UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended July 31, 2008
o
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period
from ____________________ to _____________________________
Commission
file number 000-19608
ARI Network Services,
Inc.
(Name of
small business issuer in its charter)
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WISCONSIN
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39- 1388360
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|||
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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11425 W. Lake Park Drive,
Milwaukee, Wisconsin 53224
(Address
of principal executive office)
Issuer's
telephone number (414) 973-4300
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.001 per share
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act
Yes o No R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
Yes o No R
Indicate
by check mark whether the registrant (1) 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 o No R
Indicate
by check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (S229.405 of this chapter) 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.
R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
|
Large
accelerated filer o
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Accelerated
filer o
|
|
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Non-accelerated
filer o
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Smaller
reporting company R
|
|
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(Do
not check if a smaller reporting
company)
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||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No R
As
of January 31, 2008, the aggregate market value of the Common Stock
held by non-affiliates (based on the closing price on the NASDAQ bulletin board)
was approximately $11.2 million.
As of
October 16, 2008, there were 6,971,927 shares of the registrant’s shares
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, 2008, for the 2008 Annual
Meeting of Shareholders are incorporated by reference in Part III
hereof.
2
ARI Network Services, Inc.
FORM
10-K
FOR THE
FISCAL YEAR ENDED JULY 31, 2008
INDEX
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PART
I - FINANCIAL INFORMATION
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Page
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Item
1
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4-8
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Item
2
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8
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Item
3
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9
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PART
II - OTHER INFORMATION
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Item
5
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9
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Item
7
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10-21
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Item
8
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21
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Item
9
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21
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Item
9A(T)
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21-22
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PART
III - OTHER INFORMATION
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Item
10
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22
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Item
11
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22
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Item
12
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22
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Item
13
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22
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Item
14
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22
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PART
IV - OTHER INFORMATION
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Item
15
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23-25
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26
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28
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29-49
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PART I
Item 1. Description of
Business
ARI
Network Services, Inc. (the “Company” or “ARI”) is a leading provider of
electronic parts catalogs, website solutions and related technology and services
to increase sales, efficiency and customer satisfaction for dealers,
distributors and manufacturers in various markets.
Manufacturers
and distributors drive revenue and efficiency gains by leveraging ARI’s dealer
relationships, and look to ARI as a partner to reach their dealers. Dealers rely
on ARI’s extensive network of manufacturer and distributor relationships and
leverage this network into content and solutions which result in revenue and
efficiency gains.
The
Company provides robust Internet-based and CD-ROM interactive electronic parts
catalogs of manufactured equipment to over 24,000 dealers in approximately 85
countries. It serves dealers in various market segments including
outdoor power, power sports, appliance, agricultural, marine, recreation
vehicles, floor maintenance, auto and construction. The Company also supplies
eCommerce-enabled websites, direct mail custom marketing and technology-related
services.
ARI
operates primarily in two business segments: the United States and
Netherlands-based European operations. Each provides
technology-enabled business solutions that connect manufacturers in selected
industries with their service and distribution networks. Segmented operating
information is provided to the Company’s chief operating decision
makers.
ARI’s
electronic parts catalogs, (including our flagship PartSmartÔ product), dealer marketing
services and eCommerce services, (including our WebSiteSmart ProÔ product), enable partners
in a service and distribution network to (a) conveniently reference parts,
service bulletins and other technical reference information, and (b) market to
their customers and prospects. ARI also provides an electronic data
interchange service enabling exchange of electronic business documents such as
purchase orders, invoices, warranty claims and status inquiries. The
Company briefly operated a business which offered financing and insurance
services to dealers in the Power Sports industry. This operation was
closed in November 2007.
The
electronic cataloging suite of products and services enable partners in a
service and distribution network to look up electronically technical reference
information such as illustrated parts lists, service bulletins, price files,
repair instructions and other technical information regarding the products of
multiple manufacturers.
The
website suite of products and services allow dealers to quickly establish an
online presence to reach beyond typical geographic constraints and extend their
store hours, allowing their customers to look up and order parts and accessories
24 hours a day, 7 days a week.
An
important element to ARI’s business is its relationship with over 85 dealer
business management system providers through our COMPASS Partners™
program. A dealer business management system is used by a dealer to
manage inventory, maintain accounting records, bill customers and focus
marketing efforts. ARI software’s ability to interface with these
systems provides the dealer with a more robust, informative, and cost-effective
solution.
ARI also
provides eCommerce services to the North American agribusiness industry,
accounting for 3% of fiscal 2008’s total revenue.
No single
customer accounted for 10% or more of ARI’s revenue in fiscal 2008 or fiscal
2007.
Our
executive offices are located at 11425 West Lake Park Drive, Milwaukee,
Wisconsin 53224-3025 and our telephone number at that location is (414)
973-4300. ARI is a Wisconsin corporation, incorporated in
1981. We maintain a website at http://www.arinet.com, which is not
part of this report.
Mission and Strategy
Our
mission is to be the leading provider of electronic parts catalogs, marketing
services and related technology and services to increase sales and profits for
dealers in selected manufacturing industry segments, primarily those with shared
distribution channels and service networks. Our vision is that
whenever a dealer in one of our target markets accesses technical parts and
service information electronically from a manufacturer or distributor or markets
its products and services to its customers, 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 be the leading provider of
electronic catalog products and services in those markets. After
establishing a position in a market, we will then bring other products and
services to bear – including marketing services - in order
to expand our presence and solidify our competitive position. Our goal is to
provide a complete array of high-quality electronic catalog, marketing, and
eventually, other services that industry participants will adopt and use
effectively.
During
fiscal 2008, the Company focused on three growth initiatives: (i) maintaining
and enhancing the current base of catalog business; (ii) growing the marketing
services business and (iii) making selected synergistic
acquisitions.
To
maintain and enhance the current base of catalog business, we are seeking to
maintain a renewal rate in North America of approximately 89% on dealer catalog
subscriptions and to sell new catalogs and dealers at a rate sufficient to
replace or increase the revenue from non-renewing subscriptions. We
believe that we are highly penetrated in our two primary markets (Outdoor Power
and Power Sports) both in terms of dealers and catalog titles, and that there
are opportunities for additional growth in related markets.
Our
primary initiative in North America is expansion of marketing services, which
includes WebsiteSmart ProÔ, ARI MailSmartÔ, and additional add-on
products, including EMailSmartÔ, our automated website
content management services and marketing professional services. These
products respond directly to our customers’ desire for assistance from a trusted
partner like ARI in marketing and selling to their customers and
prospects. We are investing in additional sales and marketing resources as
well as in product development to support this initiative. Our
marketing services business grew approximately 79% in fiscal 2008 and 354% in
fiscal 2007, inclusive of the January 2007 acquisition of OC-Net, Inc.
(“OC-Net”).
In ARI’s
Netherlands-based European operations, our focus is to adapt our success in the
U.S. market to our European-based customers through a combination of direct and
indirect business relationships with manufacturers and dealers. We
believe that this will position us for growth in the future by leveraging what
we do well while being responsive to the local operating requirements within the
various European countries.
Finally,
we continue to seek acquisition and other business development opportunities
that will solidify or accelerate our market position in both electronic parts
catalogs and professional marketing services.
Products
and Services
We offer
three basic kinds of services to our customers in the Equipment Industry: (i)
electronic catalogs for
publishing and viewing technical reference information about the equipment, (ii)
marketing services,
including website creation services which enable a dealer to create and maintain
a website, including eCommerce features and (iii) electronic data interchange
services for exchanging documents such as purchase orders,
invoices,
and warranty claims.
The
following table shows the products and services that we offer, a brief
description of them and the industries where they are currently in
use.
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Electronic
Catalog Products And Services
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Product
or Service
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Description
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Primary
Industry/Market
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PartSmart® 8™
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Electronic
parts catalog for equipment dealers
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Equipment-
all sub-markets except RV
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PartSmart®
Web™
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Web
based electronic parts catalog, formerly EMPARTweb
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Equipment
- all sub-markets
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Lookupparts.com
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PartSmart
Web-based lookup service offered to dealers on a subscription
basis
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Equipment
- all sub-markets except RV
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PartSmart®
Web™ASP
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Electronic
parts catalog viewing software offered as a hosted service for individual
distributors and manufacturers, formerly EMPARTweb ASP
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Equipment
- all sub-markets
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PartSmart®
Cart™
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Add-on
product to PartSmart Web™ that facilitates order taking from the
catalog
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Equipment
- all sub-markets
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PartSmart®
Data Manager™
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Electronic
parts catalog creation software used to produce catalogs for viewing on
PartSmart Classic, PartSmart 8, and PartSmart Web
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Equipment
- all sub-markets
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PartSmart®
IPL™
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Electronic
parts catalog for equipment dealers
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Appliance
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PartSmart®
IPL Web™
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Web
based electronic parts catalog
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Appliance
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Electronic
publishing services
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Project
management, data conversion, editing, production, and distribution
services for manufacturers who wish to outsource catalog production
operations
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Equipment
- all sub-markets
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|
Professional
services
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Project
management, software customization, back-end system integration, roll-out
management, and help desk support services
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Equipment
- all sub-markets
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MARKETING
SERVICES
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Product
or Service
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Description
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Primary
Industry/Market
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WebsiteSmart
Pro™
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Software
to create customized websites and conduct business electronically,
including optional shopping cart, superseding WebsiteSmart
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Equipment
- outdoor power, power sports
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Professional
Services
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Large-scale
website creation, hosting and maintenance
services
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Equipment
– all sub-markets
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ARI
MailSmart™
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Direct
mail solution that enables users to cost-effectively and efficiently reach
customers and prospects with customized messages
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Equipment
– all sub-markets
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eMailSmart™
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Email
solution that enables users to stay in touch with customers through
special offers and a quarterly newsletter
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Equipment
– all sub-markets
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Content
Management Services
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Add-on
solution to WebsiteSmart Pro™ that automatically updates a website with
Weather Alerts, promotions based on customer seasonality and supplier
promotions
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Equipment
– all
sub-markets
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eCommerce
Products and Services
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||
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Product
or Service
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Description
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Primary
Industry/Market
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TradeRoute®
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Document
handling and communications for product ordering, warranty claims and
other business documents
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Equipment
- Outdoor power and RV
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WarrantySmart™
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Web-based
end-to-end warranty claims processing system that enables dealers and
manufacturers to streamline product registration and warranty claim
processing, as well as check claim status online
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Equipment
– all sub-markets
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As part
of our historical business practice, we continue to provide electronic
transaction services to the North American agribusiness industry, representing
approximately 3% of our fiscal 2008 and fiscal 2007 revenue.
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 on every
product in each of our targeted vertical Equipment Industry
sub-markets. In electronic catalog software and services, the largest
direct competitor is Snap-on Business Solutions, which offers electronic service
catalogs in the motorcycle, marine, outdoor power and auto
markets. In addition, there are a variety of small companies focused
on specific industries. Many of the smaller companies may also
represent acquisition targets for us. There are also other companies
that provide more general catalog services such as Stibo, Pindar and IHS that
may in the future directly compete with us in our target markets. In
addition, there are also a number of larger companies which have targeted
Web-based catalogs for procurement, such as Ariba and i2 Technologies, Inc.,
which could expand their offerings to address the needs of our markets and
become competitors in the future. WebSiteSmart Pro™ has many
competitors, including Dominion Enterprises, 50 Below, and many internet service
providers. In the eCommerce 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. Snap-on Business Solutions
also offers a communication solution. There are also large, general
market eCommerce companies like AT&T Communications, Inc., which offer
products and services which could address some of our customers’
needs. These general eCommerce companies do not typically compete
with us directly, but they could decide to do so in the future. These
companies may also represent alliance partner opportunities for
us. 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 Bravo Solution, which
could expand their offerings to target our served markets. In
addition, companies focused on asset management or post-sales services, such as
Servigistics, could expand their offerings and enter our markets; these
companies may also represent alliance partner candidates. Finally,
given the current pace of technological change, it is possible that as yet
unidentified well-capitalized competitors could emerge, that existing
competitors could merge and/or obtain additional capital thereby making them
more formidable, or that new technologies could come on-stream that could
threaten our position.
ARI’s
primary competitive advantages are (i) our focus on our target markets and the
industry knowledge and customer relationships we have developed in those target
markets, (ii) our robust electronic parts catalog software products, (iii) the
e-commerce contributions of our WebsiteSmartPro™ product, and (iv) our
relationships with over 85 dealer business management system
providers. We believe that our competitive advantages will enable us
to compete effectively and sustainably in these markets.
Employees
As of
October 16, 2008, we had 102 full-time equivalent employees. Of
these, 18 are engaged in maintaining or developing software and providing
software customization services, 24 are in sales and marketing, 13 are engaged
in catalog creation and maintenance or database management, 36 are involved in
customer implementation and support and 11 are involved in administration and
finance. None of these employees is represented by a union.
Executive
Officers of the Registrant
The table
below sets forth the names of ARI’s executive officers as of October 16,
2008. The officers serve at the discretion of the Board.
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Name
|
Age
|
Capacities in which they
Serve
|
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Roy
W. Olivier
|
49
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President,
Chief Executive Officer and Director
|
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Brian
E. Dearing
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53
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Chairman
of the Board, Chief Corporate Development and Strategy Officer and
Secretary
|
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Kenneth
S. Folberg
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48
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Vice
President of Finance and Chief Financial Officer
|
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Michael
T. Tenpas
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40
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Vice
President of Global Sales and Marketing
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Robert
J. Hipp
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41
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Chief
Technology
Officer
|
Roy W. Olivier. Mr.
Olivier, was appointed President and Chief Executive Officer of the Company in
May 2008. Mr. Olivier served as Vice President of Global Sales and
Marketing of the Company from September 2006 to May 2008. Prior to
joining the Company in 2006, Mr. Olivier was a consultant to start-up, small and
medium-sized businesses. Until December 2001, he was Vice President,
Sales & Marketing for ProQuest Media Solutions, a business he founded in
1993 and sold to ProQuest in 2000. Prior to that, Mr. Olivier held various sales
and marketing executive and managerial positions with several other companies in
the telecommunications and computer industries, including Multicom Publishing,
Inc., BusinessLand and PacTel.
Brian E. Dearing. Mr. Dearing
is the Chairman of the Board and Chief Corporate Development and Strategy
Officer of the Company. He has been a director since 1995 and was
elected Chairman of the Board of Directors in 1997. Mr. Dearing
served as the Company’s President and Chief Executive Officer from 1995 until
May 2008. He also served as Acting Chief Financial Officer, Treasurer
and/or Secretary for several interim periods, including most of fiscal year
2008. He currently serves as Secretary. Prior to joining
ARI in 1995, 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.
Kenneth S.
Folberg. Mr. Folberg joined the Company as Vice President of
Finance and Chief Financial Officer in July 2008. Prior to
joining ARI, Mr. Folberg served as Global Finance Program Director for Manpower,
Inc. Prior to joining Manpower, he was a contract finance
executive with Resources Global. He also served as Controller and
Vice President of Logistics and Labor Relations with Fresh Brands, Inc., a
mid-sized public supermarket distributor, from 1990 to 1999. Prior to
joining Fresh Brands, Folberg was a senior auditor and consultant with Deloitte
& Touche at its Los Angeles and Milwaukee offices. Mr. Folberg
earned a BS in Accounting from the University of Southern
California.
Michael T. Tenpas. Mr. Tenpas
joined ARI as Vice President of Global Sales and Marketing in July
2008. For the last 12 years, Mr. Tenpas worked for Norlight
Telecommunications, Inc. in Brookfield, WI, starting as a senior account
executive in 1996, then serving in a number of other sales roles, culminating in
his promotion to Executive Vice President and General Manager of Data Center
Business. Mr. Tenpas earned a BS in Business Management from the University of
Phoenix.
Robert J. Hipp. Mr. Hipp was
promoted to Chief Technology Officer in July 2008. Mr. Hipp joined
ARI in January, 2007 as part of ARI’s acquisition of OC-Net in Cypress, CA,
where he had been chief executive officer and president since he founded the
company in 1986. Prior to founding OC-Net, Mr. Hipp held various
technical and managerial positions in the Construction Industry.
Item 2. Description of
Properties
ARI
occupies approximately 17,000 square feet in an office building in Milwaukee,
Wisconsin, under a lease expiring June 30, 2009. This facility houses
our headquarters and one of our data centers. In Cypress, California, we occupy
approximately 6,000 square feet of office space under a lease expiring August
31, 2011. This facility houses our second data center. In Colorado
Springs, Colorado, we rent approximately 5,200 square feet of office space,
which is currently vacant, under a lease expiring March 31, 2011. In
Williamsburg, Virginia, we occupied approximately 5,100 square feet of office
space under a lease that was terminated on October 1, 2008, as the Company
relocated this operation to its corporate headquarters.
