1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39- 1388360
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
330 E. Kilbourn Avenue, Milwaukee, Wisconsin 53202
--------------------------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code (414) 278-7676
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of The Securities Exchange Act of 1934 during
the preceding twelve 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 ninety days.
YES X NO
--- ---
As of May 25, 2001 there were 6,184,281 shares of the registrant's shares
outstanding.
2
ARI NETWORK SERVICES, INC.
NOTE REGARDING AMENDED FORM 10-Q
The Company is making this filing to show, among other things, the effect of the
restatement of our financial statements noted below. For current information on
ARI Network Services, Inc., please refer to other recent filings with the
Securities and Exchange Commission.
The Company sells licenses or license renewals and maintenance service
agreements to most of its customers for the software products sold to them. The
Company had previously recognized revenues related to the licenses at the time
of delivery and license renewals at the time of renewal. Following discussions
with the staff of the Securities and Exchange Commission, the Company revised
its revenue recognition policy for transactions entered into after August 1,
1999, to recognize revenues resulting from these licenses and renewals over the
term of the arrangement, which is generally twelve months.
As a result of this revision, the Company has restated its financial statements
as of and for the three and six months ended January 31, 2001 and 2000. As a
result of this revision, the Company's revenues and earnings have increased by
$226,000 or $0.03 per share and decreased by $437,000 or $0.07 per share for the
three and six months ended January 31, 2001, respectively and decreased by
$523,000 or $0.09 per share and $853,000 or $0.14 per share for the three and
six months ended January 31, 2000, respectively.
To give effect to the above restatement, the Company is amending only the
following sections of the Report on Form 10-Q:
Part I, Item 1. Financial Statements
Part I, Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
2
3
ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JANUARY 31, 2001
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial statements
Condensed balance sheets - January 31, 2001 and
July 31, 2000 4-5
Condensed statements of operations for the three and six
months ended January 31, 2001 and 2000 6
Condensed statements of cash flows for the six months
ended January 31, 2001 and 2000 7
Notes to unaudited condensed financial statements 8-9
Item 2 Management's discussion and analysis of financial condition and
results of operations 9-17
Signatures 18
3
4
ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(RESTATED AND UNAUDITED)
JANUARY 31 JULY 31
ASSETS 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 810 $ 563
Trade receivables, less allowance for doubtful accounts of $754
at January 31, 2001 and $697 at July 31, 2000 3,045 3,282
Prepaid expenses and other 107 109
------------ ------------
Total current assets 3,962 3,954
Equipment and leasehold improvements:
Computer equipment 4,394 4,389
Leasehold improvements 239 239
Furniture and equipment 992 846
------------ ------------
5,625 5,474
Less accumulated depreciation and amortization 5,193 5,038
------------ ------------
Net equipment and leasehold improvements 432 436
Goodwill, less accumulated amortization of $1,742 at January 31,
2001 and $1,413 at July 31, 2000 1,547 1,876
Deferred financing costs, less accumulated amortization of $126 at
January 31, 2001 and $59 at July 31, 2000 293 321
Capitalized software development:
Network platform 11,467 11,467
Software products 30,257 29,317
------------ ------------
41,724 40,784
Less accumulated amortization 30,841 28,883
------------ ------------
Net capitalized software development 10,883 11,901
------------ ------------
TOTAL ASSETS $ 17,117 $ 18,488
============ ============
4
5
ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(RESTATED AND UNAUDITED)
JANUARY 31 JULY 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------ ------------
Current liabilities:
Current portion of notes payable to shareholder $ 361 $ 361
Current portion of notes payable 422 461
Accounts payable 651 836
Unearned income 5,293 4,373
Accrued payroll and related liabilities 1,730 1,182
Other accrued liabilities 1,331 1,310
Current portion of capital lease obligations 151 111
------------ ------------
Total current liabilities 9,939 8,634
Long term liabilities:
Notes payable to shareholder (net of discount) 164 313
Notes payable (net of discount) 2,360 2,168
Capital lease obligations 233 214
------------ ------------
Total long term liabilities 2,757 2,695
Shareholders' equity:
Cumulative preferred stock, par value $.001 per share, 1,000,000 shares
authorized; 20,350 shares issued and outstanding at January 31, 2001 and
July 31, 2000 -- --
Common stock, par value $.001 per share, 25,000,000 shares authorized;
6,168,270 shares issued and outstanding at January 31, 2001 and July 31,
2000 6 6
Common stock warrants and options 2,459 2,459
Additional paid-in-capital 91,781 91,781
Accumulated deficit (89,825) (87,087)
------------ ------------
Total shareholders' equity 4,421 7,159
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,117 $ 18,488
============ ============
See notes to unaudited condensed financial statements.
