARI's computers and other office equipment and infrastructure
systems such as HVAC, electric supply and telecommunications equipment and
services and similar equipment and services of ARI's suppliers and customers.
ARI's overall year 2000 program (including the Empart Products and the Powercom
and NDI Products and Operations) provides for plans to either sunset or bring
into compliance 52 different computing platforms, 37 ARI
14
15
products, and 339 vendor software products. We currently anticipate that any
problems resulting from non-compliant products will be addressed through a
combination of product modifications as part of planned product enhancements and
migration of customers to functionally similar products that are year 2000
compliant.
Surveys have been sent to all material suppliers. Alternatives will be
identified for any products or services that will not be compliant by December
31, 1999. As of the date hereof, we are not aware of any suppliers with year
2000 issues that would have a material impact on ARI's results of operations or
financial condition. However, ARI has no means of ensuring that suppliers
actually will be year 2000 compliant by January 1, 2000.
We are not aware of any customer with year 2000 issues that will have a material
impact on ARI's results of operations or financial condition. However, ARI has
no means of ensuring that customers actually will be year 2000 compliant by
January 1, 2000. There is a risk that customers may become increasingly resource
constrained by year 2000 issues and will, therefore, have fewer resources
available for purchasing our products and services or implementing our products
once purchased. This could have a material adverse effect on ARI's sales. It is
also possible that some of our customers will fail to remediate their own
internal year 2000 issues and that such failure will adversely affect the
customer and its ability to use and/or pay for our products and services.
ARI is using both internal and external resources to reprogram or replace, test
and implement the software and operating equipment for year 2000 modifications.
Management estimates that the total cost of the year 2000 program will be
approximately $550,000. Included in this estimate is approximately $100,000
which management has estimated will be added to our year 2000 program costs
because of the NDI Products and Operations. This estimate is based upon a
comparison of the systems and software operated and sold by ARI compared to the
systems operated and sold by NDI. These costs are being funded with cash from
operations and with the WITECH Credit Facility and the RFC Facility. As of
September 30, 1999, ARI has incurred approximately $307,000 relating to all
phases of the year 2000 program.
Our plans to complete the year 2000 modifications are based on our best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, and other factors.
Estimates on the status of completion and the expected completion dates are
based on costs incurred to date compared to total expected costs. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of trained personnel, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-K 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 ARI's selected market segments, the
positioning of ARI's products in those segments, consequences of year 2000
issues, variations in demand for and cost of customer services and technical
support, customer adoption of Internet-enabled Windows(R) applications and their
willingness to upgrade from earlier versions of software, ARI's ability to
release new software applications and upgrades on a timely basis, ARI's ability
to establish and maintain strategic alliances, ARI's ability to manage its
costs, ARI's ability to manage its business in a rapidly changing environment,
ARI's ability to finance capital investments, and ARI's ability to implement its
acquisition strategy to increase growth.
Projected revenues and, therefore, profitability and cash flows are difficult to
estimate because ARI's revenues and operating results may vary substantially
from quarter to quarter. 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.
Recurring revenues are also difficult to estimate. Recurring revenues from
maintenance and subscription fees may be estimated based on the number of
subscribers to ARI's services but will be affected by the renewal ratio, which
15
16
cannot be determined in advance. Recurring revenues from network traffic fees
and transaction fees are difficult to estimate as they are determined by usage.
Usage is a function of the number of subscribers and the number of transactions
per subscriber. Transactions include product ordering, warranty claim
processing, inventory and sales reporting, parts number updates and price
updates. ARI cannot materially affect or predict the volume of transactions per
customer.
Although ARI has recently introduced and plans to expand its Internet-enabled
Windows portfolio of products, the marketplace is highly competitive and there
can be no assurance that a customer will select ARI's software and services over
that of a competitor. The environment in which ARI competes is characterized by
rapid technological changes, dynamic customer demands, and frequent product
enhancements and product introductions. Some of ARI's current and potential
competitors have greater financial, technical, sales, marketing and advertising
resources than ARI. The widespread acceptance of the Internet may increase the
usage of ARI's product applications and may change the manner in which ARI
charges for its services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ARI is subject to market risks pertaining to interest rate movements and
collectibility of accounts receivable. ARI's only expenses subject to interest
rate risk are (i) interest expense on the WITECH Line and the WITECH Term Loan
and (ii) monthly program fees owed with respect to the RFC Facility. See
"Liquidity and Capital Resources". The WITECH Line and Term Loan bear interest
tied to prevailing market rates. The monthly program fees under the RFC Facility
are also tied to prevailing market interest rates. An increase or decrease of
one percent in the prime interest rate would affect ARI's net loss by
approximately plus or minus $31,000, annualized, based on the outstanding
balances under the WITECH and RFC Facilities at October 7, 1999. As a result,
ARI believes that the market risk relating to interest rate movements is
minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARI's Financial Statements and related notes for the fiscal years ended July 31,
1999, 1998 and 1997 together with the report thereon of ARI's independent
auditors, Ernst & Young LLP, are attached hereto as Exhibit A-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
16
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ARI
Information regarding the directors of ARI and compliance with Section
16(a) of the Exchange Act is included in ARI's definitive 1999 Annual Meeting
Proxy Statement, and is incorporated herein by reference. See "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance".