Item 3. Legal
Proceedings
On June
23, 2008, Powersports Complete, LLC(“Powersports”) filed a complaint in the
United States District Court for the Eastern District of Wisconsin against the
Company and its wholly-owned subsidiary, ARI Outsourced F&I Center, LLC
(“ARI Outsourced”). The complaint claims, among other things, that
the Company and ARI Outsourced are liable to Powersports in connection with
their business arrangements during 2007. The complaint also claims
that Powersports, among other remedies, is entitled to compensatory and punitive
damages. The Company and ARI Outsourced filed their answer to the
complaint on September 16, 2008. The answer denied that Powersports
is entitled to the payments described above, and asserted numerous counterclaims
against Powersports. There have not been any communication or
settlement discussions among Powersports, ARI or ARI Outsourced since the answer
was filed.
PART
II
Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
ARI’s
common stock is currently quoted on the NASDAQ Over the Counter Bulletin Board
(“OTCBB”) under the symbol ARIS. The following table sets forth the
high and low sales price for the periods indicated. OTCBB quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily reflect actual transactions.
|
Fiscal
Quarter Ended
|
High
|
Low
|
|
October
31, 2006
|
$2.25
|
$1.90
|
|
January
31, 2007
|
$2.18
|
$1.80
|
|
April
30, 2007
|
$2.28
|
$1.85
|
|
July
31, 2007
|
$2.00
|
$1.35
|
|
October
31, 2007
|
$1.74
|
$1.31
|
|
January
31, 2008
|
$1.74
|
$1.34
|
|
April
30, 2008
|
$1.95
|
$1.40
|
|
July
31, 2008
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$1.85
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$1.35
|
As of
October 16, 2008, there were approximately 195 holders of record of the
Company’s common stock. The Company has not paid cash dividends to
date and has no present intention to pay cash dividends.
During
the quarter ended July 31, 2008, the Company did not repurchase any of its
equity securities.
In
conjunction with the Company’s purchase of all of the assets related to
electronic parts catalog, electronic commerce and certification testing for
service technicians of Info Access, the micropublishing division of Eye
Communication Systems, Inc. (“ESCI”), the Company issued 312,500 of its common
stock as a portion of the consideration paid to ESCI. The Company
believes that this transaction is exempt from registration requirements pursuant
to Section 4(2) of the Securities Act of 1933, as amended. The
recipient of these securities represented its intention to acquire the
securities for investment only and not with a view toward distribution, and the
appropriate legends were affixed to the
share certificates.
Item 7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
The
following table sets forth certain financial information with respect to the
Company as of and for each of the five fiscal years ended July 31, which
was derived from audited Financial Statements and Notes thereto of ARI Network
Services, Inc. for the fiscal years ended July 31, 2008 and
2007. The reports, thereon, of Wipfli LLP 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
Operation” and the aforementioned Financial Statements and Notes.
|
Statement of Income
Data:
|
||||||||||||||||||||
|
(In thousands, except per share
data)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Subscriptions,
support and other services revenues
|
$ | 11,909 | $ | 11,290 | $ | 10,320 | $ | 9,913 | $ | 9,291 | ||||||||||
|
Software
license and renewal revenues
|
2,115 | 2,187 | 2,036 | 2,248 | 2,378 | |||||||||||||||
|
Professional
services revenues
|
2,893 | 1,958 | 1,646 | 1,500 | 1,770 | |||||||||||||||
|
Total
Revenue
|
16,917 | 15,435 | 14,002 | 13,661 | 13,439 | |||||||||||||||
|
Cost
of products and services sold:
|
||||||||||||||||||||
|
Cost
of subscriptions, support and other services sold
|
1,010 | 1,188 | 990 | 877 | 514 | |||||||||||||||
|
Cost
of software licenses and renewals sold (1)
|
814 | 956 | 681 | 626 | 1,564 | |||||||||||||||
|
Cost
of professional services sold
|
1,047 | 575 | 330 | 455 | 760 | |||||||||||||||
|
Total
cost of products and services sold
|
2,871 | 2,719 | 2,001 | 1,958 | 2,838 | |||||||||||||||
|
Gross
Margin
|
14,046 | 12,716 | 12,001 | 11,703 | 10,601 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Depreciation
and amortization (exclusive of amortization of software products included
in cost of sales)
|
727 | 631 | 382 | 263 | 156 | |||||||||||||||
|
Customer
operations and support
|
970 | 1,131 | 1,141 | 1,030 | 1,104 | |||||||||||||||
|
Selling,
general and administrative
|
9,163 | 9,110 | 7,185 | 7,141 | 7,004 | |||||||||||||||
|
Software
development and technical support
|
1,836 | 1,679 | 1,224 | 1,123 | 1,051 | |||||||||||||||
|
Restructuring
charge
|
529 | - | - | - | - | |||||||||||||||
|
Net
operating expenses
|
13,225 | 12,551 | 9,932 | 9,557 | 9,315 | |||||||||||||||
|
Operating
income
|
821 | 165 | 2,069 | 2,146 | 1,286 | |||||||||||||||
|
Other
income (expense)
|
(28 | ) | (60 | ) | (59 | ) | (184 | ) | (169 | ) | ||||||||||
|
Income
before provision for income taxes
|
793 | 105 | 2,010 | 1,962 | 1,117 | |||||||||||||||
|
Income
tax benefit (expense)
|
590 | (4 | ) | 1,200 | 853 | (62 | ) | |||||||||||||
|
Net
income
|
$ | 1,383 | $ | 101 | $ | 3,210 | $ | 2,815 | $ | 1,055 | ||||||||||
|
Average
common shares outstanding:
|
||||||||||||||||||||
|
Basic
|
6,678 | 6,378 | 6,130 | 5,992 | 5,840 | |||||||||||||||
|
Diluted
|
6,903 | 6,550 | 6,510 | 6,653 | 6,143 | |||||||||||||||
|
Net
income per share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.21 | $ | 0.02 | $ | 0.52 | $ | 0.47 | $ | 0.18 | ||||||||||
|
Diluted
|
$ | 0.20 | $ | 0.02 | $ | 0.49 | $ | 0.42 | $ | 0.17 | ||||||||||
(1)
Includes amortization of software products of $764, $800, $648, $570 and $1,512
in 2008, 2007, 2006, 2005 and 2004, respectively.
|
Selected
Balance Sheet Data:
|
||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
July
31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Working
capital (deficit)
|
$ | (5,475 | ) | $ | (5,221 | ) | $ | (3,357 | ) | $ | (3,911 | ) | $ | (4,062 | ) | |||||
|
Capitalized
software development (net)
|
1,596 | 1,606 | 1,468 | 1,486 | 970 | |||||||||||||||
|
Total
assets
|
12,193 | 9,927 | 9,436 | 7,933 | 6,191 | |||||||||||||||
|
Current
portion of long-term debt & capital lease obligations
|
1,471 | 1,031 | 1,400 | 1,204 | 1,010 | |||||||||||||||
|
Total
long-term debt & capital lease obligations
|
349 | 484 | 580 | 2,037 | 3,309 | |||||||||||||||
|
Total
shareholders’ equity (deficit)
|
2,896 | 718 | (312 | ) | (3,609 | ) | (6,551 | ) | ||||||||||||
Summary
The
Company produced net income of $1,383,000 for the fiscal year ended
July 31, 2008, compared to $101,000 for the fiscal year ended July 31,
2007. The increase in earnings was primarily due to an increase in
sales and the recognition of a gain on deferred tax assets in fiscal 2008
compared to increased expenses in fiscal 2007 for costs related to a
potential acquisition which was not closed and support for a major new release
of the Company’s product. Total revenue increased approximately 9.6%
during fiscal 2008 compared to fiscal 2007, primarily due to the inclusion of a
full year of revenue from OC-Net in fiscal 2008 compared to six months of its
revenue in fiscal 2007 and sales growth in marketing
services. Management expects revenues and operating income to
increase marginally in fiscal 2008 as the Company pursues various growth and
efficiency initiatives in an economic environment that is showing signs of
significant weakness. We anticipate sufficient cash flow from
operations to execute our plans with regard to these growth
initiatives.
Critical Accounting Policies and
Estimates
General
The
Company’s discussion and analysis of its financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including, among others, those related to customer contracts, valuation of
intangible assets, bad debts, capitalized software product costs, financing
instruments, revenue recognition and other accrued expenses. The Company bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements.
Revenue
Recognition
Revenue
for use of the network (including transaction fees) and for information services
is recognized in the period such services are utilized. Revenue from annual or
periodic maintenance fees, hosting fees, license and license renewal fees and
catalog subscription fees is recognized ratably over the period the service is
provided. Revenue under arrangements that include acceptance terms beyond the
Company’s standard terms is not recognized until acceptance has occurred. If
collectability is not considered probable, revenue is recognized when the fee is
collected. Arrangements that include professional services are evaluated to
determine whether those services are essential to the functionality of other
elements of the arrangement. When professional services are not considered
essential, the revenue allocable to the professional services is recognized as
the services are performed. When professional services are considered essential,
revenue under the arrangement is recognized pursuant to contract accounting
using the percentage-of-completion method with progress-to-completion measured
based upon labor hours incurred. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the entire loss on
the contract is made. Revenue under arrangements with customers who are not the
ultimate users (resellers) is deferred if there is any contingency on the
ability and intent of the reseller to sell such software to a third party.
Amounts invoiced to customers prior to recognition as revenue as discussed above
are reflected in the accompanying balance sheets as deferred
revenue.
Bad Debts
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company currently reserves for most amounts due over 90 days, unless there
is reasonable assurance of collectability. If the financial condition of the
Company’s customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Legal Provisions
The
Company is periodically involved in legal proceedings arising from contracts,
patents or other matters in the normal course of business. The Company reserves
for any material estimated losses if the outcome is probable, in accordance with
the provisions of SFAS No. 5 “Accounting for Contingencies”.
Impairment of Long-Lived
Assets
Equipment
and leasehold improvements, capitalized software product costs, goodwill,
customer lists, and other identifiable intangible assets 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.
Cash and Cash
Equivalents
The
Company’s investment policy, as approved by the Board of Directors, is designed
to provide preservation of capital, adequate liquidity to meet projected cash
requirements, optimum yields in relationship to risk, market conditions and tax
considerations and minimum risk of principal loss through diversified short and
medium term investments. Eligible investments include direct obligations of the
U.S. Treasury, obligations issued or guaranteed by the U.S. government, certain
time deposits, certificates of deposits issued by commercial banks, money market
mutual funds, asset backed securities and municipal bonds. The Company’s current
investments include money market funds.
Debt Instruments
The
Company valued debt discounts for common stock warrants granted in consideration
for notes payable using the Black-Scholes valuation method. Non-cash interest
expense is recorded for the amortization of the debt discount over the term of
the debt.
Deferred Income
Taxes
The tax
effect of the temporary differences between the book and tax bases of assets and
liabilities and the estimated tax benefit from tax net operating losses is
reported as deferred tax assets and liabilities in the balance sheet. An
assessment of the likelihood that net deferred tax assets will be realized from
future taxable income is performed. Because the ultimate realizability of
deferred tax assets is highly subject to the outcome of future events, the
amount established as valuation allowances is considered to be a significant
estimate that is subject to change in the near term. To the extent a valuation
allowance is established or there is a change in the allowance during a period,
the change is reflected with a corresponding increase or decrease in the tax
provision in the statement of operations.
Stock-Based
Compensation
On
August 1, 2006, the Company adopted SFAS No. 123(R) (revised
2004) (SFAS No. 123(R)), “Share-Based Payment”, to account for its
stock option plans, which is a revision of SFAS No. 123 and
SFAS No. 95 “Statement of Cash Flows”. The Company adopted
SFAS 123(R) using the modified prospective approach. Under this transition
method, compensation cost recognized for the years ended July 31, 2008 and 2007
includes the cost for all stock options granted prior to, but not yet vested as
of August 1, 2006. This cost was based on the grant-date fair value
estimated in accordance with the original provisions of SFAS No. 123.
The cost for all share-based awards granted subsequent to July 31, 2006,
represents the grant-date fair value that was estimated in accordance with the
provisions of FAS No. 123(R). Results for prior periods have not been
restated. Compensation cost for options will be recognized in earnings, net of
estimated forfeitures, on a straight-line basis over the requisite service
period. There were no capitalized stock-based compensation costs at July 31,
2008 and 2007.
Revenues
Management
reviews the Company’s revenue in the aggregate, by geography and by product
category within region. The Company’s strategic focus is electronic catalog and
marketing services in the Equipment Industry.
The
following tables set forth, for the periods indicated, certain revenue
information derived from the Company’s financial statements:
|
Revenue
by Location and Service
|
||||||||||||
|
(Dollars in
Thousands)
|
||||||||||||
|
For
the Fiscal Year Ended July 31
|
||||||||||||
|
2008
|
2007
|
Percent
Change
|
||||||||||
|
North
America
|
||||||||||||
|
Catalog
subscriptions
|
$ | 9,953 | $ | 10,265 | (3.0 | ) | ||||||
|
Catalog
professional services
|
1,268 | 1,207 | 5.1 | |||||||||
|
Marketing
services
|
2,351 | 1,595 | 47.4 | |||||||||
|
Marketing
professional services
|
1,594 | 606 | 163.0 | |||||||||
|
Dealer
& distributor communications
|
660 | 678 | (2.7 | ) | ||||||||
|
Subtotal
North America
|
15,826 | 14,351 | 10.3 | |||||||||
|
Rest
of the World
|
||||||||||||
|
Catalog
subscriptions
|
1,078 | 936 | 15.2 | |||||||||
|
Catalog
professional services
|
13 | 148 | (91.2 | ) | ||||||||
|
Subtotal
Rest of the World
|
1,091 | 1,084 | 0.6 | |||||||||
|
Total
Revenue
|
||||||||||||
|
Catalog
subscriptions
|
11,031 | 11,201 | (1.5 | ) | ||||||||
|
Catalog
professional services
|
1,281 | 1,355 | (5.5 | ) | ||||||||
|
Marketing
services
|
2,351 | 1,595 | 47.4 | |||||||||
|
Marketing
professional services
|
1,594 | 606 | 163.0 | |||||||||
|
Dealer
& distributor communications
|
660 | 678 | (2.7 | ) | ||||||||
|
Total
Revenue
|
$ | 16,917 | $ | 15,435 | 9.6 | |||||||
North America
Catalog
Subscriptions
North
American catalog subscription revenues are derived from software license fees,
license renewal fees, software maintenance and support fees, catalog
subscription fees, and other miscellaneous subscription fees charged to dealers,
distributors and manufacturers for the use of the Company’s catalog products in
the United States and Canada. Catalog subscription revenues decreased slightly
in fiscal 2008, compared to the same period last year, primarily due to
decreased subscriptions to the Company’s CD-based catalog products, primarily by
two manufacturers. Catalog subscription renewals from the Company’s North
American dealers were greater than 89% for fiscal 2008. Management expects
revenues from catalog subscriptions in North America to remain relatively the
same in fiscal 2009.
Catalog Professional
Services
Revenues
from North American catalog professional services are derived from software
customization labor, data conversion labor, data conversion replication fees,
travel and shipping fees primarily charged to manufacturers and distributors in
the United States and Canada. Revenues from catalog professional services in
North America decreased in fiscal 2008, compared to the same period last year,
primarily due to lower customization labor charged for the deployment of new
web-based manufacturer databases. Management expects revenues from catalog
professional services in North America to remain relatively the same in fiscal
2009.
Marketing
Services
Revenues
from the Company’s North American marketing service subscriptions are derived
from start-up, hosting and access fees charged to dealers for Website Smart™ and
Website Smart Pro™, commissions on on-line sales through Website Smart Pro™ and
set-up and postage fees for ARI MailSmart™ in the United States and Canada.
Revenues from marketing services in North America increased in fiscal 2008,
compared to the same period last year, primarily due to revenue from customer
contracts acquired with OC-Net for an entire year in fiscal 2008 compared to a
half year in fiscal 2007. and new sales of Website Smart Pro™. The sales
increases are a result of the Company’s investments in sales and marketing for
the marketing services business. Revenues from Website Smart Pro™ are included
in Marketing services beginning January 27, 2007. Management expects
revenues from marketing services in North America to continue to increase in
fiscal 2009, compared to the prior year, due to revenue from new sales as the
Company continues to focus its resources in this market.
