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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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AMENDMENT NO. 1
(XX) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended July 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from ............... to ...............
Commission File No. 0-19608
ARI NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1388360
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 East Kilbourn Ave. 53202-3149
Milwaukee, Wisconsin (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (414) 278-7676
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of May 25, 2001, aggregate market value of the Common Stock held by
non-affiliates (based on the closing price on the NASDAQ National Market System)
was approximately $4.1 million.
As of May 25, 2001, there were 6,184,281 shares of Common Stock of the
registrant outstanding.
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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, 2000, for the 2000
Annual Meeting of Shareholders are incorporated by reference in Part III hereof.
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NOTE REGARDING AMENDED FORM 10-K
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 year ended July 31, 2000 only. As a result of this revision,
the Company's revenues have decreased and net loss has increased for the year
ended July 31, 2000 by $1,256,000 or $0.21 per share.
The Company has reclassified amortization of industry specific applications from
depreciation and amortization to cost of products and services sold for all
periods shown. This has no impact on earnings.
The Company is amending only the following sections of the Report on Form 10-K:
Part II, Item 6. Selected Financial Data
Part II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Part II, Item 8. Financial Statements and Supplementary Data
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PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial information with respect to the
Company as of and for each of the five years in the period ended July 31, 2000,
which was derived from audited Financial Statements and Notes thereto of ARI
Network Services, Inc. Audited Financial Statements and Notes as of July 31,
2000 and 1999 and for each of the three years in the period ended July 31, 2000,
and the report of Ernst & Young LLP thereon are included elsewhere in this
Report. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere
herein.
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Network and other services revenues $ 9,743 $ 8,616 $ 5,811 $ 5,235 $ 4,484
Software revenues 1,289 2,822 1,431 888 418
Professional services revenues 2,272 1,450 722 790 350
-------- -------- -------- -------- --------
Total revenues 13,304 12,888 7,964 6,913 5,252
Operating expenses:
Cost of network and other services sold 1,415 1,431 1,327 1,035 925
Cost of software sold* 3,614 2,543 1,333 940 742
Cost of professional services sold 1,965 1,234 407 484 203
Depreciation and amortization (exclusive of
amortization of
Industry specific application included in
cost of sales 1,778 1,773 1,021 950 1,143
Network operations 2,048 1,017 708 1,004 919
Selling, general and administrative 8,214 6,995 4,586 4,819 4,585
Network construction and expansion 2,779 2,786 2,198 1,897 1,897
-------- -------- -------- -------- --------
Operating expenses before amounts
capitalized 21,813 17,779 11,580 11,129 10,414
Less capitalized portion (1,729) (1,802) (1,546) (1,155) (1,230)
-------- -------- -------- -------- --------
Net operating expenses 20,084 15,977 10,034 9,974 9,184
-------- -------- -------- -------- --------
Operating loss (6,780) (3,089) (2,070) (3,061) (3,932)
Other income (expense) (822) (326) (70) (214) (274)
-------- -------- -------- -------- --------
Net loss $ (7,602) $ (3,415) $ (2,140) $ (3,275) $ (4,206)
======== ======== ======== ======== ========
Weighted average common shares outstanding 6,002 5,061 4,119 3,611 3,114
Basic and diluted net loss per share $ (1.27) $ (0.67) $ (0.52) $ (0.91) $ (1.35)
SELECTED BALANCE SHEET DATA:
Working capital (deficit) $ (4,680) $ (3,476) $ 762 $ (689) $ (3,412)
Capitalized network system (net)** 11,901 14,052 9,122 8,957 9,264
Total assets 18,488 20,438 12,808 11,416 11,479
Current portion of long-term debt and capital 933 713 58 64 63
lease obligations
Total long-term debt and capital lease obligations 2,695 3,511 1,653 8 22
Total shareholders' equity 7,159 9,756 8,962 8,947 6,182
* Includes amortization of industry specific applications of $3,224, $2,057,
$1,121, $772 and $657.
** Fiscal 1999 includes a reclassification of $5,208 from goodwill as a result
of the finalization of the purchase price allocation for the NDI acquisition.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
Total revenue grew 3% during fiscal 2000 compared to fiscal 1999, while revenues
in the Equipment Industry grew 15%. Management attributes the less than expected
increase in total revenue to the changes in revenue recognition required by
Statement of Position 98-9 (which requires recognition of the Company's software
licenses and renewals in multiple element arrangements over the term of the
arrangement), late delivery of the Company's communications software and to a
12% decline in non-Equipment Industry revenues. The development delays
negatively affected our expected recurring revenues by delaying deployment of
the software to customers who had already signed with us. The delay also
affected non-recurring revenues because the existing accounts could not be
referenced as a fully deployed account and because the development team was
assigned to existing accounts, and therefore was not available to work on newly
signed accounts. Net loss grew as overall expenditures continued, without the
corresponding increase in revenues, to address the software development issues
and position the Company to resume its revenue growth.
REVENUES
Management reviews the Company's recurring vs. non-recurring revenue in the
aggregate and within the Equipment Industry and all other industries. The
Equipment Industry has been a growing percentage of our revenue over the past
three years, representing approximately two thirds of the Company's revenue in
fiscal 2000. As more fully described in Note 11 of the Notes to our Financial
Statements, we revised our accounting policy for the recognition of revenue for
software licenses and renewals in multiple element arrangement effective August
1, 1999. As a result of this revision, we have restated our financial statements
for the year ended July 31, 2000 as presented herein.
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's financial statements:
REVENUE BY INDUSTRY
(IN THOUSANDS)
YEAR ENDED JULY 31
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PERCENT PERCENT
INDUSTRY: 2000 1999 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
Equipment Industry
Recurring $ 5,621 $ 3,243 73% $ 3,243 $ 606 435%
Non-recurring 2,864 4,157 (31%) 4,157 1,588 162%
------- ------- ------- -------
Subtotal 8,485 7,400 15% 7,400 2,194 237%
Other Revenues
Recurring 4,483 4,841 (7%) 4,841 4,600 5%
Non-recurring 336 647 (48%) 647 1,170 (45%)
------- ------- ------- -------
Subtotal 4,819 5,488 (12%) 5,488 5,770 (5%)
Total Revenue
Recurring 10,104 8,084 25% 8,084 5,206 55%
Non-recurring 3,200 4,804 (33%) 4,804 2,758 74%
------- ------- ------- -------
Grand Total $13,304 $12,888 3% $12,888 $ 7,964 62%
======= ======= ======= =======
Recurring revenues are derived from catalog subscription fees, software
maintenance and support fees, software license renewals, network traffic and
support fees and other miscellaneous subscription fees. Recurring revenues
increased in fiscal 2000 and fiscal 1999, compared to the prior year, primarily
due to increases in the Equipment Industry revenues driven by the Powercom and
NDI acquisitions. Recurring revenue, as a percentage of total revenue, increased
from 65% in fiscal 1998 and 63% in fiscal 1999 to 76% in fiscal 2000 primarily
due to increases in the customer base in the Equipment Industry caused by the
Powercom and NDI acquisitions and to a drop in non-recurring revenues.
Management believes a ratio of approximately two thirds recurring revenue to one
third non-recurring revenue is desirable in order to establish an appropriate
level of base revenue while continuing to add new
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sales to drive future increases in recurring revenue. This revenue mix may
fluctuate from quarter to quarter or year to year.