Information with respect to ARI's executive officers is shown at the end of Part
I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation, Employment Agreements,
Compensation of Directors, Employee Stock Options and other compensation plans
is included in ARI's definitive 1999 Annual Meeting Proxy Statement, and is
incorporated herein by reference. See "Executive Compensation" and "Election of
Directors".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of ARI's common stock is
included in ARI's definitive 1999 Annual Meeting Proxy Statement and is
incorporated herein by reference. See "Security Ownership of Certain Beneficial
Owners".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information related to Certain Relationships and Related Transactions
is included in ARI's definitive 1999 Annual Meeting Proxy Statement, and is
incorporated herein by reference. See "Certain Transactions".
17
18
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, 1999 and 1998.
Statements of operations for each of the three years in the period ended
July 31, 1999.
Statements of shareholders' equity for each of the three years in the period
ended July 31, 1999.
Statements of cash flows for each of the three years in the period ended
July 31, 1999.
Notes to financial statements - July 31, 1999.
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, 1999, 1998, and
1997.
The Financial Statement Schedule is located immediately following the Financial
Statements. All other schedules to which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(A)3.
EXHIBITS:
See (c) below.
(B) REPORTS ON FORM 8-K:
On May 28, 1999 ARI filed a Form 8-K (dated May 28, 1999) with respect to Item 2
of Form 8-K. On July 27, 1999 ARI filed a report on Form 8-K/A (dated July 27,
1999) with respect to Item 7 which excluded audited financial statements of NDI
and related pro forma financial information.
18
19
(C)
EXHIBITS:
EXHIBIT
NUMBER
DESCRIPTION
2.1
Asset Purchase Agreement dated September 15, 1998 between ARI and Briggs &
Stratton Corporation, incorporated herein by reference to Exhibit 2.1 of ARI's
current Report on Form 8-K filed September 25, 1998. ARI agrees to furnish
supplementally to the Commission upon request the Schedules and Exhibits to the
Asset Purchase Agreement listed on the Table of Contents of the Asset Purchase
Agreement.
2.2
Registration Rights Agreement dated September 15, 1998 between the Company and
Briggs & Stratton Corporation, incorporated herein by reference to Exhibit 2.2
of the Company's Current Report on Form 8-K filed September 25, 1998.
2.3
Agreement and Plan of Merger dated April 21, 1999 by and among the Company,
Network Dynamics Incorporated, Mr. R. Gale King and Mr. K. Shae Murphy,
incorporated herein by reference to Exhibit 2.1 of the Company's report on Form
8K filed May 28, 1999. The Company agrees to furnish supplementally to the
Commission upon request the schedules and exhibits to the Agreement and Plan of
Merger listed on the Table of Contents.
3.1
Articles of Incorporation of the Company, as amended, incorporated herein by
reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 1999.
3.2
By-laws of the Company incorporated herein by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (Reg. No. 33-43148).
4.1
The Company agrees to furnish to the Commission upon request copies of any
agreements with respect to long term debt not exceeding 10% of the Company's
consolidated assets.
10.1*
1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.2 of
the Company's Form 10-Q for the quarter ended January 31, 1999.
10.2*
1993 Director Stock Option Plan, as amended, incorporated herein by reference to
Exhibit 10.3 of the Company's Form 10-Q for the quarter ended January 31, 1999.
10.3
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.
10.4
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).
19
20
10.5
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).
10.6
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.
10.7
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.
10.8
Amendment No. 5 to Loan Agreement dated December 20, 1995 between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.31 of the
Company's Form 10-K for the fiscal year ended July 31, 1996.
10.9
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.
10.10
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.
10.11
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.
10.12
Amendment No. 9 to Loan Agreement dated November 5, 1996, between the Company
and WITECH Corporation, including Forms of Amended and Restated Commitment
Warrant and Usage Warrant, incorporated herein by reference to Exhibit 10.1 of
the Company's Form 10-Q for the quarter ended October 31, 1996.
10.13
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.
10.14
Amendment No. 11 to Loan Agreement dated January 21, 1998 between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the fiscal quarter ended April 30, 1998.
10.15
Amendment No. 12 to Loan Agreement dated May 27, 1998 between the Company and
WITECH Corporation incorporated herein by reference to Exhibit 10.1 of the
Company's Form 10-Q for the fiscal quarter ended April 30, 1998.
20
21
10.16
Amendment No. 13 to Loan Agreement dated September 14, 1998 between the Company
and WITECH Corporation incorporated herein by reference to Exhibit 10.16 of the
Company's Form 10-K for the fiscal year ended July 31, 1998.
10.17
Consent of WITECH Corporation, dated September 15, 1998, incorporated herein by
reference to Exhibit 10.1 of the Company's Form 10-Q for the fiscal quarter
ended October 31, 1998.
10.18
Amendment No. 14 to Loan Agreement dated January 29, 1999, between the Company
and WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's 10-Q for the fiscal quarter ended January 31, 1999.