Note: The balance sheet at July 31, 2000 has been derived from the audited
balance sheet at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
5
6
ARI NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(RESTATED AND UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 JANUARY 31
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenues:
Subscriptions, support and transaction fees $ 2,550 $ 2,479 $ 5,102 $ 4,979
Software licenses and renewals 842 210 1,601 307
Professional services 694 637 1,525 1,095
------------ ------------ ------------ ------------
4,086 3,326 8,228 6,381
Operating expenses:
Cost of products and services sold:
Subscriptions, support and transaction fees 317 403 690 721
Software licenses and renewals* 907 981 1,874 1,893
Professional services 402 408 904 772
------------ ------------ ------------ ------------
1,626 1,792 3,468 3,386
Depreciation and amortization (exclusive of amortization
of software products included in cost of sales) 370 412 770 856
Customer operations and support 409 541 813 1,025
Selling, general and administrative 2,200 2,115 4,433 3,920
Software development and support 830 822 1,675 1,478
------------ ------------ ------------ ------------
Operating expenses before amounts capitalized 5,435 5,682 11,159 10,665
Less capitalized portion (508) (447) (940) (819)
------------ ------------ ------------ ------------
Net operating expenses 4,927 5,235 10,219 9,846
------------ ------------ ------------ ------------
Operating loss (841) (1,909) (1,991) (3,465)
Other expense:
Interest expense (396) (180) (767) (278)
Other, net 21 (2) 20 (6)
------------ ------------ ------------ ------------
Total other expense (375) (182) (747) (284)
------------ ------------ ------------ ------------
Net loss $ (1,216) (2,091) (2,738) (3,749)
============ ============ ============ ============
Average common shares outstanding 6,168 5,974 6,168 5,843
Basic and diluted net loss per share $ (0.20) $ (0.35) $ (0.44) $ (0.64)
============ ============ ============ ============
See notes to unaudited condensed financial statements.
* Includes amortization of software products of $793, $820, $1,672 and $1,575
and excludes other depreciation and amortization shown separately
6
7
ARI NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(RESTATED AND UNAUDITED)
SIX MONTHS ENDED
JANUARY 31
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net loss $ (2,738) $ (3,749)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of network platform 286 348
Amortization of software products 1,672 1,575
Amortization of goodwill 329 327
Amortization of deferred financing costs and debt discount 476 --
Depreciation and other amortization 155 181
Net change in receivables, prepaid expenses and other 239 (50)
Net change in accounts payable, unearned income and
accrued liabilities 1,304 1,118
------------ ------------
Net cash provided by (used in) operating activities 1,723 (250)
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (10) (40)
Software products capitalized (940) (819)
------------ ------------
Net cash provided by (used in) investing activities (950) (859)
FINANCING ACTIVITIES
Net borrowings under line of credit -- 500
Repayments under notes payable (405) (330)
Deferred financing costs (39) --
Payments of capital lease obligations (82) (56)
Proceeds from issuance of common stock -- 1,264
------------ ------------
Net cash provided by (used in) financing activities (526) 1,378
------------ ------------
Net increase (decrease) in cash 247 269
Cash at beginning of period 563 127
------------ ------------
Cash at end of period $ 810 $ 396
============ ============
Cash paid for interest $ 291 $ 278
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for:
Furniture and equipment $ 141 $ --
Issuance of common stock as payment of line of credit -- 1,000
Conversion of line of credit to note payable -- 1,000
See notes to unaudited condensed financial statements.
7
8
NOTES TO CONDENSED FINANCIAL STATEMENTS
(RESTATED AND UNAUDITED)
JANUARY 31, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared and reviewed
in accordance with accounting principles generally accepted in the United States
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for fiscal year end financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
months ended January 31, 2001 are not necessarily indicative of the results that
may be expected for the fiscal year ending July 31, 2001. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-KA for the year ended July 31, 2000.
2. BASIC AND DILUTED NET LOSS PER SHARE
Dilutive earnings per share is not shown as the impact is antidilutive.
3. PREFERRED STOCK
The Series A preferred stock accrues dividends on a quarterly basis,
cumulatively, at a rate per annum equal to the product of the stated value
thereof and 2% above the prime rate (minimum dividend rate of 10% and maximum of
14%). All Series A preferred stock must be redeemed at $100 per share plus
accrued and unpaid dividends prior to any payment of dividends on, or
repurchases by the Company of, the Company's common stock. Prior to August 1,
2002, dividends, if declared by the Board of Directors, can be paid in either
cash or additional shares of Series A preferred stock. The total amount of
dividends in arrears on the Series A preferred stock is $887,000 at January 31,
2001.
4. NOTES PAYABLE
The convertible debentures, issued on April 27, 2000, and accrued interest
thereon are convertible into common stock at a rate of $4 per share, subject to
certain conditions and adjustments. Concurrent with the issuance of the
debentures, the Company issued the investors 600,000 common stock purchase
warrants expiring April 27, 2005 and 800,000 investment options expiring October
27, 2001. Each of the warrants and options are exercisable for one share of
common stock at a price of $6 per share. The warrants and options, which were
estimated to have a value of $2,354,000 at the time of issuance, less
accumulated amortization, reduce the carrying amount of the debt.
5. DERIVATIVES
Effective August 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended, requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position measured at
fair value. The impact of the adoption of SFAS 133 was immaterial to the
Company's financial statements.