Non-recurring revenues are derived from initial software licenses and
professional service fees. Non-recurring revenues increased in fiscal 1999,
compared to the prior year, primarily due to increased new business in the
Equipment Industry. These new sales decreased in fiscal 2000, compared to fiscal
1999, as the Company experienced delays in the development of customized
communications software and the recognition of software licenses and renewals
over the twelve month period of the arrangement, beginning in fiscal 2000. The
Company has installed its TradeRoute(R) software at over 3,000 dealer locations
as of the end of fiscal 2000. Management believes that non-recurring revenues
will increase during fiscal 2001 because most of the development issues have
been solved, although these revenues will be recognized at a slower rate than
prior to the revenue recognition change. This positions the Company for a more
solid and determinable revenue stream.
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power, recreation vehicles, motorcycles, manufactured housing, farm equipment,
marine, construction, power sports, floor maintenance, auto parts after market
and others. Management's strategy is to expand the Company's electronic parts
catalog software and services and dealer communication business with
manufacturers and distributors and their dealers in the existing vertical
markets and to expand to other similar markets in the future. Revenues from all
of the Company's acquisitions are included in the Equipment Industry revenues.
Recurring revenues in the Equipment Industry increased in fiscal 2000 and fiscal
1999, compared to the prior year, primarily due to the acquisitions of Powercom
and NDI, both of which had substantial recurring revenue bases. Non-recurring
revenues in the Equipment Industry decreased in fiscal 2000, compared to the
prior year, primarily due to the recognition of software licenses and renewals
over a twelve month period and delays in the delivery of the Company's
customized communications software. Non-recurring revenues in the Equipment
Industry increased in fiscal 1999, compared to the prior year, due to increased
software and professional services sold to new and existing manufacturer
customers, primarily in the recreation vehicle market. Management expects
recurring and non-recurring revenues in the Equipment Industry to increase at a
higher percentage of total revenues in fiscal 2001, as management continues to
focus attention and resources in this industry.
Non-Equipment Industry Business
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. Other than a slight increase in recurring revenues in
fiscal 1999 due to a price increase, both recurring and non-recurring revenues
in this business decreased over the prior year in fiscal 2000 and in fiscal
1999. Management believes the decline in non-recurring revenues may signal that
the Company is approaching saturation of the available market for the products
and services offered by the Company in these industries and that consolidation
in the agricultural customer base is the primary reason for the decline in
recurring revenues. Management expects revenues in the non-Equipment Industry
business will decline in fiscal 2001.
Our five-year contract with the Association of American Railroads expired in
December, 2000. Our five-year contract with the Associated Press, on which our
business in the non-daily newspaper publishing industries depends, expired in
December 2000 and has been 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
this will be the case.
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OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's financial statements:
OPERATING EXPENSES
(IN THOUSANDS)
YEAR ENDED JULY 31
-----------------------------------------------------------------------
PERCENT PERCENT
2000 1999 CHANGE 1999 1998 CHANGE
Cost of products and services sold $ 6,994 $ 5,208 34% $ 5,208 $ 3,067 70%
Network operations 2,048 1,017 101% 1,017 708 44%
Selling, general & administrative 8,214 6,995 17% 6,995 4,586 53%
Network construction and expansion 2,779 2,786 0% 2,786 2,198 27%
Depreciation and amortization (exclusive of
amortization of industry specific applications included
in cost of products and services sold) 1,778 1,773 0% 1,773 1,021 74%
Less capitalized portion (1,729) (1,802) (4%) (1,802) (1,546) 17%
-------- -------- -------- --------
Net operating expenses $ 20,084 $ 15,977 26% $ 15,977 $ 10,034 59%
======== ======== ======== ========
The categories of operating expense generally increased over the past two fiscal
years primarily as a result of the Powercom and NDI acquisitions completed on
September 15, 1998 and May 13, 1999, respectively.
Cost of products and services sold consists primarily of amortization of
industry specific applications, royalties, telecommunications, distribution
costs, customization and catalog production labor and temporary help fees. Cost
of products and services sold increased in fiscal 2000 and fiscal 1999, compared
to the prior year, primarily as a result of increased revenues and a change in
the mix of products and services sold. Cost of products and services sold as a
percentage of total revenue increased to 53% in fiscal 2000, from 40% in fiscal
1999 and 39% in fiscal 1998 primarily due to development cost overruns and
amortization of industry specific applications. Cost of professional services
sold as a percentage of professional services revenue was 86% in fiscal 2000
compared to 85% in fiscal 1999 and 56% in fiscal 1998. The increases in fiscal
2000 and fiscal 1999, compared to fiscal 1998, were due to costs of professional
services which were not invoiced to the customer. The cost of these services was
in excess of the customer's expected cost to complete for several major software
customization projects in the Equipment Industry. The Company accrues estimated
costs to complete projects when the estimated cost to complete exceeds
anticipated billings. These excess costs were absorbed by the Company and had a
negative impact on margins in the professional services category of revenue.
Most of these projects were completed by the second quarter of fiscal 2001.
Network and other services cost of sales as a percentage of network and other
services revenue was 15% in fiscal 2000 compared to 17% in fiscal 1999 and 23%
in fiscal 1998. The cost of these services, as a percentage of revenue,
decreased over the past three years due to reduced telecommunications costs.
Software cost of sales as a percentage of software revenue was 280% in fiscal
2000, compared to 90% in fiscal 1999 and 93% in fiscal 1998. The cost of
software as a percentage of software revenue increased significantly in fiscal
2000, compared to fiscal 1999 and fiscal 1998, due to lower software license
revenues with higher software amortization costs. Management expects gross
margins to be approximately between 50% and 60% in fiscal 2001 and to fluctuate
slightly from quarter to quarter based on the mix of products and services sold.
Network operations costs consist primarily of data center operations, software
maintenance agreements for the Company's core network, catalog data maintenance
and customer support. Network operations costs increased significantly in fiscal
2000 compared to fiscal 1999 and fiscal 1998 due to increased staffing in the
catalog data maintenance area from the May 13, 1999 acquisition of NDI.
Management expects these costs to continue to increase, but at a slower rate
than revenues.
Selling, general and administrative expenses ("SG&A") increased in fiscal 2000,
compared to fiscal 1999 and fiscal 1998, due to additional costs absorbed in the
Powercom and NDI acquisitions. SG&A, as a percentage of revenue, increased to
62% in fiscal 2000 from 54% in fiscal 1999 after having steadily decreased for
each of the four previous fiscal years due to the reduction in revenue in fiscal
2000 as a result of the recognition of software licenses and
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renewals over a twelve month period and additional costs absorbed from the
acquisition of NDI without a corresponding increase in revenue. Management
expects SG&A to decline as a percentage of sales in the future.
The Company's technical staff (in-house and contracted) is allocated between
network construction and expansion and software customization services for
customer applications. Therefore, management expects fluctuations between
software customization services and development expenses from quarter to
quarter, as the mix of development and customization activities will change
based on customer requirements. During fiscal 2000, our technical resources were
focused primarily on customization projects for our customers in the recreation
vehicles market that are in the process of implementing our TradeRoute(R) dealer
communications system, development of Web-based communications and cataloging
software and increased year 2000 compliance efforts in November and December
1999. During fiscal 1999 development resources were focused primarily on the
development of TradeRoute(R) and PLUS(1)(R). We expect our technical resources
to continue to focus on software customization and development of Web-based
software in fiscal 2001, although the mix may fluctuate quarter to quarter based
on customer requirements. We expect software customization and development
expenses to increase during fiscal 2001 due to additional focus on the
development of our Web-based products.
Depreciation and amortization expenses increased substantially in fiscal 2000
and fiscal 1999 compared to fiscal 1998 due primarily to increased goodwill
recognized in connection with the Company's acquisition of Powercom in September
1998. As a percentage of total revenue, depreciation and amortization was 13% in
fiscal 2000, 14% in fiscal 1999 and 13% in fiscal 1998. Management expects
depreciation and amortization expenses to continue at the current rate in fiscal
2001, barring any additional acquisitions.