10.19
Consent of WITECH Corporation, dated April 19, 1999, incorporated herein by
reference to Exhibit 4.1 of the Company's Form 10-Q for the fiscal quarter ended
April 30, 1999.
10.20
Amendment No. 15 to Loan Agreement dated September 23, 1999, between the Company
and WITECH Corporation.
10.21
Receivables Sales Agreement, dated September 28, 1999, between the Company and
RFC Capital Corporation.
10.22
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.
10.23
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.
10.24*
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*
Form of Change of Control Agreement between the Company and each of Brian E.
Dearing, Mark L. Koczela, John C. Bray, Michael E. McGurk and Frederic G.
Tillman.
10.26*
Deferred Compensation Plan.
10.27*
Deferred Bonus Plan.
10.28
Preferred Stock Purchase Agreement dated July 15, 1997, between the Company and
WITECH Corporation, incorporated herein by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-2 (Reg. No. 333-31295) filed on July
15, 1997.
10.29
Revolving Credit Agreement dated September 15, 1998 between the Company and
Briggs & Stratton Corporation, incorporated herein by reference to Exhibit 2.3
of the Company's Current Report on Form 8-K filed September 25, 1998.
21
22
10.30
Amendment 1 to Revolving Credit Agreement dated May 25, 1999 between the Company
and Briggs & Stratton Corporation, incorporated herein by reference to Exhibit
10.1 of the Company's Form 10-Q for the fiscal quarter ended April 30, 1999.
23.1
Consent of Ernst & Young LLP.
24.1
Powers of Attorney appear on the signature page hereof.
27.1
Financial Data Schedule
* Management Contract or Compensatory Plan.
22
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee, State of Wisconsin on this 26th day of October, 1999.
ARI NETWORK SERVICES, INC.
By:
--------------------------------
Brian E. Dearing
Chairman, President, CEO & Acting CFO,
& Acting CAO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brian E. Dearing 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
Chairman, President & CEO & Director , 1999
- ----------------------------- & Acting CFO & Acting CAO ---------------
Brian E. Dearing (Principal Executive Officer)
Director , 1999
- ----------------------------- ---------------
William H. Alverson
Director , 1999
- ----------------------------- ---------------
Gordon J. Bridge
Director , 1999
- ----------------------------- ---------------
Francis Brzezinski
Director , 1999
- ----------------------------- ---------------
George D. Dalton
Director , 1999
- ----------------------------- ---------------
Eric P. Robison
Director , 1999
- ----------------------------- ---------------
Richard W. Weening
23
24
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 26th day of October, 1999.
ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
-----------------------------------------
Brian E. Dearing,
Chairman, President & CEO & Acting CFO,
& Acting CAO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brian E. Dearing 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 Chairman, President, CEO & Director October 29, 1999
- ------------------------------ Acting CFO & Acting CAO
Brian E. Dearing (Principal Executive Officer)
/s/ William H. Alverson Director October 29, 1999
- ------------------------------
William H. Alverson
/s/ Gordon J. Bridge Director October 29, 1999
- ------------------------------
Gordon J. Bridge
/s/ Francis Brzezinski Director October 29, 1999
- ------------------------------
Francis Brzezinski
/s/ George D. Dalton Director October 29, 1999
- ------------------------------
George D. Dalton
/s/ Eric P. Robison Director October 29, 1999
- ------------------------------
Eric P. Robison
/s/ Richard W. Weening Director October 29, 1999
- ------------------------------
Richard W. Weening
24
25
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, 1999 and 1998, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended July 31, 1999. 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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended July 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Milwaukee, Wisconsin
September 24, 1999, except for Notes 3 and 10,
as to which the date is September 30, 1999 and
September 28, 1999, respectively
1
26
ARI Network Services, Inc.
Balance Sheets
(Dollars in Thousands, Except Per Share Data)
JULY 31
1999 1998
-----------------
ASSETS (Note 3)
Current assets:
Cash $ 127 $ 194
Trade receivables, less allowance for doubtful accounts of
$278 in 1999 and $185 in 1998 3,175 2,643
Prepaid expenses and other 126 118
-----------------
Total current assets 3,428 2,955
Equipment and leasehold improvements:
Network system hardware 4,246 3,778
Leasehold improvements 239 239
Furniture and equipment 513 485
-----------------
4,998 4,502
Less accumulated depreciation and amortization 4,574 4,107
-----------------
Net equipment and leasehold improvements 424 395
Goodwill, less accumulated amortization of $980 in
1999 and $171 in 1998 7,742 336
Network system:
Network platform 11,467 11,467
Industry-specific applications 22,155 19,906
-----------------
33,622 31,373
Less accumulated amortization 24,778 22,251
-----------------
8,844 9,122
-----------------
$20,438 $12,808
=================
2
27
JULY 31
1999 1998
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit payable to shareholder $ 246 $ -
Current portion of notes payable 385 28
Accounts payable 1,204 581
Unearned income 3,307 776
Accrued payroll and related liabilities 1,091 620
Other accrued liabilities 589 158
Current portion of capital lease obligations 82 30
---------------------------
Total current liabilities 6,904 2,193
Line of credit payable to shareholder 2,754 1,620
Notes payable 734 -
Unearned income 267 -
Capital lease obligations 23 33
Commitments (Note 4)
Shareholders' equity:
Cumulative preferred stock, par value $.001 per
share, 1,000,000 shares authorized; 20,350 and
20,000 shares issued and outstanding in 1999 and
1998, respectively
- -
Common stock, par value $.001 per share, 25,000,000
shares authorized; 5,097,432 and 4,247,460 shares
issued and outstanding in 1999 and 1998, respectively 5 4
Common stock to be issued 2,406 -
Additional paid-in capital 86,830 85,028
Accumulated deficit (79,485) (76,070)
---------------------------
Total shareholders' equity 9,756 8,962
---------------------------
$ 20,438 $ 12,808
===========================
See accompanying notes.
