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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(XX) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended July 31, 2001
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from ............... to ...............
Commission File No. 0-19608
ARI NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1388360
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 East Kilbourn Ave. 53202-3149
Milwaukee, Wisconsin (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (414) 278-7676
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_____]
As of October 25, 2001, aggregate market value of the Common Stock held by
non-affiliates (based on the closing price on the NASDAQ bulletin board) was
approximately $1.7 million.
As of October 25, 2001, there were 6,184,281 shares of Common Stock of the
registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, to be filed with the Securities
and Exchange Commission no later than 120 days after July 31, 2001, for the
2001 Annual Meeting of Shareholders are incorporated by reference in Part III
hereof.
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ITEM 1. BUSINESS
BUSINESS OVERVIEW
ARI Network Services, Inc. (the "Company" or "ARI") is a provider of
technology-enabled business solutions that connect manufacturers in selected
industries with their service and distribution networks. We focus our sales
and marketing on the U.S., Canadian, European and Australian manufactured
equipment industry (the "Equipment Industry"), providing direct sales and
service in North America and operating through value-added sales and service
agents elsewhere. Sales for these manufacturers are driven by their dealers'
needs for parts for repair, warranty, and maintenance services. The Equipment
Industry is made up of separate sub-markets in which the manufacturers often
share common distributors, retail dealers and/or service points. These
sub-markets include: outdoor power, recreation vehicles, motorcycles,
manufactured housing, farm equipment, marine, construction, power sports,
floor maintenance, auto parts aftermarket and others. By "Equipment" we mean
capital goods which are repaired rather than discarded when broken and for
which the repairs are generally performed by a distributed network of
independent dealers and/or repair shops. The Equipment Industry has been a
growing percentage of our revenue over the past three years, representing 76%
of fiscal 2001 revenue. We expect this percentage to continue to increase in
fiscal 2002 and beyond.
Our products and services enable Equipment Industry manufacturers to automate
business communications with their worldwide distributors, dealers, and
service points. We supply three types of software and services: robust Web and
CD-ROM electronic parts catalogs, transaction services and template-based
website services. The electronic cataloging products and services enable
partners in a service and distribution network to electronically look up
technical reference information such as illustrated parts lists, service
bulletins, price files, repair instructions and other technical information
regarding the products of multiple manufacturers. The transaction services
allow the manufacturers and their distribution and service partners to
exchange electronic business documents such as purchase orders, invoices,
warranty claims, and status inquiries. The template-based website service
makes it easy for a dealer to create a professional web presence and to
optionally conduct electronic business with its customers. Our products and
services use the Internet for data transport and a combination of the
World-Wide Web and CD-ROM technology for user interfaces and data
presentation.
Our sales and marketing activities are focused primarily on Equipment Industry
manufacturers that sponsor our products and services to their dealers,
distributors and/or service points. These manufacturers have the financial
capability and business power to implement an automation strategy throughout
their service and distribution networks. We believe that the implementation of
our products can increase loyalty and productivity in the service and
distribution network as well as end-customer satisfaction. In addition to
software licenses and support services, a typical implementation for a given
manufacturer will involve professional services for project management,
software customization, and roll-out management. Once manufacturer sponsorship
is obtained, we also develop a direct business relationship with the
distributors, dealers, and service points for software and services.
An important aspect of our business is the relationships we have developed
with over 100 dealer business management system providers through our COMPASS
Partners(TM) program. A dealer business management system is used to manage
inventory, maintain accounting records, bill customers and focus marketing
efforts. Our software's ability to interface with these systems provides the
end-user with a more robust, informative, and cost-effective solution.
Our customer base currently comprises approximately 100 manufacturers in 12
different sub-markets of the Equipment Industry, as well as over 20,000
dealers, distributors, and repair facilities in more than 50 countries. No
single customer accounted for 10% or more of our revenues in fiscal 2001.
As part of our historical business practice, we continue to provide electronic
directory and transaction services, to the U.S. and Canadian agribusiness
industry, which accounted for 11% of our total revenue in fiscal 2001. During
fiscal 2001, we provided electronic directory services to the U.S. and
Canadian freight transportation industry and on-line information management
services to the non-daily newspaper publishing industry, which accounted for
3% and 10%, respectively, of our total revenue in fiscal 2001. The contract
with the freight transportation industry expired in December, 2000 and the
contract with the non-daily newspaper publishing industry will expire in
November, 2001.
2
Our executive offices are located at 330 East Kilbourn Avenue, Milwaukee,
Wisconsin 53202 and our telephone number at that location is (414) 278-7676.
ARI is a Wisconsin corporation, incorporated in 1981. We maintain a website at
http://www.arinet.com(TM), which is not part of this report.
MISSION AND STRATEGY
Our mission is to be the leading provider of technology-enabled business
solutions for sales, services and product support in selected manufacturing
industry segments with shared distribution channels and service networks. Our
vision is that whenever a manufacturer in one of our target markets
communicates or does business electronically with a distributor, dealer or
service location, it will use at least some of our products and services to do
so. To achieve this vision, our strategy is to concentrate on a few vertical
markets, and to be the leading provider of catalog products and services.
After establishing a position in a market, we will then bring other products
and services to bear in order to expand our presence and solidify our
competitive position. Our goal is to provide a complete array of high-quality
software and services that industry participants will adopt and use
effectively.
Our strategy includes driving growth in our targeted markets through three
distinct programs: (i) sales; (ii) strategic alliances; and (iii)
acquisitions. Our external sales team focuses on large manufacturers and
distributors in the targeted industry sectors, while internal telesales
representatives sell to dealers and small to medium sized distributors. The
alliance strategy includes three parts: (i) manufacturer sales parties; (ii)
COMPASS partners; and (iii) non-US sales and service agents. We have a
relationship with Click Commerce, under which they sell our web catalog
products and services as part of their total product suite. We are actively
cultivating relationships with other potential manufacturer sales partners.
Through our COMPASS Partners program, we have a strategic alliance
relationship with over 100 companies that provide complementary software and
services to distributors and dealers in our targeted industries. Outside of
North America, we sell to manufacturers directly, but use local agents to
provide sales and support to dealers. We also have an active acquisition
program that has generated four acquisitions in the last five years. We seek
to acquire businesses with market positions in our targeted markets,
additional products that we can provide to our customer base, and development
talent to supplement our current staff.
Through our sales, alliance and acquisition programs, we expect to expand our
business both by growing market share in our current Equipment sectors and by
entering new sectors.
PRODUCTS AND SERVICES
We offer three basic kinds of services to our customers in the Equipment
Industry: (i) electronic catalogs for publishing and viewing technical
reference information about the equipment, (ii) electronic communications for
exchanging documents such as purchase orders, invoices, and warranty claims
and (iii) website services which allow a dealer to create a website using a
series of templates. The following table shows the software products and
services that we offer, a brief description of the products and the industries
where they are currently in use.
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ELECTRONIC CATALOG PRODUCTS AND SERVICES
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PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY/MARKET
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EMPARTweb(TM) Web based electronic parts catalog based upon the Equipment - outdoor power, auto
EMPART database technology parts after-market, marine and
motorcycle
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PartSmart(TM) Electronic parts catalog for equipment dealers Equipment - all sub-markets except
RV and manufactured housing
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EMPARTviewer(TM) Electronic parts catalog viewing software Equipment - RV and manufactured
housing only
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EMPARTpublisher(TM) Electronic parts catalog creation software used to Equipment - all sub-markets
produce catalogs for viewing on EMPARTweb, PartSmart,
and EMPARTviewer
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Electronic publishing Project management, data conversion, editing, Equipment - all sub-markets
services production, and distribution services for
manufacturers who wish to outsource catalog
production operations
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3
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ELECTRONIC COMMUNICATIONS PRODUCTS AND SERVICES
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PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY/MARKET
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TradeRoute(R)Customized Web-based e-Commerce forms to support transactions Equipment - outdoor power
Web forms such as product ordering, warranty claims and other
business processes
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TradeRoute(R) Document handling and communications for product Equipment - all sub-markets
ordering, warranty claims and other business documents
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Professional services Project management, software customization, roll-out All Industries Equipment - all
management, and help desk support services sub-markets
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WEBSITE SERVICES
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PRODUCT OR SERVICE DESCRIPTION PRIMARY INDUSTRY/MARKET
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WebSite Smart(TM) Template-based software to create Equipment - outdoor power, power
customized dealer websites and conduct sports
business electronically
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As part of our historical business practice, we continue to provide e-Commerce
services to certain non-equipment industries, including the U.S. and Canadian
agribusiness industry and the U.S. non-daily newspaper publishing industry. In
these non-equipment industries, we provide electronic directory and
transaction services as well as on-line information management services. In
fiscal 2001, these products and services accounted for 21% of our total
revenue and are expected to decline significantly in fiscal 2002.