6. RESTATEMENT
As a result of discussions with the Securities and Exchange Commission that
concluded on May 21, 2001, the Company has restated its financial statements as
of and for the three and six months ended January 31, 2001 and 2000 to defer
revenue recognition allocable to software licenses in multiple element
arrangements under SOP 97-2, Software Revenue Recognition, as amended by SOP
98-4 and SOP 98-9. SOP 98-9, which included more restrictive requirements for
establishing vendor specific objective evidence of fair value in multiple
element arrangements, was effective for transactions entered into by the Company
beginning August 1, 1999. As a result of this revision, the Company's revenues
and earnings have increased by $226,000 or $0.03 per share and decreased by
$437,000 or $0.07 per share for the three and six months ended January 31, 2001,
respectively and decreased by $523,000 or $0.09 per share and $853,000 or $0.14
per share for the three and six months ended January 31, 2000, respectively. The
effect on the balance sheet as of January 31, 2001 and July 31, 2000 was an
increase in unearned income and an increase in accumulated deficit of $1,693,000
and $1,256,000, respectively.
8
9
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
OCTOBER 31, 2000
7. SUBSEQUENT EVENTS
On March 29, 2001, the Company received a letter from the Nasdaq National Market
(Nasdaq) stating that the Company's common stock failed to maintain a minimum
market value of public float of $5 million over 30 consecutive trading days. The
Company has been provided 90 days to become compliant with this Nasdaq
requirement. On May 15, 2001, the Company received a letter from Nasdaq stating
that the Company's common stock failed to maintain a minimum bid price of $1.00
over 30 consecutive trading days. The Company has been provided 90 days to
become compliant with this Nasdaq requirement. Unless the Company demonstrates
compliance with the requirements or appeals the decisions, the Company's common
stock will be delisted from Nasdaq and trading in the Company's common stock
would thereafter be conducted in the over-the-counter markets such as the OTC
Bulletin Board.
The RGC International Investors Debenture (see liquidity) requires the Company
to maintain the listing of its common stock on Nasdaq, the Nasdaq Small Cap
Market, the New York Stock Exchange or the American Stock Exchange. Failure to
cure a violation under the Debenture within 10 days is considered a default
which would result in the subordinated debenture becoming due and payable at
130% of the outstanding principal and accrued interest balances, as well as, an
increase in the stated interest rate from 7% to 17%.
The Company's loan agreement with a shareholder (see liquidity) requires
maintenance of a minimum net worth of $5.3 million at all times. As of January
31, 2001, the Company is in violation of this covenant, resulting in the note
payable to shareholder and line of credit payable to shareholder being due and
payable. The line of credit expires December 31, 2001. The Company is in
discussions with the shareholder to reduce the net worth requirement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the quarter ended January 31, 2001 increased 23% from
$3,326,000 in fiscal 2000 to $4,086,000 in fiscal 2001, representing the
nineteenth of the past twenty consecutive quarters of year-over-year revenue
improvement. Earnings improved by 42%, from a net loss of $2,091,000, or $0.35
per share for the quarter ended January 31, 2000 to a net loss of $1,216,000 or
$0.20 per share for the quarter ended January 31, 2001.
REVENUES
The Company is a leading provider of Partner Relationship Management and
business-to-business Internet e-Commerce solutions for sales, service and
life-cycle product support in the manufactured equipment market. The Company
currently serves over 100 manufacturers and 20,000 dealers in more than 100
countries in 12 segments of the worldwide manufactured equipment market
including outdoor power, recreation vehicles, auto and truck parts aftermarket,
marine, construction, power sports, floor maintenance and others. The Company
builds and supports a full suite of multi-media electronic catalog publishing
and viewing software for the Web or CD. The Company's communications systems
provide a global electronic pathway for parts orders, product registrations,
warranty claims and other transactions between manufacturers and their networks
of sales and service points.
The Company also has a supplemental business that provides a variety of
electronic commerce services to non-Equipment industries such as:
transportation, agribusiness and publishing. The non-Equipment industries
generate positive cash flows for the Company but have not shown significant
growth over the past three years.
Management reviews the Company's recurring vs. non-recurring revenue in the
aggregate and within the U.S. and Canadian Equipment, International Equipment
and non-Equipment markets.
9
10
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's unaudited financial statements.