Capitalized development costs represented 62% of network construction and
expansion expense in fiscal 2000, compared to 65% and 70% in fiscal 1999 and
fiscal 1998, respectively. Capitalized expenses decreased from fiscal 1998 and
fiscal 1999 to fiscal 2000, as a percentage of network construction and
expansion expense, due to the fact that the Company's development resources were
focused on software customization projects and Year 2000 compliance projects,
both of which are expensed.
OTHER ITEMS
Interest expense increased $481,000 in fiscal 2000, compared to fiscal 1999, due
to additional financing by the Company under its RFC facility (described below)
and the Debenture sold to Rose Glen (also described below). Interest expense
increased $187,000 in fiscal 1999, compared to fiscal 1998, due to additional
borrowings under the Company's line of credit with WITECH. The Company expects
interest expense to increase in fiscal 2001, as the Company amortizes non-cash
interest expense associated with the Debenture. See "Liquidity and Capital
Resources".
Net loss increased $4,187,000 in fiscal 2000, compared to the prior year,
primarily due to lower than expected new sales, the recognition of software
licenses and renewals over a twelve month period, increased costs from delays in
development and the increase in non-cash amortization expense resulting from the
Company's acquisition of NDI. Net loss increased $1,275,000 in fiscal 1999,
compared to the prior year, primarily due to the increase in non-cash
amortization expense resulting from the two acquisitions completed in fiscal
1999. 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.
The Company's Year 2000 readiness program was completed on schedule. All of the
Company's products have either been discontinued or have Year 2000 compliant
versions, which were shipped prior to December 31, 1999, with some minor
exceptions that were addressed prior to December 31, 1999 with distribution of
patches to a small number of customers to enable them to continue to use the
Company's software until the complete Year 2000 compliant version had been
implemented. Over the last two years, the Company has spent $420,000 on the Year
2000 program out of a total expected expenditure of $550,000. The Company has
not been a party to any litigation or arbitration proceeding to date involving
its products or services related to Year 2000 compliance issues. However, there
can be no assurance that we will not in the future be required to defend our
products or services in such proceedings, or to negotiate resolutions of claims
based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, regardless of the merits of such disputes, and any
potential liability on the Company's part for Year 2000-related damages,
including consequential damages, could have an adverse effect on the Company's
business and financial results.
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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
(IN THOUSANDS)
YEAR ENDED JULY 31
-----------------------------------------------------------------
PERCENT PERCENT
2000 1999 CHANGE 1999 1998 CHANGE
--------- --------- -------- -------
Net cash provided by (used in) operating activities
before changes in working capital $(2,316) $ 415 n/a $ 415 $ 2 n/a
Net cash used in investing activities (1,792) (1,815) 1% (1,815) (1,601) (13%)
------- ------- ------- -------
Subtotal (4,108) (1,400) (193%) (1,400) (1,599) 12%
Effect of net changes in working capital 1,153 (74) n/a (74) (702) 89%
------- ------- ------- -------
Net cash used in operating and investing activities $(2,955) $(1,474) (100%) $(1,474) $(2,301) 36%
======= ======= ======= =======
Management analyzes the Company's cash flow by breaking it down into three
components: (i) net cash provided by (used in) operating activities before
changes in working capital, which is a measure of the cash generating capability
of the Company's business; (ii) net cash used in investing activities, which is
a measure of the Company's investment in products and infrastructure for the
future; and (iii) effect of changes in working capital, which is primarily
driven by the timing of payments and invoicing relative to the end of a
reporting period.
Total cash flows from operating and investing activities declined from fiscal
1999 to fiscal 2000 due to reduced cash flows from operations before working
capital changes, $1,256,000 of which was a decrease in revenue due to the
adoption of SOP 98-9, and improved from fiscal 1998 to fiscal 1999 because of
increased cash flows from operations before working capital changes. The
analysis reveals that the primary reason for the Company's cash flow performance
is the performance of its underlying business, rather than changes in investment
or working capital timing.
Net cash provided by (used in) operating activities before changes in working
capital decreased in fiscal 2000, compared to the prior year, primarily due to
lower than expected revenues and increased costs as a result of delays in
development. Net cash provided by operating activities before changes in working
capital increased in fiscal 1999, compared to the prior year, due to increased
revenues and tight cost controls. Net cash used in investing activities
increased in fiscal 2000 and fiscal 1999, compared to fiscal 1998, due to
increased costs attributable to the development of the Company's Web-based
communications and catalog software in fiscal 2000 and a new release of the
Company's TradeRoute(R) software in fiscal 1999. The effect of net changes in
working capital is dependent on the timing of payroll and other cash
disbursements and may vary significantly from year to year. In fiscal 2000, cash
provided by working capital was higher, primarily due to higher unearned income
balances caused by the Company's change in revenue recognition policy. In fiscal
1998, use of cash for working capital was higher primarily due to an increase in
accounts receivable related to increased revenue in the fourth quarter of fiscal
1998, compared to the same period in fiscal 1997, and the timing of cash
disbursements. The Company expects that positive cash flow from operations will
resume in the first quarter of fiscal 2001, but that operating losses will
continue in fiscal 2001 due to non-cash amortization expenses. The Company
expects to fund research and development costs in fiscal 2001 with excess cash
from operations and the proceeds of its current financing instruments described
below.
At July 31, 2000, the Company had cash and cash equivalents of approximately
$563,000 compared to approximately $127,000 at July 31, 1999.
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.
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DEBT SCHEDULE
(IN THOUSANDS)
JULY 31 JULY 31 NET
2000 1999 CHANGE
------------ ----------- ----------
Debt to Shareholder:
Current portion of line of credit $ - $ 246 $ (246)
Current portion of notes payable 361 - 361
Long-term portion of line of credit payable - 2,754 (2,754)
Long-term portion of notes payable 389 - 389
Debt Discount (common stock warrants) (76) - (76)
------------ ----------- ----------
Total Debt to Shareholder 674 3,000 (2,326)
Subordinated Debenture:
Long-term notes payable other 4,000 - 4,000
Debt discount (common stock warrants and options) (2,158) - (2,158)
------------ ----------- ----------
Total Subordinated Debenture 1,842 - 1,842
Other Debt:
Current portion of notes payable other 461 385 76
Long-term notes payable other (net of discount) 326 734 (408)
------------ ----------- ----------
Total Other Debt 787 1,119 (332)
------------ ----------- ----------
Total Debt $ 3,303 $ 4,119 $ (816)
============ =========== ==========
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 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. 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 principal and accrued interest. 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.
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.
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. If exercised, the
Investment Option would contribute an additional $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
16
10
if the Company is unable to obtain waivers from the Investors, 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 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 2.0% and the WITECH Term Loan bears interest at prime plus 3.25%. In
conjunction with obtaining the WITECH Credit Facility, since 1993, ARI has
issued to WITECH 350 shares of its non-voting cumulative preferred stock and
total warrants for the purchase of up to 280,000 shares of its common stock,
including (i) warrants for the purchase of 250,000 shares at $2.125 per share
and (ii) warrants for the purchase of 30,000 shares of its common stock at $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 that were 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.
On December 21, 1999, the Company and WITECH amended the WITECH Line to enable
the Company to borrow an additional Five Hundred Thousand Dollars ($500,000)
under the WITECH Line (the "Bridge Loan"). The Bridge Loan bore interest at
prime plus 2.0%. As consideration for the Bridge Loan, ARI paid a closing fee of
$50,000 to WITECH.
On April 27, 2000, the Company used a part of the proceeds from the sale of the
Debenture to (i) pay down the outstanding amount due under the WITECH Line and
(ii) repay the Bridge Loan and the interest and closing fee associated
therewith. The WITECH Line terminates on December 31, 2001. As of May 25, 2001
there were no amounts outstanding under the WITECH Line and $472,000 was
outstanding under the WITECH term loan.