Marketing Professional
Services
Revenues
from the Company’s North American marketing professional services are derived
from website customization labor primarily charged to manufacturers,
distributors and other customers in the United States. Revenues from marketing
professional services in North America resulted from customization of websites
primarily related to contracts acquired with OC-Net.
Dealer and Distributor
Communications
Revenues
from dealer and distributor communications are derived from license renewal
fees, software maintenance, customization labor and other communication fees
charged for dealers and distributors to communicate with manufacturers in the
manufactured equipment industry and the agricultural inputs industry. Dealer and
distributor communication revenues decreased in fiscal 2008, compared to the
same period last year, primarily due to a decline in the base of customers as
the Company focused primarily on its catalog and marketing services products.
Management expects revenues from dealer and distributor communication products
will be a slowly declining percentage of total revenue in fiscal 2009, compared
to fiscal 2008.
Rest of the World
Catalog
Subscriptions
Catalog
subscription revenues from the rest of the world are derived from software
license fees, license renewal fees, software maintenance and support fees,
catalog subscription fees, and other miscellaneous subscription fees charged to
dealers, distributors and manufacturers outside of North America for the use of
the Company’s catalog products. Catalog subscription revenues for the rest of
the world increased in fiscal 2008, compared to fiscal 2007, due to the change
in currency exchange rates, but decreased in the base currency for the same
periods. The Company continues to face challenges in the European market. We
expect catalog subscription revenues from the rest of the world to remain
relatively stable in fiscal 2009, compared to fiscal 2008.
Catalog Professional
Services
Revenues
from the Company’s rest of the world catalog professional services are derived
from software customization labor, data conversion labor and data conversion
replication fees. Revenues from catalog professional services in the rest of the
world decreased to a negligible amount in fiscal 2008, compared to fiscal 2007,
due to less revenue from conversion services charged for updates to existing
manufacturer databases, primarily from one manufacturer. We expect catalog
professional services revenues from the rest of the world to increase slightly
in fiscal 2009, compared to fiscal 2008, as we focus on obtaining new
manufacturer catalog content to convert.
Cost of Products and Services
Sold
The
following table sets forth, for the periods indicated, certain information
concerning the Company’s revenue and cost of products and services sold, derived
from the Company’s financial statements.
|
Gross
Margin by Revenue Type
|
||||||||||||
|
(Dollars in
thousands)
|
||||||||||||
|
For
the Fiscal Year Ended July 31
|
||||||||||||
|
2008
|
2007
|
Percent
Change
|
||||||||||
|
Catalog
subscriptions
|
||||||||||||
|
Revenue
|
11,031 | 11,201 | (1.5 | ) | ||||||||
|
Cost
of revenue
|
1,226 | 1,264 | (3.0 | ) | ||||||||
|
Gross
margin - Catalog subscriptions
|
9,805 | 9,937 | (1.3 | ) | ||||||||
|
Gross
margin percentage
|
88.9 | % | 88.7 | % | ||||||||
|
Catalog
professional services
|
||||||||||||
|
Revenue
|
1,281 | 1,355 | (5.5 | ) | ||||||||
|
Cost
of revenue
|
503 | 518 | (2.9 | ) | ||||||||
|
Gross
margin - Catalog professional services
|
778 | 837 | (7.0 | ) | ||||||||
|
Gross
margin percentage
|
60.7 | % | 61.8 | % | ||||||||
|
Marketing
services
|
||||||||||||
|
Revenue
|
2,351 | 1,595 | 47.4 | |||||||||
|
Cost
of revenue
|
585 | 678 | (13.7 | ) | ||||||||
|
Gross
margin - Marketing services
|
1,766 | 917 | 92.6 | |||||||||
|
Gross
margin percentage
|
75.1 | % | 57.5 | % | ||||||||
|
Marketing
professional services
|
||||||||||||
|
Revenue
|
1,594 | 606 | 163.0 | |||||||||
|
Cost
of revenue
|
542 | 183 | 196.2 | |||||||||
|
Gross
margin - Marketing professional services
|
1,052 | 423 | 148.7 | |||||||||
|
Gross
margin percentage
|
66.0 | % | 69.8 | % | ||||||||
|
Dealer
and distributor communications
|
||||||||||||
|
Revenue
|
660 | 678 | (2.7 | ) | ||||||||
|
Cost
of revenue
|
15 | 76 | (80.3 | ) | ||||||||
|
Gross
margin - Dealer and distributor communications
|
645 | 602 | 7.1 | |||||||||
|
Gross
margin percentage
|
97.7 | % | 88.8 | % | ||||||||
|
Total
|
||||||||||||
|
Revenue
|
16,917 | 15,435 | 9.6 | |||||||||
|
Cost
of revenue
|
2,871 | 2,719 | 5.6 | |||||||||
|
Gross
margin
|
14,046 | 12,716 | 10.5 | |||||||||
|
Gross
margin percentage
|
83.0 | % | 82.4 | % | ||||||||
Cost of
catalog subscriptions consists primarily of reseller fees, software amortization
costs, catalog replication and distribution costs. Cost of catalog subscriptions
as a percentage of revenue remained relatively the same in fiscal 2008, compared
to fiscal 2007. Management expects gross margins, as a percentage of revenue
from catalog subscriptions, to vary slightly from year to year due to the timing
of data shipments and variations in the recognition of revenue which does not
directly correlate to software amortization expense, which is generally on a
straight-line basis.
Cost of
catalog professional services consists of customization and catalog production
labor. Cost of professional services as a percentage of revenue remained
relatively consistent in fiscal 2008, compared to fiscal 2007. Management
expects cost of catalog professional services, as a percentage of revenue from
catalog professional services, to fluctuate from year to year depending on the
mix of services sold and the portion of customizations which are billable, and
on the Company’s performance towards the contracted amount for customization
projects.
Cost of
revenue for marketing service subscriptions consists primarily of website setup
labor, software amortization costs, postcards, printing and distribution costs.
Cost of marketing services as a percentage of revenue decreased for fiscal 2008,
compared to fiscal 2007, primarily due to increased sales from the Company’s
Website products, which have a higher margin than MailSmart™. Management expects
gross margins, as a percent of revenue from marketing services, to fluctuate
from year to year depending on the mix of products and services
sold.
Cost of
revenues for marketing professional services consists of website customization
labor associated primarily with new contracts acquired with OC-Net in
January 2007.
Management expects cost of marketing professional services to fluctuate from
year to year depending on the Company’s performance towards the contracted
amount for customization projects and the actual labor rates negotiated in
customer contracts.
Cost of
dealer and distributor communications revenue consists primarily of
telecommunication costs, royalties and software customization labor. Cost of
dealer and distributor communications as a percentage of revenue decreased for
the fiscal year ended July 31, 2008, compared to fiscal 2007, primarily due
to a decrease in telecommunication costs and software customization labor.
Management expects gross margins, as a percent of revenue from dealer and
distributor communications, to decline slightly in fiscal 2008, as there will be
no new sales
of this
product .
Operating
Expenses
The
following table sets forth, for the periods indicated, certain operating expense
information derived from the Company’s financial statements:
|
Operating
Expenses
|
||||||||||||
|
(Dollars in
thousands)
|
||||||||||||
|
For
the Fiscal Year Ended July 31
|
||||||||||||
|
2008
|
2007
|
Percent
Change
|
||||||||||
|
Customer
operations and support
|
$ | 970 | $ | 1,131 | (14.2 | ) | ||||||
|
Selling,
general and administrative
|
9,163 | 9,110 | 0.6 | |||||||||
|
Software
development and technical support
|
1,836 | 1,679 | 9.4 | |||||||||
|
Depreciation
and amortization (exclusive of amortization of software products included
in cost of products and services sold)
|
727 | 631 | 15.2 | |||||||||
|
Restructuring
charge
|
529 | - | n/a | |||||||||
|
Net
operating expenses
|
$ | 13,225 | $ | 12,551 | 5.4 | |||||||
Net
operating expenses increased in fiscal 2008, compared to the prior year,
primarily due to a restructuring charge taken to reflect severance costs and
redundant occupancy costs related to the consolidation of the Company’s data
conversion operations in Virginia into its Wisconsin location and the
consolidation of the software development operations in Colorado into its
California location. Management expects net operating expenses to
continue to be higher in fiscal 2009, compared to the previous year, due to
growth of the Company, but to decline as a percentage of sales due to the
restructuring that was designed to improve efficiency and reduce
costs.
See
“Other Items” for a discussion of the portion of operating expenses that may not
recur in fiscal 2009.
Customer
operations and support consists primarily of server room operations, software
maintenance agreements for the Company’s core network and customer support
costs. Customer operations and support costs decreased by $161,000 in fiscal
2008, compared to fiscal 2007, primarily due to temporary help used in fiscal
2007 to support a new release of the Company’s catalog
software. Management expects customer operations and support costs to
continue at the same level in fiscal 2009.
Selling,
general and administrative expenses (“SG&A”) remained relatively unchanged
in fiscal 2008, compared to fiscal 2007. This is primarily the result
of the following offsetting factors: (a) Company incurred $288,000 in start-up
costs in fiscal 2008 for a venture in Nashville, Tennessee related to providing
finance and insurance processing services to equipment dealers. The
venture did not generate satisfactory results for the Company and was
subsequently discontinued in November, 2007; (b) Higher labor, data center and
other occupancy costs for having the California facility acquired as part of the
OC-Net acquisition for 12 months in fiscal 2008, compared with approximately 6
months in fiscal 2007; (c) Reduced professional fees related to
acquisition activities; and (d) lower indirect labor costs. SG&A,
as a percentage of revenue, decreased from 59% in fiscal 2007 to 54% in fiscal
2008. Management expects SG&A costs to be higher for fiscal 2009,
compared to fiscal 2008, due to the addition of the staff from the acquisition
of certain assets relating to Info Access and the addition of sales
staff.
The
Company’s technical staff (in-house and contracted) performs software
development, technical support, software customization and data conversion
services for customer applications. Management expects fluctuations from year to
year, as the mix of development and customization activities will change based
on customer requirements even if the total technical staff cost remains
relatively constant. Software development and technical support costs increased
in fiscal 2008, compared to fiscal 2007, primarily due to operating costs
associated with the new California facility. Management expects
software development and technical support costs to remain relatively constant
in fiscal 2009, compared to fiscal 2008. Depreciation
and amortization expense increased in fiscal 2008, compared to the same period
last year primarily due to the amortization of new software and equipment and
the amortization of intangible assets as-associated with the OC-Net acquisition.
Management expects depreciation and other amortization to continue to be higher
in fiscal 2009, compared to the previous year, due to the additional
amortization of the ECSI fixed and intangible assets.
The
facility consolidation resulting in the restructuring charge is part of the
Company’s effort to streamline its operations by locating the management, sales,
support, publishing and fulfillment activities in its Wisconsin location and
concentrating its product and web development activities in its California
location. Such costs are not expected to repeat in fiscal
2009.
Other Items
Interest
expense includes both cash and non-cash interest. Interest paid decreased
$74,000 in fiscal 2008, compared to fiscal 2007, due to the reduction in debt
principal as the Company pays off its notes. To acquire certain
assets relating to ECSI, the Company added (in July 2008) an aggregate amount of
$300,000 in debt to ECSI, including a $100,000, 90-day promissory note and a
$200,000, one-year promissory note. This debt, together with a draw
on a bank line of credit to partially fund the $1 million cash portion of the
purchase price, will likely increase the amount of interest expense in fiscal
2009, compared to fiscal 2008. See “Liquidity and Capital
Resources”.
The
Company had net income of $1,383,000 in fiscal 2008, compared to $101,000 in
fiscal 2007. The increase in earnings is primarily due to the increases in
sales, stable level of operating expenses (without restructuring charges) and
the income from recognition of deferred tax assets in fiscal 2008. There were
several one-time expenses paid in fiscal 2007 which include distribution,
development, and support costs associated with fixing a major new release of the
Company’s catalog product of approximately $100,000, salary and severance for
management that was not replaced of approximately $550,000, costs related to an
acquisition project that did not materialize of approximately $100,000, and
other miscellaneous overhead costs of approximately $100,000. Over $250,000 of
these expenses were recorded in the fourth quarter of fiscal
2007. For fiscal 2009, management has embarked on numerous
initiatives intended to achieve double-digit growth in revenue and operating
income.
Liquidity and Capital
Resources
The
following table sets forth, for the periods indicated, certain cash flow
information derived from the Company’s financial statements:
|
Cash
Flow Information
|
||||||||||||
|
(Dollars in
thousands)
|
||||||||||||
|
For
the Fiscal Year Ended July 31
|
||||||||||||
|
2008
|
2007
|
Percent
Change
|
||||||||||
|
Net
income
|
$ | 1,383 | $ | 101 | 1269.3 | |||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Amortization
of software products
|
764 | 800 | (4.5 | ) | ||||||||
|
Amortization
of debt discount and other
|
25 | (15 | ) | 266.7 | ||||||||
|
Depreciation
and other amortization
|
727 | 631 | 15.2 | |||||||||
|
Stock
based compensation
|
306 | 159 | 92.5 | |||||||||
|
Deferred
income taxes
|
(648 | ) | - | n/a | ||||||||
|
Stock
issued to 401(k) plan
|
38 | 41 | (7.3 | ) | ||||||||
|
Net
change in working capital
|
(568 | ) | (573 | ) | (0.8 | ) | ||||||
|
Net
cash provided by operating activities
|
2,027 | 1,144 | 77.2 | |||||||||
|
Net
cash used in investing activities
|
(1,651 | ) | (2,174 | ) | 24.1 | |||||||
|
Net
cash used in financing activities
|
(353 | ) | (1,491 | ) | 76.3 | |||||||
|
Effect
of foreign currency exchange rate changes on cash
|
13 | (13 | ) | 200.0 | ||||||||
|
Net
change in cash
|
$ | 36 | $ | (2,534 | ) | 101.4 | ||||||
Net cash
provided by operating activities increased in fiscal 2008, compared to fiscal
2007, primarily due to the increase in operating income. Management expects cash
from operating activities to increase in fiscal 2009 due to increased sales and
cost efficiencies.
Net cash
used in investing activities decreased in fiscal 2008, compared to the prior
year, primarily due to the purchase of OC-Net in fiscal 2007. Management expects
cash used in investing activities to fluctuate from year to year, depending on
the level of software development and the timing of acquisitions.
Net cash
used in financing activities decreased in fiscal 2008, compared to the prior
year, as the Company made the final payment on notes to two of its debt holders
, per the terms of each note. The payments of debt principal for ECSI and OC-Net
acquisition debt, together with payments to reduce the Company’s bank line of
credit, are likely to significantly increase fiscal 2009 cash used for financing
activities.
At
July 31, 2008, the Company had cash and cash equivalents of $1,086,000
compared to $1,050,000 at July 31, 2007. Cash from operations
exceeded $2.1 million for fiscal 2008. Most of this cash, along with
$700,000 on the line of credit (as described below), was used for debt repayment
of $1,035,000, the Info Access acquisition cash consideration of $1,000,000,
investment in software development and other capital expenditures
of
$119,000.