ACQUISITIONS
Since December 1995, ARI has had a business development program aimed at
identifying, evaluating and closing acquisitions which augment and strengthen
our market position, product offerings, and personnel resources. Since the
program's inception, more than 300 acquisition candidates have been evaluated,
resulting in four completed acquisitions. The following table shows selected
information regarding these acquisitions:
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Acquisition Date Acquired Company and Location Description of Acquired Company
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November 4, 1996 cd\*.IMG, Inc. ("CDI") CDI developed the Plus1(R) electronic
New Berlin, WI parts catalog which featured parts
information from over 20
manufacturers in the outdoor power,
marine, motorcycle and power sports
industries and was replaced with the
Partsmart electronic catalog.
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September 30, 1997 Empart Technologies, Inc. ("EMPART") EMPART provided us with the
Foster City, CA EMPARTpublisher and EMPARTviewer
software.
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September 15, 1998 POWERCOM-2000 ("POWERCOM"), a subsidiary of POWERCOM provided electronic catalog
Briggs & Stratton Corporation outdoor power, and communication services to a
power tools, and power Colorado Springs, CO number of manufacturers in North
America, Europe, and Australia in the
sports industries.
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May 13, 1999 Network Dynamics Incorporated ("NDI") NDI provided us with the PartSmart
Williamsburg, VA electronic catalog which was used by
over 10,000 dealers to view catalogs
from 50 different manufacturers in 6
sectors of the Equipment Industry.
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4
COMPETITION
Competition for ARI's products and services in the Equipment Industry varies
by product and by sub-market. No single competitor today competes with us in
each of our targeted vertical Equipment Industry sub-markets. In electronic
catalog software and services, our direct competitors include ProQuest,
Enigma, and NetVendor Inc. which provide electronic catalog services in the
motorcycle, marine, and auto markets, and a variety of small companies focused
on specific industries. Many of these smaller companies may also represent
acquisition targets for us. There are also other companies that provide
catalog services such as Saqqara Systems, Inc. and Requisite Technology, Inc.
that may in the future directly compete with us in our target markets. In
addition, there are also a number of larger companies which have targeted
Web-based catalogs for procurement, such as Ariba, Commerce One, and i2
Technologies, Inc., which could expand their offerings to address the needs of
our markets and become competitors in the future. In the communications part
of our business, the primary competition comes from in-house information
technology groups who may prefer to build their own Web-based proprietary
systems, rather than use our industry-common solutions. There are also large,
general market e-Commerce companies like SBC Technologies Inc. and Peregrine
Systems, Inc., which offer products and services which could address some of
our customers' needs. These general e-Commerce companies do not typically
compete with us directly, but they could decide to do so in the future. These
companies may also represent alliance partner opportunities for us. In
addition, as in the catalog side of our business, there are a variety of small
companies focused on specific industries which compete with us and which may
also represent acquisition targets. Another potential source of competition in
the future is the group of companies attempting to build so-called "net
communities," such as Chemdex or VerticalNet, which could expand their
offerings to target our served markets. Finally, given the high level of
interest in Internet-related investment opportunities and the current pace of
technological change, it is possible that as yet unidentified well-capitalized
competitors could emerge, that existing competitors could merge and/or obtain
additional capital thereby making them more formidable, or that new
technologies could come on-stream that could threaten our position.
ARI's primary competitive advantages are (i) our focus on our target markets
and the industry knowledge and customer relationships we have developed in
those target markets, (ii), our robust electronic parts catalog software
products, and (iii) our relationships with over 100 dealer business management
system providers. When combined with products and services that are designed
for our targeted industries, we believe that our competitive advantages will
enable us to compete effectively and sustainably in these markets.
EMPLOYEES
As of October 25, 2001, we had 101 full-time equivalent employees. Of these,
12 are engaged in maintaining or developing software and providing software
customization services, 27 are in sales and marketing, 23 are engaged in
catalog creation and maintenance or database management, 30 are involved in
customer implementation and support and 9 are involved in administration and
finance. None of these employees is represented by a union.
ITEM 2. PROPERTIES
ARI occupies approximately 23,000 square feet in an office building in
Milwaukee, Wisconsin, under a lease expiring July 31, 2002. This facility
houses our headquarters and data center. In Colorado Springs, Colorado, we
occupy approximately 5,500 square feet of office space under a lease expiring
January 31, 2006. In Williamsburg, Virginia we occupy approximately 5,100
square feet of office space under a lease that expires October 1, 2004. In the
Netherlands we occupy approximately 450 square feet of office space under a
month-to-month lease.
ITEM 3. LEGAL PROCEEDINGS
ARI is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names of ARI's executive officers as of October
25, 2001. The officers serve at the discretion of the Board.
Name Age Capacities in Which Serving
---- --- ---------------------------
Brian E. Dearing 46 Chairman of the Board of Directors, CEO and President
Timothy Sherlock 49 CFO, Secretary, Treasurer and Vice President of Finance
John C. Bray 44 Vice President of Sales
Michael E. McGurk 53 Vice President of Technology Operations
Frederic G. Tillman 39 Vice President of Technology Development
--------------------
BRIAN E. DEARING. Mr. Dearing, Chief Executive Officer and a director since
1995 and Chairman of the Board of Directors since 1997, is CEO and President.
Prior to joining ARI, Mr. Dearing held a series of electronic commerce
executive positions at Sterling Software, Inc. in the U.S. and in Europe.
Prior to joining Sterling in 1990, Mr. Dearing held a number of marketing
management positions in the EDI business of General Electric Information
Services from 1986. Mr. Dearing holds a Masters Degree in Industrial
Administration from Krannert School of Management at Purdue University and a
BA in Political Science from Union College.
TIMOTHY SHERLOCK. Mr. Sherlock was appointed Chief Financial Officer,
Secretary, Treasurer and Vice President of Finance in April, 2001. Prior to
joining ARI, Mr. Sherlock was CFO and vice president of finance and
administration for Catalyst International, Inc., a warehouse management
software specialist. Before joining Catalyst in 1999, he held a series of
progressively more responsible finance positions at Advantage Learning
Systems, Inc. (ALS), a leading educational software firm based in Wisconsin
Rapids, Wis. culminating in his appointment as vice president, secretary and
CFO. His early career included a variety of financial management positions at
Cray Research, Inc., Eagan, Minn., from 1983 to 1995. Mr. Sherlock, a
Certified Public Accountant, received a BA in business administration from the
College of St. Thomas, St. Paul, Minn.
JOHN C. BRAY. Mr. Bray was appointed Vice President of Sales in September
1996. Prior to joining ARI, Mr. Bray was Manager of Global Internet Sales and
Consulting at GE Information Services (GEIS) in Rockville, Maryland. Before
joining GEIS, Mr. Bray had a six year sales career at AT&T, culminating in his
appointment as Regional Vice President of Sales for AT&T's EasyLink Services,
marketing electronic commerce services. He holds a BA in marketing from the
University of Iowa.