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 in compliance at July
31, 2000 but is currently not in compliance with the financial covenant in the
Agreement and intends to seek a waiver. If the Company is unable to obtain a
waiver, the Company would lose an essential source of liquidity.
As part of ARI's acquisition of Powercom from Briggs & Stratton Corporation
("Briggs") in September 1998, Briggs agreed to provide ARI with a working
capital line of credit in the amount of $250,000 (the "Briggs Line"). ARI agreed
to exhaust all available credit under the WITECH Line before borrowing any
amounts under the Briggs Line. The Briggs Line bore interest at prime plus 2%
and was secured by a first position lien against all accounts receivable
generated from customers of Powercom that were assigned to ARI as part of the
acquisition. The Briggs Line was repaid in full and cancelled on October 7,
1999.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three-year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each $1.0
million increase. Under the Sale Agreement, RFC 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. Initial funding was actually $1,045,000, of which
$182,000 was immediately used to pay off the Briggs Line. As of May 25, 2001,
the balance of the RFC Facility was $664,000.
The RFC Facility states that the Company must be in compliance with 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.
17
11
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. 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 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 decreased
from positive $727,000 in fiscal 1999 to negative $1,807,000 in fiscal 2000
primarily due to money spent to address the software development issues without
corresponding revenue and to the change in revenue recognition. EBITDA increased
from $72,000 in fiscal 1998 to $727,000 in fiscal 1999 primarily due to
increased revenues and cost controls over cash expenditures. Management believes
that EBITDA will be positive in fiscal 2001, 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 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.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-K are forward looking statements
including revenue growth, future cash requirements 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 growth rate of ARI's selected market segments, the
positioning of ARI's products in those segments, consequences of year 2000
issues, variations in demand for and cost of customer services and technical
support, customer adoption of Internet-enabled applications and their
willingness to upgrade from earlier versions of software, ARI's ability to
release new software applications and upgrades on a timely basis, ARI's ability
to establish and maintain strategic alliances, ARI's ability to manage its
costs, ARI's ability to manage its business in a rapidly changing environment,
ARI's ability to finance capital investments, and ARI's ability to implement its
acquisition strategy to increase growth.
Projected revenues and, therefore, profitability and cash flows are difficult to
estimate because ARI's revenues and operating results may vary substantially
from quarter to quarter, driven primarily by variations in non-recurring
revenues from software license and customization fees. License fee revenues are
based on contracts signed and products delivered. Non-recurring revenues are
affected by the time required to close large license fee and development
agreements, which cannot be predicted with any certainty due to customer
requirements and decision-making processes.
Recurring revenues are also difficult to estimate. Recurring revenues from
maintenance and subscription fees may be estimated based on the number of
subscribers to ARI's services but will be affected by the renewal ratio, which
cannot be determined in advance. Recurring revenues from network traffic fees
and transaction fees are difficult to estimate as they are determined by usage.
Usage is a function of the number of subscribers and the number of transactions
per subscriber. Transactions include product ordering, warranty claim
processing, inventory and sales reporting, parts number updates and price
updates. ARI cannot materially affect or predict the volume of transactions per
customer.
18
12
Although ARI has recently introduced and plans to expand its Internet-enabled
Windows products, the marketplace is highly competitive and there can be no
assurance that a customer will select ARI's software and services over that of a
competitor. The environment in which ARI competes is characterized by rapid
technological changes, dynamic customer demands, and frequent product
enhancements and product introductions. Some of ARI's current and potential
competitors have greater financial, technical, sales, marketing and advertising
resources than ARI. The widespread acceptance of the Internet may increase the
usage of ARI's product applications but may dramatically change the manner in
which ARI charges for its services.
For a discussion of additional risks and uncertainties which may impact the
Company please look at the section titled "Risk Factors" in the Company's
Registration Statement on Form S-3 filed on May 12, 2000, as amended.
19
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARI's Financial Statements and related notes for the fiscal years ended July 31,
2000, 1999 and 1998 together with the report thereon of ARI's independent
auditors, Ernst & Young LLP, are attached hereto as Exhibit A-1.
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(A)1.
FINANCIAL STATEMENTS
Report of independent auditors on Financial Statements and Financial Statement
Schedule.
Balance sheets - July 31, 2000 and 1999.
Statements of operations for each of the three years in the period ended July
31, 2000.
Statements of shareholders' equity for each of the three years in the period
ended July 31, 2000.
Statements of cash flows for each of the three years in the period ended July
31, 2000.
Notes to financial statements - July 31, 2000.
The Financial Statements are located immediately following the signature page.
23.1
Consent of Ernst & Young LLP.
20
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee, State of Wisconsin on this 1st day of June, 2001.
ARI NETWORK SERVICES, INC.
By:
-----------------------------------------
Brian E. Dearing,
Chairman, President & CEO & Acting CFO,
& Acting CAO
21
15
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders
ARI Network Services, Inc.
We have audited the accompanying balance sheets of ARI Network Services, Inc.
(the Company) as of July 31, 2000 and 1999, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended July 31, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated September 15, 2000,
the Company, as discussed in Note 12, has been notified of certain Nasdaq
National Market requirements that have not been maintained, which, if not cured,
would cause the Company to be delisted from the Nasdaq National Market. Any
delisting will cause the Company's subordinated debenture to be in default and
due on demand. Additionally, as of January 31, 2001, the Company is in violation
of a restrictive covenant under its loan agreement with a shareholder. Also, the
Company's line of credit with a shareholder expires in December 2001;
accordingly, the Company does not have long-term credit availability. Note 12
describes management's plans to address these issues.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at July 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended July 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
1
16
As discussed in Note 11, the balance sheet at July 31, 2000, and the statements
of operations, shareholders' equity and cash flows for the year then ended, have
been restated.
Milwaukee, Wisconsin
September 15, 2000, except for
Notes 11 and 12, as to which
the dates are May 21, 2001
and May 15, 2001,
respectively
2
17
ARI Network Services, Inc.
Balance Sheets
(Dollars in Thousands, Except Per Share Data)
JULY 31
2000 1999
----------------------------------
ASSETS (Note 3)
Current assets:
Cash $ 563 $ 127
Trade receivables, less allowance for doubtful
accounts of $697 in 2000 and $278 in 1999 3,282 3,175
Prepaid expenses and other 109 126
----------------------------------
Total current assets 3,954 3,428
Equipment and leasehold improvements:
Network system hardware and software 4,389 4,246
Leasehold improvements 239 239
Furniture and equipment 846 513
----------------------------------
5,474 4,998
Less accumulated depreciation and amortization 5,038 4,574
----------------------------------
Net equipment and leasehold improvements 436 424
Goodwill, less accumulated amortization of $1,413 in
2000 and $755 in 1999 1,876 2,534
Deferred financing costs, less accumulated amortization of $59 in
2000 321 -
Network system:
Network platform 11,467 11,467
Industry-specific applications 29,317 27,588
----------------------------------
40,784 39,055
Less accumulated amortization 28,883 25,003
----------------------------------
11,901 14,052
----------------------------------
$18,488 $20,438
==================================
3
18
JULY 31
2000 1999
----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (restated)
Current liabilities:
Line of credit payable to shareholder $ - $ 246
Current portion of notes payable to shareholder 361 -
Current portion of notes payable 461 385
Accounts payable 836 1,204
Unearned income 4,373 3,307
Accrued payroll and related liabilities 1,182 1,091
Other accrued liabilities 1,310 589
Current portion of capital lease obligations 111 82
----------------------------------
Total current liabilities 8,634 6,904
Line of credit payable to shareholder - 2,754
Notes payable to shareholder 313 -
Notes payable 2,168 734
Unearned income - 267
Capital lease obligations 214 23
----------------------------------
Total noncurrent liabilities 2,695 3,778
Commitments (Note 5)
Shareholders' equity:
Cumulative preferred stock, par value $.001 per
share, 1,000,000 shares authorized; 20,350 shares
issued and outstanding - -
Common stock, par value $.001 per share, 25,000,000
shares authorized; 6,168,270 and 5,097,432 shares
issued and outstanding in 2000 and 1999, respectively 6 5
Common stock warrants and options 2,459 -
Common stock to be issued - 2,406
Additional paid-in capital 91,781 86,830
Accumulated deficit (87,087) (79,485)
----------------------------------
Total shareholders' equity 7,159 9,756
----------------------------------
$18,488 $ 20,438
==================================
See accompanying notes.