The
following table sets forth, for the periods indicated, certain information
related to the Company’s debt derived from the Company’s audited financial
statements.
|
Debt
Schedule
|
||||||||||||
|
(Dollars in
thousands)
|
||||||||||||
|
For
the Fiscal Year Ended July 31
|
||||||||||||
|
2008
|
2007
|
Percent
Change
|
||||||||||
|
Note
payable to WITECH:
|
||||||||||||
|
Current
portion of note payable
|
$ | - | $ | 50 | (100.0 | ) | ||||||
|
Long
term portion of note payable
|
- | - | n/a | |||||||||
|
Total
note payable to WITECH
|
- | 50 | (100.0 | ) | ||||||||
|
Notes
payable to New Holders:
|
||||||||||||
|
Current
portion of notes payable
|
- | 500 | (100.0 | ) | ||||||||
|
Long
term portion of notes payable
|
- | - | n/a | |||||||||
|
Total
face value of notes payable to New Holders
|
- | 500 | (100.0 | ) | ||||||||
|
Carrying
value in excess of face value of notes payable
|
- | 4 | (100.0 | ) | ||||||||
|
Debt
discount (common stock warrants and options)
|
- | (3 | ) | 100.0 | ||||||||
|
Total
carrying value of notes payable to New Holders
|
- | 501 | (100.0 | ) | ||||||||
|
Debt
related to acquisition of OC-Net:
|
||||||||||||
|
Current
portion of notes payable
|
233 | 233 | - | |||||||||
|
Long
term portion of notes payable
|
117 | 350 | (66.57 | ) | ||||||||
|
Total
notes payable
|
350 | 583 | (40.0 | ) | ||||||||
|
Current
cash earnout
|
150 | 250 | (40.0 | ) | ||||||||
|
Long
term cash holdback
|
- | 150 | (100.00 | ) | ||||||||
|
Imputed
interest on cash earnout/holdback
|
(8 | ) | (32 | ) | (75.0 | ) | ||||||
|
Total
debt related to acquisition of OC-Net
|
492 | 951 | (48.3 | ) | ||||||||
|
Debt
related to acquisition of Info Access:
|
||||||||||||
|
Current
portion of notes payable
|
300 | - | 100.0 | |||||||||
|
Long
term portion of notes payable
|
- | - | n/a | |||||||||
|
Total
notes payable to Eye Communication Systems, Inc.
|
300 | - | 100.0 | |||||||||
|
Current
borrowings on line of credit
|
700 | - | 100.0 | |||||||||
|
Total
Debt
|
$ | 1,492 | $ | 1,502 | (0.7 | ) | ||||||
On April
24, 2003, the Company restructured its debt. In exchange for
previously outstanding securities, the Company issued to a group of investors
(collectively, the “New Holders”), in aggregate, $500,000 in cash, new unsecured
notes in the amount of $3.9 million (the “New Notes”) and new warrants for
250,000 common shares, exercisable at $1.00 per share (the “New
Warrants”). The interest rate on the New Notes was prime plus 2%,
adjusted quarterly. The New Notes were payable in $200,000 quarterly
installments commencing March 31, 2004 through December 31, 2005 and $300,000
quarterly installments commencing March 31, 2006 at the prime interest rate plus
2%. The New Notes were paid in full on December 31, 2007 and the
warrants expire on April 24, 2013.
On August
7, 2003, the Company purchased from WITECH Corporation 1,025,308 shares of the
Company’s common stock, 30,000 common stock warrants and 20,350 shares of Series
A Preferred Stock for $200,000 at closing and an $800,000 promissory note which
was payable in $50,000 quarterly installments through September 30, 2007 at the
prime interest rate plus 2%, adjusted quarterly. The note was paid in
full on September 28, 2007.
The
Company issued $700,000 of notes and $400,000 of future, non-interest bearing
contingent payments in connection with the OC-Net acquisition in 2007. The
interest rate on the notes is prime plus 2%, adjusted quarterly (effective rate
of 7.00% as of July 31, 2008). The notes are payable in quarterly principal
installments of $58,333, commencing March 31, 2007 through December 31, 2009.
The notes do not contain any financial covenants. The Company paid $250,000 of
the future contingent payments in February, 2008, and the remaining $150,000,
which includes $8,000 of imputed interest, is due in January, 2009.
On July
1, 2008, the Company issued $300,000 of notes payable in connection with the
Info Access acquisition, of which $100,000 is due on October 1, 2008 and
$200,000 is due on July 1, 2009. The interest rate on the payments is
6%.
On
July 9, 2004, the Company entered into a line of credit with JPMorgan
Chase, N.A. which was amended on April 25, 2008. The amended line of
credit permits the Company to borrow an amount equal to 80% of the book value of
all eligible accounts receivable plus 45% of the value of all eligible open
renewal orders (provided the renewal rate is at least 85%) minus $75,000, up to
$1,500,000, and bears interest at prime rate (effective rate of 5.00% as of
July 31, 2008). Eligible accounts include certain non-foreign
accounts receivable which are less than 90 days from the invoice date. The
line of credit terminates July 9, 2009, and is secured by substantially all
of the Company’s assets. The line of credit limits repurchases of common stock,
the payment of dividends, liens on assets and new indebtedness. Borrowings
outstanding on the line of credit were $700,000 and $ - 0 - at July 31, 2008 and
2007, respectively.
Management
believes that funds generated from operations will be adequate to fund the
Company’s operations, investments and debt payments for the foreseeable future,
although additional financing may be necessary if the Company were to complete a
material acquisition or to make a large investment in its business.
Acquisitions
Since
December 1995, the Company has had a formal business development program
aimed at identifying, evaluating and closing acquisitions that augment and
strengthen the Company’s market position, product offerings, and personnel
resources. Since the program’s inception, seven business acquisitions and one
software asset acquisition have been completed, six of which were fully
integrated into the Company’s operations prior to fiscal year 2007.
On
January 26, 2007, the Company purchased all of the outstanding stock of
OC-Net, Inc. (“OC-Net”). OC-Net, a privately held California corporation,
provided website development and hosting services to the Power Sports market
(which includes motorcycles, All Terrain Vehicles, snowmobiles and personal
watercraft), as well as certain customers outside the Power Sports market.
Consideration for the acquisition included approximately $1.1 million
in cash, 350,000 shares of the Company’s common stock, $700,000 in debt to the
sellers and future contingent payments totaling up to $400,000.
On July
1, 2008, the Company acquired certain assets of Info Access, the micropublishing
division of Eye Communication Systems, Inc. (“ECSI”) pursuant to the terms of an
Asset Purchase Agreement, by and among ECSI, John Bessent and the
Company. Under its terms, the Company acquired all of the assets
related to electronic parts catalog, electronic commerce and certification
testing for service technicians. Consideration for the acquisition
included (1) approximately $1.0 million in cash, (2) 312,500 shares of the
Company common stock, 125,000 of which will be held in escrow for 15 months
pending the satisfaction of certain conditions relating to post-closing
revenues, (3) an aggregate amount of $300,000 in debt to ECSI, including a
90-day promissory note in the amount of $100,000 and a one-year promissory note
in the amount of $200,000 and (4) the assumption of certain
liabilities.
The
business development program is an important component of the Company’s
long-term growth strategy and the Company expects to continue to pursue it
aggressively.
Forward Looking
Statements
Certain
statements contained in this Form 10-K are forward looking statements including
revenue growth, future cash flows and cash generation and sources of liquidity.
Expressions such as “believes,” “anticipates,” “expects,” and similar
expressions are intended to identify such forward looking statements. Several
important factors can cause actual results to materially differ from those
stated or implied in the forward looking statements. Such factors include, but
are not limited to the factors listed on exhibit 99.1 of this annual report on
Form 10-K, which is incorporated
herein by reference.
Quarterly Financial
Data
The
following table sets forth the unaudited operations data for each of the eight
quarterly periods ended July 31, 2008, prepared on a basis consistent with
the audited financial statements, reflecting all normal recurring adjustments
that are considered necessary. The quarterly information is as follows (in
thousands, except per share data):
|
Quarterly
Financial Data
|
||||||||||||||||||||||||||||||||
|
(Unaudited - In thousands,
except per share data)
|
||||||||||||||||||||||||||||||||
|
1st
|
2nd
|
3rd
|
4th
|
|||||||||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||
|
Net
revenues
|
$ | 4,224 | $ | 3,503 | $ | 4,222 | $ | 3,691 | $ | 4,158 | $ | 4,101 | $ | 4,313 | $ | 4,140 | ||||||||||||||||
|
Gross
margin
|
3,477 | 2,957 | 3,442 | 3,107 | 3,484 | 3,270 | 3,643 | 3,382 | ||||||||||||||||||||||||
|
Net
income (loss)
|
243 | 225 | 335 | 248 | 427 | (205 | ) | 378 | (167 | ) | ||||||||||||||||||||||
|
Basic
EPS
|
$ | 0.04 | $ | 0.04 | $ | 0.05 | $ | 0.04 | $ | 0.06 | $ | (0.03 | ) | $ | 0.06 | $ | (0.03 | ) | ||||||||||||||
|
Diluted
EPS
|
$ | 0.04 | $ | 0.03 | $ | 0.05 | $ | 0.04 | $ | 0.06 | $ | (0.03 | ) | $ | 0.05 | $ | (0.02 | ) | ||||||||||||||
Off-Balance Sheet
Arrangements
ARI has
no significant off-balance sheet arrangements that have or are reasonably likely
to have a material current or future effect on its financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources.
Item 8. Financial
Statements and Supplementary Data
Reference
is made to the consolidated financial statements, the reports thereon and the
notes thereto commencing after the signature page of this Report, which are
incorporated herein by reference.
Item 9. Changes in
and Disagreements with Accountants on Accounting and Financial Disclosure –
None
Item 9A(T). Controls and
Procedures
Evaluation of Disclosure Controls and
Procedures.
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized,
and reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
As
required by Rule 13a-15 under the Exchange Act, we have completed an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls and
procedures as of July 31, 2008. Based upon this evaluation, our management,
including the Chief Executive Officer and the Chief Financial Officer, has
concluded that our disclosure controls and procedures were effective as of
July 31, 2008.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive Officer and the
Chief Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control over Financial Reporting – Guidance for Smaller Public Companies issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation under this framework, our management concluded that our
internal control over financial reporting was effective as of July 31,
2008.
This
report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial
reporting.
Management’s
report was not subject to attestation by the Company’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
Changes
in Internal Controls
There
were no changes to the Company’s internal control over financial reporting
during the quarter ended July 31, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Limitations on Effectiveness of
Controls and Procedures
Our
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.
PART
III
Item 10. Directors, Executive Officers,
Promoters and Control Persons; Compliance With Section 16(a) of the Exchange
Act
Information
regarding the directors of ARI, the Company’s Code of Ethics and compliance with
Section 16(a) of the Exchange Act is included in ARI’s definitive 2008 Annual
Meeting Proxy Statement, and is incorporated herein by reference. See
“Election of Directors”, “Section 16(a) Beneficial Ownership Reporting
Compliance” and “Code of Ethics.” 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 2008 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 and Related Stockholder
Matters
Information
regarding beneficial ownership of ARI’s common stock and common stock authorized
for issuance under equity compensation plans is included in ARI’s definitive
2008 Annual Meeting Proxy Statement and is incorporated herein by
reference. See “Security Ownership of Certain Beneficial Owners” and
“Equity Compensation Plan Information”.
Item 13. Certain Relationships and Related
Transactions
Information
related to Certain Relationships and Related Transactions is included in ARI’s
definitive 2008 Annual Meeting Proxy Statement, and is incorporated herein by
reference. See “Certain Transactions”.
Item 14. Principal Accountant Fees and
Services
Information
regarding Principal Accountant Fees and Services is included in ARI’s definitive
2008 Annual Meeting Proxy Statement, and is incorporated herein by
reference. See “Ratification of Independent Auditors”.
PART IV
Item
15. Exhibits:
|
Exhibit
Number
|
Description
|
|
2.1
|
Stock
Purchase Agreement dated January 26, 2007, by and among OC-Net, Inc., the
stockholders of OC-Net, Inc. and the Company, incorporated by reference to
the Company’s Current Report on Form 8-K filed on January 29,
2007.
|
|
2.2
|
Asset
Purchase Agreement dated July 1, 2008 between the Company, Eye
Communication Systems, Inc. and John Bessent, incorporated by
reference to Exhibit 2.1 of the Company’s Form 8-K filed on July
7,2008.
|
|
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
|
Articles
of Amendment of the Company, incorporated herein by reference to Exhibit
3.2 of Form 8-K filed on August 18, 2003.
|
|
3.3
|
By-laws
of the Company incorporated herein by reference to Exhibit 3.1 of the
Company’s Registration Statement on Form S-l (Reg. No.
33-43148).
|
|
4.1
|
Form
of Promissory Note of the Company (issued under Exchange Agreement listed
as Exhibit 10.4), incorporated herein by reference to Exhibit 4.1 of the
Company’s Form 10-Q for the quarter ended April 30,
2003.
|
|
4.2
|
Promissory
Note dated August 7, 2003 payable to WITECH Corporation, incorporated
herein by reference to Exhibit 4.1 of the Company’s Form 8-K filed on
August 8, 2003.
|
|
4.3
|
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 herein 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
|
Exchange
Agreement dated April 24, 2003 between ARI Network Services, Inc., ARI
Network Services Partners, LP, Dolphin Offshore Partners, LP and SDS
Merchant Fund, LP, including form of Common Stock Purchase Warrant
(Exhibit B), incorporated herein by reference to Exhibit 10.1 of the
Company’s Form 10-Q for the quarter ended April 30,
2003.
|
|
10.4
|
Rights
Agreement dated as of August 7, 2003, between the Company and American
Stock Transfer & Trust Company, as Rights Agent, incorporated herein
by reference to Exhibit 10.1 of Form 8-K filed on August 18,
2003.
|
|
10.5*
|
Summary
of Executive Bonus Arrangements (Fiscal 2006), incorporated herein by
reference to Exhibit 10.7 of the Company’s Form 10-KSB for the fiscal year
ended July 31, 2005.
|
|
10.6*
|
Summary
of Executive Bonus Arrangements (Fiscal 2007), incorporated herein by
reference to Exhibit 10.8 of the Company’s Form 10-KSB for the fiscal year
ended July 31, 2006.
|
|
10.7
*
|
Summary
of Executive Bonus Arrangements (Fiscal 2008), incorporated herein by
reference to Exhibit 10.9 of the Company’s Form 10-KSB for the fiscal year
ended July 31, 2007..
|
|
10.8
|
Letter
agreement dated June 25, 2003 between the Company and Ascent Partners,
Inc. incorporated herein by reference to Exhibit 10.1 of the Company’s
Form 10-QSB for the quarter ended January 31, 2004.
|
|
10.9
|
Credit
Agreement dated July 9, 2004 between the Company and Bank One, NA,
incorporated by reference to exhibit 10.14 of the Company’s Form 10-KSB
for the year ended July 31, 2004.
|
|
10.10
|
Amendment
to Credit Agreement dated February 15, 2005, between the Company and
JPMorgan Chase Bank, NA, successor by merger to Bank One, NA. ,
incorporated herein by reference to Exhibit 10.14 of the Company’s Form
10-KSB for the fiscal year ended July 31, 2005.
|
|
10.11
|
Continuing
Security Agreement dated July 9, 2004, between the Company and JPMorgan
Chase Bank, NA, successor by merger to Bank One, NA., incorporated by
reference to Exhibit 10.15 of the Company’s Form 10-KSB for the year ended
July 31, 2004.
|
|
10.12
|
Line
of credit note dated July 9, 2004 by the Company for $500,000,
incorporated by reference to exhibit 10.16 of the Company’s Form 10-KSB
for the year ended July 31, 2005.
|
|
10.13
|
Note
Modification Agreement dated February 15, 2005 to the Line of Credit Note
dated July 9, 2004 by the Company for $500,000, incorporated herein by
reference to Exhibit 10.17 of the Company’s Form 10-KSB for the fiscal
year ended July 31, 2005.
|
|
10.14
|
Note
Modification Agreement dated October 26, 2006, to the Line of Credit Note
dated July 9, 2004 by the Company for $1,000,000, incorporated herein by
reference to Exhibit 10.1 of the Company’s Form 8-K filed on October 31,
2006.
|
|
10.15
|
Note
Modification Agreement dated April 25, 2006 to the Line of Credit Note
dated July 9, 2004 by the Company for $500,000, incorporated herein by
reference to Exhibit 10.16 of the Company’s Form 10-KSB for the fiscal
year ended July 31, 2006.
|
|
10.16
|
Consulting
Agreement dated January 3, 2005 between the Company and Ascent Partners,
Inc., incorporated by reference to Exhibit 10.1 of Form 8-K filed on
January 4, 2005.
|
|
10.17
|
First
Amendment to Rights Agreement dated November 10, 2005, between the Company
and American Stock Transfer & Trust Company, as Rights Agent,
incorporated by reference to Exhibit 10.1 of Form 8-K filed on November
14, 2005.
|
|
10.18
|
Amendment
to Credit Agreement dated May 10, 2007, between the Company and JP Morgan
Chase Bank, NA, successor by merger to Bank One, NA, incorporated by
reference to the Company’s Form 10-QSB for the quarter ended April 30,
2007.
|
|
10.19
|
Note
Modification Agreement dated May 10, 2007, between the Company and JP
Morgan Chase Bank, NA, successor by merger to Bank One, NA, incorporated
by reference to the Company’s Form 10-QSB for the quarter ended April 30,
2007.
|
|
Note
Modification Agreement dated April 25, 2008, between the Company and JP
Morgan Chase Bank, NA, successor by merger to Bank One,
NA.
|
|
|
10.21*
|
Change
of Control Agreement dated April 1, 2006 between the Company and Brian E.
Dearing, incorporated by reference to Exhibit 10.1 of the Company’s Form
10-QSB for the quarter ended October 31, 2007.
|
|
10.22*
|
Change
of Control Agreement dated April 1, 2006 between the Company and John C.
