SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 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 December 11, 2001, there were 6,184,281 shares of the registrant's shares
outstanding.
ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1 Financial statements
Condensed balance sheets - October 31, 2001 and July 31, 2001 3-4
Condensed statements of operations for the three months ended
October 31, 2001 and 2000 5
Condensed statements of cash flows for the three months ended
October 31, 2001 and 2000 6
Notes to unaudited condensed financial statements 7
Item 2 Management's discussion and analysis of financial condition and results
of operations 7-15
Signatures
2
ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
OCTOBER 31 JULY 31
ASSETS 2001 2001
------------- -------------
Current assets:
Cash $ 297 $ 313
Trade receivables, less allowance for doubtful accounts of $733
at October 31, 2001 and $757 at July 31, 2001 1,600 2,084
Prepaid expenses and other 124 140
------- -------
Total current assets 2,021 2,537
Equipment and leasehold improvements:
Computer equipment 4,394 4,394
Leasehold improvements 239 239
Furniture and equipment 1,000 1,000
------- -------
5,633 5,633
Less accumulated depreciation and amortization 5,344 5,293
------- -------
Net equipment and leasehold improvements 289 340
Goodwill, less accumulated amortization of $57 at October 31,
2001 and $54 at July 31,2001 12 15
Deferred financing costs, less accumulated amortization of $235 at
October 31, 2001 and $203 at July 31, 2001 175 207
Capitalized software development 23,791 23,533
Less accumulated amortization 19,962 19,572
------- -------
Net capitalized software development 3,829 3,961
------- -------
TOTAL ASSETS $ 6,326 $ 7,060
======= =======
3
ARI NETWORK SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
OCTOBER 31 JULY 31
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 2001 2001
--------------- -------------
Current liabilities:
Current portion of notes payable to shareholder $ 273 $ 333
Current portion of notes payable 2,984 2,902
Current portion of line of credit to shareholder 98 200
Accounts payable 989 951
Deferred revenue 4,298 4,811
Accrued payroll and related liabilities 1,337 1,487
Other accrued liabilities 1,490 1,499
Current portion of capital lease obligations 128 173
--------- ---------
Total current liabilities 11,597 12,356
Long term liabilities:
Notes payable to shareholder - 15
Notes payable 55 78
Capital lease obligations 158 158
Accrued restructuring costs 303 303
--------- ---------
Total long term liabilities 516 554
Shareholders' equity (deficit):
Cumulative preferred stock, par value $.001 per share, 1,000,000 shares
authorized; 20,350 shares issued and outstanding at October 31, 2001 and
July 31, 2001 - -
Common stock, par value $.001 per share, 25,000,000 shares authorized;
6,168,281 shares issued and outstanding at October 31, 2001 and July 31, 2001 6 6
Common stock warrants and options 2,459 2,459
Additional paid-in-capital 91,797 91,797
Accumulated deficit (100,049) (100,112)
--------- ---------
Total shareholders' equity (deficit) (5,787) (5,850)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 6,326 $ 7,060
========= =========
See notes to unaudited condensed financial statements.
Note: The balance sheet at July 31, 2001 has been derived from the audited
balance sheet at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
4
ARI NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
OCTOBER 31
2001 2000
------------------ ------------------
Net revenues:
Subscriptions, support and other services fees $ 2,455 $ 2,552
Software licenses and renewals 820 759
Professional services 545 831
------------------ ------------------
3,820 4,142
Operating expenses:
Cost of products and services sold:
Subscriptions, support and other services fees 209 373
Software licenses and renewals * 396 967
Professional services 208 502
------------------ ------------------
813 1,842
Depreciation and amortization (exclusive of amortization of
software products included in cost of products and
services sold) 54 400
Customer operations and support 303 404
Selling, general and administrative 1,857 2,233
Software development and technical support 646 845
------------------ ------------------
Operating expenses before amounts capitalized 3,673 5,724
Less capitalized portion (258) (432)
------------------ ------------------
Net operating expenses 3,415 5,292
------------------ ------------------
Operating income (loss) 405 (1,150)
Other expense:
Interest expense (329) (371)
Other, net (13) (1)
------------------ ------------------
Total other expense (342) (372)
------------------ ------------------
Net income (loss) $ 63 $ (1,522)
================== ==================
Average common shares outstanding 6,184 6,168
Basic and diluted net income (loss) per share $ 0.01 $ (0.25)
================== ==================
See notes to unaudited condensed financial statements.