MICHAEL E. MCGURK. Mr. McGurk was appointed Vice President of Technology in
January 1997 and became Vice President of Technology Operations in August
1999. Prior to joining ARI, Mr. McGurk developed and operated a large format
printing services business for customers involved in business process
re-engineering projects. Before opening the printing service, Mr. McGurk had a
twelve year career in information technology management at various divisions
of General Electric, including GE Medical Systems, GE Corporate and GE
Aircraft Engines. Mr. McGurk's early career included sales and technology
positions at Cullinet and CinCom Systems. Mr. McGurk holds an MBA and BS from
Miami University in Ohio.
FREDERIC G. TILLMAN. Mr. Tillman was appointed Vice President of Technology
Development in August 1999. He joined ARI in September 1998 as part of the
acquisition of Powercom where he had been Vice President of Software
Development. Prior to joining Powercom in May 1998, Mr. Tillman was Director
of New Product Development for ADAC Healthcare Information Systems in Houston,
Texas, a producer of information systems for hospital laboratories and
radiology departments. Before joining ADAC in 1990, Mr. Tillman spent six
years at General Dynamics as a software engineer. Mr. Tillman holds an MBA
from Texas Christian University and a BS in Computer Science from Oklahoma
State University.
6
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ARI's common stock is currently quoted on the NASDAQ Over the Counter Bulletin
Board ("OTCBB") under the symbol ARIS. Prior to July 7, 2001, ARI's common stock
was quoted on the NASDAQ National Market System. The following table sets forth
the high and low closing sales price for the periods indicated. OTCBB
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions.
Fiscal Quarter Ended High Low
October 31, 1999.................... $6.281 $3.500
January 31, 2000.................... $18.750 $3.250
April 30, 2000...................... $12.813 $3.500
July 31, 2000....................... $6.063 $2.000
October 31, 2000.................... $2.594 $1.750
January 31, 2001.................... $2.250 $0.938
April 30, 2001...................... $1.625 $0.688
July 31, 2001....................... $1.050 $0.220
As of October 25, 2001, there were approximately 228 holders of record of the
Company's common stock. The Company has not paid cash dividends to date and
has no present intention to pay cash dividends.
7
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,
2001, which was derived from audited Financial Statements and Notes thereto of
ARI Network Services, Inc. Audited Financial Statements and Notes as of July
31, 2001 and 2000 and for each of the three years in the period ended July 31,
2001, 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
---------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ----------- ---------- ----------
Subscriptions, support and other services revenues $ 9,985 $ 9,743 $ 8,616 $ 5,811 $ 5,235
Software license and renewal revenues 3,266 1,289 2,822 1,431 888
Professional services revenues 2,526 2,272 1,450 722 790
---------- ---------- ----------- ---------- ----------
Total revenues 15,777 13,304 12,888 7,964 6,913
Operating expenses:
Cost of subscriptions, support and other
services sold 1,740 1,415 1,431 1,327 1,035
Cost of software licenses and renewals sold (1) 3,137 3,614 2,543 1,333 940
Cost of professional services sold 1,359 1,965 1,234 407 484
Depreciation and amortization (exclusive of
amortization of software products included in
cost of sales 1,517 1,778 1,773 1,021 950
Customer operations and support 1,597 2,048 1,017 708 1,004
Selling, general and administrative 8,790 8,214 6,995 4,586 4,819
Software development and technical support 3,317 2,779 2,786 2,198 1,897
Restructuring and other charges (2) 7,766 - - - -
---------- ---------- ----------- ---------- ----------
Operating expenses before amounts capitalized 29,223 21,813 17,779 11,580 11,129
Less capitalized portion (1,972) (1,729) (1,802) (1,546) (1,155)
---------- ---------- ----------- ---------- ----------
Net operating expenses 27,251 20,084 15,977 10,034 9,974
---------- ---------- ----------- ---------- ----------
Operating loss (11,474) (6,780) (3,089) (2,070) (3,061)
Other income (expense) (1,551) (822) (326) (70) (214)
---------- ---------- ----------- ---------- ----------
Net loss $(13,025) $ (7,602) $ (3,415) $ (2,140) $ (3,275)
========== ========== =========== ========== ==========
Weighted average common shares outstanding 6,175 6,002 5,061 4,119 3,611
Basic and diluted net loss per share $ (2.11) $ (1.27) $ (0.67) $ (0.52) $ (0.91)
SELECTED BALANCE SHEET DATA:
(IN THOUSANDS)
Working capital (deficit) $ (9,819) $ (4,680) $ (3,476) $ 762 $ (689)
Capitalized software development (net) (3) 3,961 11,901 14,052 9,122 8,957
Total assets 7,060 18,488 20,438 12,808 11,416
Current portion of long-term debt and capital
lease obligations 3,608 933 713 58 64
Total long-term debt and capital lease obligations 251 2,695 3,511 1,653 8
Total shareholders' equity (deficit) (5,850) 7,159 9,756 8,962 8,947
(1) Includes amortization of software products of $3,178, $3,224, $2,057,
$1,121 and $772.
(2) See note 4 to the financial statements.
(3) 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.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
Total revenue grew 19% during fiscal 2001 compared to fiscal 2000, while
revenues in the Equipment Industry grew 42%. Total revenue growth was slightly
less than the Company's target growth rate of between 20% and 30% due to the
faster than expected decline in non-Equipment Industry revenue. Net loss
increased in fiscal 2001, compared to fiscal 2000, due to the restructuring
and other charges the Company incurred for employee termination costs,
termination of operating lease agreements and to write off certain impaired
assets related to its network platform and communications products. Operating
loss before restructuring and other charges decreased in fiscal 2001, compared
to fiscal 2000, primarily due to increased margins and decreased operating
expense. As a result of cost reductions related to the Company's
restructuring, management expects results to improve in fiscal 2002.
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
four years, representing approximately 76% of the Company's revenue in fiscal
2001.
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
--------------------------------------------------------------------------
PERCENT PERCENT
INDUSTRY: 2001 2000 CHANGE 2000 1999 CHANGE
---- ---- ------- ---- ---- -------
Equipment Industry
Recurring $ 8,696 $ 5,621 55% $ 5,621 $ 3,243 73%
Non-recurring 3,364 2,864 17% 2,864 4,157 (31%)
----------- ---------- ----------- ----------
Subtotal 12,060 8,485 42% 8,485 7,400 15%
Other Revenues
Recurring 3,686 4,483 (18%) 4,483 4,841 (7%)
Non-recurring 31 336 (91%) 336 647 (48%)
----------- ---------- ----------- ----------
Subtotal 3,717 4,819 (23%) 4,819 5,488 (12%)
Total Revenue
Recurring 12,382 10,104 23% 10,104 8,084 25%
Non-recurring 3,395 3,200 6% 3,200 4,804 (33%)
----------- ---------- ----------- ----------
Grand Total $ 15,777 $ 13,304 19% $ 13,304 $ 12,888 3%
=========== ========== =========== ==========
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 2001 and fiscal 2000, compared to the prior year,
primarily due to increases in the Equipment Industry revenues. Recurring
revenue, as a percentage of total revenue, increased from 63% in fiscal 1999
and 76% in fiscal 2000 to 78% in fiscal 2001 primarily due to increases in the
customer base in the Equipment Industry. 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 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 2001,
compared to fiscal 2000, due to increased catalog license revenue in the
Equipment Industry. Non-recurring revenues decreased in fiscal 2000, compared
to fiscal 1999, as the Company experienced delays in the development of
customized communications software and changed its recognition of software
license and renewal revenue from up front upon sale to ratably over the twelve
month period of the arrangement, beginning in fiscal 2000. Management believes
that non-recurring revenues will increase during fiscal 2002.