REVENUE BY INDUSTRY SECTOR
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
INDUSTRY SECTOR JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
--------- --------- --------- ---------
EQUIPMENT INDUSTRY
U.S. and Canadian
Recurring $ 2,150 $ 1,310 64% $ 3,781 $ 2,589 46%
Non-recurring 699 623 12% 1,574 1,038 52%
--------- --------- --------- ---------
Subtotal 2,849 1,933 47% 5,355 3,627 48%
International
Recurring 269 108 149% 547 182 201%
Non-recurring 80 114 (30)% 207 140 48%
--------- --------- --------- ---------
Subtotal 349 222 57% 754 322 134%
Total Equipment Industry
Recurring 2,419 1,418 71% 4,328 2,771 56%
Non-recurring 779 737 6% 1,781 1,178 51%
--------- --------- --------- ---------
Subtotal 3,198 2,155 48% 6,109 3,949 55%
NON-EQUIPMENT INDUSTRY
Recurring 888 1,158 (23)% 2,072 2,289 (9)%
Non-recurring -- 13 (100)% 47 143 (67)%
--------- --------- --------- ---------
Subtotal 888 1,171 (24)% 2,119 2,432 (13)%
TOTAL REVENUE
Recurring 3,307 2,576 28% 6,400 5,060 26%
Non-recurring 779 750 4% 1,828 1,321 38%
--------- --------- --------- ---------
Grand Total $ 4,086 $ 3,326 23% $ 8,228 $ 6,381 29%
--------- ---------
========= ========= ========= =========
Recurring revenues are derived from catalog subscription fees, software
maintenance and support fees, software license renewals, network traffic and
support fees and other miscellaneous subscription fees. Non-recurring revenues
are derived from initial software license fees and professional services fees.
Recurring revenue, as a percentage of total revenue, increased from 77% to 81%
for the three months ended January 31, 2000 and 2001, respectively, due to an
increase in annual renewal revenues and lower than expected new software license
revenues in the Equipment Industry as a result of heavy turnover in the
Company's sales force and a "lag time" to hire new sales people. On a year to
date basis, recurring revenue is 78% of total revenue compared to 79% of total
revenue for the same period last year. Management believes that the remainder of
the year will be more in line with the Company's ideal relationship of
approximately two thirds recurring revenue to one third non-recurring revenue.
Management believes that this "target" ratio establishes an appropriate level of
base revenue while the Company continues to add new sales to drive future
increases in recurring revenue. This ratio is expected to fluctuate from quarter
to quarter and year to year, depending on the size and timing of new business.
10
11
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power, recreation vehicles, motorcycles, auto and truck parts after-market,
manufactured housing, farm equipment, marine, construction, power sports, floor
maintenance and others primarily in the U.S., Canada, Europe and Australia.
Management's strategy is to expand the Company's electronic parts catalog and
dealer communications software and services business with manufacturers and
distributors and their dealers in the existing vertical markets and to expand to
other similar markets in the future.
U.S. and Canada
Recurring revenues in the U.S. and Canadian Equipment Industry increased for
the three and six month periods ended January 31, 2001, compared to the same
periods last year, primarily due to increased catalog license, maintenance
and subscription renewals from the Company's growing base of customers and
the renegotiation of prior agreements from a fixed price structure to the
Company's time and materials based business model. Non-recurring revenues in
the U.S. and Canadian Equipment Industry increased for the three and six
month periods ended January 31, 2001, compared to the same periods last
year, due to the proportional recognition of software licenses sold in
fiscal 2000 and to new software licenses and professional services sold to
dealers and manufacturers in the first quarter of this fiscal year. Revenues
in the U.S. and Canadian Equipment Industry increased, as a percentage of
total revenues, from 57% for the six months ended January 31, 2000 to 65%
for the six months ended January 31, 2001. Management expects recurring and
non-recurring revenues in the U.S. and Canadian Equipment Industry to
increase at a higher rate than total revenues for the remainder of fiscal
2001, as management continues to focus attention and resources in this
industry.
International (Europe and Australia)
Recurring revenues in the International Equipment Industry increased for the
three and six month periods ended January 31, 2001, compared to the same
periods last year, primarily due to catalog license, maintenance and
subscription renewals from new business added last year. Non-recurring
revenues in the International Equipment Industry decreased for the three
month period ended January 31, 2001 compared to the same period last year,
due to a lack of new software sales in the first half of fiscal 2001 but
increased for the six month period ended January 31, 2001 compared to the
same period last year due to the proportional recognition of software
licenses sold in fiscal 2000. Revenues in the International Equipment
Industry increased, as a percentage of total revenues, from 5% for the six
months ended January 31, 2000 to 9% for the six months ended January 31,
2001, although the increase was lower than expected due to the Company's
Shift from the Equipment markets to other more lucrative markets and the
establishment of new sales leads. Management expects recurring and
non-recurring revenues in the International Equipment Industry to increase
at a higher rate than total revenues for the remainder of fiscal 2001, as
management continues to focus attention and resources in this industry.
Non-Equipment Industry
The Company's business outside of the Equipment Industry includes sales of
database management services to the agricultural inputs and railroad industries,
electronic communications services to the agricultural inputs industry, and the
on-line provision of information for republication to the non-daily newspaper
publishing industry. The non-Equipment Industry business is characterized by a
base of customers with long-term relationships with the Company. Revenues in the
non-Equipment Industry decreased for the three and six month periods ended
January 31, 2001, compared to the same periods last year, due to the Company's
focus in the Equipment Industry. Management expects revenues in the
non-Equipment Industry will decline for the remainder of fiscal 2001. Management
expects that consolidation in the agricultural customer base is the reason for
the decline in recurring revenues from the agricultural inputs industry and
management believes that revenue from this market will continue to decrease in
the future as the Company reaches saturation in this market. The Company's
five-year contract with the Association of American Railroads expired on
December 31, 2000. Per quarter, the Association of American Railroads
represented approximately $250,000 of non-Equipment Industry recurring revenues.