* Includes amortization of software products of $390 and $879 and excludes
other depreciation and amortization shown separately.
5
ARI NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
OCTOBER 31
2001 2000
----------------------------
OPERATING ACTIVITIES
Net income (loss) $ 63 $(1,522)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Amortization of network platform - 143
Amortization of software products 390 879
Amortization of goodwill 3 165
Amortization of deferred financing costs and debt discount 237 240
Depreciation and other amortization 51 92
Net change in receivables, prepaid expenses and other
current assets 500 (300)
Net change in accounts payable, deferred revenue and
accrued liabilities (634) 713
------- -------
Net cash provided by operating activities 610 410
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements - (18)
Software product costs capitalized (258) (432)
------- -------
Net cash used in investing activities (258) (450)
FINANCING ACTIVITIES
Repayments under line of credit (102) -
Payments under notes payable (221) (163)
Payments of capital lease obligations (45) (31)
Debt issuance costs incurred - (30)
------- -------
Net cash used in financing activities (368) (224)
------- -------
Net decrease in cash (16) (264)
Cash at beginning of period 313 563
------- -------
Cash at end of period $ 297 $ 299
======= =======
Cash paid for interest $ 118 $ 61
======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for:
Computer equipment $ - $ 108
See notes to unaudited condensed financial statements.
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 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 accounting principles generally accepted
in the United States 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 months ended October 31, 2001 are not necessarily indicative of the
results that may be expected for the fiscal year ending July 31, 2002. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended July 31,
2001.
2. BASIC AND DILUTED NET INCOME (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 $1,093,000 at October
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 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 which expired October 27, 2001. Each of the
warrants are exercisable for one share of common stock at a price of $6 per
share. The warrants and options, which were originally estimated to have a value
of $2,354,000, less accumulated amortization, reduce the carrying amount of the
debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the quarter ended October 31, 2001 decreased $322,000 or 8%
compared to the same period last year, due to the expected decline in
non-Equipment Industry revenue. Earnings improved 104% from a net loss of
$1,522,000, or $0.25 per share for the quarter ended October 31, 2000 to net
income of $63,000 or $0.01 per share for the quarter ended October 31, 2001.
Management believes that, due to the restructuring in the fourth quarter of
fiscal 2001 which focused the Company on our core catalog business and reduced
both cash and non-cash expenses to bring them in line with our revenues, we will
continue to show profits for one or more quarters during fiscal 2002. See
"Forward Looking Statements."
REVENUES
The Company is a leading provider of technology-enabled business 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 supplies three types of software and services: robust Web
and CD-ROM electronic parts catalogs, transaction services and template-based
7
website services. The Company's primary business is electronic cataloging; the
others are complementary businesses that leverage our catalog position.
The Company also has a supplemental business that provides e-Commerce services
to certain non-equipment industries including agribusiness and publishing. As
the Company focuses on its core businesses in the Equipment industry, revenues
in the non-equipment industry are expected to decline significantly during
fiscal 2002.
Management reviews the Company's recurring vs. non-recurring revenue in the
aggregate and within the North American Equipment, Non-North American Equipment
and non-Equipment markets.
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
INDUSTRY SECTOR OCTOBER 31 PERCENT
2001 2000 CHANGE
---------------- ----------------
EQUIPMENT INDUSTRY
North American
Recurring $ 1,964 $ 1,631 20%
Non-recurring 737 875 (16%)
--------------- ---------------
Subtotal 2,701 2,506 8%
Non-North American
Recurring 218 278 (22%)
Non-recurring 98 127 (23%)
--------------- ---------------
Subtotal 316 405 (22%)
Total Equipment Industry
Recurring 2,182 1,909 14%
Non-recurring 835 1,002 (17%)
-------------- --------------
Subtotal 3,017 2,911 4%
NON-EQUIPMENT INDUSTRY
Recurring 795 1,184 (33%)
Non-recurring 8 47 (83%)
--------------- ---------------
Subtotal 803 1,231 (35%)
TOTAL REVENUE
Recurring 2,977 3,093 (4%)
Non-recurring 843 1,049 (20%)
--------------- ---------------
Grand Total $ 3,820 $ 4,142 (8%)
=============== ===============
8
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 licenses and professional services fees.