Bray, incorporated by reference to Exhibit 10.2 of the Company’s Form
10-QSB for the quarter ended October 31, 2007.
|
|
10.23*
|
Change
of Control Agreement dated September 13, 2006 between the Company and Roy
W. Olivier, incorporated by reference to Exhibit 10.3 of the Company’s
Form 10-QSB for the quarter ended October 31, 2007.
|
|
Change
of Control Agreement dated July 31, 2008 between the Company and Robert J.
Hipp.
|
|
|
10.25*
|
Employment
Agreement dated March 13, 2008 between the Company and Brian E. Dearing,
incorporated by reference to Exhibit 10.1 of the Company’s Form 10-QSB for
the quarter ended January 31,
2008.
|
|
10.26*
|
Employment
Agreement dated May 1, 2008 between the Company and Roy W. Olivier,
incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed
on May 2, 2008.
|
|
10.27*
|
2000
Stock Option Plan, as amended, incorporated by reference to Exhibit 10.1
of the Company’s Form 10-Q for the quarter ended April 30,
2008.
|
|
Employment
Agreement dated January 26, 2007 between the Company and Robert J.
Hipp.
|
|
|
10.29*
|
Employment
Agreement dated July 28, 2008 between the Company and Kenneth S. Folberg,
incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed
on July 28, 2008.
|
|
Subsidiaries
of the Company.
|
|
|
Consent
of Wipfli LLP.
|
|
|
24.1
|
Powers
of Attorney appear on the signature page hereof.
|
|
Section
302 Certification of Chief Executive Officer
|
|
| 31.2 | Section 302 Certification of Chief Financial Officer. |
|
Section
906 Certification of Chief Executive Officer
|
|
| 32.2 | Section 906 Certification of Chief Financial Officer. |
|
Forward-Looking
Statements
Disclosure.
|
*
Management Contract or Compensatory Plan.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 29th day of October
2008.
|
ARI
NETWORK SERVICES, INC.
|
|
|
By: /s/
Roy W. Olivier
|
|
|
Roy
W. Olivier,
|
|
|
President
and Chief Executive Officer
|
|
|
By: /s/ Kenneth S.
Folberg
|
|
|
Kenneth
S. Folberg,
|
|
|
Chief
Financial Officer
|
KNOW ALL MEN BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints Brian E.
Dearing, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and his name, place and stead, in any
and all capacities, to sign any and all amendments to this report and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each act and thing requisite and necessary to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
| /s/ Brian E. Dearing | ||
|
Brian
E. Dearing
|
Chairman
of the Board and Chief Corporate Development and Strategy
Officer
|
October
29, 2008
|
|
/s/ Roy W. Olivier
|
Director
|
October
29, 2008
|
|
Roy
W. Olivier
|
||
|
/s/ Gordon J. Bridge
|
Director
|
October
29, 2008
|
|
Gordon
J. Bridge
|
||
|
/s/ Ted C. Feierstein
|
Director
|
October
29, 2008
|
|
Ted
C. Feierstein
|
||
|
/s/ William C. Mortimore
|
Director
|
October
29, 2008
|
|
William
C. Mortimore
|
||
|
/s/ P. Lee Poseidon
|
Director
|
October
29, 2008
|
|
P.
Lee Poseidon
|
Report of Wipfli LLP,
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders
ARI
Network Services, Inc.
We have
audited the accompanying consolidated balance sheets of ARI Network Services,
Inc. and Subsidiaries (the Company) as of July 31, 2008 and 2007 and the related
consolidated statements of income, shareholders’ equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 as of July 31, 2008 and
2007 and the results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States.
Wipfli
LLP
Milwaukee,
Wisconsin
October
29, 2008
This page
left intentionally blank
Consolidated Financial Statements
ARI
Network Services, Inc.
Years
ended July 31, 2008 and 2007
ARI
Network Services, Inc.
Consolidated
Balance Sheets
(Dollars
in Thousands, Except Per Share Data)
|
July
31
|
||||||||
|
2008
|
2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 1,086 | $ | 1,050 | ||||
|
Trade
receivables, less allowance for doubtful accounts of $178 in 2008 and $148
in 2007
|
1,304 | 1,302 | ||||||
|
Work
in process
|
264 | 223 | ||||||
|
Prepaid
expenses and other
|
392 | 291 | ||||||
|
Deferred
income taxes
|
330 | 555 | ||||||
|
Total
current assets
|
3,376 | 3,421 | ||||||
|
Equipment
and leasehold improvements:
|
||||||||
|
Computer
equipment
|
5,647 | 5,324 | ||||||
|
Leasehold
improvements
|
198 | 128 | ||||||
|
Furniture
and equipment
|
2,842 | 2,749 | ||||||
| 8,687 | 8,201 | |||||||
|
Less
accumulated depreciation and amortization
|
7,523 | 6,991 | ||||||
|
Net
equipment and leasehold improvements
|
1,164 | 1,210 | ||||||
|
Deferred
income taxes
|
2,412 | 1,539 | ||||||
|
Goodwill
|
2,196 | 1,269 | ||||||
|
Other
intangible assets
|
1,396 | 882 | ||||||
|
Other
long term assets
|
53 | - | ||||||
|
Capitalized
software product costs:
|
||||||||
|
Amounts
capitalized for software product costs
|
13,209 | 12,455 | ||||||
|
Less
accumulated amortization
|
11,613 | 10,849 | ||||||
|
Net
capitalized software product costs
|
1,596 | 1,606 | ||||||
|
Total
assets
|
$ | 12,193 | $ | 9,927 | ||||
|
July
31
|
||||||||
|
2008
|
2007
|
|||||||
|
Liabilities
and shareholders’ equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
borrowings on line of credit
|
$ | 700 | $ | – | ||||
|
Current
portion of notes payable
|
676 | 1,023 | ||||||
|
Accounts
payable
|
408 | 703 | ||||||
|
Deferred
revenue
|
5,071 | 5,619 | ||||||
|
Accrued
payroll and related liabilities
|
922 | 962 | ||||||
|
Accrued
sales, use and income taxes
|
80 | 28 | ||||||
|
Accrued
vendor specific liabilities
|
284 | 175 | ||||||
|
Other
accrued liabilities
|
615 | 124 | ||||||
|
Current
portion of capital lease obligations
|
95 | 8 | ||||||
|
Total
current liabilities
|
8,851 | 8,642 | ||||||
|
Non-current
liabilities:
|
||||||||
|
Notes
payable (net of discount)
|
116 | 479 | ||||||
|
Long-term
portion of accrued compensation
|
97 | 55 | ||||||
|
Other
long-term liabilities
|
– | 28 | ||||||
|
Capital
lease obligations
|
233 | 5 | ||||||
|
Total
non-current liabilities
|
446 | 567 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Total
liabilities
|
9,297 | 9,209 | ||||||
|
Shareholders’
equity:
|
||||||||
|
Cumulative
preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0
shares issued and outstanding in 2008 and 2007,
respectively
|
– | – | ||||||
|
Junior
preferred stock, par value $.001 per share, 100,000 shares authorized; 0
shares issued and outstanding in 2008 and 2007,
respectively
|
– | – | ||||||
|
Common
stock, par value $.001 per share, 25,000,000 shares authorized; 6,971,927
and 6,623,605 shares issued and outstanding in 2008 and 2007,
respectively
|
7 | 7 | ||||||
|
Common
stock warrants and options
|
501 | 195 | ||||||
|
Additional
paid-in capital
|
95,148 | 94,627 | ||||||
|
Accumulated
deficit
|
(92,708 | ) | (94,091 | ) | ||||
|
Other
accumulated comprehensive loss
|
(52 | ) | (20 | ) | ||||
|
Total
shareholders’ equity
|
2,896 | 718 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 12,193 | $ | 9,927 | ||||
See
accompanying notes
This page
left intentionally blank
ARI
Network Services, Inc.
Consolidated
Statements of Income
(Dollars
in Thousands, Except Per Share Data)
|
Year
ended July 31
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
revenues:
|
||||||||
|
Subscriptions,
support and other services fees
|
$ | 11,909 | $ | 11,290 | ||||
|
Software
licenses and renewals
|
2,115 | 2,187 | ||||||
|
Professional
services
|
2,893 | 1,958 | ||||||
|
Total
net revenues
|
16,917 | 15,435 | ||||||
|
Cost
of products and services sold:
|
||||||||
|
Subscriptions,
support and other services fees
|
1,010 | 1,188 | ||||||
|
Software
licenses and renewals
|
814 | 956 | ||||||
|
Professional
services
|
1,047 | 575 | ||||||
|
Total
cost of products and services sold
|
2,871 | 2,719 | ||||||
|
Gross
Margin
|
14,046 | 12,716 | ||||||
|
Operating
expenses:
|
||||||||
|
Depreciation
and amortization (exclusive of amortization of software products included
in cost of products and services sold)
|
727 | 631 | ||||||
|
Customer
operations and support
|
970 | 1,131 | ||||||
|
Selling,
general and administrative
|
9,163 | 9,110 | ||||||
|
Software
development and technical support
|
1,836 | 1,679 | ||||||
|
Restructuring
|
529 | - | ||||||
|
Net
operating expenses
|
13,225 | 12,551 | ||||||
|
Operating
income
|
821 | 165 | ||||||
|
Other
income (expense):
|
||||||||
|
Interest
expense
|
(99 | ) | (153 | ) | ||||
|
Other,
net
|
71 | 93 | ||||||
|
Total
other income (expense)
|
(28 | ) | (60 | ) | ||||
|
Income
before provision for income taxes
|
793 | 105 | ||||||
|
Income
tax benefit (expense)
|
590 | (4 | ) | |||||
|
Net
income
|
$ | 1,383 | $ | 101 | ||||
|
Basic
and diluted net income per common share:
|
||||||||
|
Basic
|
$ | 0.21 | $ | 0.02 | ||||
|
Diluted
|
$ | 0.20 | $ | 0.02 | ||||
See
accompanying notes
ARI
Network Services, Inc.
Consolidated
Statements of Shareholders’ Equity
(Dollars
in Thousands)
|
Number
of Shares Issued and Outstanding
|
Par
Value
|
|||||||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Preferred
Stock
|
Common
Stock
|
Common
Stock Warrants & Options
|
Paid
in Capital
|
Accumulated
Deficit
|
Other
Accumulated
Comprehensive
Loss
|
Total
|
||||||||||||||||||||||||||||
|
Balance
July 31, 2006
|
– | 6,202,529 | $ | – | $ | 6 | $ | 36 | $ | 93,838 | $ | (94,192 | ) | $ | – | $ | (312 | ) | ||||||||||||||||||
|
Issuance
of common stock under stock purchase plan
|
– | 13,394 | – | – | – | 23 | – | – | 23 | |||||||||||||||||||||||||||
|
Issuance
of common stock as contribution to 401(k) plan
|
– | 18,556 | – | – | – | 41 | – | – | 41 | |||||||||||||||||||||||||||
|
Issuance
of common stock from exercise of stock options
|
– | 39,126 | – | – | – | 19 | – | – | 19 | |||||||||||||||||||||||||||
|
Issuance
of common stock related to acquisitions
|
– | 350,000 | – | 1 | – | 706 | – | – | 707 | |||||||||||||||||||||||||||
|
Stock
based compensation
|
– | – | – | – | 159 | – | – | – | 159 | |||||||||||||||||||||||||||
|
Net
income
|
– | – | – | – | – | – | 101 | – | 101 | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
– | – | – | – | – | – | – | (20 | ) | (20 | ) | |||||||||||||||||||||||||
|
Comprehensive
income
|
– | – | – | – | – | – | – | – | 81 | |||||||||||||||||||||||||||
|
Balance
July 31, 2007
|
– | 6,623,605 | – | $ | 7 | $ | 195 | $ | 94,627 | $ | (94,091 | ) | (20 | ) | $ | 718 | ||||||||||||||||||||
|
Issuance
of common stock under stock purchase plan
|
– | 5,541 | – | – | – | 7 | – | – | 7 | |||||||||||||||||||||||||||
|
Issuance
of common stock as contribution to 401(k) plan
|
– | 30,090 | – | – | – | 48 | – | – | 48 | |||||||||||||||||||||||||||
|
Return
of common stock from 401(k) plan
|
– | (6,031 | ) | – | – | – | (10 | ) | – | – | (10 | ) | ||||||||||||||||||||||||
|
Issuance
of common stock under executive bonus plan
|
– | 6,222 | – | – | – | 7 | – | – | 7 | |||||||||||||||||||||||||||
|
Issuance
of common stock related to acquisitions
|
– | 312,500 | – | – | – | 469 | – | – | 469 | |||||||||||||||||||||||||||
|
Stock
based compensation
|
– | – | – | – | 306 | – | – | – | 306 | |||||||||||||||||||||||||||
|
Net
income
|
– | – | – | – | – | – | 1,383 | – | 1,383 | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
– | – | – | – | – | – | – | (32 | ) | (32 | ) | |||||||||||||||||||||||||
|
Comprehensive
income
|
– | – | – | – | – | – | – | – | 1,351 | |||||||||||||||||||||||||||
|
Balance
July 31, 2008
|
– | 6,971,927 | $ | – | $ | 7 | $ | 501 | $ | 95,148 | $ | (92,708 | ) | $ | (52 | ) | $ | 2,896 | ||||||||||||||||||
See accompanying
notes
ARI
Network Services, Inc
Consolidated
Statements of Cash Flows
(In
Thousands)
|
Year
ended July 31
|
||||||||
|
2008
|
2007
|
|||||||
|
Operating
activities
|
||||||||
|
Net
income
|
$ | 1,383 | $ | 101 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Amortization
of software products
|
764 | 800 | ||||||
|
Amortization
of deferred financing costs, debt discount and
|
||||||||
|
excess
carrying value over face amount of notes payable
|
25 | (15 | ) | |||||
|
Depreciation
and other amortization
|
727 | 631 | ||||||
|
Interest
expense converted to subordinated debt
|
- | - | ||||||
|
Stock
issued as consideration to vendor
|
- | - | ||||||
|
Deferred
income taxes
|
(648 | ) | - | |||||
|
Stock
based compensation related to stock options
|
306 | 159 | ||||||
|
Stock
issued as contribution to 401(k) plan
|
38 | 41 | ||||||
|
Net
change in assets and liabilities:
|
||||||||
|
Trade
receivables, net
|
9 | (318 | ) | |||||
|
Work
in process
|
(41 | ) | (60 | ) | ||||
|
Prepaid
expenses and other
|
(91 | ) | (36 | ) | ||||
|
Other
long term assets
|
(53 | ) | - | |||||
|
Accounts
payable
|
(364 | ) | 147 | |||||
|
Deferred
revenue
|
(571 | ) | (16 | ) | ||||
|
Accrued
payroll related liabilities
|
9 | (191 | ) | |||||
|
Accrued
sales, use and income taxes
|
52 | (20 | ) | |||||
|
Accrued
vendor specific liabilities
|
109 | 71 | ||||||
|
Other
accrued liabilities
|
373 | (150 | ) | |||||
|
Net
cash provided by operating activities
|
2,027 | 1,144 | ||||||
|
Investing
activities
|
||||||||
|
Purchase
of equipment, software and leasehold improvements
|
(119 | ) | (639 | ) | ||||
|
Cash
paid for goodwill and intangible assets related to
acquisitions
|
(769 | ) | (462 | ) | ||||
|
Cash
paid for other net assets related to acquisitions
|
(239 | ) | (715 | ) | ||||
|
Software
product costs capitalized
|
(524 | ) | (358 | ) | ||||
|
Net
cash used in investing activities
|
(1,651 | ) | (2,174 | ) | ||||
|
Financing
activities
|
||||||||
|
Borrowings
under line of credit
|
700 | - | ||||||
|
Payments
under notes payable
|
(1,035 | ) | (1,517 | ) | ||||
|
Payments
of capital lease obligations
|
(25 | ) | (16 | ) | ||||
|
Proceeds
from issuance of common stock
|
7 | 42 | ||||||
|
Net
cash used in financing activities
|
(353 | ) | (1,491 | ) | ||||
|
Effect
of foreign currency exchange rate changes on cash
|
13 | (13 | ) | |||||
|
Net
change in cash
|
36 | (2,534 | ) | |||||
|
Cash
at beginning of period
|
1,050 | 3,584 | ||||||
|
Cash
at end of period
|
$ | 1,086 | $ | 1,050 | ||||
|
Cash
paid for interest
|
$ | 109 | $ | 183 | ||||
|
Cash
paid for income taxes
|
$ | 5 | $ | 18 | ||||
ARI
Network Services, Inc
Consolidated
Statements of Cash Flows
(In
Thousands)
|
Year
ended July 31
|
||||||||
|
2008
|
2007
|
|||||||
|
Noncash
investing and financing activities
|
||||||||
|
Capital
lease obligations incurred for computer equipment
|
$ | 334 | $ | - | ||||
|
Capital
lease obligations assumed in connection with acquisitions
|
6 | 37 | ||||||
|
Accrued
liabilities assumed in connection
with acquisition
|
113 | - | ||||||
|
Debt
issued in connection with acquisitions
|
300 | 1,060 | ||||||
|
Issuance
of common stock related to payment of executive bonus
|
7 | - | ||||||
|
Issuance
of common stock in connection with acquisitions
|
469 | 707 | ||||||
See
accompanying notes
ARI
Network Services, Inc.