The Company's five year contract with the Associated Press, on which its
business in the non-daily newspaper publishing industry depends, expired in
December 2000 and was extended to September 14, 2001. Management is currently
negotiating with the Associated Press to renew the contract, and, based on
discussions we have had, management believes that if the contract is
renegotiated, margins are likely to decline, although there is no assurance that
the contract will be renewed.
11
12
COST OF PRODUCTS AND SERVICES SOLD
The following table sets forth, for the periods indicated, certain revenue and
cost of products and services sold information derived from the Company's
unaudited financial statements.
COST OF PRODUCTS AND SERVICES SOLD AS A PERCENT OF REVENUE BY REVENUE TYPE
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
----------- --------- --------- --------
Subscriptions, support and transaction
fees
Revenue $ 2,550 $ 2,479 3% $ 5,102 $ 4,979 2%
Cost of revenue 317 403 (21)% 690 721 (4)%
Cost of revenue as a percent of revenue 12% 16% 14% 14%
Software licenses and renewals
Revenue 842 210 301% 1,601 307 421%
Cost of revenue 907 981 (8)% 1,874 1,893 (1)%
Cost of revenue as a percent of revenue 108% 467% 117% 617%
Professional services
Revenue 694 637 9% 1,525 1,095 39%
Cost of revenue 402 408 (1)% 904 772 17%
Cost of revenue as a percent of revenue 58% 64% 59% 71%
Total
Revenue $ 4,086 $ 3,326 23% $ 8,228 $ 6,381 29%
Cost of revenue 1,626 1,792 (9)% 3,468 3,386 2%
Cost of revenue as a percent of revenue 40% 54% 42% 53%
Cost of subscriptions, support and transaction fees consists primarily of
Associated Press royalties, telecommunications and catalog replication and
distribution costs. Cost of subscriptions, support and transaction fees as a
percentage of revenue decreased for the three month period ended January 31,
2001, compared to the same period last year, primarily due to lower
telecommunications costs and remained relatively consistent for the six month
period ended January 31, 2001, compared to the same period last year. Management
expects gross margins from subscriptions, support and transaction fees to
fluctuate somewhat from quarter to quarter based on the mix of products and
services sold.
Cost of software licenses and renewals consists primarily of amortization of
software products, royalties, and software distribution costs. Cost of software
licenses and renewals as a percentage of revenue varies significantly due to the
variability of new software license revenues and relatively fixed cost of sales,
which comprises primarily amortization of software costs. Cost of software
licenses and renewals as a percentage of revenue decreased for the three and six
month periods ended January 31, 2001, compared to the same periods last year,
due to higher software license revenues in fiscal 2001 primarily as a result of
the proportional recognition of software licenses sold in fiscal 2000.
Management expects gross margins from software licenses and renewals to
fluctuate significantly from quarter to quarter based on the number of licenses
sold.
Cost of professional services consists of customization and catalog production
labor. Cost of professional services as a percentage of revenue decreased for
the three and six month periods ended January 31, 2001, compared to the same
periods last year, primarily because professional services revenue increased
from the conversion of old "fixed bid" contracts to time and materials contracts
without a corresponding increase in the cost needed to provide those services.
Management expects cost of professional services to fluctuate from quarter to
quarter depending on the mix of services sold and on the Company's performance
towards the estimate given to customers for customization projects.
12
13
OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's unaudited financial statements.
OPERATING EXPENSES
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
---------- ---------- ---------- ---------- ---------- ----------
Cost of products and services sold $ 1,626 $ 1,792 (9)% $ 3,468 $ 3,386 2%
Customer operations and support 409 541 (24)% 813 1,025 (21)%
Selling, general and administrative 2,200 2,115 4% 4,433 3,920 13%
Software development and support 830 822 1% 1,675 1,478 13%
---------- ---------- ---------- ----------
5,065 5,270 (4)% 10,389 9,809 6%
Depreciation and amortization 370 412 (10)% 771 856 (10)%
Less capitalized portion (508) (447) 14% (940) (819) 15%
---------- ---------- ---------- ----------
Net operating expenses $ 4,927 $ 5,235 (6)% $ 10,220 $ 9,846 4%
========== ========== ========== ==========
Customer operations and support consists primarily of data center operations,
software maintenance agreements for the Company's core network, catalog data
maintenance and customer support costs. Customer operations and support costs
decreased for the three and six month periods ended January 31, 2001, compared
to the same periods last year, due to classifying direct labor costs, which were
not tracked prior to the integration of the NDI acquisition, to direct cost of
sales in the catalog production area of professional services.