3
28
ARI Network Services, Inc.
Statements of Operations
(Dollars in Thousands, Except Per Share Data)
YEAR ENDED JULY 31
1999 1998 1997
------------------------------------------------
Net revenues:
Network and other services $ 8,616 $ 5,811 $ 5,235
Software 2,822 1,431 888
Development 1,450 722 790
------------------------------------------------
12,888 7,964 6,913
Operating expenses:
Variable cost of products and services
sold (exclusive of depreciation and
amortization shown separately below):
Network and other services 1,431 1,327 1,035
Software 486 212 168
Development 1,234 407 484
------------------------------------------------
3,151 1,946 1,687
Depreciation and amortization 3,830 2,142 1,722
Network operations 1,017 708 1,004
Selling, general and administrative 6,995 4,586 4,819
Network construction and expansion 2,786 2,198 1,897
------------------------------------------------
17,779 11,580 11,129
Less capitalized portion (1,802) (1,546) (1,155)
------------------------------------------------
Total operating expenses 15,977 10,034 9,974
------------------------------------------------
Operating loss (3,089) (2,070) (3,061)
Other income (expense):
Interest expense (312) (125) (223)
Other, net (14) 55 9
------------------------------------------------
(326) (70) (214)
------------------------------------------------
Net loss $ (3,415) $ (2,140) $ (3,275)
================================================
Net loss per share $ (.67) $ (.52) $ (.91)
================================================
See accompanying notes.
4
29
ARI Network Services, Inc.
Statements of Shareholders' Equity
(Dollars in Thousands)
Number of Shares Issued Common Stock to be
and Outstanding Issued Par Value
--------------------------------------------- ----------------- Additional
Preferred Common Number of Preferred Common Paid-in Accumulated
Stock Stock Shares Amount Stock Stock Capital Deficit
--------------------------------------------- ------------------------------------------
Balance July 31, 1996 - 3,234,277 - $ - $ - $3 $76,834 $(70,655)
Issuance of common stock (net of
offering costs of $11) - 316,176 - - - 1 2,785 -
Issuance of common stock in
connection with acquisition
of cd\*. IMG, Inc. - 29,412 - - - - 250 -
Issuance of common stock as
payment of line of credit - 111,111 - - - - 1,000 -
Issuance of common stock
under stock purchase plan - 778 - - - - 4 -
Issuance of preferred stock 20,000 - - - - - 2,000 -
Net loss - - - - - - - (3,275)
-----------------------------------------------------------------------------------------
Balance July 31, 1997 20,000 3,691,754 - - - 4 82,873 (73,930)
Issuance of common stock (net of
offering costs of $54) - 387,500 - - - - 1,496 -
Issuance of common stock in
connection with acquisition
of Empart Technologies, Inc. - 163,523 - - - - 654 -
Issuance of common stock under
stock purchase plan - 4,683 - - - - 5 -
Net loss - - - - - - - (2,140)
-----------------------------------------------------------------------------------------
Balance July 31, 1998 20,000 4,247,460 - - - 4 85,028 (76,070)
Issuance of preferred stock 350 - - - - - - -
Issuance of common stock in
connection with acquisitions - 840,000 550,019 2,406 - 1 1,784 -
Issuance of common stock under
stock purchase plan and
from exercise of stock options - 9,972 - - - - 18 -
Net loss - - - - - - - (3,415)
-----------------------------------------------------------------------------------------
Balance July 31, 1999 20,350 5,097,432 550,019 $ 2,406 $ - $5 $86,830 $(79,485)
=========================================================================================
See accompanying notes.
5
30
Common Stock to be
Issued Par Value
- ----------------------------------------------------- Additional
Number of Preferred Common Paid-in Accumulated
Shares Amount Stock Stock Capital Deficit
- --------------------------------------------------------------------------------------
- $ - $ - $3 $76,834 $(70,655)
- - - 1 2,785 -
- - - - 250 -
- - - - 1,000 -
- - - - 4 -
- - - - 2,000 -
- - - - - (3,275)
- --------------------------------------------------------------------------------------
- - - 4 82,873 (73,930)
- - - - 1,496 -
- - - - 654 -
- - - - 5 -
- - - - - (2,140)
- --------------------------------------------------------------------------------------
- - - 4 85,028 (76,070)
- - - - - -
550,019 2,406 - 1 1,784 -
- - - - 18 -
- - - - - (3,415)
======================================================================================
550,019 $ 2,406 $ - $5 $86,830 $(79,485)
======================================================================================
See accompanying notes.