Recurring revenue, as a percentage of total revenue, was 78% for the three
months ended October 31, 2001 compared to 75% for the same period last year.
Management believes that the relationship of approximately three quarters
recurring revenue to one quarter non-recurring revenue establishes an
appropriate level of base revenue while the Company continues to add new sales
to drive future increases in recurring revenue. If the manufacturing sector of
the economy improves in the future, the percentage of recurring revenue may be
slightly lower, indicating a higher amount of new business. This ratio is
expected to fluctuate from quarter to quarter and year to year, depending on the
size and timing of new business. Management expects the combination of increased
Equipment Industry revenues and decreased non-Equipment Industry revenues to
result in minimal increase to slightly decreased revenues for the remainder of
fiscal 2002.
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
software and services business with manufacturers and distributors and their
dealers in the existing vertical markets, add supplemental products for existing
customers, and then expand to other similar markets in the future. Revenues in
the Equipment Industry increased, as a percentage of total revenues, from 70%
for the three months ended October 31, 2000 to 79% for the three months ended
October 31, 2001. Management expects revenues in the Equipment Industry to
increase for the remainder of fiscal 2002, as management continues to focus
attention and resources in this industry, but not at a rate sufficient to
deflect the decline in non-Equipment Industry revenues.
North American
Recurring revenues in the North American Equipment Industry increased for
the three month period ended October 31, 2001, compared to the same period
last year, primarily due to increased catalog license, maintenance and
subscription renewals from the Company's growing base of customers.
Non-recurring revenues in the North American Equipment Industry decreased
for the three month period ended October 31, 2001, compared to the same
period last year, due to fewer new customer contracts because of the decline
in the manufacturing sector of the economy.
Non-North American
Recurring revenues in the Non-North American Equipment Industry decreased
for the three month period ended October 31, 2001, compared to the same
period last year, primarily due to the loss of a major customer in the
agricultural equipment market. Non-recurring revenues in the Non-North
American Equipment Industry decreased for the three month period ended
October 31, 2001, compared to the same period last year, primarily due to
the decrease in sales to new customers.
Non-Equipment Industry
The Company's business outside of the Equipment Industry includes sales of
database management services and electronic communications services to the
agricultural inputs industry, the on-line provision of information for
republication to the non-daily newspaper publishing industry and until December
31, 2000, database management services to the railroad industry. Revenues in the
non-Equipment Industry decreased for the three month period ended October 31,
2001, compared to the same period last year, due to the Company's focus in the
Equipment Industry, continued consolidation in the agricultural inputs industry,
and the non-renewal of the railroad industry business. Management expects
revenues in the non-Equipment Industry will decline significantly for the
remainder of fiscal 2002. The Company's five-year contract with the Associated
Press, on which its business in the non-daily newspaper publishing industry
depends, expires on December 31, 2001.
9
COST OF PRODUCTS AND SERVICES SOLD
The following table sets forth, for the periods indicated, certain revenue and
variable 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
OCTOBER 31 PERCENT
2001 2000 CHANGE
-------------- --------------
Subscriptions, support and other services
fees
Revenue $ 2,455 $ 2,552 (4%)
Cost of revenue 209 373 (44%)
Cost of revenue as a percent of revenue 9% 15%
Software licenses and renewals
Revenue 820 759 8%
Cost of revenue 396 967 (59%)
Cost of revenue as a percent of revenue 48% 127%
Professional services
Revenue 545 831 (34%)
Cost of revenue 208 502 (59%)
Cost of revenue as a percent of revenue 38% 60%
Total
Revenue $ 3,820 $ 4,142 (8%)
Cost of revenue 813 1,842 (56%)
Cost of revenue as a percent of revenue 21% 44%
Cost of subscriptions, support and other services fees consists primarily of
telecommunications and catalog replication and distribution costs and Associated
Press royalties. Cost of subscriptions, support and other services fees as a
percentage of revenue decreased for the three month period ended October 31,
2001, compared to the same period last year, primarily due to the elimination of
revenues and costs associated with the railroad industry which had lower gross
margins. Management expects gross margins from subscriptions, support and other
services fees to fluctuate 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 decreased for the three month
period ended October 31, 2001, compared to the same period last year, primarily
due to lower software amortization costs as a result of the restructuring in the
fourth quarter of fiscal 2001 and the sale of software licenses with no
associated royalties. Management expects gross margins from software licenses
and renewals to fluctuate from quarter to quarter based on the mix of products
and services 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 month period ended October 31, 2001, compared to the same period last
year, primarily due to a decrease in communication software customization, which
has a lower margin. 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.