The increase in selling, general and administrative expenses ("SG&A") for the
three and six month periods ended January 31, 2001, compared to the same periods
last year, was primarily due to increased bonuses and commissions associated
with the increased sales and to the addition of a senior level financial
consultant. SG&A, as a percentage of revenue, decreased from 61% for the six
month period ended January 31, 2000 to 54% for the six month period ended
January 31, 2001. Management expects costs to continue to increase in SG&A for
the remainder of fiscal 2001, as the Company's revenues grow, but the increase
is expected to be at a slower rate than revenues.
The Company's technical staff (in-house and contracted) performs both software
development and support and software customization services for customer
applications. Therefore, management expects fluctuations between software
customization services and development expenses quarter to quarter, as the mix
of development and customization activities will change based on customer
requirements. Software development and support costs increased for the six month
period ended January 31, 2001, compared to the same period last year, primarily
due to an increase in resources focused on development of Web-based
communications and cataloging software. Management expects software development
and support costs to continue to increase for the remainder of fiscal 2001, but
at a slower rate than revenues.
Depreciation and amortization expense decreased slightly for the three and six
month periods ended January 31, 2001, compared to the same periods last year.
Management expects depreciation and amortization to remain relatively consistent
for the remainder of fiscal 2001, providing there are no additional
acquisitions.
Capitalized software development costs represented 56% of software development
and support for the six month period ended January 31, 2001, compared to 55% for
the same period last year. Management expects capitalized software development
to fluctuate from quarter to quarter depending on the deployment of the
Company's resources between software development available for capitalization
and customer customizations.
13
14
OTHER ITEMS
Net loss decreased for the three and six month periods ended January 31, 2001,
compared to the same periods last year, due to revenues increasing at a higher
rate than costs. As the Company continues its acquisition program, non-cash
amortization of goodwill and other intangible assets from the Company's
acquisitions may cause net losses to continue even if net cash provided by
operations and used in investing activities is positive.
Cash paid for interest increased for the three and six month periods ended
January 31, 2001, compared to the same periods last year, primarily due to
increased utilization of the RFC Facility. Non-cash interest expense was
incurred for the three and six month periods ended January 31, 2001 as the
Company accrued interest and amortized debt discount for the Debenture sold to
Rose Glen in April 2000. Management expects cash paid for interest to decrease
as the Company continues to pay off debt and non-cash interest expense to
increase, compared to the prior year, as the Company accrues and amortizes
non-cash interest expense associated with the Debenture. See "Liquidity and
Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, certain cash flow
information derived from the Company's unaudited financial statements.
CASH FLOW INFORMATION
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
--------- -------- -------- ---------
Net cash provided by (used in) operating
activities before changes in working capital $ 183 $ (859) 121% $ 180 $ (1,318) 114%
Net cash provided by (used in) investing activities (500) (480) (4)% (950) (859) (11)%
--------- -------- -------- ---------
Subtotal (317) (1,339) 76% (770) (2,177) 65%
Effect of net changes in working capital 1,130 (540) 309% 1,543 1,068 44%
--------- -------- -------- ---------
Net cash provided by (used in) operating
and investing activities $ 813 $ (1,879) 143% $ 773 $ (1,109) 170%
========= ======== ======== =========
Net cash provided by operating activities before changes in working capital
increased for the three and six months ended January 31, 2001, compared to the
same periods last year, due to revenues increasing at a higher rate than
expenses. Net cash used in investing activities increased for the three and six
months ended January 31, 2001, compared to the same periods last year, primarily
due to increased costs attributable to the development of the Company's
Web-based software. The effect of net changes in working capital is dependent on
the timing of payroll and other cash disbursements, accruals and the timing of
invoices and may vary significantly from quarter to quarter. Management expects
cash provided by operating activities to be positive for the fiscal year ended
July 31, 2001, however, there can be no assurance that these results will be
ultimately achieved.
The Company expects to continue to incur operating losses for the fiscal year
ending July 31, 2001 due to non-cash expenses. Although there can be no
assurance that profitability will be achieved thereafter, management expects to
achieve full profitability before the end of fiscal 2003, provided there are no
additional acquisitions.
At January 31, 2001, the Company had cash and cash equivalents of approximately
$810,000 compared to approximately $563,000 at July 31, 2000.
14
15
The following table sets forth, for the periods indicated, certain information
related to the Company's debt derived from the Company's unaudited financial
statements.