6
31
ARI Network Services, Inc.
Statements of Cash Flows
(In Thousands)
YEAR ENDED JULY 31
1999 1998 1997
--------------------------------------------
OPERATING ACTIVITIES
Net loss $ (3,415) $ (2,140) $ (3,275)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of network platform 695 695 690
Amortization of industry-specific applications 1,832 1,121 772
Amortization of goodwill 809 100 71
Depreciation and other amortization 494 226 189
Net change in receivables, prepaid expenses
and other 431 (714) (183)
Net change in accounts payable, unearned
income and accrued liabilities (505) 12 (19)
--------------------------------------------
Net cash provided by (used in) operating
activities 341 (700) (1,755)
INVESTING ACTIVITIES
Purchase of equipment and leasehold
improvements (56) (55) (79)
Cash received in acquisitions 43 - -
Industry-specific applications costs capitalized (1,802) (1,546) (1,155)
--------------------------------------------
Net cash used in investing activities (1,815) (1,601) (1,234)
FINANCING ACTIVITIES
Borrowings (repayments) under line of credit 1,380 1,120 (2,000)
Borrowings under notes payable 80 - -
Payments of capital lease obligations and notes
payable (71) (190) (109)
Proceeds from issuance of preferred stock - - 2,000
Proceeds from issuance of common stock 18 1,501 2,790
--------------------------------------------
Net cash provided by financing activities 1,407 2,431 2,681
--------------------------------------------
Net increase (decrease) in cash (67) 130 (308)
Cash at beginning of year 194 64 372
--------------------------------------------
Cash at end of year $ 127 $ 194 $ 64
============================================
Cash paid for interest $ 310 $ 129 $ 214
============================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for -
Network system hardware $ - $ 55 $ 28
Issuance of common stock for acquisitions 4,191 654 250
Issuance of common stock as payment of
line of credit - - 1,000
See accompanying notes.
6
32
ARI Network Services, Inc.
Notes to Financial Statements
July 31, 1999
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ARI Network Services, Inc. (the Company) operates in one business segment and
provides business-to-business e-commerce services to manufacturers in selected
industries with shared service networks and distribution channels. The Company's
e-commerce services use telecommunications technology and software to help
customers conduct business electronically, computer-to-computer, with minimal
changes to their internal business systems. The Company focuses on the U.S.,
Canadian, European and Australian manufactured equipment industry as well as
certain non-equipment industries, including the U.S. and Canadian agribusiness
industry, the U.S. and Canadian freight transportation industry, and the U.S.
non-daily newspaper publishing industry. The company provides both electronic
catalog and transaction processing software and services, enabling dealers and
distributors in a shared distribution and service network to electronically look
up parts, service bulletins and other technical information, and to exchange
electronic business documents such as purchase orders, invoices, warranty
claims, and status inquiries with the manufacturers. The Company's customers are
located primarily in the United States and Canada.
REVENUE RECOGNITION
Revenue for use of the network and for information services is recognized in the
period such services are utilized.
The Company recognizes the revenue allocable to software licenses and specified
upgrades upon delivery of the software product or upgrade to the end user,
unless the fee is not fixed or determinable or collectibility is not probable.
The Company considers all arrangements with payment terms extending beyond
twelve months and other arrangements with payment terms longer than normal not
to be fixed or determinable. If the fee is not fixed or determinable, revenue is
recognized as payments become due from the customer. Arrangements that include
acceptance terms beyond the Company's standard terms are not recognized until
acceptance has occurred. If collectibility is not considered probable, revenue
is recognized when the fee is collected.
7
33
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Arrangements that include software services are evaluated to determine whether
those services are essential to the functionality of other elements of the
arrangement. When software services are considered essential, revenue under the
arrangement is recognized using contract accounting. When software services are
not considered essential, the revenue allocable to the software services is
recognized as the services are performed.
Revenue from annual or periodic maintenance fees is recognized over the period
the maintenance is provided. Revenue from catalog subscriptions is recognized
over the subscription term.
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.
8
34
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company also develops and purchases industry-specific software applications
for personal computers and mainframes which, when utilized with the platform,
give rise to the Company's products and services tailored to its targeted
industries.
Certain software development costs and network construction and expansion costs
are capitalized when incurred. Capitalization of these costs begins upon the
establishment of technological feasibility. The establishment of technological
feasibility and the ongoing assessment of recoverability of software and network
system costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technologies.
The annual amortization of the platform and the industry-specific software
applications is the greater of the amount computed using (a) the ratio that
current gross revenues for the network or an industry-specific product bear to
the total of current and anticipated future gross revenues for the network or an
industry-specific product or (b) the straight-line method over the estimated
economic life of the product (20 years - platform, 3 years - industry-specific
software applications). Amortization starts when the product is available for
general release to customers.