4
19
ARI Network Services, Inc.
Statements of operations
(Dollars in Thousands, Except Per Share Data)
YEAR ENDED JULY 31
2000 1999 1998
------------------------------------------------------
Net revenues: (restated)
Network and other services $ 9,743 $ 8,616 $ 5,811
Software 1,289 2,822 1,431
Professional services 2,272 1,450 722
------------------------------------------------------
13,304 12,888 7,964
Operating expenses:
Cost of products and services sold
Network and other services 1,415 1,431 1,327
Software 3,614 2,543 1,333
Professional services 1,965 1,234 407
------------------------------------------------------
6,994 5,208 3,067
Depreciation and amortization* 1,778 1,773 1,021
Network operations 2,048 1,017 708
Selling, general and administrative 8,214 6,995 4,586
Network construction and
expansion 2,779 2,786 2,198
------------------------------------------------------
21,813 17,779 11,580
Less capitalized portion (1,729) (1,802) (1,546)
------------------------------------------------------
Total operating expenses 20,084 15,977 10,034
------------------------------------------------------
Operating loss (6,780) (3,089) (2,070)
Other income (expense):
Interest expense (793) (312) (125)
Other, net (29) (14) 55
------------------------------------------------------
(822) (326) (70)
------------------------------------------------------
Net loss $ (7,602) $ (3,415) $ (2,140)
======================================================
Net loss per share $ (1.27) $ (.67) $ (.52)
======================================================
* exclusive of amortization of industry-specific applications included in cost
of products and services sold
See accompanying notes.
5
20
ARI Network Services, Inc.
Statements of Shareholders' Equity
(Dollars in Thousands)
Number of Shares Issued and
Outstanding
---------------------------------
Preferred Common
Stock Stock
---------------------------------
Balance July 31, 1997 20,000 3,691,754
Issuance of common stock (net of offering costs of $54) - 387,500
Issuance of common stock in connection with acquisition
of Empart Technologies, Inc. - 163,523
Issuance of common stock under stock purchase plan - 4,683
Net loss - -
---------------------------------
Balance July 31, 1998 20,000 4,247,460
Issuance of preferred stock 350 -
Issuance of common stock in connection with acquisitions - 840,000
Issuance of common stock under stock purchase plan and
from exercise of stock options - 9,972
Net loss - -
---------------------------------
Balance July 31, 1999 20,350 5,097,432
Issuance of common stock in connection with acquisitions - 550,019
Issuance of common stock as payment on line of credit - 195,122
Issuance of common stock for professional services
received - 58,270
Issuance of common stock under stock purchase plan and
from exercise of stock options - 267,427
Issuance of common stock warrants and options in
connection with notes payable - -
Net loss (restated) - -
---------------------------------
Balance July 31, 2000 (restated) 20,350 6,168,270
=================================
6
21
Common Stock to be
Issued Par Value Common
---------------------------------------------------------- Stock Additional
Number of Preferred Common Warrants Paid-in Accumulated
Shares Amount Stock Stock and Options Capital Deficit
-------------------------------------------------------------------------------------------------------------
- $ - $ - $4 $ - $82,873 $(73,930)
- - - - - 1,496 -
- - - - - 654 -
- - - - - 5 -
- - - - - - (2,140)
-------------------------------------------------------------------------------------------------------------
- - - 4 - 85,028 (76,070)
- - - - - - -
550,019 2,406 - 1 - 1,784 -
- - - - - 18 -
- - - - - - (3,415)
-------------------------------------------------------------------------------------------------------------
550,019 2,406 - 5 - 86,830 (79,485)
(550,019) (2,406) - 1 - 2,405 -
- - - - - 1,000 -
- - - - - 211 -
- - - - - 1,335 -
- - - - 2,459 - -
- - - - - - (7,602)
-------------------------------------------------------------------------------------------------------------
- $ - $ - $6 $2,459 $91,781 $(87,087)
=============================================================================================================
See accompanying notes.
7
22
ARI Network Services, Inc.
Statements of Cash Flows
(In Thousands)
YEAR ENDED JULY 31
2000 1999 1998
-----------------------------------------------------
OPERATING ACTIVITIES (restated)
Net loss $(7,602) $(3,415) $(2,140)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Amortization of network platform 656 695 695
Amortization of industry-specific applications 3,224 2,057 1,121
Amortization of goodwill 658 584 100
Amortization of debt discount and deferred financing fees 284 - -
Depreciation and other amortization 464 494 226
Net change in receivables, prepaid expenses and other
current assets (90) 431 (714)
Net change in accounts payable, unearned income and
accrued liabilities 1,243 (505) 12
-----------------------------------------------------
Net cash provided by (used in) operating activities (1,163) 341 (700)
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (63) (56) (55)
Cash received in acquisitions - 43 -
Industry-specific applications costs capitalized (1,729) (1,802) (1,546)
-----------------------------------------------------
Net cash used in investing activities (1,792) (1,815) (1,601)
FINANCING ACTIVITIES
Borrowings (repayments) under line of credit (1,000) 1,380 1,120
Borrowings under notes payable 4,000 80 -
Payments of capital lease obligations and notes payable (690) (71) (190)
Debt issuance costs incurred (254) - -
Proceeds from issuance of common stock 1,335 18 1,501
-----------------------------------------------------
Net cash provided by financing activities 3,391 1,407 2,431
-----------------------------------------------------
Net increase (decrease) in cash 436 (67) 130
Cash at beginning of year 127 194 64
-----------------------------------------------------
Cash at end of year $ 563 $ 127 $ 194
=====================================================
Cash paid for interest $ 437 $ 310 $ 129
=====================================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for -
Network system hardware $ 328 $ - $ 55
Issuance of common stock for acquisitions - 4,191 654
Issuance of common stock as payment on line of credit 1,000 - -
Conversion of line of credit to notes payable to shareholder 1,000 - -
Issuance of common stock warrants and options 2,459 - -
Issuance of common stock for professional services:
Network system hardware and software 85 - -
Deferred financing costs 126 - -
See accompanying notes.
8
23
ARI Network Services, Inc.
Notes to Financial Statements
July 31, 2000
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ARI Network Services, Inc. (the Company) operates in one business segment and
provides business-to-business e-commerce solutions to manufacturers in selected
industries with shared service networks and distribution channels. Disaggregated
operating expense information is not provided to the chief operating decision
maker of the Company. The Company's e-commerce services use telecommunications
technology and software to help customers conduct business electronically,
computer-to-computer, with minimal changes to their internal business systems.
The Company focuses on the U.S., Canadian, European and Australian manufactured
equipment industry as well as certain non-equipment industries, including the
U.S. and Canadian agribusiness industry, the U.S. and Canadian freight
transportation industry and the U.S. non-daily newspaper publishing industry.