Notes
to Consolidated Financial Statements
1.
Description of Business and
Significant Accounting Policies
Description
of Business
ARI
Network Services, Inc. (the “Company” or “ARI”) is a leading provider of
electronic parts catalogs, website solutions and related technology and services
to increase sales, efficiency and customer satisfaction for dealers,
distributors and manufacturers in various markets.
Manufacturers
and distributors drive revenue and efficiency gains by leveraging ARI’s dealer
relationships and look to ARI as a partner to reach their
dealers. Dealers rely on ARI’s extensive network of manufacturer and
distributor relationships and leverage this network into content and solutions
which result in revenue and efficiency gains.
The
Company provides robust Internet-based and CD-ROM interactive electronic parts
catalogs of manufactured equipment to approximately 24,000 dealers in
approximately 85 countries. It serves dealers in various market
segments including outdoor power, power sports, appliance, agricultural, marine,
recreation vehicles, floor maintenance, auto, construction. The
Company also supplies eCommerce enabled websites, direct mail custom marketing
and technology-related services.
ARI
operates primarily in two business segments: the US and European
operations. Each provides technology-enabled business solutions that
connect manufacturers in selected industries with their service and distribution
networks. Segmented operating information is provided to the Company’s chief
operating decision makers.
ARI’s
electronic parts catalogs, including its flagship PartSmart® product, dealer
marketing services and eCommerce services, including its WebSiteSmart ProÔ product, enable
partners in a service and distribution network to (a) conveniently reference
parts, service bulletins and other technical reference information, (b) market
to their customers and prospects and (c) exchange electronic business documents
such as purchase orders, invoices, warranty claims and status
inquiries. The Company briefly operated a business which offered
insurance and financing services to dealers in the Powersports
industry. This operation was closed in November 2007.
The
electronic cataloging suite of products and services enable partners in a
service and distribution network to look up electronically technical reference
information such as illustrated parts lists, service bulletins, price files,
repair instructions and other technical information regarding the products of
multiple manufacturers.
The
website suite of products and services allow dealers to quickly establish an
online presence to reach beyond typical geographic constraints and extend their
store hours, allowing their customers to look up and order parts and accessories
24 hours a day, 7 days a week.
An
important element to ARI’s business is its relationship with over 85 dealer
business management system providers through our COMPASS Partners™
program. A dealer business management system is used by a dealer to
manage inventory, maintain accounting records, bill customers and focus
marketing efforts. ARI software’s ability to interface with these
systems provides the dealer with a more robust, informative, and cost-effective
solution.
ARI also
provides eCommerce services to the North American agribusiness industry,
accounting for 3% of fiscal 2008’s total revenue.
No single
customer accounted for 10% or more of ARI’s revenue in fiscal 2008 and
2007.
Principles
of Consolidation
The
financial statements include the accounts of ARI Network Services, Inc. and its
wholly owned subsidiaries, ARI Europe B.V. and ARI Outsourced F&I Center,
LLC. All intercompany transactions and balances have been
eliminated.
The
functional currency of the Company’s subsidiary in the Netherlands is the Euro;
accordingly, monetary assets and liabilities are translated into United States
dollars at the rate of exchange existing at the end of the period, and
non-monetary assets and liabilities are translated into United States dollars at
historical exchange rates. Income and expense amounts, except for those related
to assets translated at historical rates, are translated at the average exchange
rates during the period. Adjustments resulting from the re-measurement of the
financial statements into the functional currency are charged or credited to
comprehensive income (loss).
Cash
and Cash Equivalents
For
purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
The
Company’s investment policy, as approved by the Board of Directors, is designed
to provide preservation of capital, adequate liquidity to meet projected cash
requirements, optimum yields in relationship to risk, market conditions and tax
considerations and minimum risk of principal loss through diversified short and
medium term investments. Eligible investments include direct
obligations of the U.S. Treasury, obligations issued or guaranteed by the U.S.
government, certain time deposits, certificates of deposits issued by commercial
banks, money market mutual funds, asset backed securities and municipal
bonds. The Company’s current investments include money market mutual
funds with terms not exceeding ninety days.
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash deposits in bank accounts. Deposits in
excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) of
$250,000 ($100,000 as of July 31, 2008) are exposed to loss in the event of
nonperformance by the institution. The Company had cash deposits in
excess of the FDIC insurance coverage of $986,000 and $950,000 as of July 31,
2008 and 2007, respectively.
Trade
Receivables and Credit Policy
Trade
receivables are uncollateralized customer obligations due on normal trade terms,
most of which require payment within 30 days from the invoice
date. Payments of trade receivables are allocated to the specific
invoices identified on the customer’s remittance advice or, if unspecified, are
applied to the earliest unpaid invoices.
The
carrying amount of trade receivables is reduced by an allowance that reflects
management’s best estimate of the amounts that will not be
collected. Management individually reviews all receivable balances
that exceed 60 days from the invoice date and based on an assessment of current
creditworthiness, estimates the portion, if any, of the balance that will not be
collected. The allowance for potential credit losses is reflected as
an offset to trade receivables in the accompanying balance sheets.
Work
in Process
Work in
process consists of billable professional services performed by the Company, for
which revenue was recognized pursuant to contract accounting primarily using the
percentage-of-completion method with progress-to-completion measured based upon
labor hours incurred, which have not been invoiced as of the end of the
reporting period.
Revenue
Recognition
Revenue
for use of the network and for information services is recognized on a
straight-line basis over the period of the contract.
Revenue
from annual or periodic maintenance fees is recognized ratably over the period
the maintenance is provided. Revenue from catalog subscriptions is recognized on
a straight-line basis over the subscription term.
Revenue
from software licenses in multiple element arrangements is recognized ratably
over the contractual term of the arrangement. The Company considers all
arrangements with payment terms extending beyond 12 months not to be fixed or
determinable and evaluates other arrangements with payment terms longer than
normal to determine whether the arrangement is 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
collectability is not considered probable, revenue is recognized when the fee is
collected.
Arrangements
that include professional services are evaluated to determine whether those
services are essential to the functionality of other elements of the
arrangement. Types of services that are considered essential include customizing
complex features and functionality in the products’ base software code or
developing complex interfaces within a customer’s environment. When professional
services are not considered essential, the revenue allocable to the professional
services is recognized as the services are performed. When professional services
are considered essential, revenue under the arrangement is recognized pursuant
to contract accounting using the percentage-of-completion method with
progress-to-completion measured based upon labor hours incurred. When the
current estimates of total contract revenue and contract cost indicate a loss, a
provision for the entire loss on the contract is made in the period the amount
is determined.
Revenue
on arrangements with customers who are not the ultimate users (resellers) is
deferred if there is any uncertainty regarding the ability and intent of the
reseller to sell such software independent of their payment to the
Company.
Amounts
invoiced to customers prior to recognition as revenue as discussed above are
reflected in the accompanying balance sheets as deferred revenue.
Use
of Estimates
The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the United States 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. The Company considers capitalization and amortization of software
product costs, realizability and valuation of intangible assets, accruals for
anticipated losses on projects and litigation, sales tax liabilities, various
contract arrangements, and the deferred tax valuation allowance to be
significant estimates that are subject to change in the near term.
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
accelerated methods for income tax purposes. Depreciation and amortization have
been provided over the estimated useful lives of the assets as
follows:
|
Years
|
|
|
Computer
equipment
|
3-5
|
|
Leasehold
improvements
|
7
|
|
Furniture
and equipment
|
3-5
|
Leasehold
improvements are amortized over the useful lives of the assets or the term of
the related lease agreement, whichever is shorter.
Capitalized
and Purchased Software Product Costs
Certain
software development and acquisition costs are capitalized when incurred.
Capitalization of these costs begins upon the establishment of technological
feasibility. The establishment of technological feasibility and the on-going
assessment of recoverability of software costs require 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 software products is the greater of the amount computed
using: (a) the ratio that current gross revenues for the network or a software
product bear to the total of current and anticipated future gross revenues for
the network or a software product, or (b) the straight-line method over the
estimated economic life of the product which currently runs from three to five
years. Amortization starts when the product is available for general release to
customers. All other software development and support expenditures
are charged to expense in the period incurred.
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, equipment and
leasehold improvements and capitalized software product costs 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. Such analyses
necessarily involve judgment. The Company evaluated the ongoing value of its
long-lived assets as of July 31, 2008 and 2007. The Company incurred
$43,000 of impairment charges related to its PartSmart™ product, included in
depreciation and amortization, in fiscal 2007 and none in fiscal
2008.
Deferred
Financing Costs
Costs
incurred to obtain long-term financing are included in other assets and are
amortized over the term of the related debt.
Capitalized
Interest Costs
In 2008
and 2007, interest costs of $3,000 and $6,000, respectively, were capitalized
and included in the capitalized software product costs.
Insurance
Premiums Receivable
The
Company is the beneficiary of the total premiums paid on a split life insurance
policy at the death of the policy holder. Insurance premiums
receivable are recorded at present value based on the average life expectancy of
the policy holder and are included in other long term
assets. Insurance premiums receivable at July 31, 2008 consisted of
$53,000, which is the present value of future life insurance premiums receivable
of $214,000 discounted at 8% over 18 years. There was no life
insurance premiums receivable recorded prior to July 31, 2008.
Shipping
and Handling
Revenue
received from shipping and handling fees is reflected in net
revenue. Costs incurred for shipping and handling are reported in
cost of products and services sold.
Income
Taxes
Income
taxes are accounted for using an asset and liability approach, which requires
the recognition of taxes payable or refundable for the current year and deferred
tax liabilities and assets for the future tax consequences of events that have
been recognized in the financial statements or tax returns. The measurement of
current and deferred tax assets and liabilities is based on provisions of
enacted
tax laws; the effects of potential future changes
in tax laws or rates are not anticipated. If it is more likely than not that
full realization of deferred income tax benefits is not expected, a deferred tax
valuation allowance is recorded.
Foreign
Currency Translation
The
Company’s Netherland subsidiary uses the euro as its functional currency.
Accordingly, assets and liabilities are translated into U.S. dollars at
year-end exchange rates, and revenues and expenses are translated at
weighted-average exchange rates. The resulting translation adjustment is
recorded as a separate component of shareholders’ equity and will be included in
the determination of net income (loss) only upon sale or liquidation of the
subsidiary.
Stock-Based
Compensation
On
August 1, 2006, the Company adopted SFAS No. 123(R) (revised
2004) (SFAS No. 123(R)), “Share-Based Payment”, to account for its
stock option plans, which is a revision of SFAS No. 123 and
SFAS No. 95 “Statement of Cash Flows”. The Company adopted
SFAS 123(R) using the modified prospective approach. Under this transition
method, compensation cost recognized for the years ended July 31, 2008 and 2007
includes the cost for all stock options granted prior to, but not yet vested as
of August 1, 2006. This cost was based on the grant-date fair value
estimated in accordance with the original provisions of SFAS No. 123.
The cost for all share-based awards granted subsequent to July 31, 2006,
represents the grant-date fair value that was estimated in accordance with the
provisions of FAS No. 123(R). Results for prior periods have not been
restated. Compensation cost for options will be recognized in earnings, net of
estimated forfeitures, on a straight-line basis over the requisite service
period. There were no capitalized stock-based compensation costs at July 31,
2008 and 2007.
Comprehensive
Income (Loss)
Comprehensive
income is a more inclusive financial reporting method that includes disclosure
of financial information that historically has not been recognized in the
calculation of net income. The Company has reported Comprehensive Income which
includes net income and cumulative translation adjustments in the Consolidated
Statements of Shareholders’ Equity for the year ended July 31, 2008 and
2007.
Basic
and Diluted Net Income Per Common Share
Basic net
income per common share is computed by dividing net income by the basic weighted
average number of common shares outstanding during the
period. Diluted net income per common share is computed by dividing
net income by the weighted average number of common shares outstanding during
the period and reflects the potential dilution that could occur if all of the
Company’s outstanding stock options and warrants that are in the money were
exercised (calculated using the treasury stock method). The following
table is a reconciliation of basic and diluted net income per common share for
the periods indicated (in thousands, except per share data):
|
2008
|
2007
|
|||||||
|
Net
income
|
1,383 | 101 | ||||||
|
Weighted-average
common shares outstanding
|
6,678 | 6,378 | ||||||
|
Effect
of dilutive stock options and warrants
|
225 | 172 | ||||||
|
Diluted
weighted-average common shares outstanding
|
6,903 | 6,550 | ||||||
|
Net
income per share:
|
||||||||
|
Basic
|
$ | 0.21 | $ | 0.02 | ||||
|
Diluted
|
$ | 0.20 | $ | 0.02 | ||||
|
Options
that could potentially dilute net income per share in the future that are
not included in the computation of diluted net income per share, as their
impact is anti-dilutive
|
941 | 467 | ||||||
Goodwill
and Other Intangible Assets
Under Statement of Financial Accounting Standards (SFAS)
No. 142, “Goodwill and Other Intangible Assets” goodwill and
intangible assets deemed to have indefinite lives are not amortized, but are
subject to annual impairment tests. Intangible assets with definitive lives at
July 31, 2008 and 2007 consist primarily of costs of customer relationships,
which are amortized over their estimated useful lives of five
years. These assets were acquired in the Info Access
acquisition on July 1, 2008 and the OC-Net acquisition on January 26, 2007,
where the fair values were determined using the discounted cash flow
approach.
The
Company performs annual impairment tests annually or more frequently if facts
and circumstances warrant a review. The Company determined that there was a
single reporting unit for the purpose of goodwill impairment tests under SFAS
142. For purposes of assessing the impairment of goodwill, the
Company estimates the value of the reporting unit using the best evidence
available, which in fiscal 2008 was a discounted cash flow model, consideration
of recent transaction values and market capitalization. This fair value is then
compared with the carrying value of the reporting unit. During fiscal 2008 and
2007 there were no impairments to goodwill.
Intangible
assets with indefinite lives consisted of $2,196,000 and $1,269,000 of goodwill
at July 31, 2008 and 2007, respectively.
Amortizable
intangible assets costs consisted of the following (in thousands):
|
Customer
|
Accumulated
|
Net
|
||||||||||
|
Relationships
|
Amortization
|
Amount
|
||||||||||
|
Balance
7/31/07
|
$ | 1,000 | $ | (119 | ) | $ | 881 | |||||
|
Additions
|
730 | - | 730 | |||||||||
|
Amortization
expense
|
- | (215 | ) | (215 | ) | |||||||
|
Balance
7/31/08
|
$ | 1,730 | $ | (334 | ) | $ | 1,396 | |||||
|
Finance
|
Accumulated
|
Net
|
||||||||||
|
Costs
|
Amortization
|
Amount
|
||||||||||
|
Balance
7/31/07
|
$ | 20 | $ | (19 | ) | $ | 1 | |||||
|
Amortization
expense
|
- | (1 | ) | (1 | ) | |||||||
|
Balance
7/31/08
|
$ | 20 | $ | (20 | ) | $ | - | |||||
The
estimated future amortization expense related to intangible assets for the years
subsequent to July 31, 2008 is as follows (in thousands):
|
Year ending July 31,
|
||||
|
2009
|
$ | 383 | ||
|
2010
|
383 | |||
|
2011
|
383 | |||
|
2012
|
247 | |||
|
Total
|
$ | 1,396 | ||
During
fiscal 2008 the Company reclassified $190,000 from amortizable intangible assets
to goodwill. The reclassification was related to the value assigned
to workforce intangible assets acquired in the OC – Net acquisition during
fiscal 2007. It was determined during fiscal 2008 that the nature of
the workforce intangible assets capitalized required the assets to be presented
with goodwill as required by Statement of Financial Accounting Standard 141
Business Combinations. The impact that this reclassification had on
amortization expense was immaterial. The fiscal 2007 financial
statements have been restated to conform to the fiscal 2008
presentation.