9
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 aftermarket
and others. Management's strategy is to expand the Company's electronic parts
catalog software and services business with manufacturers and distributors and
their dealers in the existing vertical markets, add additional products and
services in these markets and then 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 2001 and fiscal 2000, compared to the prior year,
primarily due to an increase in the base of catalog customers. Non-recurring
revenues in the Equipment Industry increased in fiscal 2001, compared to the
prior year, due to increased software and professional services sold to new
and existing manufacturer customers. Non-recurring revenues in the Equipment
Industry decreased in fiscal 2000, compared to the prior year, primarily due
to changing the recognition of software license and renewal revenue to be over
a twelve month period and to delays in the delivery of the Company's
customized communications software. Management expects recurring and
non-recurring revenues in the Equipment Industry to increase at a higher
percentage of total revenues in fiscal 2002, 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 industry and, for
fiscal 2000 and part of fiscal 2001, the railroad industry, electronic
communications services to the agricultural inputs industry, and the on-line
provision of information for republication to the non-daily newspaper
publishing industry. Both recurring and non-recurring revenues in this
business have decreased from the prior year in fiscal 2001 and in fiscal 2000.
Our five-year contract with the Association of American Railroads expired in
December, 2000 and our five-year contract with the Associated Press, on which
our business in the non-daily newspaper publishing industries depends, expires
in November, 2001. Revenues from these contracts was approximately $2 million
in fiscal 2001.
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
2001 2000 CHANGE 2000 1999 CHANGE
---------- ----------- ---------- ----------
Cost of products and services sold $ 6,236 $ 6,994 (11%) $ 6,994 $ 5,208 34%
Customer operations and support 1,597 2,048 (22%) 2,048 1,017 101%
Selling, general & administrative 8,790 8,214 7% 8,214 6,995 17%
Software development and technical support 3,317 2,779 19% 2,779 2,786 0%
Depreciation and amortization (exclusive
of amortization of software products included
in cost of products and services sold) 1,517 1,778 (15%) 1,778 1,773 0%
Restructuring and other charges 7,766 - n/a - - -
---------- ----------- ---------- ----------
Less capitalized portion (1,972) (1,729) 14% (1,729) (1,802) (4%)
---------- ----------- ---------- ----------
Net operating expenses $ 27,251 $ 20,084 36% $ 20,084 $ 15,977 26%
========== =========== ========== ==========
Net operating expenses increased in fiscal 2001, compared to the prior year,
primarily due to restructuring and other charges and increased in fiscal 2000,
compared to the prior year, primarily as a result of the NDI acquisition
completed on May 13, 1999.
Cost of products and services sold consists primarily of amortization of
software products, royalties, telecommunications, distribution costs,
customization and catalog production labor and temporary help fees. Cost of
products and services sold decreased in fiscal 2001, compared to the prior
10
year, primarily due to a change in the mix of products and services sold. Cost
of products and services sold increased in fiscal 2000, 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 decreased to 40% in fiscal 2001, from 53% in fiscal 2000,
primarily due to decreased customization revenue and higher license and
subscription revenues, which have higher margins. Cost of products and
services sold as a percentage of total revenue increased to 53% in fiscal
2000, from 40% in fiscal 1999, primarily due to development cost overruns and
increased amortization of software products. Cost of professional services as
a percentage of professional services revenue was 54% in fiscal 2001, compared
to 86% in fiscal 2000 and 85% in fiscal 1999. The decrease in fiscal 2001,
compared to the prior two years, was primarily due to i) the completion of
several major customization projects in the Equipment Industry which had costs
in excess of the customer's expected cost to complete and were not invoiced to
the customer and ii) an increase in data conversion revenue as the Company
converted several NDI contracts from a fixed price to a time and materials
price. Subscription, support and other services cost of sales as a percentage
of subscription, support and other services revenue has remained relatively
the same over the past three years: 17% in fiscal 2001, 15% in fiscal 2000 and
17% in fiscal 1999. Software license and renewal cost of sales as a percentage
of software license and renewal revenue was 96% in fiscal 2001, compared to
280% in fiscal 2000 and 90% in fiscal 1999. The cost of software licenses and
renewals as a percentage of software license and renewal revenue increased
significantly in fiscal 2000, compared to fiscal 2001 and fiscal 1999, due to
lower software license revenues with higher software product amortization
costs, which are fixed, regardless of the level of sales. Management expects
gross margins for total revenues to be approximately between 55% and 65% in
fiscal 2002 and to fluctuate slightly from quarter to quarter based on the mix
of products and services sold.
Customer operations and support costs consist primarily of data center
operations, software maintenance agreements for the Company's core network,
catalog data maintenance and customer support. Customer operations and support
costs decreased in fiscal 2001, compared to the prior year, primarily due to
cost reductions in catalog data maintenance and directory services. Customer
operations and support costs increased significantly in fiscal 2000, compared
to fiscal 1999, due to increased staffing in the catalog data maintenance area
from the May 13, 1999 acquisition of NDI. Management expects these costs to
decline as a percentage of revenue in the future.
Selling, general and administrative expenses ("SG&A") increased in fiscal
2001, compared to the prior year, primarily due to the hiring of additional
upper level finance, sales and marketing personnel. SG&A increased in fiscal
2000, compared to fiscal 1999, due to additional costs absorbed in the NDI
acquisition. SG&A, as a percentage of revenue, was 56% in fiscal 2001, 62% in
fiscal 2000 and 54% in fiscal 1999. The increase in fiscal 2000 was primarily
due to the lower than expected increase in revenue in fiscal 2000 as a result
of the recognition of software licenses and 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 revenues in the future.
The Company's technical staff (in-house and contracted) is allocated between
software development and technical support 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 2001, our technical resources
were focused primarily on a new release of TradeRoute(R), a major
customization project of our Web-based catalog for a customer in the auto
parts aftermarket industry and on-going catalog data updates. During fiscal
2000, our technical resources were focused primarily on customization projects
for our TradeRoute(R) customers and development of Web-based communications
and cataloging software. During fiscal 1999, our technical resources were
focused primarily on the development of TradeRoute(R) and PLUS1(R). We expect
our technical resources to continue to focus on software customization,
catalog data updates and development of Web-based software in fiscal 2002,
although the mix may fluctuate quarter to quarter based on customer
requirements. We expect software customization and development expenses to
decrease during fiscal 2002 due to the Company's restructuring to focus on our
catalog products, which require less customization and development than our
communication products.
Depreciation and amortization expenses decreased in fiscal 2001, compared to
fiscal 2000 and fiscal 1999, primarily due to fully depreciated data
processing equipment. As a percentage of total revenue, depreciation and
amortization was 10% in fiscal 2001, 13% in fiscal 2000 and 14% in fiscal
1999. Management expects depreciation and amortization expenses to decrease in
fiscal 2002 due to the write-off of impaired assets due to the restructuring
of operations.
11
In the fourth quarter of fiscal 2001, management commenced a restructuring
designed to refocus resources from the Company's communication products to the
Company's core catalog products, which contribute greater cash margins, in
order to reach sustainable cash generation and earnings. During the quarter
ended July 31, 2001, the Company incurred non-cash impairment charges of
$7,333,000 for the write-off of long-lived assets related to our network
platform and communication software and $433,000 in accrued restructuring
expense related to severance and future minimum lease payments. As of October
25, 2001, the Company had reduced its number of full-time equivalent employees
to 101 from 137 prior to the restructuring and eliminated all but a few
contract staff. The Company does not believe the reductions will have a
material adverse effect on the Company's future competitiveness or operations
and that the restructuring will position the Company to show a quarterly
profit before the end of fiscal 2002, although there can be no assurance that
this will occur.
Capitalized development costs represented 59% of software development and
support expense in fiscal 2001, compared to 62% in fiscal 2000 and 65% in
fiscal 1999. Capitalized expenses decreased in fiscal 2001, compared to fiscal
2000 and fiscal 1999, as a percentage of software development and technical
support, due to the fact that the Company's development resources were focused
on software customization projects and catalog data updates, both of which are
expensed.
OTHER ITEMS
Interest expense increased $794,000 in fiscal 2001 and $481,000 in fiscal
2000, compared to the prior year, due to the Debenture sold to Rose Glen
(described below) and additional financing by the Company under its RFC
facility (also described below). The Company expects interest expense to
decrease slightly in fiscal 2002, as the Company pays down principal balances.
See "Liquidity and Capital Resources".