All other network construction and expansion expenditures are charged to expense
in the period incurred.
GOODWILL
Goodwill, representing the excess of cost over net assets of businesses
acquired, is stated at cost and is amortized on a straight-line basis over five
years.
IMPAIRMENT OF LONG-LIVED ASSETS
Equipment and leasehold improvements, network system costs and goodwill are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets.
9
35
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Such analyses necessarily involve judgment. The Company evaluated the ongoing
value of its long-lived assets as of July 31, 1999 and 1998, and determined that
there was no significant impact on the Company's results of operations.
CAPITALIZED INTEREST COSTS
In 1999, 1998 and 1997, interest costs of $109,000, $40,000 and $35,000,
respectively, were capitalized and included in the network system.
NET LOSS PER SHARE
The basic and dilutive weighted-average shares used in the earnings per share
calculation are 5,061,000, 4,119,000 and 3,611,000, respectively, in 1999, 1998
and 1997. Dilutive earnings per share is not shown as the impact is
antidilutive.
SHAREHOLDERS' EQUITY
On November 19, 1997, the Board of Directors of the Company declared a
one-for-four reverse stock split on the Company's common stock, to shareholders
of record on November 19, 1997. Shareholders' equity, share and per share data
appearing in the financial statements and notes thereto have been adjusted for
the reverse stock split.
RECLASSIFICATIONS
Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.
ACCOUNTING PRONOUNCEMENTS
Effective August 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." Net loss for 1999,
1998 and 1997 is the same as comprehensive income defined pursuant to SFAS No.
130.
The Company adopted Statement of Position (SOP) 97-2, "Software Revenue
Recognition," effective for transactions entered into beginning August 1, 1998.
The adoption of SOP 97-2 did not have a material impact on the Company's 1999
financial statements.
10
36
ARI Network Services, Inc.
Notes to Financial Statements (continued)
2. ACQUISITIONS
In September 1998, the Company acquired certain assets used in the operation of
Briggs & Stratton Corporation's Powercom-2000 business (Powercom). Aggregate
consideration for the acquisition consisted of 840,000 shares of the Company's
common stock and the assumption of certain liabilities totaling $2,291,000.
In May 1999, the Company acquired the assets of Network Dynamics, Inc. (NDI).
Aggregate consideration for the acquisition consisted of 550,019 shares of the
Company's common stock, which were issued in September 1999, and the assumption
of certain liabilities totaling $3,623,000.
The acquisitions were accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based upon their respective fair values at the date of acquisition. The
financial statements include the operating results of the acquisitions from
their respective dates of acquisition. The excess of the purchase price over the
fair value of net assets acquired of $2,782,000 for Powercom and $5,433,000 for
NDI have been recorded as goodwill.
The following unaudited pro forma results of operations for the years ended July
31, 1999 and 1998 assume that the acquisitions had occurred on August 1, 1997
(in thousands, except per share data):
1999 1998
-----------------------
Net revenues $15,482 $12,414
Net loss (4,533) (5,191)
Basic and diluted net loss per share (0.81) (0.94)
The pro forma results do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred on
August 1, 1997, nor are they necessarily indicative of future operating results.
11
37
ARI Network Services, Inc.
Notes to Financial Statements (continued)
3. LINE OF CREDIT AND NOTES PAYABLE
In December 1994, the Company entered into a $1,500,000 revolving line of credit
agreement with two shareholders. In December 1996, the Company issued 111,111
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 had a $3,000,000 revolving line of credit agreement with a
shareholder that was to expire on December 31, 2001. On September 30, 1999, the
Company and the shareholder restructured and amended the line of credit
agreement in order to reduce the line of credit from $3,000,000 to $1,000,000,
establish a $1,000,000 term loan payable and convert $1,000,000 of the line of
credit into 195,122 shares of common stock. The term loan is payable in equal
monthly installments over three years commencing November 1, 1999 and bears
interest at prime plus 3.25%. The line of credit expires December 31, 2001. The
Company is required to pay a fee of .025% per month on the unused portion of the
line of credit. Borrowings under the line of credit bear interest at prime plus
2%. In connection with this amendment, the Company paid $12,500 in financing
fees and issued a warrant to purchase 30,000 shares of the Company's common
stock at $5.125 per share. The long-term portion of the $3,000,000 line of
credit balance outstanding at July 31, 1999 includes $1,000,000 which was
converted to common stock on September 30, 1999, $1,000,000 line of credit that
the Company intends to have outstanding for an uninterrupted period extending
beyond one year from the balance sheet date and $754,000 of the term note. The
entire agreement is secured by substantially all assets of the Company other
than accounts receivable sold under the receivables sales agreement described in
Note 10. The agreement contains various restrictive covenants including
maintenance of a minimum level of net worth and restrictions on additional
indebtedness.
In connection with the origination of the line of credit agreement and various
extensions of the agreement through July 31, 1999, the Company has issued the
shareholder 350 shares of its Series A Preferred Stock and total warrants for
the purchase of up to 250,000 shares of its common stock at $2.125 per share.
These warrants lapse on either September 30, 2000 or December 31, 2001, as to
any shares of common stock not issued.