10
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
OCTOBER 31 PERCENT
2001 2000 CHANGE
-------------- ------------
Cost of products and services sold $ 813 $ 1,842 (56%)
Customer operations and support 303 404 (25%)
Selling, general and administrative 1,857 2,233 (17%)
Software development and technical support 646 845 (24%)
Less capitalized portion (258) (432) (40%)
Depreciation and amortization 54 400 (87%)
-------------- ------------
Net operating expenses $ 3,415 $ 5,292 (35%)
============== ============
Customer operations and support consists primarily of data center operations,
software maintenance agreements for the Company's core network and customer
support costs. Customer operations and support costs decreased for the three
month period ended October 31, 2001, compared to the same period last year,
primarily due to the cost reductions associated with the Company's
restructuring. Management expects customer operations and support costs to
continue to be lower than last year for the remainder of fiscal 2002 due to the
cost containment efforts instituted by the restructuring.
Selling, general and administrative expenses ("SG&A") decreased for the three
month period ended October 31, 2001, compared to the same period last year,
primarily due to the cost reductions associated with the Company's
restructuring. SG&A, as a percentage of revenue, decreased from 54% for the
three month period ended October 31, 2000 to 49% for the three month period
ended October 31, 2001. Management expects costs in SG&A to continue to be lower
than last year for the remainder of fiscal 2002 due to the cost containment
efforts instituted by the restructuring.
The Company's technical staff (in-house and contracted) performs both software
development and technical 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 technical support costs
decreased for the three month period ended October 31, 2001, compared to the
same period last year, primarily due to the reduction of resources related to
the Company's communications products as a result of the restructuring.
Management expects software development and technical support costs to continue
to be lower than the previous year for the remainder of fiscal 2002 due to the
cost containment efforts instituted by the restructuring.
Depreciation and amortization expense decreased significantly for the three
month period ended October 31, 2001, compared to the same period last year.
Management expects depreciation and amortization to continue to be significantly
lower than the previous year for the remainder of fiscal 2002 due to the
write-off of long-lived assets related to the Company's network platform.
Capitalized software product costs represented 40% of software development and
technical support for the three month period ended October 31, 2001, compared to
51% for the same period last year. Management expects capitalized software
product costs to fluctuate from quarter to quarter depending on the deployment
of the Company's resources between early stage research, software development
available for capitalization, customer customizations and maintenance and
technical support.
11
OTHER ITEMS
Earnings improved 104% from a loss of $1,522,000 for the three month period
ended October 31, 2000, to net income of $63,000 for the three month period
ended October 31, 2001. The substantial improvement in earnings is attributable
to the restructuring, which focused the Company on its core catalog business and
reduced both cash and non-cash expenses to bring them in line with our revenues.
Interest paid or accrued for payment decreased for the three month period ended
October 31, 2001, compared to the same period last year, as the Company paid off
$916,000 of debt and capital lease obligations since October 31, 2000. Non-cash
interest expense was incurred for the three month periods ended October 31, 2000
and 2001 as the Company 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, if the Company restructures 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
OCTOBER 31 PERCENT
2001 2000 CHANGE
------------- ------------
Net cash provided by (used in) operating activities
before changes in working capital $ 744 $ (3) n/a
Net cash used in investing activities (258) (450) 43%
------------- ------------
Subtotal 486 (453) 207%
Effect of net changes in working capital (134) 413 (132%)
------------- ------------
Net cash provided by (used in) operating and
investing activities $ 352 $ (40) 980%
============= ============
Net cash provided by operating activities before changes in working capital
increased for the three month period ended October 31, 2001, compared to the
same period last year, due to the reduction in cash expenses related to the
Company's restructuring. Net cash used in investing activities decreased for the
three month period ended October 31, 2001, compared to the same period last
year, primarily due to decreased costs attributable to the development of the
Company's communications 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 and used in investing
activities to be positive for the fiscal year ended July 31, 2002, however,
there can be no assurance that this result will be ultimately achieved.