Net loss increased $5,423,000 in fiscal 2001, compared to the prior year,
primarily due to the write-off of impaired assets and the accrual of related
expenses in the Company's restructuring. Net loss increased $4,187,000 in
fiscal 2000, compared to the prior year, primarily due to lower than expected
new sales, the change in revenue recognition to recognize software licenses
and renewals over a twelve month period rather than up front, increased costs
from delays in development and the increase in non-cash amortization expense
resulting from the Company's acquisition of NDI.
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
2001 2000 CHANGE 2000 1999 CHANGE
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities before changes in working capital $ 401 $ (2,316) 117% $ (2,316) $ 415 n/a
Net cash used in investing activities (1,977) (1,792) (10%) (1,792) (1,815) 1%
---------- ---------- ---------- ----------
Subtotal (1,576) (4,108) 62% (4,108) (1,400) (193%)
Effect of net changes in working capital 2,084 1,153 81% 1,153 (74) n/a
---------- ---------- ---------- ----------
Net cash provided by (used) in operating and
investing activities $ 508 $ (2,955) 117% $ (2,955) $ (1,474) (100%)
========== ========== ========== ==========
Net cash provided by (used in) operating activities before changes in working
capital increased in fiscal 2001, compared to the prior year, due to increased
revenues and tight cost controls. Net cash provided by (used in) operating
activities before changes in working capital decreased in fiscal 2000,
compared to the prior year, primarily
12
due to lower than expected revenues, $1,256,000 of which was due to the
adoption of SOP 98-9, and increased costs as a result of delays in
development.
Net cash used in investing activities increased in fiscal 2001, compared to
fiscal 2000 and fiscal 1999, due to increased costs attributable to the
development of the Company's Web-based communications and catalog software and
a new release of the Company's TradeRoute(R) software.
The effect of net changes in working capital is dependent on the timing of
payroll and other cash disbursements and may vary significantly from year to
year. In fiscal 2001, cash provided by working capital was higher, compared to
the prior year, primarily due to intensive collection efforts on past due
accounts receivables and an increase in deferred revenue as sales increased.
In fiscal 2000, cash provided by working capital was higher, compared to the
prior year, primarily due to higher deferred revenue balances caused by the
Company's change in revenue recognition policy. The Company expects that
positive cash flow from operations will continue in the first quarter of
fiscal 2002. The Company expects to fund research and development costs in
fiscal 2002 with excess cash from operations and the proceeds of its current
financing instruments described below.
At July 31, 2001, the Company had cash and cash equivalents of approximately
$313,000 compared to approximately $563,000 at July 31, 2000.
The following table sets forth, for the periods indicated, certain information
related to the Company's debt derived from the Company's audited financial
statements.
DEBT SCHEDULE
(IN THOUSANDS)
JULY 31 JULY 31 NET
2001 2000 CHANGE
----------- ----------- ---------
Debt to Shareholder:
Current portion of line of credit $ 200 $ - $ 200
Current portion of notes payable 333 361 (28)
Long-term portion of notes payable 56 389 (333)
Debt discount (common stock warrants) (41) (76) 35
----------- ----------- ---------
Total Debt to Shareholder 548 674 (126)
Subordinated Debenture:
Notes payable, in default at July 31, 2001 4,000 4,000 -
Debt discount (common stock warrants and options) (1,373) (2,158) 785
----------- ----------- ---------
Total Subordinated Debenture 2,627 1,842 785
Other Debt:
Current portion of notes payable other 275 461 (186)
Long-term notes payable other (net of discount) 78 326 (248)
----------- ----------- ---------
Total Other Debt 353 787 (434)
----------- ----------- ---------
Total Debt $ 3,528 $ 3,303 $ 225
=========== =========== =========
On April 27, 2000, the Company issued and sold pursuant to a Securities
Purchase Agreement, dated as of April 25, 2000, by and among the Company and
RGC International Investors, LDC (the "Investor"), (i) a convertible
subordinated debenture in the amount of $4,000,000 due on April 27, 2003 (the
"Debenture"), and convertible into shares of the Company's common stock, (ii)
warrants to purchase 600,000 shares of Common Stock (the "Warrants"), and
(iii) an investment option to purchase 800,000 shares of Common Stock (the
"Investment Option"). The Investment Option expired on October 27, 2001 and
the Warrants expire on April 27, 2005. The Debenture is convertible into
Common Stock at $4 per share and the Warrants are exercisable at $6 per share.
The Company is required to maintain listing of its common stock on the Nasdaq
National Market, the Nasdaq Small Cap Market, the New York Stock Exchange or
the American Stock Exchange; failure to meet this requirement results in the
Debenture becoming fully due at 130% of principal and accrued interest, as
well as an increase in the interest rate from 7% to 17%. At any time after
October 27, 2000, the Company can require the Investor to convert the amount
owed under the Debenture into Common Stock at $4.00 per share provided that:
(i) the closing bid price of the Common Stock has been greater than $6.60 for
twenty (20) consecutive trading days and (ii) the Company's resale
registration statement has been effective for at least three (3) months. As
long as $500,000 or more principal amount
13
of the Debenture is outstanding, the Company agreed not to: (i) pay any
dividends or make any other distribution on our common stock, other than stock
dividends and stock splits; (ii) repurchase or redeem any shares of our
capital stock, except in exchange for common stock or preferred stock; (iii)
incur or assume any liability for borrowed money, except our existing debt,
debt from a bona fide financial lending institution, indebtedness to trade
creditors, borrowings used to repay the debenture, indebtedness assumed or
incurred in connection with the acquisition of a business, product, license or
other asset, refinancing of any of the above, and indebtedness that is
subordinate to the debenture; (iv) sell or otherwise dispose of assets outside
the normal course of business, except the sale of a business, product, license
or other asset that our board of directors determines is in the best interests
of us and our shareholders, and sales of assets with a value not exceeding
$500,000 in any 12-month period following the issuance of the debenture; (v)
lend money or make advances to any person not in the ordinary course of
business, except loans to subsidiaries or joint ventures approved by a
majority of our independent directors, guarantee another person's liabilities,
except, among other things, guarantees made in connection with the acquisition
of a business, product, license or other asset.
The Company is currently not in compliance with the Nasdaq National Market
requirements including the dollar minimum bid price, the $5 million public
float and $4 million net tangible asset test. The Company was delisted on July
7, 2001 from NASDAQ National Market System but is currently listed on the
NASDAQ Bulletin Board Market. The delisting resulted in a default condition on
the RGC debenture, which gives RGC the right to accelerate the Debenture,
although they have not actually done so. The Company is currently negotiating
a new debenture with RGC and has a signed term sheet. However, if the Company
is unable to complete the negotiation of a new debenture or obtain waivers
from the Investor, shareholders could be materially and adversely affected.
ARI has a line of credit with WITECH that has been in place since October 4,
1993 (the "WITECH Credit Facility"). On September 30, 1999, ARI and WITECH
restructured the $3.0 million outstanding under the WITECH Credit Facility to
provide for (i) a $1.0 million revolving line of credit (the "WITECH Line")
which expires on December 31, 2001; (ii) a $1.0 million term loan (the "WITECH
Term Loan") payable in equal monthly principal installments over three years,
commencing November 1, 1999; and (iii) WITECH's purchase of $1.0 million of
ARI's common stock at $5.125 per share. The WITECH Line bears interest at
prime plus 3.25% and the WITECH Term Loan bears interest at prime plus 4.0%.
The WITECH Line terminates on December 31, 2001. As of October 25, 2001 there
was $132,000 outstanding under the WITECH Line and $333,000 was outstanding
under the WITECH term loan.
The only financial covenant stipulated in the WITECH Credit Facility was that
ARI maintained a net worth (calculated in accordance with generally accepted
accounting principles) of at least $1 million. This net worth covenant was
waived as of July 31, 2001 and for the fiscal year ended July 31, 2002.