12
38
ARI Network Services, Inc.
Notes to Financial Statements (continued)
3. LINE OF CREDIT AND NOTES PAYABLE (CONTINUED)
Notes payable consist of the following at July 31 (in thousands):
1999 1998
----------------------
Term loan $ 360 $ -
Note payable to bank 602 -
Note payable to Briggs & Stratton Corporation 80 -
Other 77 28
----------------------
1,119 28
Less current maturities 385 28
----------------------
$ 734 $ -
======================
The term loan requires monthly principal and interest payments of approximately
$8,000 through June 2008. The note payable to bank bears interest at 9.75% which
is payable monthly through December 1999; thereafter monthly principal payments
of $25,000 plus interest are due through January 2002. The note payable to
Briggs & Stratton Corporation is due in October 1999 and bears interest at prime
plus 2% payable monthly.
Future maturities of notes payable as of July 31, 1999 are as follows (in
thousands):
Fiscal year ending
------------------
2000 $ 385
2001 423
2002 234
2003 77
-------
$ 1,119
=======
4. CAPITAL AND OPERATING LEASES AND RELATED-PARTY TRANSACTIONS
The Company leases office space under operating lease arrangements expiring in
2001 through 2004. The Company is generally liable for its share of increases in
the landlord's direct operating expenses and real estate taxes up to 5% of the
previous year's rent. Total rental expense for the operating leases was $400,000
in 1999, $487,000 in 1998 and $645,000 in 1997.
13
39
ARI Network Services, Inc.
Notes to Financial Statements (continued)
4. CAPITAL AND OPERATING LEASES AND RELATED-PARTY TRANSACTIONS (CONTINUED)
Minimum lease payments under remaining capital and operating leases are as
follows (in thousands):
Fiscal year ending Capital Leases Operating Lease
- ------------------ ------------------------------------
2000 $105 $ 677
2001 21 490
2002 14 435
2003 2 13
------------------------------------
Total minimum lease payments 142 $ 1,615
===============
Amounts representing interest 37
---------------
Present value of minimum capital lease payments 105
Less amounts payable in one year 82
---------------
$ 23
===============
The Company and Quaestus Limited Partnership (Quaestus), a shareholder, had an
agreement dated September 30, 1993, which was terminated October 31, 1997,
whereby Quaestus assisted the Company with investor relations, executive
recruiting, business and strategic planning and corporate finance matters.
During fiscal 1998 and 1997, the Company expensed $36,000 and $176,000,
respectively.
Quaestus has been issued a warrant to purchase 62,500 shares of common stock at
$17 per share exercisable through December 1999.
5. SHAREHOLDERS' EQUITY
In July 1997, the Company issued 20,000 shares of Series A Preferred Stock for
$2,000,000 to a common 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.
14
40
ARI Network Services, Inc.
Notes to financial statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
In the event of liquidation or dissolution of the Company, the holders of shares
of Series A Preferred Stock shall be entitled to receive $100 per share plus
accrued and unpaid dividends before any distribution is made to the holders of
common stock. Accumulated dividends in arrears at July 31, 1999 are $447,000.
6. STOCK PLANS
The Company's 1991 Stock Option Plan (Stock Option Plan) has 850,000 shares of
common stock reserved for issuance. Options granted under the Stock Option Plan
may be either (a) options intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, or (b)
nonqualified stock options.
Any incentive stock option that is granted under the Stock Option Plan may not
be granted at a price less than the fair market value of the stock on the date
of grant (or less than 110% of the fair market value in the case of holders of
10% or more of the voting stock of the Company). Nonqualified stock options may
be granted at the exercise price established by the Stock Option Committee,
which may be less than, equal to, or greater than the fair market value of the
stock on the date of grant.
Each option granted under the Stock Option Plan is exercisable for a period of
ten years from the date of grant (five years in the case of a holder of more
than 10% of the voting stock of the Company) or such shorter period as
determined by the Stock Option Committee and shall lapse upon the expiration of
said period, or earlier upon termination of the participant's employment with
the Company.
At its discretion, the Stock Option Committee may require a participant to be
employed by the Company for a designated number of years prior to exercising any
options. The Committee may also require a participant to meet certain
performance criteria, or that the Company meet certain targets or goals, prior
to exercising any options.
15
41
ARI Network Services, Inc.
Notes to financial statements (continued)
6. STOCK PLANS (CONTINUED)
Changes in option shares under the Stock Option Plan are as follows:
1999 1998 1997
-------------------------------------
Options outstanding at beginning of year 528,715 350,685 261,214
Granted:
1999--$1.75 to $8.38 per share 213,175 - -
1998--$2.25 to $4.62 per share - 229,499 -
1997--$7.00 to $12.00 per share - - 185,875
Exercised:
1999--$2.13 to $2.25 per share (784) - -
Canceled or expired (65,257) (51,469) (96,404)
-------------------------------------
Options outstanding at end of year 675,849 528,715 350,685
=====================================
Options exercisable at July 31 429,763 318,282 180,282
=====================================
Options available for grant at July 31 132,717 280,635 108,665
=====================================
The Company's 1992 Employee Stock Purchase Plan (Stock Purchase Plan) has 62,500
shares of common stock reserved for issuance and 18,706 shares have been issued
through July 31, 1999. All employees of the Company, other than executive
officers, with six months of service are eligible to participate. Shares may be
purchased at the end of a specified period at the lower of 85% of the market
value at the beginning or end of the specified period through accumulation of
payroll deductions.