The Company expects to continue to be profitable for one or more remaining
quarters of the fiscal year ending July 31, 2002 and thereafter as a result of
the restructuring in the fourth quarter of fiscal 2001, although there can be no
assurance that this result will be achieved. For the quarter in which we
complete the re-negotiation of the Rose Glen debenture, we expect to incur a
significant non-cash charge to earnings for the balance of the debt discount.
This non-cash charge is expected to be large enough to more than offset our
anticipated profits for the fiscal year.
At October 31, 2001, the Company had cash of approximately $297,000 compared to
approximately $313,000 at July 31, 2001.
12
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)
OCTOBER 31 JULY 31
2001 2001 NET
(UNAUDITED) (AUDITED) CHANGE
--------------- ------------- ---------------
Debt to Shareholder:
Current portion of line of credit $ 98 $ 200 $ (102)
Current portion of notes payable 305 333 (28)
Long-term portion of notes payable - 56 (56)
Debt discount (common stock warrants) (32) (41) 9
--------------- ------------- ---------------
Total Debt to Shareholder 371 548 (177)
Subordinated Debenture:
Notes payable, in default 4,000 4,000 -
Debt discount (common stock warrants and options) (1,177) (1,373) 196
--------------- ------------- ---------------
Total Subordinated Debenture 2,823 2,627 196
Other Debt:
Current portion of notes payable other 161 275 (114)
Long-term notes payable other 55 78 (23)
--------------- ------------- ---------------
Total Other Debt 216 353 (137)
--------------- ------------- ---------------
Total Debt $ 3,410 $ 3,528 $ (118)
=============== ============= ===============
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 $4,000,000 due on April 27, 2003 (the "Debenture"),
and convertible into shares of the Company's common stock, (ii) warrants to
purchase 600,000 shares of Common Stock (the "Warrants"), and (iii) an
investment option to purchase 800,000 shares of Common Stock (the "Investment
Option"). The Investment Option expired 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 are exercisable at $6 per share. 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 results in the Debenture becoming
fully due at 130% of principal and accrued interest, as well as an increase in
the interest rate from 7% to 17%. 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. As long as $500,000 or more principal amount of the
Debenture is outstanding, the Company agreed not to: (i) pay any dividends or
make any other distribution on our common stock, other than stock dividends and
stock splits; (ii) repurchase or redeem any shares of our capital stock, except
in exchange for common stock or preferred stock; (iii) incur or assume any
liability for borrowed money, except our existing debt, debt from a bona fide
financial lending institution, indebtedness to trade creditors, borrowings used
to repay the debenture, indebtedness assumed or incurred in connection with the
acquisition of a business, product, license or other asset, refinancing of any
of the above, and indebtedness that is subordinate to the debenture; (iv) sell
or otherwise dispose of assets outside the normal course of business, except the
sale of a business, product, license or other asset that our board of directors
determines is in the best interests of us and our shareholders, and sales of
assets with a value not exceeding $500,000 in any 12-month period following the
issuance of the debenture; (v) lend money or make advances to any person not in
the ordinary course of business, except loans to subsidiaries or joint ventures
approved by a majority of our independent directors, guarantee another person's
liabilities, except, among other things, guarantees made in connection with the
acquisition of a business, product, license or other asset.
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. The Company was delisted on July 7, 2001
from NASDAQ National Market System but is currently listed on the NASDAQ
Bulletin Board Market. The delisting resulted in a default condition on the RGC
debenture, which gives RGC the right to accelerate the Debenture, although they
have not actually done so. The Company is currently negotiating a new debenture
with RGC and has a signed term sheet. However, if the Company is unable to
complete the negotiation of a new debenture or obtain waivers from the Investor,
shareholders could be materially and adversely affected.