On September 28, 1999, ARI and RFC Capital Corporation ("RFC") executed a
Receivables Sales Agreement (the "Sale Agreement") establishing a $3.0 million
working capital facility (the "RFC Facility"). The three-year Sale Agreement
allows RFC to purchase up to $3.0 million (the "Purchase Commitment") of ARI's
accounts receivable. The Purchase Commitment may be increased in increments of
$1.0 million upon mutual agreement and a payment by ARI of $10,000 for each
$1.0 million increase. Under the Sale Agreement, RFC purchases 90% of eligible
receivables. In connection with the Sale Agreement ARI was required to pay a
Commitment Fee of $45,000 on September 28, 1999, $30,000 on September 28,
2000, and $15,000 on September 28, 2001. In addition, ARI is obligated to pay
a monthly program fee equal to the greater of (a) $3,000 or (b) the amount of
the purchased but uncollected receivables times the prime rate plus 2%. ARI
may terminate the Sale Agreement prior to three-year term by paying 2.0% of
the Purchase Commitment during the second year, and 1.0% of the Purchase
Commitment during the third year. As of October 25, 2001, the balance of the
RFC Facility was $710,000.
Management believes that funds generated from operations and the RFC Facility
will be adequate to fund the Company's operations, investments and debt
payments through fiscal 2002 if the Debenture is successfully renegotiated or
the necessary waiver is obtained from RGC. If management is unable to
renegotiate the Debenture or obtain the necessary waiver, the Company will
remain in default and owe in excess of $5 million, which would have a material
adverse effect on the Company. Management is working diligently to renegotiate
the Debenture, but there can be no assurance that these efforts will be
successful. Management has restructured the Company to reduce cash overhead by
over $1.5 million in fiscal 2002. Management is also continually analyzing its
anticipated cash flows under a variety of growth scenarios ranging from slight
contraction to modest growth. Management believes that, provided the defaults
can be amended, either (i) sufficient cash can be generated from the business
to fund operations and a modest level of investment or (ii) that the cash
profile of the business can be further restructured to be self-funding,
although there can be no assurance that these efforts will be successful.
14
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 negative $1,807,000 in fiscal 2000 to negative $6,743,000 in fiscal 2001
primarily due to restructuring and other charges, partially offset by
increased revenues and cost controls over cash expenditures. 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.
Management believes that EBITDA will be positive in fiscal 2002, although
there can be no assurance that this will occur.
The Company has included data with respect to EBITDA because it is commonly
used as a measurement of financial performance and by investors to analyze and
compare companies on the basis of operating performance. EBITDA is not a
measurement of financial performance under 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
indicator 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 flows and cash generation and sources of
liquidity. Expressions such as "believes," "anticipates," "expects," and
similar expressions are intended to identify such forward looking statements.
Several important factors can cause actual results to materially differ from
those stated or implied in the forward looking statements. Such factors
include, but are not limited to the factors listed on exhibit 99.1 of the
Company's annual report on Form 10-K for the year ended July 31, 2001, which
is incorporated herein by reference.
QUARTERLY FINANCIAL DATA
The following table sets forth the unaudited operations data for each of the
eight quarterly periods ended July 31, 2001, prepared on a basis consistent
with the audited financial statements, reflecting all normal recurring
adjustments that are considered necessary. The quarterly information is as
follows ( in thousands):
1st 2nd 3rd 4th
---------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000 2001 2000
---------------------------------------------------------------------------------------
Net revenues $4,142 $3,055 $4,086 $3,326 $3,876 $3,155 $3,673 $3,768
Gross profit 2,300 1,461 2,460 1,534 2,499 1,423 2,282 1,892
Net loss (1,522) (1,658) (1,216) (2,091) (1,502) (1,843) (8,785) (2,010)
Basic and diluted
net loss per share ($0.25) ($0.29) ($0.20) ($0.35) ($0.24) ($0.30) ($1.42) ($0.33)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ARI is subject to market risks pertaining to interest rate movements and
collectibility of accounts receivable. ARI's only expenses subject to interest
rate risk are (i) interest expense on the WITECH Line and the WITECH Term Loan
and (ii) monthly program fees owed with respect to the RFC Facility. See
"Liquidity and Capital Resources". The WITECH Line and Term Loan bear interest
tied to prevailing market rates. The monthly program fees under the RFC
Facility are also tied to prevailing market interest rates. An increase or
decrease of one percent in the prime interest rate would affect ARI's net loss
by approximately plus or minus $13,000, annualized, based on the outstanding
balances under the WITECH and RFC Facilities at October 25, 2001. As a result,
ARI believes that the market risk relating to interest rate movements is
minimal.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARI's Financial Statements and related notes for the fiscal years ended July
31, 2001, 2000 and 1999 together with the report thereon of ARI's independent
auditors, Ernst & Young LLP, are attached hereto as Exhibit A-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ARI
Information regarding the directors of ARI and compliance with Section 16(a)
of the Exchange Act is included in ARI's definitive 2001 Annual Meeting Proxy
Statement, and is incorporated herein by reference. See "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance".
Information with respect to ARI's executive officers is shown at the end of
Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation, Employment Agreements,
Compensation of Directors, Employee Stock Options and other compensation plans
is included in ARI's definitive 2001 Annual Meeting Proxy Statement, and is
incorporated herein by reference. See "Executive Compensation" and "Election
of Directors".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of ARI's common stock is included
in ARI's definitive 2001 Annual Meeting Proxy Statement and is incorporated
herein by reference. See "Security Ownership of Certain Beneficial Owners".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information related to Certain Relationships and Related Transactions is
included in ARI's definitive 2001 Annual Meeting Proxy Statement, and is
incorporated herein by reference. See "Certain Transactions".
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a)1.
FINANCIAL STATEMENTS
Report of independent auditors on Financial Statements and Financial Statement
Schedule.
Balance sheets - July 31, 2001 and 2000.
Statements of operations for each of the three years in the period ended July
31, 2001.
Statements of shareholders' equity(deficit) for each of the three years in the
period ended July 31, 2001.
Statements of cash flows for each of the three years in the period ended July
31, 2001.
Notes to financial statements - July 31, 2001.
The Financial Statements are located immediately following the signature
pages.
16
(a)2.
FINANCIAL STATEMENT SCHEDULES
Schedule II
Valuation and qualifying accounts for the years ended July 31, 2001, 2000, and
1999.
The Financial Statement Schedule is located immediately following the
Financial Statements. All other schedules to which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
(a)3.
EXHIBITS:
See (c) below.
(b) REPORTS ON FORM 8-K:
On May 25, 2001 ARI filed a Form 8-K (dated July 31, 2000) with respect to
Item 7 of Form 8-K.
(c)
EXHIBITS:
EXHIBIT
NUMBER
DESCRIPTION
3.1 Articles of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended April
30, 1999.
3.2 By-laws of the Company incorporated herein by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-1
(Reg. No. 33-43148).
4.1 The Company agrees to furnish to the Commission upon request
copies of any agreements with respect to long term debt not
exceeding 10% of the Company's consolidated assets.
10.1* 1991 Stock Option Plan, as amended, incorporated by reference to
Exhibit 10.2 of the Company's Form 10-Q for the quarter ended
January 31, 1999.
10.2* 1993 Director Stock Option Plan, as amended, incorporated herein
by reference to Exhibit 10.3 of the Company's Form 10-Q for the
quarter ended January 31, 1999.
10.3* 2000 Stock Option Plan, incorporated herein by reference to
Exhibit 10.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 2000.
10.4* Loan Agreement by and between the Company and WITECH Corporation
dated October 4, 1993, incorporated herein by reference to
Exhibit 10.10 of the Company's Form 10-K for the fiscal year
ended July 31, 1993.
10.5 Amendment to Loan Agreement dated May 19, 1994 between the
Company and WITECH Corporation, incorporated herein by reference
to Exhibit 10.22 of the Company's Registration Statement on Form
S-3 (Reg. No. 33-75760).
10.6 Amendment No. 2 to Loan Agreement dated July 28, 1994 between
the Company and WITECH Corporation, incorporated herein by
reference to Exhibit 10.22 of the Company's Registration
Statement on Form S-1 (Reg. No. 33-80914).