The Company provides both electronic catalog and transaction processing software
and services, enabling dealers and distributors in a shared distribution and
service network to electronically look up parts, service bulletins and other
technical reference information, and to exchange electronic business documents
such as purchase orders, invoices, warranty claims and status inquiries with the
manufacturers. The Company's customers are located primarily in the United
States, Europe and Canada. Transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the U.S.
dollar are included in the results of operations as incurred. Transaction gains
and losses were insignificant in each of the periods reported.
REVENUE RECOGNITION
Revenue for use of the network and for information services is recognized in the
period such services are utilized.
Revenue from annual or periodic maintenance fees is recognized ratably over the
period the maintenance is provided. Revenue from catalog subscriptions is
recognized over the subscription term.
9
24
ARI Network Services, Inc.
Notes to Financial Statements
July 31, 2000
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prior to the adoption of Statement of Position (SOP) 98-9 on August 1, 1999, the
Company recognized revenue allocable to software licenses in multiple element
arrangements upon delivery of the software product to the end user. Upon
adoption of SOP 98-9 on August 1, 1999, 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 and other arrangements with payment terms longer than
normal not to be fixed or determinable. If the fee is not fixed or determinable,
revenue is recognized as payments become due from the customer. Arrangements
that include acceptance terms beyond the Company's standard terms are not
recognized until acceptance has occurred. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
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. Revenue on
arrangements with customers who are not the ultimate users (resellers) is
deferred if there is any uncertainty on the ability and intent of the reseller
to sell such software independent of their payment to the Company.
10
25
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed under the straight-line method for financial reporting
purposes and under accelerated methods for income tax purposes. Depreciation and
amortization have been provided over the estimated useful lives of the assets as
follows:
Years
-------
Network system hardware and software 2 - 10
Leasehold improvements 10
Furniture and equipment 2 - 5
NETWORK CONSTRUCTION AND EXPANSION AND SOFTWARE DEVELOPMENT
The Company has developed a basic network and telecommunications platform which
is the foundation of its network. The platform can be used on different hardware
and is not subject to the frequency of technological changes that sometimes
occur with hardware or industry-specific applications.
11
26
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company also develops and purchases industry-specific software applications
for personal computers and mainframes which, when utilized with the platform,
give rise to the Company's products and services tailored to its targeted
industries.
Certain software development costs and network construction and expansion costs
are capitalized when incurred. Capitalization of these costs begins upon the
establishment of technological feasibility. The establishment of technological
feasibility and the ongoing assessment of recoverability of software and network
system costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technologies.
The annual amortization of the platform and the industry-specific software
applications is the greater of the amount computed using (a) the ratio that
current gross revenues for the network or an industry-specific product bear to
the total of current and anticipated future gross revenues for the network or an
industry-specific product or (b) the straight-line method over the estimated
economic life of the product (20 years - platform, 3 years - industry-specific
software applications). Amortization starts when the product is available for
general release to customers.
All other network construction and expansion expenditures are charged to expense
in the period incurred.
GOODWILL
Goodwill, representing the excess of cost over net assets of businesses
acquired, is stated at cost and is amortized on a straight-line basis over five
years.
IMPAIRMENT OF LONG-LIVED ASSETS
Equipment and leasehold improvements, network system costs and goodwill are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets.
12
27
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Such analyses necessarily involve judgment. The Company evaluated the ongoing
value of its long-lived assets as of July 31, 2000 and 1999, and determined that
there was no significant impact on the Company's results of operations.
DEFERRED FINANCING COSTS
Costs incurred to obtain long-term financing are amortized using the interest
method over the term of the related debt.
CAPITALIZED INTEREST COSTS
In 2000, 1999 and 1998, interest costs of $76,000, $56,000 and $19,000,
respectively, were capitalized and included in the network system.
OTHER ACCRUED LIABILITIES
Other accrued liabilities include accrued royalties of $486,000 and $319,000 at
July 31, 2000 and 1999, respectively.
COMPREHENSIVE INCOME
Net loss for 2000, 1999 and 1998 is the same as comprehensive income defined
pursuant to Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income."
NET LOSS PER SHARE
The basic and diluted weighted-average shares used in the net loss per share
calculation are 6,002,000, 5,061,000 and 4,119,000, respectively, in 2000, 1999
and 1998. Basic and diluted net loss per share is the same for all periods as
the impact of all dilutive securities is antidilutive.
RECLASSIFICATIONS
Certain 1999 and 1998 amounts have been reclassified to conform to the 2000
presentation.
13
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ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, which establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133, which will be
effective for the Company beginning August 1, 2000, requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company does not expect the
potential effect of adopting the provisions of SFAS No. 133, as amended, to have
a significant impact on its financial statements.
2. ACQUISITIONS
The Company has accounted for its acquisitions using the purchase method of
accounting and accordingly, the purchase price was allocated to assets acquired
and liabilities assumed based upon their respective fair values at the date of
acquisition. The financial statements include the operating results of the
acquisitions from their respective dates of acquisition.
In September 1998, the Company acquired certain assets used in the operation of
Briggs & Stratton Corporation's Powercom-2000 business (Powercom). Aggregate
consideration for the acquisition consisted of 840,000 shares of the Company's
common stock and the assumption of certain liabilities totaling $2,291,000. The
excess of the purchase price over the fair value of net assets acquired of
$2,782,000 for Powercom has been recorded as goodwill.
On May 13, 1999, the Company acquired the assets of Network Dynamics, Inc.
(NDI). On this date, NDI was merged with and into the Company and the separate
corporate existence of NDI ceased. Common stock to be paid as consideration to
the former shareholders of NDI was held in escrow until the Total NDI Value, as
defined, was determined in August 1999 upon completion of an audit of the
balance sheet as of May 13, 1999. Aggregate consideration for the acquisition
consisted of 550,019 shares of the Company's common stock, which were issued in
September 1999, and the assumption of certain liabilities totaling $3,623,000.
The purchase price in excess of net tangible assets acquired was recorded as
goodwill until a final valuation by an independent appraisal firm to allocate
the purchase price was completed in December 1999. The Company then allocated
the purchase price in excess of net tangible assets acquired to
industry-specific applications.
14
29
ARI Network Services, Inc.
Notes to Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma results of operations for the year ended July
31, 1999, assumes that the acquisitions had occurred on August 1, 1998 (in
thousands, except per share data):
1999
---------
Net revenues $15,482
Net loss (4,533)
Basic and diluted net loss per share (0.81)
The pro forma results do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred on
August 1, 1998, nor are they necessarily indicative of future operating results.
3. LINE OF CREDIT AND NOTES PAYABLE TO SHAREHOLDER
At July 31, 1999, the Company had a $3,000,000 revolving line of credit
agreement with a shareholder that was to expire on December 31, 2001. On
September 30, 1999, the Company and the shareholder restructured and amended the
line of credit agreement in order to reduce the line of credit from $3,000,000
to $1,000,000, establish a $1,000,000 term loan payable and convert $1,000,000
of the line of credit into 195,122 shares of common stock. The term loan is
payable in equal monthly installments over three years commencing November 1,
1999, and bears interest at prime (9.5% at July 31, 2000) plus 3.25%. The line
of credit expires December 31, 2001. The Company is required to pay a fee of
.025% per month on the unused portion of the line of credit. Borrowings under
the line of credit bear interest at prime plus 2%. No amounts are outstanding
under the line of credit at July 31, 2000. In connection with this amendment,
the Company issued a warrant to purchase 30,000 shares of the Company's common
stock at $4 per share. These warrants are exercisable at any time through
September 2006 and have been valued at $105,000 for financial statement
purposes. The value allocated to the warrants, which reduce the carrying value
of the debt, was measured at the date of grant because the number of shares was
fixed and determinable. The value was determined based upon a Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
6%, dividend yield of 0%, expected common stock market price volatility factor
of .72 and an expected life of the warrants of six years. The debt discount is
being amortized straight-line over the three year term of the debt. The
unamortized balance of the debt discount at July 31, 2000 was $76,000. The
entire agreement is secured by
15
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ARI Network Services, Inc.