ARI has a line of credit with WITECH that has been in place since October 4,
1993 (the "WITECH Credit Facility"). On September 30, 1999, ARI and WITECH
restructured the $3.0 million outstanding under the WITECH Credit Facility to
provide for (i) a $1.0 million revolving line of credit (the "WITECH Line")
which expires on December 31, 2001; (ii) a $1.0 million
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term loan (the "WITECH Term Loan") payable in equal monthly principal
installments over three years, commencing November 1, 1999; and (iii) WITECH's
purchase of $1.0 million of ARI's common stock at $5.125 per share. The WITECH
Line bears interest at prime plus 3.25% and the WITECH Term Loan bears interest
at prime plus 4.0%. The WITECH Line terminates on December 31, 2001. As of
December 11, 2001 there was $13,000 outstanding under the WITECH Line and
$277,000 was outstanding under the WITECH term loan.
The only financial covenant stipulated in the WITECH Credit Facility was that
ARI maintained a net worth (calculated in accordance with generally accepted
accounting principles) of at least $1 million. This net worth covenant was
waived as of July 31, 2001 and for the fiscal year ended July 31, 2002.
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. In connection with the Sale Agreement ARI was required to pay a
Commitment Fee of $45,000 on September 28, 1999, $30,000 on September 28, 2000,
and $15,000 on September 28, 2001. In addition, ARI is obligated to pay a
monthly program fee equal to the greater of (a) $3,000 or (b) the amount of the
purchased but uncollected receivables times the prime rate plus 2%. ARI may
terminate the Sale Agreement prior to three-year term by paying 2.0% of the
Purchase Commitment during the second year, and 1.0% of the Purchase Commitment
during the third year. As of December 11, 2001, the balance of the RFC Facility
was $981,000.
Management believes that funds generated from operations and the RFC Facility
will be adequate to fund the Company's operations, investments and debt payments
through fiscal 2002 if the Debenture is successfully renegotiated or the
necessary waiver is obtained from RGC. If management is unable to renegotiate
the Debenture or obtain the necessary waiver, the Company will remain in default
and owe in excess of $5 million, which would have a material adverse effect on
the Company. Management is working diligently to renegotiate the Debenture, but
there can be no assurance that these efforts will be successful. Management has
restructured the Company to reduce cash overhead by over $1.5 million in fiscal
2002. Management is also continually analyzing its anticipated cash flows under
a variety of growth scenarios ranging from modest contraction to modest growth.
Management believes that, provided the defaults can be cured, 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
further restructured to be self-funding, although there can be no assurance that
these efforts will be successful.
The Company believes that earnings before interest, taxes, depreciation and
amortization ("EBITDA") is generally accepted as providing useful information
regarding a company's ability to service and/or incur debt. EBITDA increased
from $128,000 for the three month period ended October 31, 2000 to $836,000 for
the three month period ended October 31,2001 primarily due to reductions in cash
expenses as a result of the restructuring. Management believes that EBITDA will
continue to be positive for the remainder of fiscal 2002, although there can be
no assurance that this will occur.
The Company has 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 accounting principles generally
accepted in the United States and should not be considered an alternative to
operating income, as determined in accordance with accounting principles
generally accepted in the United States, as an indicator of our operating
performance, or to cash flows from operating activities, as determined in
accordance with generally accepted generally accepted in the United States, as a
measure of our liquidity. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
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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, all of which were fully integrated into the Company's operations
prior to fiscal year 2000.
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ACQUISITION DATE ACQUIRED COMPANY AND LOCATION DESCRIPTION OF ACQUIRED COMPANY
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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 and was
replaced with the Partsmart catalog.
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September 30, 1997 Empart Technologies, Inc. ("EMPART") EMPART provided us with the
Foster City, CA EMPARTpublisher and EMPARTviewer
software.
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September 15, 1998 POWERCOM-2001 ("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.
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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.
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FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-Q 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 the Company's annual
report on Form 10-K for the year ended July 31, 2001.
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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: December 17, 2001 /s/ Brian E. Dearing
-------------------------------------------
Brian E. Dearing, Chairman of the Board
/s/ Timothy Sherlock
-------------------------------------------
Timothy Sherlock, Chief Financial Officer
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