10.7 Consent and Amendment No. 3 to Loan Agreement dated December 2,
1994 between the Company and WITECH Corporation, incorporated
herein by reference to Exhibit 10.1 of the Company's Form 10-Q
for the quarter ended October 31, 1994.
10.8 Amendment No. 4 to Loan Agreement dated October 18, 1995 between
the Company and WITECH Corporation, incorporated herein by
reference to Exhibit 10.14 of the Company's Form 10-K for the
fiscal year ended July 31, 1995.
10.9 Amendment No. 5 to Loan Agreement dated December 20, 1995
between the Company and WITECH Corporation, incorporated herein
by reference to Exhibit 10.31 of the Company's Form 10-K for the
fiscal year ended July 31, 1996.
17
10.10 Amendment No. 6 to Loan Agreement dated January 23, 1996, between the Company and WITECH Corporation,
incorporated herein by reference to Exhibit 10.32 of the Company's Form 10-K for the fiscal year
ended July 31, 1996.
10.11 Amendment No. 7 to Loan Agreement dated April 20, 1996 between the Company and WITECH Corporation,
incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended
April 30, 1996.
10.12 Amendment No. 8 to Loan Agreement dated May 31, 1996 between the Company and WITECH Corporation,
incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended
April 30, 1996.
10.13 Amendment No. 9 to Loan Agreement dated November 5, 1996, between the Company and WITECH Corporation,
including Forms of Amended and Restated Commitment Warrant and Usage Warrant, incorporated herein by
reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended October 31, 1996.
10.14 Amendment No. 10 to Loan Agreement dated May 30, 1997, between the Company and WITECH Corporation,
incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended
April 30, 1997.
10.15 Amendment No. 11 to Loan Agreement dated January 21, 1998 between the Company and WITECH
Corporation, incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the fiscal
quarter ended April 30, 1998.
10.16 Amendment No. 12 to Loan Agreement dated May 27, 1998 between the Company and WITECH Corporation
incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the fiscal quarter
ended April 30, 1998.
10.17 Amendment No. 13 to Loan Agreement dated September 14, 1998 between the Company and WITECH Corporation
incorporated herein by reference to Exhibit 10.16 of the Company's Form 10-K for the fiscal year ended
July 31, 1998.
10.18 Consent of WITECH Corporation, dated September 15, 1998, incorporated herein by reference to Exhibit
10.1 of the Company's Form 10-Q for the fiscal quarter ended October 31, 1998.
10.19 Amendment No. 14 to Loan Agreement dated January 29, 1999, between the Company and WITECH Corporation,
incorporated herein by reference to Exhibit 10.1 of the Company's 10-Q for the fiscal quarter ended
January 31, 1999.
10.20 Consent of WITECH Corporation, dated April 19, 1999, incorporated herein by reference to Exhibit 4.1
of the Company's Form 10-Q for the fiscal quarter ended April 30, 1999.
10.21 Amendment No. 15 to Loan Agreement dated September 23, 1999, between the Company and WITECH
Corporation, incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K for the
fiscal year ended July 31, 1999.
10.22 Amendment No. 16 to Loan Agreement dated December 21, 1999 between the Company and WITECH Corporation,
incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the fiscal quarter
ended January 31, 2000.
10.23 Amendment No. 17 to Loan Agreement dated July 9, 2001 between the Company and WITECH Corporation.
10.24 Amendment No. 18 to Loan Agreement dated October 22, 2001 between the Company and WITECH Corporation.
10.25 Receivables Sales Agreement, dated September 28, 1999, between the Company and RFC Capital Corporation,
incorporated herein by reference to Exhibit 10.21 of the Company's Form 10-K for the fiscal year ended
July 31, 1999.
10.26* Form of Change of Control Agreement between the Company and each of Brian E. Dearing, John C. Bray,
Michael E. McGurk, Frederic G. Tillman and Timothy Sherlock, incorporated herein by reference to
Exhibit 10.25 of the Company's Form 10-K for the fiscal year ended July 31, 1999.
10.27* Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.26 of the Company's Form
10-K for the fiscal year ended July 31, 1999.
10.28* Deferred Bonus Plan, incorporated herein by reference to Exhibit 10.27 of the Company's Form 10-K for
the fiscal year ended July 31, 1999.
10.29 Preferred Stock Purchase Agreement dated July 15, 1997, between the Company and WITECH Corporation,
incorporated herein by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-2
(Reg. No. 333-31295) filed on July 15, 1997.
10.30* Website Development Agreement dated December 9, 1999 between the Company and Gordon J. Bridge,
incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the fiscal quarter
ended January 31, 2000.
18
10.31 Securities Purchase Agreement, dated as of April 25, 2000, by
and among the Company and RGC International Investors, LDC,
incorporated herein by reference to Exhibit 99.1 of the
Company's Report on Form 8-K filed May 2, 2000.
10.32 Convertible Subordinated Debenture dated as of April 27, 2000,
incorporated herein by reference to Exhibit 99.2 of the
Company's Report on Form 8-K filed May 2, 2000.
10.33 Stock Purchase Warrant dated as of April 27, 2000, incorporated
herein by reference to Exhibit 99.3 of the Company's Report on
Form 8-K filed May 2, 2000.
10.34 Investment Option dated as of April 27, 2000, incorporated
herein by reference to Exhibit 99.4 of the Company's Report on
Form 8-K filed May 2, 2000.
10.35 Registration Rights Agreement, dated as of April 27, 2000, by
and among the Company and RGC International Investors, LDC,
incorporated herein by reference to Exhibit 99.5 of the
Company's Report on Form 8-K filed May 2, 2000.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney appear on the signature page hereof.
99.1 Forward-Looking Statements Disclosure.
* Management Contract or Compensatory Plan.
19
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 13th day of November, 2001.
ARI NETWORK SERVICES, INC.
By: /s/ Brian E. Dearing
-----------------------------
Brian E. Dearing,
Chairman, President & CEO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brian E. Dearing, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any
and all amendments to this report and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Commission,
granting unto said attorney-in-fact and agent full power and authority to do
and perform each act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/s/ Brian E. Dearing Chairman, President, CEO & Director November 13, 2001
------------------------------ (Principal Executive Officer)
Brian E. Dearing
/s/ Timothy Sherlock Chief Financial Officer, Secretary, November 13, 2001
------------------------------- Treasurer & VP of Finance
Timothy Sherlock
/s/ Gordon J. Bridge Director November 13, 2001
------------------------------
Gordon J. Bridge
/s/ Ted C. Feierstein Director November 13, 2001
------------------------------
Ted C. Feierstein
/s/ D. Bruce Merrifield, Jr. Director November 13, 2001
----------------------------
D. Bruce Merrifield, Jr.
/s/ Richard W. Weening Director November 13, 2001
---------------------------
Richard W. Weening
21
FINANCIAL STATEMENTS
ARI Network Services, Inc.
Years ended July 31, 2001, 2000 and 1999
ARI Network Services, Inc.
Financial Statements
Years ended July 31, 2001, 2000 and 1999
CONTENTS
Report of Independent Auditors........................................1
Financial Statements
Balance Sheets........................................................3
Statements of Operations..............................................5
Statements of Shareholders' Equity (Deficit)..........................6
Statements of Cash Flows..............................................8
Notes to Financial Statements........................................10
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, 2001 and 2000, and the related statements of
operations, shareholders' equity (deficit) and cash flows for each of the
three years in the period ended July 31, 2001. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at July 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended July 31, 2001, 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
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 3,
the Company has incurred recurring operating losses, has a working capital
deficiency and has a shareholders' deficit. In addition, the Company has not
complied with certain covenants of its loan agreement and does not have
long-term credit availability. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
Milwaukee, Wisconsin
September 28, 2001, except for
Note 5, as to which the date is
October 22, 2001
2
ARI Network Services, Inc.