DEBT SCHEDULE
(IN THOUSANDS)
JANUARY 31 JULY 31
2001 2000 NET
(UNAUDITED) (AUDITED) CHANGE
------------ ------------ ------------
Debt to Shareholder:
Current portion of notes payable $ 361 $ 361 $ --
Long-term portion of notes payable 222 389 (167)
Debt discount (common stock warrants) (58) (76) 18
------------ ------------ ------------
Total Debt to Shareholder 525 674 (149)
Subordinated Debenture:
Long-term notes payable other 4,000 4,000 --
Debt discount (common stock warrants and options)
(1,767) (2,158) 391
------------ ------------ ------------
Total Subordinated Debenture 2,233 1,842 391
Other Debt:
Current portion of notes payable other
422 461 (39)
Long-term notes payable other
127 326 (199)
------------ ------------ ------------
Total Other Debt
549 787 (238)
------------ ------------ ------------
Total Debt $ 3,307 $ 3,303 $ 4
============ ============ ============
On April 27, 2000, the Company issued and sold pursuant to a Securities Purchase
Agreement, dated as of April 25, 2000, by and among the Company and RGC
International Investors, LDC (the "Investor"), (i) a convertible subordinated
debenture in the amount of Four Million Dollars ($4,000,000) due on April 27,
2003 (the "Debenture"), and convertible into shares of the Company's common
stock, $.001 par value per share (the "Common Stock"), (ii) warrants to purchase
Six Hundred Thousand (600,000) shares of Common Stock (the "Warrants"), and
(iii) an investment option to purchase Eight Hundred Thousand (800,000) shares
of Common Stock (the "Investment Option"). The Investment Option expires on
October 27, 2001 and the Warrants expire on April 27, 2005. The Debenture is
convertible into Common Stock at $4 per share and the Warrants and Investment
Option are exercisable at $6 per share. At any time after October 27, 2000, the
Company can require the Investor to convert the amount owed under the Debenture
into Common Stock at $4.00 per share provided that: (i) the closing bid price of
the Common Stock has been greater than $6.60 for twenty (20) consecutive trading
days and (ii) the Company's resale registration statement has been effective for
at least three (3) months. The resale registration became effective on September
1, 2000. The Company is required to maintain listing of its common stock on the
Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange
or the American Stock Exchange; failure to meet this requirement would result in
the Debenture becoming fully due at 130% of outstanding principal and accrued
interest and an increase in the stated interest rate from 7% to 17%. At any time
after April 27, 2001, the Company can require the Investor to exercise the
Investment Option if the closing bid price of the Common Stock is greater than
$9.90 for twenty (20) consecutive trading days and the Company's resale
registration statement has been effective for at least three (3) months. If
exercised, the Investment Option would contribute an additional Four Million
Eight Hundred Thousand Dollars ($4,800,000) of working capital to the Company.
The Company is currently not in compliance with the Nasdaq National Market
requirements, including the dollar minimum bid price, the $5 million public
float and $4 million net tangible asset test. If the Company is delisted, and if
the Company is unable to obtain waivers from the Investor or renegotiate the
Debenture, shareholders could be materially and adversely affected.
ARI has a $1.0 million line of credit with WITECH (the "WITECH Line") that has
been in place since October 4, 1993. The WITECH Line expires on December 31,
2001. The WITECH Line bears interest at prime plus 2.0%. As of May 25, 2001
there were no amounts outstanding under the WITECH Line and $472,000 outstanding
under the WITECH term loan. In conjunction with obtaining the WITECH Line, since
1993, ARI has issued to WITECH 350 shares of its non-voting cumulative preferred
stock and total warrants for the purchase of up to 280,000 shares of its common
stock, including (i) warrants for the purchase of 250,000 shares at $2.125 per
share and (ii) warrants for the purchase of 30,000 shares of its common stock at
$4.00 per share. The exercise price under the warrants is reduced if ARI issues
stock at less than the then current exercise price. WITECH also purchased 20,000
shares of non-voting cumulative preferred stock on July 15, 1997. Of the 280,000
warrants to purchase shares of Common Stock issued to WITECH; (i) warrants to
purchase 175,000 shares of Common Stock at $2.125 expired on October 1, 2000;
(ii) warrants to purchase 75,000 shares of Common Stock at $2.125 expire on
January 1, 2002; and (iii) warrants to purchase 30,000 shares of Common Stock at
$4.000 expire on October 1, 2006.
15
16
The only financial covenant in the WITECH Credit Facility is that ARI must
maintain a net worth (calculated in accordance with generally accepted
accounting principles) of at least $5.3 million. ARI was not in compliance with
the financial covenant in the Agreement on January 31, 2001 and intends to seek
a waiver. If the Company is unable to obtain a waiver, the Company would lose an
essential source of liquidity.
In connection with both the subordinated debenture and the WITECH Line, the
Company recognizes amortization of a debt discount, the gross amount of which is
the value of the warrants and options issued as partial consideration for the
terms of the debt instrument. The amortization of the debt discount appears as
non-cash interest expense on the statement of operations and the net value of
the debt discount reduces the carrying value of the debt on the balance sheet.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each $1.0
million increase. Under the Sale Agreement, RFC purchases 90% of eligible
receivables. ARI is obligated to pay a monthly program fee equal to the greater
of (a) $3,000 or (b) the amount of the purchased but uncollected receivables
times the prime rate plus 2%. ARI may terminate the Sale Agreement prior to
three years by paying: 3.0% of the Purchase Commitment during the first year;
2.0% of the Purchase Commitment during the second year; and 1.0% of the Purchase
Commitment during the third year. The balance of the RFC Facility at May 25,
2001 was $664,000.
The RFC Facility states that the Company must be in compliance with the
covenants under the WITECH facility, which it currently is not. If the Company
is unable to obtain a waiver from RFC, the Company would lose an essential
source of liquidity.