Accounting
Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an amendment of
FASB Statement No. 115.” SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date.
SFAS No. 159 is effective for the Company August 1, 2008. The
adoption of this guidance is not expected to have a material impact on the
Company’s consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”). This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The adoption of this guidance is not expected to have had a material
impact on the Company’s consolidated financial statements.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, “Goodwill and Other Intangible Assets” FSP FAS
142-3 is effective for fiscal years beginning after December 15, 2008 and early
adoption is prohibited.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires companies with
derivative instruments to disclose information that should enable financial
statement
users to understand how and why a company uses derivative instruments, how
derivative instruments and related hedged items are accounted for under SFAS 133
and how derivative instruments and related hedged items affect a company’s
financial position, financial performance and cash flows. SFAS 161 is effective
for the Company’s fiscal year beginning August 1, 2009. The adoption of SFAS 161
is not expected to have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 ” (“SFAS 160”).
SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. It requires consolidated net income to
be reported at amounts that include the amounts attributable to both the parent
and the noncontrolling interest. SFAS 160 establishes a single method of
accounting for changes in a parent’s ownership interest in a subsidiary that do
not result in deconsolidation. SFAS 160 is effective for the Company’s fiscal
year beginning August 1, 2009. The adoption of SFAS 160 is not expected to have
a material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements
of the original pronouncement requiring that the purchase method be used for all
business combinations. SFAS 141(R) defines the acquirer as the entity that
obtains control of one or more businesses in the business combination,
establishes the acquisition date as the date that the acquirer achieves control
and requires the acquirer to recognize the assets acquired, liabilities assumed
and any noncontrolling interest at their fair values as of the acquisition date.
In addition, SFAS 141(R) requires expensing of acquisition-related and
restructure-related costs, remeasurement of earn out provisions at fair value,
measurement of equity securities issued for purchase at the date of close of the
transaction and non-expensing of in-process research and development related
intangibles. SFAS 141(R) is effective for the Company’s business combinations
for which the acquisition date is on or after August 1, 2009.
2.
Capitalized and Purchased Software Product Costs
The
balance of capitalized and purchased software product costs consisted of the
following (in thousands):
|
Software
|
Accumulated
|
Net
|
||||||||||
|
Product Costs
|
Amortization
|
Amount
|
||||||||||
|
Balance
7/31/07
|
$ | 12,455 | $ | (10,849 | ) | $ | 1,606 | |||||
|
Capitalized
costs
|
524 | - | 524 | |||||||||
|
Acquisitions
|
230 | - | 230 | |||||||||
|
Amortization
expense
|
- | (764 | ) | (764 | ) | |||||||
|
Balance
7/31/08
|
$ | 13,209 | $ | (11,613 | ) | $ | 1,596 | |||||
The
estimated aggregate amortization expense for each of the five succeeding fiscal
years related to capitalized and purchased software product costs subject to
amortization expense consist of the following at July 31, 2008 (in
thousands):
|
Year Ending July 31,
|
||||
|
2009
|
$ | 684 | ||
|
2010
|
452 | |||
|
2011
|
277 | |||
|
2012
|
120 | |||
|
2013
|
63 | |||
|
Total
|
$ | 1,596 | ||
3.
Notes Payable
Notes
payable consist of the following at July 31 (in thousands):
|
2008
|
2007
|
|||||||
|
Notes
Payable
|
$ | 800 | $ | 1,533 | ||||
|
Less
imputed interest
|
(8 | ) | (33 | ) | ||||
|
Less
debt discount
|
- | (3 | ) | |||||
|
Plus
carrying value in excess of the face amount of the notes
payable
|
- | 5 | ||||||
| 792 | 1,502 | |||||||
|
Less
current maturities
|
676 | 1,023 | ||||||
| $ | 116 | $ | 479 | |||||
On April
24, 2003, the Company restructured its debt. In exchange for
previously outstanding securities, the Company issued to a group of investors
(collectively, the “New Holders”), in aggregate, $500,000 in cash, new unsecured
notes in the amount of $3.9 million (the “New Notes”) and new warrants for
250,000 common shares, exercisable at $1.00 per share (the “New
Warrants”). The interest rate on the New Notes was prime plus 2%,
adjusted quarterly. The New Notes were payable in $200,000 quarterly
installments commencing March 31, 2004 through December 31, 2005 and $300,000
quarterly installments commencing March 31, 2006 at the prime interest rate plus
2%. The New Notes were paid in full on December 31,
2007.
In
accordance with SFAS No. 15, “Accounting by Debtors and Creditors for Troubled
Debt Restructurings,” the exchange of the previously outstanding securities for
$500,000 in cash, the New Notes and the New Warrants was accounted for as a
troubled debt restructuring and no gain was recorded. Instead the
liability in excess of the future cash flows to the New Holders, which was
approximately $322,000, was amortized as a reduction of interest expense over
the life of the New Notes.
On August
7, 2003, the Company purchased from WITECH Corporation 1,025,308 shares of the
Company’s common stock, 30,000 common stock warrants and 20,350 shares of Series
A Preferred Stock for $200,000 at closing and an $800,000 promissory note which
was payable in $50,000 quarterly installments through September 30, 2007 at the
prime interest rate plus 2%, adjusted quarterly. The note was paid in
full on September 28, 2007.
The
Company issued $700,000 of notes and $400,000 of future, non-interest bearing
contingent payments in connection with the OC-Net acquisition in 2007. The
interest rate on the notes is prime plus 2%, adjusted quarterly (effective rate
of 7.00% as of July 31, 2008). The notes are payable in quarterly principal
installments of $58,333, commencing March 31, 2007 through December 31, 2009.
The notes do not contain any financial covenants. The Company paid $250,000 of
the future contingent payments in February, 2008, and the remaining $150,000,
which includes $8,000 of imputed interest, is due in January,
2009.
In 2008,
the Company issued $300,000 of notes payable in connection with the Info Access
acquisition, of which $100,000 is due on October 1, 2008 and $200,000 is due on
July 1, 2009. The interest rate on the payments is 6%.
Principal
payments due on notes payable are as follows:
|
Year Ending July 31
|
||||
|
2009
|
$ | 676,000 | ||
|
2010
|
116,000 | |||
|
TOTAL
|
$ | 792,000 | ||
4.
Acquisitions
On
January 26, 2007, the Company purchased all of the outstanding stock of OC-Net,
Inc. (“OC-Net”), a privately held corporation in Cypress, CA, that provided
website development and hosting services to the Power Sports market (which
includes motorcycles, All Terrain Vehicles, snowmobiles and personal
watercraft), as well as certain customers outside the Power Sports market.
Consideration for the acquisition included approximately $1.1 million in
cash, 350,000 shares of the Company’s common stock, $700,000 in debt to the
sellers and future contingent payments totaling up to $400,000. It
was determined that as of July 31, 2008 and 2007, it was more likely than not
that the contingencies associated with the remaining $150,000 would be resolved
such that the Company would owe that amount. Accordingly, this amount
has been recorded as a liability at July 31, 2008 and 2007.
The
purchase price of this acquisition has been allocated to the following specific
assets and liabilities acquired based on the fair value of those identified
tangible and intangible assets and liabilities as determined by an independent
valuation (in thousands):
|
Cash
|
$ | 41 | ||
|
Accounts
receivable
|
99 | |||
|
Prepaid
taxes
|
5 | |||
|
Equipment
|
101 | |||
|
Software
|
580 | |||
|
Goodwill
|
1,269 | |||
|
Other
intangible assets
|
1,000 | |||
|
Total
assets
|
3,095 | |||
|
Accounts
payable
|
$ | 56 | ||
|
Deferred
revenue
|
19 | |||
|
Capital
leases
|
29 | |||
|
Deferred
taxes
|
7 | |||
|
Total
liabilities
|
111 | |||
|
Net
assets acquired
|
$ | 2,984 |
Capitalized
software is amortized over 4 years and intangibles related to customer
relationships are amortized over 5 years. In connection with the acquisition,
the Company entered into an employment agreement with Robert Hipp (the
“Employment Agreement”) to serve as a Marketing/Business Development Manager for
the Company. The term of the Employment Agreement expires on January 26,
2009.
The
following table shows the audited results of operations for the fiscal year
ended July 31, 2008 and the unaudited pro forma results of operations for the
fiscal year ended July 31, 2007, which assumes the acquisition of the OC-Net
business occurred at the beginning of that period:
|
(in
thousands, except per share data)
|
||||||||
|
ProForma
|
||||||||
|
Results
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenue
|
$ | 16,917 | $ | 16,094 | ||||
|
Net
income(loss)
|
1,383 | (146 | ) | |||||
|
Net
income(loss)/share
|
0.21 | (0.02 | ) | |||||
|
Net
income(loss)/diluted share
|
0.20 | (0.02 | ) | |||||
This pro
forma information does not purport to be indicative of the results that actually
would have been obtained if the combined operations had been conducted during
the periods presented and is not intended to be a projection of future
results.
On July
1, 2008, the Company acquired all
of the assets related to electronic parts catalog (EPC), electronic commerce and
certification testing for service technicians of Info Access, the
micropublishing division of Eye Communications, Inc., of Hartland,
Wis. Consideration for the acquisition included approximately
$1.0 million in cash, 312,500 shares of the Company’s common stock, 125,000 of
which is held in escrow based on contingent revenue retention and notes payable
of $300,000. It was determined that as of July 31, 2008, the
contingencies associated with the shares in escrow would be resolved such that
the Company would owe that amount. Accordingly, this amount has been
recorded as outstanding stock at July 31, 2008.
The
purchase price of this acquisition has been allocated to the following specific
assets and liabilities acquired based on the fair value of those identified
tangible and intangible assets and liabilities (in thousands):
|
Prepaid
expenses
|
$ | 9 | ||
|
Software
|
230 | |||
|
Goodwill
|
927 | |||
|
Other
intangible assets
|
730 | |||
|
Total
assets
|
1,896 | |||
|
Deferred
revenue
|
$ | 23 | ||
|
Capital
leases
|
6 | |||
|
Total
liabilities
|
29 | |||
|
Net
assets acquired
|
$ | 1,867 |
Capitalized
software is amortized over 2 years and intangibles related to customer
relationships are amortized over 4 years.
5.
Capital and Operating Leases
The
Company leases office space and certain office equipment under operating lease
arrangements expiring through 2012. The Company is generally liable for its
share of increases in the landlord’s direct operating expenses and real estate
taxes related to the office space leases. Total rental expense for the operating
leases was $659,000 in 2008 and $586,000 in 2007.
Where
applicable, rent expense for leased offices is recognized on a straight-line
basis over the lease terms, which differ from the pattern of payments required
by the leases. Other accrued liabilities include $18,000 of deferred rent at
July 31, 2008 and $48,000, of deferred rent at July 31, 2007. As more
fully discussed in Note 12, the Company has a recorded liability totaling
$204,000 for estimated net future lease costs associated with closed
offices.
The
Company has certain capital lease agreements in place related to computer and
office equipment. Minimum lease payments under remaining capital and
operating leases are as follows (in thousands):
|
Capital
|
Operating
|
|||||||
|
Fiscal year ending
|
Leases
|
Leases
|
||||||
|
2009
|
$ | 128 | $ | 563 | ||||
|
2010
|
123 | 298 | ||||||
|
2011
|
112 | 230 | ||||||
|
2012
|
19 | 13 | ||||||
|
2013
|
16 | - | ||||||
|
Thereafter
|
- | - | ||||||
|
Less
amounts related to interest
|
69 | - | ||||||
|
Total
minimum lease payments
|
$ | 328 | $ | 1,104 | ||||
6.
Line of Credit
On July
9, 2004, the Company entered into a line of credit with JPMorgan Chase, N.A.
which, as since amended, permits the Company to borrow an amount equal to 80% of
the book value of all eligible accounts receivable plus 45% of the value of all
eligible open renewal orders (provided the renewal rate is at least 85%) minus
$75,000, up to $1,500,000, and bears interest at prime rate. Eligible
accounts include certain non-foreign accounts receivable which are less than 90
days from the invoice date. The line of credit terminates July 9,
2009, and is secured by substantially all of the Company’s
assets. The line of credit limits repurchases of common stock, the
payment of dividends, liens on assets and new indebtedness. As of
July 31, 2008 and 2007, there was $700,000 and $-0-, respectively, outstanding
on the line of credit.
7.
Shareholders’ Equity
Shareholder
Rights Plan
On August
7, 2003, the Company adopted a Shareholder Rights Plan designed to protect the
interests of common shareholders from an inadequate or unfair takeover, but not
affect a takeover proposal which the Board of Directors believes is fair to all
shareholders. Under the Shareholder Rights Plan adopted by the Board
of Directors, all shareholders of record on August 18, 2003 received one
Preferred Share Purchase Right for each share of common stock they owned.
These Rights trade in tandem with the common stock until and unless they
are triggered. Should a person or group acquire more than 10% of ARI’s
common stock (or if an existing holder of 10% or more of the common stock were
to increase its position by more than 1%), the Rights would become exercisable
for every shareholder except the acquirer that triggered the exercise. The
Rights, if triggered, would give the rest of the shareholders the ability to
purchase additional stock of ARI at a substantial discount. The rights
will expire on August 18, 2013, and can be redeemed by the Company for $0.01 per
Right at any time prior to a person or group becoming a 10%
shareholder.
8.
Stock-based Compensation Plans
Total
stock compensation expense recognized by the Company for the years ended July
31, 2008 and 2007 was approximately $306,000 and $159,000,
respectively. As of July 31, 2008 and 2007, there was approximately
$481,000 and $143,000, respectively, of total unrecognized compensation cost
related to non-vested options granted under the plans.
The
Company used the Black-Scholes model to value stock options granted. Expected
volatility is based on historical volatility of the Company’s stock. The
expected life of options granted represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the contractual term of the options is based on the U.S. Treasury yields in
effect at the time of grant. As stock-based compensation expense recognized in
our results of operations is based on awards ultimately expected to vest, the
amount has been reduced for estimated forfeitures. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on our historical experience. Prior to fiscal
year 2007, we accounted for forfeitures as they occurred for the purposes of our
pro forma information under SFAS 123.
The
weighted average assumptions in the following table were used to
estimate the fair value of options granted:
|
Twelve
months ended
July
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Expected
life (years)
|
10
years
|
10
years
|
||||||
|
Risk-free
interest rate
|
4.52 | % | 4.88 | % | ||||
|
Expected
volatility
|
78 | % | 122 | % | ||||
|
Expected
forfeiture rate
|
20.92 | % | 15.91 | % | ||||
|
Expected
dividend yield
|
0 | % | 0 | % | ||||
Employee
Stock Purchase Plans
The
Company’s 2000 Employee Stock Purchase Plan has 175,000 shares of common stock
reserved for issuance, and 154,322 of the shares have been issued as of July
31,
2008. All
employees of the Company, other than executive officers, with nine 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, not to exceed 5,000 shares per employee per
year.
Stock
Option Plans
On
November 19, 2003, pursuant to its option exchange program, the Company
accepted for cancellation from all stock option plans old options to purchase
319,186 shares of common stock, representing approximately 29% of the shares of
common stock underlying all old options that were eligible for exchange in the
offer. Subject to and in accordance with the terms of the offer, the Company
issued, on the new option grant date, May 21, 2004, new options to purchase
245,944 shares of the Company’s common stock from the 2000 Stock Option Plan in
exchange for the old options cancelled in the offer. The new options were 50%
vested immediately and of the remaining options, 25% vested on July 31,
2005 and 25% vested on July 31, 2006.
1991
Stock Option Plan
The
Company’s 1991 Stock Option Plan was terminated on August 14, 2001, except
as to outstanding options. Options granted under the 1991 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 (the Code), or
(b) nonqualified stock options.
Any
incentive stock option that was granted under the 1991 Plan could 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 were allowed to be
granted at the exercise price established by the Compensation Committee, which
could 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 1991 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
Compensation 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 Compensation 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 meets certain targets or goals, prior to
exercising any options.