Notes to Financial Statements (continued)
3. LINE OF CREDIT AND NOTES PAYABLE TO SHAREHOLDER (CONTINUED)
substantially all assets of the Company other than accounts receivable sold
under the receivable sales agreement described in Note 4. The agreement contains
various restrictive covenants including maintenance of a minimum level of net
worth and restrictions on additional indebtedness.
On December 21, 1999, the Company and shareholder amended the line of credit
agreement to provide the Company with an additional borrowing of $500,000 as a
bridge loan. The bridge loan bore interest at prime plus 3.25%. On April 27,
2000, the Company paid the balance outstanding under the bridge loan.
Future maturities of notes payable to shareholder as of July 31, 2000, are as
follows (in thousands):
Fiscal year ending
------------------
2001 $361
2002 333
2003 56
---------
$750
=========
In connection with the origination of the line of credit agreement with the
shareholder and various extensions of the agreement, in addition to the warrants
discussed above, the Company has issued the shareholder warrants for the
purchase of up to 250,000 shares of its common stock at $2.125 per share. On
September 30, 2000, 175,000 warrants will expire and on December 31, 2001,
75,000 warrants will expire as to any shares of common stock not issued.
16
31
ARI Network Services, Inc.
Notes to Financial Statements (continued)
4. NOTES PAYABLE
Notes payable consist of the following at July 31 (in thousands):
2000 1999
-------------------------------------
Term loan $ 266 $ 360
Note payable to bank 479 602
Note payable to Briggs & Stratton Corporation,
paid in 2000 - 80
Convertible subordinated debenture 4,000 -
Less debt discount for convertible subordinated
debenture (2,158) -
Other 42 77
-------------------------------------
2,629 1,119
Less current maturities 461 385
-------------------------------------
$2,168 $ 734
=====================================
On April 27, 2000, the Company issued RGC International Investors, LDC (RGC) (i)
a convertible subordinated debenture (the Debenture) for $4,000,000 due on April
27, 2003, (ii) warrants to purchase 600,000 shares of common stock at $6 per
share (the Warrants), and (iii) an investment option to purchase 800,000 shares
of common stock at $6 per share (the Investment Option). The Investment Option
expires on October 27, 2001, and the Warrants expire on April 27, 2005. The
value allocated to the Warrants and Investment Option, which reduced the
carrying value of the debt, were measured at the date of grant because the
number of shares was fixed and determinable. The value was determined based upon
a Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 6%, dividend yield of 0%, expected common stock market price
volatility factor of .80, an expected life of the Investment Option of eighteen
months and an expected life of the Warrants of five years. A debt discount was
recorded for the fair value of the Warrants and Investment Option of $2,354,000.
The Debenture bears interest at 7% and is convertible into common stock at $4
per share. At any time after October 27, 2000, the Company can require RGC to
convert the amount owed under the Debenture into common stock at $4 per share
provided that the closing bid price of the Company's common stock has been
greater than $6.60 for 20 consecutive trading days. At any time after April 27,
2002, the Company can require RGC to exercise
17
32
ARI Network Services, Inc.
Notes to Financial Statements (continued)
the Investment Option if the closing bid price of the Company's common stock is
greater than $9.90 for 20 consecutive trading days.
4. NOTES PAYABLE (CONTINUED)
Under the terms of the Debenture and the related Investment Option and Warrants,
the Debenture is convertible and the Investment Option and Warrants are
exercisable by RGC only to the extent that the number of shares of common stock
issuable, together with the number of shares of common stock owned by RGC and
its affiliates, generally would not exceed 4.9% of the Company's outstanding
common stock at the time of conversion or exercise. In certain circumstances
where the Company has the right to force conversion of the Debenture and
exercise of the Investment Option, RGC's percentage ownership may exceed 4.9%
but cannot exceed 9.9%.
As part of the consulting fee paid in conjunction with obtaining the RGC
financing, the Company issued warrants for the purchase of 8,000 shares of its
common stock at $7.03 per share. These warrants expire on April 27, 2005.
The term loan requires monthly principal and interest payments of approximately
$8,000 through May 2003. The note payable to bank bears interest at 9.75% which
is payable monthly through December 2001.
Future maturities of notes payable as of July 31, 2000, are as follows (in
thousands):
Fiscal year ending
------------------
2001 $ 461
2002 248
2003 4,078
---------------
$4,787
===============
18
33
ARI Network Services, Inc.
Notes to Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
On September 28, 1999, the Company closed and commenced funding under a
Receivable Sale Agreement (the RFC Agreement) with RFC Capital Corporation (RFC)
pursuant to which RFC has agreed to purchase from the Company certain
receivables generated by the Company in the ordinary course of the Company's
business. The RFC Agreement allows for RFC to purchase up to $3,000,000 of the
Company's eligible receivables. Under the Agreement, RFC purchases 90% of the
eligible receivables from the Company from time to time upon presentation
thereof for a purchase price equal to approximately the net value of such
receivables. Net value is designed to yield RFC an effective rate of 11.5% plus
allow RFC to retain a holdback of 5% in the face amount of the receivables, net
of collections, against future collection risk. For the year ended July 31,
2000, the Company incurred $71,000 of financing expense relating to this
agreement.
Under the RFC Agreement, the Company performs certain servicing, administrative
and collection functions with respect to the receivables sold to RFC. Also,
pursuant to the terms of the RFC Agreement, the Company has granted to RFC a
security interest in and to the Company's U.S. receivables not sold to RFC and
the Company's customer base, excluding non U.S. customers, relating to the
generation of such accounts receivable.
19
34
ARI Network Services, Inc.
Notes to Financial Statements (continued)
5. CAPITAL AND OPERATING LEASES
The Company leases office space under operating lease arrangements expiring in
2001 through 2006. The Company is generally liable for its share of increases in
the landlord's direct operating expenses and real estate taxes up to 5% of the
previous years rent. Total rental expense for the operating leases was $616,000
in 2000, $400,000 in 1999 and $487,000 in 1998.
Minimum lease payments under remaining capital and operating leases are as
follows (in thousands):
Fiscal year ending Capital Leases Operating Leases
--------------------------- ---------------------------------------------
2001 $154 $ 664
2002 151 664
2003 99 244
2004 - 244
2005 - 189
Thereafter - 89
---------------------------------------------
Total minimum lease payments 404 $2,094
====================
Amounts representing interest and taxes 79
----------------------
Present value of minimum capital lease payments 325
Less amounts payable in one year 111
----------------------
$214
======================
6. SHAREHOLDERS' EQUITY
At July 31, 2000, the Company has 20,350 shares of Series A Preferred Stock
outstanding. The shares are entitled to cumulative annual dividends equal to the
product of $100 and prime plus 2% payable quarterly, as and when declared by the
Board of Directors. Prior to August 1, 2002, dividends payable may be paid, at
the Company's option, in lieu of cash, in additional shares of Series A
Preferred Stock. The Company may redeem outstanding shares at any time at the
redemption price of $100 per share plus accrued and unpaid dividends.
In the event of liquidation or dissolution of the Company, the holders of shares
of Series A Preferred Stock shall be entitled to receive $100 per share plus
accrued and unpaid dividends before any distribution is made to the holders of
common stock. Accumulated dividends in arrears at July 31, 2000, are $725,000.
20
35
ARI Network Services, Inc.
Notes to Financial Statements (continued)
7. STOCK PLANS
The Company's 1991 Stock Option Plan (Stock Option Plan) had 850,000 shares of
common stock authorized for issuance. Options granted under the Stock Option
Plan may be either (a) options intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended, or (b)
nonqualified stock options.