Management believes that funds generated from operations, the RFC Facility, the
Debenture and the WITECH Line will be adequate to fund the Company's operations
and investments through fiscal 2001 if the necessary waivers are obtained. If
management is unable to obtain the necessary waivers, the Company will be in
default and owe in excess of $6 million, which would have a material adverse
effect on the Company. On a long-term basis, management believes that cash for
operations as well as capital expenditures will come principally from cash
generated from operations. Management is working diligently to obtain the
necessary waivers, but there can be no assurance that these efforts will be
successful. Management is also analyzing its anticipated cash flows under a
variety of growth scenarios ranging from no growth to modest growth. Management
believes that, provided the defaults can be avoided, either (i) sufficient cash
can be generated from the business to fund operations and a modest level of
investment or (ii) that the cash profile of the business can be restructured to
be self-funding.
The following table sets forth, for the periods indicated, certain earnings
information derived from the Company's unaudited financial statements.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31 PERCENT JANUARY 31 PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
-------- -------- -------- --------
Net loss $ (1,216) $ (2,091) 42% $ (2,738) $ (3,749) 27%
Interest (cash) 230 180 28% 291 278 5%
Interest (non-cash) 166 -- 100% 476 -- 100%
Amortization of software products 793 820 (3)% 1,672 1,575 6%
Other depreciation and amortization 370 412 (10)% 770 856 (10)%
-------- -------- -------- --------
Earnings before interest, taxes,
depreciation and amortization $ 343 $ (679) 151% $ 471 $ (1,040) 145%
======== ======== ======== ========
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased for the three and six month periods ended January 31, 2001, compared
to the same periods last year, due primarily to the Company's improvement in
earnings. Management expects EBITDA to continue to remain positive for the
remainder of fiscal 2001, although there can be no assurance that these results
will be ultimately achieved. As the Company continues its acquisition program,
non-cash
16
17
amortization of goodwill and other intangible assets from the Company's
acquisitions may cause net losses to continue even if EBITDA is positive.
We have included data with respect to EBITDA because it is commonly used as a
measurement of financial performance and by investors to analyze and compare
companies on the basis of operating performance. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and should
not be considered an alternative to operating income, as determined in
accordance with generally accepted accounting principles, as an indictor of our
operating performance, or to cash flows from operating activities, as determined
in accordance with generally accepted accounting principles, as a measure of our
liquidity. EBITDA is not necessarily comparable with similarly titled measures
for other companies.
ACQUISITIONS
Since December 1995, the Company has had a formal and aggressive 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, approximately 300
acquisition candidates have been evaluated, resulting in four completed
acquisitions.
ACQUISITION DATE ACQUIRED COMPANY AND LOCATION DESCRIPTION OF ACQUIRED COMPANY
----------------------- -------------------------------------------- ----------------------------------------
November 4, 1996 cd\*.IMG, Inc. ("CDI") CDI developed the Plus(1)(R) electronic
New Berlin, WI parts catalog, which featured parts
information from over 20 manufacturers
in the outdoor power, marine, motorcycle
and power sports industries.
September 30, 1997 Empart Technologies, Inc. ("EMPART") EMPART provided us with the
Foster City, CA EMPARTpublisher and EMPARTviewer
software.
September 15, 1998 POWERCOM-2000 ("POWERCOM"), a subsidiary of POWERCOM provided electronic catalog
Briggs & Stratton Corporation and communication services to a
Colorado Springs, CO number of manufacturers in North
America, Europe, and Australia in
the outdoor power, power tools, and
power sports industries.
May 13, 1999 Network Dynamics Incorporated ("NDI") NDI provided us with the PartSmart
Williamsburg, VA electronic catalog, which was used by
over 10,000 dealers to view catalogs
from 50 different manufacturers in 6
sectors of the Equipment Industry.
FORWARD LOOKING STATEMENTS
Certain statements contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward looking statements,
including, without limitation, statements with respect to growth plans,
projected sales, revenues, earnings, costs, product development schedules and
future cash requirements and sources of liquidity. Other forward looking
information includes (i) information included or incorporated by reference in
our future filings with the Commission including, without limitation, statements
with respect to growth plans, projected sales, revenues, earnings and costs, and
product development schedules and plans and (ii) information contained in
written material, releases and oral statements issued by us, or on our behalf,
including, without limitation, statements with respect to growth plans,
projected sales, revenues, earnings and costs, and product development schedules
and plans. Generally, the words "anticipates," "believes," "expects," "intends"
and similar expressions identify forward looking statements. The Company's
actual results may differ materially from those contained in the forward looking
statements identified above. Factors which may cause such a difference to occur,
include, but are not limited to, those factors set forth in the section entitled
"Risk Factors," in the Company's registration statement on Form S-3 filed on May
12, 2000, as amended.
17
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARI Network Services, Inc.
(Registrant)
Date: June 1, 2001 /s/ Brian E. Dearing
Brian E. Dearing, Chairman of the Board --------------------------
(and acting CFO)
18