Changes
in option shares under the 1991 Plan are as follows:
|
Year ended
July
31, 2008
|
||||||||||||||||
|
Options
|
Wt-Avg
Exercise
Price
|
Wt-Avg
Remaining
Contractual
Period
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at beginning of period
|
125,686 | $ | 2.31 | 1.89 | $ | - | ||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeited
|
(32,500 | ) | $ | 2.28 | ||||||||||||
|
Outstanding
at end of period
|
93,186 | $ | 2.27 | 1.23 | $ | - | ||||||||||
|
Exercisable
at end of period
|
93,186 | $ | 2.27 | 1.23 | $ | - | ||||||||||
|
Year ended
July
31, 2007
|
||||||||||||||||
|
Options
|
Wt-Avg
Exercise
Price
|
Wt-Avg
Remaining
Contractual
Period
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at beginning of period
|
146,686 | $ | 2.28 | 2.85 | $ | 13,125 | ||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeited
|
(21,000 | ) | $ | 2.12 | ||||||||||||
|
Outstanding
at end of period
|
125,686 | $ | 2.31 | 1.89 | $ | - | ||||||||||
|
Exercisable
at end of period
|
125,686 | $ | 2.31 | 1.89 | $ | - | ||||||||||
The range
of exercise prices for options outstanding at July 31, 2008 and 2007 was $2.06
to $9.06.
1993
Director Stock Option Plan
The
Company’s 1993 Director Stock Option Plan (“Director Plan”) has expired and is
terminated except for outstanding options. The Director Plan originally had
150,000 shares of common stock reserved for issuance to non-employee directors.
Options under the Director Plan were granted at the fair market value of the
stock on the grant date.
Each
option granted under the Director Plan is exercisable one year after the date of
grant and cannot be exercised later than ten years from the date of
grant.
Changes
in option shares under the Director Plan are as
follows:
|
Year
ended
July
31, 2008
|
||||||||||||||||
|
Options
|
Wt-Avg
Exercise
Price
|
Wt-Avg
Remaining
Contractual
Period
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at beginning of period
|
1,313 | $ | 2.65 | 2.97 | $ | - | ||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeited
|
- | - | ||||||||||||||
|
Outstanding
at end of period
|
1,313 | $ | 2.65 | 1.97 | $ | - | ||||||||||
|
Exercisable
at end of period
|
1,313 | $ | 2.65 | 1.97 | $ | - | ||||||||||
|
Year
ended
July
31, 2007
|
||||||||||||||||
|
Options
|
Wt-Avg
Exercise
Price
|
Wt-Avg
Remaining
Contractual
Period
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at beginning of period
|
1,313 | $ | 2.65 | 3.97 | $ | 152 | ||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeited
|
- | - | ||||||||||||||
|
Outstanding
at end of period
|
1,313 | $ | 2.65 | 2.97 | $ | - | ||||||||||
|
Exercisable
at end of period
|
1,313 | $ | 2.65 | 2.97 | $ | - | ||||||||||
The range
of exercise prices for options outstanding at July 31, 2008 and 2007 was $2.00
to $3.56.
2000
Stock Option Plan
The
Company’s 2000 Stock Option Plan (“2000 Plan”) has 1,950,000 shares of common
stock authorized for issuance. Options granted under the 2000 Plan may be
either: (a) options intended to qualify as incentive stock options under
Section 422 of the Code, or (b) nonqualified stock
options.
Any
incentive stock option that is granted under the 2000 Plan may not be granted at
a price less than the fair market value of the stock on the date of the grant
(or less than 110% of the fair market value in the case of a participant who is
a 10% shareholder of the Company within the meaning of Section 422 of the
Code). Nonqualified stock options may be granted at the exercise price
established by the Compensation Committee.
Each
incentive stock option granted under the 2000 Plan is exercisable for a period
of not more than ten years from the date of grant (five years in the case of a
participant who is 10% shareholder of the Company). Nonqualified stock options
do not have this restriction.
Eligible
participants include current and prospective employees, non-employee directors,
consultants or other persons who provide services to the Company and whose
performance, in the judgment of the Compensation Committee or management of the
Company, can have a significant effect on the success of the Company. Changes in option shares under
the 2000 Plan are as follows:
|
Year
ended
July 31, 2008
|
||||||||||||||||
|
Options
|
Wt-Avg
Exercise
Price
|
Wt-Avg
Remain
Contract
Period
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at beginning of period
|
1,013,100 | $ | 1.45 | 6.61 | $ | 320,062 | ||||||||||
|
Granted
|
548,625 | $ | 1.51 | |||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeited
|
(181,187 | ) | $ | 1.18 | ||||||||||||
|
Outstanding
at end of period
|
1,380,538 | $ | 1.51 | 7.36 | $ | 150,967 | ||||||||||
|
Exercisable
at end of period
|
937,203 | $ | 1.48 | 6.28 | $ | 150,967 | ||||||||||
|
Year
ended
July 31, 2007
|
||||||||||||||||
|
Options
|
Wt-Avg
Exercise
Price
|
Wt-Avg
Remain
Contract
Period
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at beginning of period
|
1,054,350 | $ | 1.35 | 7.27 | $ | 814,975 | ||||||||||
|
Granted
|
127,000 | $ | 2.00 | |||||||||||||
|
Exercised
|
(39,126 | ) | $ | 0.52 | ||||||||||||
|
Forfeited
|
(129,124 | ) | $ | 1.46 | ||||||||||||
|
Outstanding
at end of period
|
1,013,100 | $ | 1.45 | 6.61 | $ | 320,062 | ||||||||||
|
Exercisable
at end of period
|
875,425 | $ | 1.39 | 6.29 | $ | 310,823 | ||||||||||
The range
of exercise prices for options outstanding at July 31, 2008 and 2007 was $0.15
to $2.74.
Changes
in non-vested option shares under the 2000 Plan are as follows:
|
Year
ended
July
31, 2008
|
||||||||
|
Options
|
Wt-Avg
Grant Date Fair Value
|
|||||||
|
Non-vested
at beginning of period
|
137,675 | $ | 1.79 | |||||
|
Granted
|
548,625 | $ | 1.51 | |||||
|
Vested
|
(226,249 | ) | $ | 1.54 | ||||
|
Forfeited
|
(16,716 | ) | $ | 2.06 | ||||
|
Non-vested
at end of period
|
443,335 | $ | 1.76 | |||||
|
Year
ended
July
31, 2007
|
||||||||
|
Options
|
Wt-Avg
Grant Date Fair Value
|
|||||||
|
Non-vested
at beginning of period
|
188,799 | $ | 1.59 | |||||
|
Granted
|
127,000 | $ | 2.00 | |||||
|
Vested
|
(49,000 | ) | $ | 1.57 | ||||
|
Forfeited
|
(129,124 | ) | $ | 1.46 | ||||
|
Non-vested
at end of period
|
137,675 | $ | 1.79 | |||||
9.
Income Taxes
The
provision for income taxes is composed of the following (in
thousands):
|
Year
ended July 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | 362 | $ | 113 | ||||
|
State
|
121 | 26 | ||||||
|
Utilization
of net operatiing loss carryforwards
|
(425 | ) | (135 | ) | ||||
|
Deferred,
net
|
(648 | ) | - | |||||
| $ | (590 | ) | $ | 4 | ||||
Provision
for income taxes is based on taxes payable under currently enacted tax laws and
an analysis of temporary differences between the book and tax bases of our
assets and liabilities, including various accruals, allowances, depreciation and
amortization. The tax effect of these temporary differences and the estimated
tax benefit from tax net operating losses are reported as deferred tax assets
and liabilities in the balance sheet. An assessment of the likelihood
that net deferred tax assets will be realized from future taxable income is
performed. To the extent that management believes it is more likely than not
that some portion, or all, of the deferred tax asset will not be realized, a
valuation allowance is established. This assessment is based on all
available evidence, both positive and negative, in evaluating the likelihood of
realizability. Issues considered in the assessment include future
reversals of existing taxable temporary differences, estimates of future taxable
income (exclusive of reversing temporary differences and carryforwards) and
prudent tax planning strategies available in future periods. Because
ultimately the realizability of deferred tax assets is highly subject to the
outcome of future events, the amount established as valuation allowances is
considered to be a significant estimate that is subject to change in the near
term. To the extent a valuation allowance is established or there is
a change in the allowance during a period, the change is reflected with a
corresponding increase or decrease in the tax provision in the statement of
operations.
The
Company had a change in its estimated valuation allowance due to a historical
trend of eight quarters of profit and projections of profit in the near future
beginning in fiscal 2005. The Company continues to evaluate the
realizability of deferred tax assets on a quarterly basis.
Significant
components of the Company’s deferred tax liabilities and assets as of July 31
are as follows (in thousands):
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$ | 10,615 | $ | 13,100 | ||||
|
Alternative
minimum tax credit carryforwards
|
78 | 66 | ||||||
|
Deferred
revenue
|
1,832 | 2,065 | ||||||
|
Goodwill basis
difference
|
430 | 514 | ||||||
|
Other
|
1,273 | 1,565 | ||||||
|
Total
deferred tax assets
|
14,228 | 17,310 | ||||||
|
Valuation
allowance for deferred tax assets
|
(10,618 | ) | (14,176 | ) | ||||
|
Net
deferred tax asset
|
3,610 | 3,134 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Software
product costs and other
|
(580 | ) | (660 | ) | ||||
|
Intangibles
|
(288 | ) | (380 | ) | ||||
|
Net
deferred taxes
|
$ | 2,742 | $ | 2,094 | ||||
As of
July 31, 2008, the Company has unused net operating loss carryforwards for
federal income tax purposes of $27,402,000 expiring in 2009 through
2020.
A portion
of these unused net operating loss carryforwards for federal income tax purposes
totaling $2,038,000 expire between 2012 and 2014 and are limited to $116,000
annually that can be utilized to offset taxable income. Use of these net
operating loss carryforwards is restricted under Section 382 of the Code because
of changes in ownership in 1997.
In
addition, the Company has net operating loss carryforwards for state income tax
purposes totaling approximately $21,644,000 expiring in 2009 through
2015.
A
reconciliation between income tax expense and income taxes computed by applying
the statutory federal income tax rate of 34% and the state rate of approximately
6% to income before income taxes is as follows (in thousands):
|
2008
|
2007
|
|||||||
|
Computed
income taxes at 40%
|
$ | 296 | $ | 42 | ||||
|
Permanent
items
|
4 | 8 | ||||||
|
Gross
change in valuation allowance
|
(648 | ) | - | |||||
|
Utilization
of previously unrecognized benefit of net operating losses
|
(425 | ) | (135 | ) | ||||
|
Effective
rate differences and Other
|
183 | 89 | ||||||
|
Income
tax expense (benefit)
|
$ | (590 | ) | $ | 4 | |||
During
2008 and 2007, $6,422,000 and $7,432,000 respectively, of federal net operating
loss carryforwards expired. These expired net operating loss
carryforwards have been included in the calculation of the change in valuation
allowance.
The
Company adopted the provisions of Financial Accounting Standards Board, or FASB,
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), on August 1, 2007. The
implementation of FIN 48 did not have a significant impact on our results of
operations or financial position and therefore no amounts were reserved for
uncertain tax positions as of July 31, 2008.
10.
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 50%, up to a maximum of $15,500 ($20,500 over age 50) in calendar 2008
(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. During 2008 and 2007, the Company issued 24,059 and 18,556 shares of
common stock, respectively, as a discretionary contribution to the 401(k) Plan.
The amounts charged to expense for the 401(k) contributions, net of forfeitures,
were $38,000 during 2008 and $41,000 during 2007.
11.
Changes in Accounting Estimates
During
fiscal 2008, the Company had a change in its estimated valuation allowance
related to deferred tax assets due to continual revisions and evaluations of the
estimates of the expected results of operations for the next twelve
months. The difference between the amounts previously recorded as a
valuation allowance and the amount recorded was credited to income in fiscal
2008. The amount of this change in accounting estimate was
approximately $648,000. The impact of this change was to increase
basic and diluted earnings per common share by $0.09.
12.
Restructuring
In July,
the Company announced a restructuring that would consolidate its data conversion
operations in Virginia into its Wisconsin location and consolidate the software
development operations in Colorado into its California location. A
charge was taken to reflect the following restructuring costs (in
thousands):
|
Severance
and related benefits
|
$ | 292 | ||
|
Net
future lease costs
|
204 | |||
|
Equipment
disposition and other
|
33 | |||
|
Total
restructuring costs
|
$ | 529 |
13.
Business Segments
Our
business segments are internally organized primarily by geographic location of
the operating facilities. In accordance with SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information”, we have
segregated the Netherlands operation and the US operations into separate
reportable segments. (Refer to Note 1, “Significant Accounting Policies”, for a
description of segment operations.) We evaluate the performance of and allocate
resources to each of the segments based on their operating results excluding
interest and taxes. The accounting policies for each of the segments are
described in Note 1. Information concerning our operating business
segments for fiscal 2008 and 2007 is as follows:
|
Business
Segment Information
|
||||||||
|
(In
thousands)
|
||||||||
|
Revenue
|
2008
|
2007
|
||||||
|
Netherlands
|
$ | 763 | $ | 668 | ||||
|
United
States
|
16,154 | 14,767 | ||||||
|
Consolidated
|
16,917 | 15,435 | ||||||
|
Net Income (Loss)
|
2008
|
2007
|
||||||
|
Netherlands
|
$ | (262 | ) | $ | (800 | ) | ||
|
United
States
|
1,645 | 901 | ||||||
|
Consolidated
|
$ | 1,383 | $ | 101 | ||||
|
Total Assets
|
2008
|
2007
|
||||||
|
Netherlands
|
$ | 1,306 | $ | 1,061 | ||||
|
United
States
|
10,887 | 8,866 | ||||||
|
Consolidated
|
$ | 12,193 | $ | 9,927 | ||||
13.
Concentration and Related Party
Briggs
& Stratton Corporation (“Briggs”) is one of the Company’s customers and owns
approximately 12% of the Company’s stock. Briggs has entered into
customer contracts with the Company and has provided vendor services to the
Company in the ordinary course of business. Generally, the customer
contracts are for one or two years and renew annually thereafter unless either
party elects otherwise. The Company invoiced Briggs approximately
$418,000 and $498,000 for products and services provided during fiscal 2008 and
fiscal 2007, respectively. Briggs had unpaid net trade receivables of
$212,000 or 17% and $250,000 or 19% of total trade receivables outstanding as of
July 31, 2008 and 2007, respectively, none of which was over 90 days at July 31,
2008 and $1,000 of which was over 90 days at July 31, 2007.
The
vendor services provided by Briggs are for printing of the Company’s postcards
resold to customers and are included in cost of sales. Briggs
invoiced the Company approximately $156,000 and $290,000 for printing services
during fiscal 2008 and fiscal 2007, respectively, $8,000 and $9,000 of which
were unpaid as of July 31, 2008 and 2007.
Gordon J.
Bridge serves on the Company’s board of directors. He was assigned to
help the Company evaluate potential strategic growth areas of the
business for which he was compensated approximately $108,000 and $176,000 during
fiscal 2008 and 2007, respectively.
14. Litigation
On June
23, 2008, Powersports Complete, LLC (“Powersports”) filed a complaint in the
United States District Court for the Eastern District of Wisconsin against the
Company and its wholly-owned subsidiary, ARI Outsourced F&I Center, LLC
(“ARI Outsourced”). The complaint claims, among other things, that
the Company and ARI Outsourced owe $56,960 to Powersports in connection with
their business arrangements during 2007. The complaint also claims
that Powersports, among other remedies, is entitled to compensatory damages in
the amount of $1,250,000 and punitive damages in the amount of
$2,500,000. The Company and ARI Outsourced filed their answer to the
complaint on September 16, 2008. The answer denied that Powersports
is entitled to the payments described above, and asserted numerous counterclaims
against Powersports. There have not been any communication or
settlement discussions among Powersports, ARI or ARI Outsourced since the answer
was filed.
ARI
Network Services, Inc.
Valuation
and Qualifying Accounts
Years
ended July 31, 2008 and 2007
(Dollars
in Thousands)
|
Description
|
Balance
at
Beginning
of
Year
|
Additions
(Reductions)
Charged
to
Expense
(Income)
|
Deductions
|
Balance
at
End
of Year
|
||||||||||||
|
Allowance
for doubtful accounts -trade receivables:
|
||||||||||||||||
|
2008
|
$ | 148 | $ | 58 | (B) | $ | 27 | (A) | $ | 178 | ||||||
|
2007
|
$ | 103 | $ | 51 | (B) | $ | 6 | (A) | $ | 148 | ||||||
|
Restructure
Accrual:
|
||||||||||||||||
|
2008
|
$ | 0 | $ | 529 | $ | 0 | $ | 529 | ||||||||
|
|
(A)
|
Uncollectible
accounts written off, net of
recoveries.
|
|
|
(B)
|
Net
of gains or losses due to changes in currency exchange
rate
|
50