Any incentive stock option that is granted under the Stock Option Plan may not
be granted at a price less than the fair market value of the stock on the date
of grant (or less than 110% of the fair market value in the case of holders of
10% or more of the voting stock of the Company). Nonqualified stock options may
be granted at the exercise price established by the Stock Option Committee,
which may be less than, equal to or greater than the fair market value of the
stock on the date of grant.
Each option granted under the Stock Option Plan is exercisable for a period of
ten years from the date of grant (five years in the case of a holder of more
than 10% of the voting stock of the Company) or such shorter period as
determined by the Stock Option Committee and shall lapse upon the expiration of
said period, or earlier upon termination of the participant's employment with
the Company.
At its discretion, the Stock Option Committee may require a participant to be
employed by the Company for a designated number of years prior to exercising any
options. The Committee may also require a participant to meet certain
performance criteria, or that the Company meet certain targets or goals, prior
to exercising any options.
21
36
ARI Network Services, Inc.
Notes to Financial Statements (continued)
7. STOCK PLANS (CONTINUED)
Changes in option shares under the Stock Option Plan are as follows:
2000 1999 1998
--------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------- --------------------------- --------------------------
Outstanding at the
beginning of the
year 675,849 $ 5.58 528,715 $ 6.45 350,685 $ 10.45
Granted 181,950 8.36 213,175 2.83 229,499 3.35
Exercised (223,136) 1.89 (784) 2.18 - -
Forfeited (121,443) 9.63 (65,257) 3.68 (51,469) 19.88
--------------------------- --------------------------- --------------------------
Outstanding at the end
of the year 513,220 $ 7.20 675,849 $ 5.58 528,715 $ 6.45
=========================== =========================== ==========================
Exercisable 308,774 $ 7.55 429,763 $ 8.01 318,282 $ 8.78
=========================== =========================== ==========================
Available for grant 72,210 132,717 280,635
=========== ============ ===========
The weighted average contractual life of options outstanding at July 31, 2000
was 7.3 years. The range of exercise prices for options outstanding at July 31,
2000 was $2.00 to $32.00
The Company's 1992 Employee Stock Purchase Plan (Stock Purchase Plan) has 62,500
shares of common stock reserved for issuance and 46,488 shares have been issued
through July 31, 2000. All employees of the Company, other than executive
officers, with six months of service are eligible to participate. Shares may be
purchased at the end of a specified period at the lower of 85% of the market
value at the beginning or end of the specified period through accumulation of
payroll deductions.
The Company's 1993 Director Stock Option Plan (Director Plan) has 150,000 shares
of common stock reserved for issuance to nonemployee directors. Options under
the Director Plan are granted at the fair market value of the stock on the grant
date.
22
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ARI Network Services, Inc.
Notes to Financial Statements (continued)
7. STOCK PLANS (CONTINUED)
Each option granted under the Director Plan is exercisable one year after the
date of grant and cannot expire later than ten years from the date of grant.
Changes in option shares under the Director Plan are as follows:
2000 1999 1998
--------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------- --------------------------- --------------------------
Outstanding at the
beginning of the
year 49,879 $ 5.44 35,433 $ 6.44 28,500 $ 9.86
Granted 42,261 8.41 14,446 2.66 15,208 2.08
Exercised (16,509) 3.46 - - - -
Forfeited (8,545) 11.62 - - (8,275) 12.27
--------------------------- --------------------------- --------------------------
Outstanding at the end
of the year 67,086 $ 6.91 49,879 $ 5.44 35,433 $ 6.44
=========================== =========================== ==========================
Exercisable 49,879 $ 4.77 35,433 $ 6.44 25,229 $ 9.07
=========================== =========================== ==========================
Available for grant 66,405 100,121 114,567
============== ============ ===========
The weighted average contractual life of options outstanding at July 31, 2000
was 7.9 years. The range of exercise prices for options outstanding at July 31,
2000 was $1.78 to $17.00.
Certain nonemployee directors have been granted stock options aggregating 57,500
shares of common stock at $2.50 to $9 per share.
23
38
ARI Network Services, Inc.
Notes to Financial Statements (continued)
7. STOCK PLANS (CONTINUED)
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its stock option plans. Had the
Company accounted for its stock option plans based upon the fair value at the
grant date for options granted under the plan, based on the provisions of SFAS
No. 123, the Company's pro forma net loss and pro forma net loss per share would
have been as follows (for purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period):
YEAR ENDED JULY 31
2000 1999 1998
------------------ -------------------- --------------------
Pro forma net loss (in thousands) $(8,647) $(3,996) $(2,507)
Pro forma net loss per share $(1.44) $(0.79) $(0.61)
Pro forma information regarding net loss and net loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options using a Black-Scholes option pricing model with the
following assumptions: risk-free interest rates ranging from 5.5% to 6%,
dividend yield of 0%; expected common stock market price volatility factors
ranging from .6 to 1.0 and an expected life of the options of ten years.
24
39
ARI Network Services, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of July 31 are as follows (in thousands):
2000 1999
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $31,723 $31,336
Other 2,208 433
------------------------------------
Total deferred tax assets 33,931 31,769
Valuation allowance for deferred tax assets (30,895) (28,302)
------------------------------------
Net deferred tax asset 3,036 3,467
Deferred tax liabilities -
Network system 3,036 3,467
------------------------------------
Net deferred taxes $ - $ -
====================================
As of July 31, 2000, the Company has unused net operating loss carryforwards for
federal income tax purposes of $37,637,000 expiring in 2007 through 2020.
In addition, the Company has unused net operating loss carryforwards for federal
income tax purposes of $10,048,000 expiring in 2001 and 2002, of which not more
than $444,000 annually can be utilized to offset taxable income. Also, the
Company has unused net operating loss carryforwards for federal income tax
purposes of $33,656,000 expiring between 2003 and 2007, of which not more than
$3,655,000 annually can be utilized to offset taxable income. Use of the net
operating loss carryforwards is restricted under Section 382 of the Internal
Revenue Code because of changes in ownership in 1987 and 1992.
25
40
ARI Network Services, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation between income tax expense and income taxes computed by
applying the statutory federal income tax rate to net loss is as follows (in
thousands):
2000 1999 1998
--------------------------------------------------
Computed income taxes at 34% $(2,585) $(1,161) $(728)
Permanent items 435 7 7
Net operating loss carryforward 2,150 1,154 721
--------------------------------------------------
Income tax expense $ - $ - $ -
==================================================
9. EMPLOYEE BENEFIT PLAN
The Company has a qualified retirement savings plan (the 401(k) Plan) covering
its employees. Each employee may elect to reduce his or her current compensation
by up to 15%, up to a maximum of $10,500 in calendar 2000 (subject to adjustment
in future years to reflect cost of living increases) and have the amount of the
reduction contributed to the 401(k) Plan. Company contributions to the 401(k)
Plan are at the discretion of the Board of Directors. The Company has not made
any contribution to the 401(k) Plan since its inception.
10. MAJOR CUSTOMERS
During fiscal 2000 and 1999, sales to any one customer did not exceed 10% of net
revenues. Sales to one customer were 12% of net revenues during 1998.
11. 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 year ended July 31, 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. The net
effect of the restatement for the year ended July 31, 2000 was to decrease
software revenue by $1,256,000 and increase net loss and net loss per share by
$1,256,000 and $0.21, respectively. The effect on the balance sheet as of
26
41
ARI Network Services, Inc.
Notes to Financial Statements (continued)
July 31, 2000 was an increase in unearned income of $1,256,000 and an increase
in accumulated deficit of $1,256,000.
12. 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 Debenture described in Note 4 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 described in Note 3 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.
27