The Company's 1993 Director Stock Option Plan (Director Plan) has 150,000 shares
of common stock reserved for issuance to nonemployee directors. Options under
the Director Plan are granted at the fair market value of the stock on the date
immediately preceding the date of grant. Each option granted under the Director
Plan is exercisable
16
42
ARI Network Services, Inc.
Notes to financial statements (continued)
6. STOCK PLANS (CONTINUED)
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:
1999 1998 1997
-------------------------------------
Options outstanding at beginning of year 35,433 28,500 22,950
Granted:
1999--$2.13 to $4.13 per share 14,446 - -
1998--$1.78 to $2.50 per share - 15,208 -
1997--$6.88 per share - - 5,550
Expired - (8,275) -
-------------------------------------
Options outstanding at end of year 49,879 35,433 28,500
=====================================
Options exercisable at July 31 35,433 25,229 23,325
=====================================
Options available for grant at July 31 100,121 114,567 46,500
=====================================
Certain nonemployee directors have been granted stock options aggregating 52,500
shares of common stock at $4 to $17 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, 1999 and 1998 would not result in net loss and net loss per share
materially different from the amounts reported.
17
43
ARI Network Services, Inc.
Notes to financial statements (continued)
7. 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):
1999 1998
-------------------------
Deferred tax assets:
Net operating loss carryforwards $31,336 $ 31,598
Other 433 503
-------------------------
Total deferred tax assets 31,769 32,101
Valuation allowance for deferred tax assets (28,302) (28,525)
-------------------------
Net deferred tax asset 3,467 3,576
Deferred tax liabilities -
Network system 3,467 3,576
=========================
Net deferred taxes $ - $ -
=========================
As of July 31, 1999, the Company has unused net operating loss carryforwards for
income tax purposes of $33,523,000 expiring in 2007 through 2018.
In addition, the Company has unused net operating loss carryforwards for income
tax purposes of $12,759,000 expiring between 2000 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
$33,656,000 expiring between 2003 and 2007, of which not more than $3,655,000
annually can be utilized to offset taxable income. Use of the net operating loss
carryforwards is restricted under Section 382 of the Internal Revenue Code
because of changes in ownership in 1987 and 1992.
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):
1999 1998 1997
--------------------------------------
Computed income taxes at 34% $(1,161) $(728) $(1,114)
Other 7 7 7
Net operating loss carryforward 1,154 721 1,107
======================================
Income tax expense $ - $ - $ -
======================================
18
44
ARI Network Services, Inc.
Notes to financial statements (continued)
8. EMPLOYEE BENEFIT PLAN
The Company has a qualified retirement savings plan (the 401(k) Plan) covering
its employees. Each employee may elect to reduce his or her current compensation
by up to 15%, up to a maximum of $10,000 in calendar 1999 (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.
9. MAJOR CUSTOMERS
During fiscal 1999, sales to any one customer did not exceed 10% of net
revenues. Sales to one customer were 12% of net revenues during each of fiscal
1998 and 1997. Accounts receivable from this customer was approximately $176,000
at July 31, 1998. Sales to one other customer were 11% and 10% of net revenues
during fiscal 1998 and 1997, respectively. Accounts receivable from this
customer was approximately $290,000 at July 31, 1998.
10. SUBSEQUENT EVENT
On September 28, 1999, the Company entered into a Receivables Sales Agreement
(Sale Agreement) establishing a $3,000,000 working capital facility. The three
year Sale Agreement allows the creditor to purchase up to $3,000,000 of the
Company's eligible accounts receivable, which may be increased in increments of
$1,000,000 upon mutual agreement and a payment by the Company of $10,000 upon
each increase. The Company will receive 90% of each increment purchased under
the Sale Agreement. In connection with the Sale Agreement, the Company is
required to pay a commitment fee of $45,000 on September 28, 1999, $30,000 on
September 28, 2000 and $15,000 on September 28, 2001. In addition, the Company
is obligated to pay a fee equal to the greater of prime plus 2% of the purchased
but uncollected receivables or $3,000 per month. The Company may terminate the
Sale Agreement prior to September 28, 2002 by paying 3% of the purchase
commitment during the first year, 2% of the purchase commitment during the
second year and 1% of the purchase commitment during the third year.
19
45
Schedule II
ARI NETWORK SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 1999, 1998 and 1997
(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:
1999 $ 185 $ 307 $ 214 (A) $ 278
======= ======= ======= ======
1998 $ 132 $ 95 $ 42 (A) $ 185
======= ======= ======= ======
1997 $ 83 $ 100 $ 51 (A) $ 132
======= ======= ======= ======
(A) Uncollectible accounts written off, net of recoveries.