Balance Sheets
(Dollars in Thousands, Except Per Share Data)
JULY 31
2001 2000
----------------------------------
ASSETS
Current assets:
Cash $ 313 $ 563
Trade receivables, less allowance for doubtful accounts of
$757 in 2001 and $697 in 2000 2,084 3,282
Prepaid expenses and other 140 109
----------------------------------
Total current assets 2,537 3,954
Equipment and leasehold improvements:
Computer equipment 4,394 4,389
Leasehold improvements 239 239
Furniture and equipment 1,000 846
----------------------------------
5,633 5,474
Less accumulated depreciation and amortization 5,293 5,038
----------------------------------
Net equipment and leasehold improvements 340 436
Goodwill, less accumulated amortization of $54 in 2001 and $1,413
in 2000 15 1,876
Deferred financing costs, less accumulated amortization of $203
in 2001 and $59 in 2000 207 321
Capitalized software development:
Network platform - 11,467
Software products 23,533 29,317
----------------------------------
23,533 40,784
Less accumulated amortization 19,572 28,883
----------------------------------
3,961 11,901
----------------------------------
$ 7,060 $18,488
==================================
3
JULY 31
2001 2000
----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit payable to shareholder $ 200 $ -
Current portion of note payable to shareholder 333 361
Current portion of notes payable, including $2,627 of
long-term debt in default at July 31, 2001 2,902 461
Accounts payable 951 836
Deferred revenue 4,811 4,373
Accrued payroll and related liabilities 1,487 1,182
Other accrued liabilities 1,499 1,310
Current portion of capital lease obligations 173 111
----------------------------------
Total current liabilities 12,356 8,634
Note payable to shareholder 15 313
Notes payable 78 2,168
Accrued restructuring costs 303 -
Capital lease obligations 158 214
----------------------------------
Total noncurrent liabilities 554 2,695
Commitments and contingencies (Notes 7 and 12)
Shareholders' equity (deficit):
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;
6,184,281 and 6,168,270 shares issued and outstanding in 2001 and
2000, respectively 6 6
Common stock warrants and options 2,459 2,459
Additional paid-in capital 91,797 91,781
Accumulated deficit (100,112) (87,087)
----------------------------------
Total shareholders' equity (deficit) (5,850) 7,159
----------------------------------
$ 7,060 $ 18,488
==================================
4
See accompanying notes.
ARI Network Services, Inc.
Statements of Operations
(Dollars in Thousands, Except Per Share Data)
YEAR ENDED JULY 31
2001 2000 1999
-----------------------------------------------------
Net revenues:
Subscriptions, support and other services fees $ 9,985 $ 9,743 $ 8,616
Software licenses and renewals 3,266 1,289 2,822
Professional services 2,526 2,272 1,450
-----------------------------------------------------
15,777 13,304 12,888
Operating expenses:
Cost of products and services sold:
Subscriptions, support and other
services fees 1,740 1,415 1,431
Software licenses and renewals 3,137 3,614 2,543
Professional services 1,359 1,965 1,234
-----------------------------------------------------
6,236 6,994 5,208
Depreciation and amortization (exclusive of
amortization of software products included in
cost of products and services sold) 1,517 1,778 1,773
Customer operations and support 1,597 2,048 1,017
Selling, general and administrative 8,790 8,214 6,995
Software development and technical support 3,317 2,779 2,786
Restructuring and other charges 7,766 - -
-----------------------------------------------------
Operating expenses before amounts capitalized
29,223 21,813 17,779
Less capitalized portion (1,972) (1,729) (1,802)
-----------------------------------------------------
Net operating expenses 27,251 20,084 15,977
-----------------------------------------------------
Operating loss (11,474) (6,780) (3,089)
Other income (expense):
Interest expense (1,587) (793) (312)
Other, net 36 (29) (14)
-----------------------------------------------------
(1,551) (822) (326)
-----------------------------------------------------
Net loss $ (13,025) $ (7,602) $ (3,415)
=====================================================
Basic and diluted net loss per share $ (2.11) $ (1.27) $ (.67)
=====================================================
5
See accompanying notes.
ARI Network Services, Inc.
Statements of Shareholders' Equity (Deficit)
(Dollars in Thousands)
Number of Shares Issued and
Outstanding
Preferred Common
Stock Stock
---------------------------------
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 - -
---------------------------------
Balance July 31, 2000 20,350 6,168,270
Issuance of common stock under stock purchase plan - 16,011
Stock compensation expense - -
Net loss - -
---------------------------------
Balance July 31, 2001 20,350 6,184,281
=================================
6
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 $ - $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)
- - - - - 14 -
- - - - - 2 -
- - - - - - (13,025)
-------------------------------------------------------------------------------------------------------------
- $ - $ - $6 $2,459 $91,797 $(100,112)
=============================================================================================================
See accompanying notes.
7
ARI Network Services, Inc.
Statements of Cash Flows
(In Thousands)
YEAR ENDED JULY 31
2001 2000 1999
-----------------------------------------------------
OPERATING ACTIVITIES
Net loss $(13,025) $(7,602) $(3,415)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of network platform 604 656 695
Amortization of software products 3,178 3,224 2,057
Amortization of goodwill 658 658 584
Amortization of debt discount and deferred financing fees 963 284 -
Depreciation and other amortization 255 464 494
Restructuring and other charges 7,766 - -
Stock compensation expense 2 - -
Net change in receivables, prepaid expenses and other
current assets 1,167 (90) 431
Net change in accounts payable, deferred revenue and
accrued liabilities 917 1,243 (505)
-----------------------------------------------------
Net cash provided by (used in) operating activities 2,485 (1,163) 341
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (5) (63) (56)
Cash received in acquisitions - - 43
Software product costs capitalized (1,972) (1,729) (1,802)
-----------------------------------------------------
Net cash used in investing activities (1,977) (1,792) (1,815)
FINANCING ACTIVITIES
Borrowings (repayments) under line of credit 200 (1,000) 1,380
Borrowings under notes payable - 4,000 80
Payments of capital lease obligations and notes payable (942) (690) (71)
Debt issuance costs incurred (30) (254) -
Proceeds from issuance of common stock 14 1,335 18
-----------------------------------------------------
Net cash provided by (used in) financing activities (758) 3,391 1,407
-----------------------------------------------------
Net increase (decrease) in cash (250) 436 (67)
Cash at beginning of year 563 127 194
-----------------------------------------------------
Cash at end of year $ 313 $ 563 $ 127
=====================================================
Cash paid for interest $ 532 $ 437 $ 310
=====================================================
See accompanying notes.
8
ARI Network Services, Inc.
Statements of Cash Flows (continued)
(In Thousands)
YEAR ENDED JULY 31
2001 2000 1999
-----------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred for -
Computer equipment $ 154 $ 328 $ -
Issuance of common stock for acquisitions - - 4,191
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:
Computer equipment - 85 -
Deferred financing costs - 126 -
See accompanying notes.
9
ARI Network Services, Inc.
Notes to Financial Statements
July 31, 2001
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ARI Network Services, Inc. (the Company) operates in one business segment and
provides technology-enabled business solutions that connect manufacturers in
selected industries with their service and distribution networks.
Disaggregated operating expense information is not provided to the chief
operating decision maker of the Company. The Company focuses on the U.S.,
Canadian, European and Australian manufactured equipment industry. The Company
provides both electronic catalog and transaction services, enabling partners
in a service and distribution 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. 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.
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
10
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
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
---------
Computer equipment 2 - 7
Leasehold improvements 10
Furniture and equipment 2 - 5
11
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT
The Company developed a basic network and telecommunications platform which
has been the foundation of its network. The platform can be used on different
hardware and has not been subject to the frequency of technological changes
that sometimes occur with hardware or software products.
The Company also develops and purchases software products 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. Note 4
further describes certain capitalized software development costs written down
to net realizable value based upon the Company's future plans.
The annual amortization of the platform and the software products is the
greater of the amount computed using: (a) the ratio that current gross
revenues for the network or a software product bear to the total of current
and anticipated future gross revenues for the network or a software product,
or (b) the straight-line method over the estimated economic life of the
product (20 years - platform, 3 years - software products). Amortization
starts when the product is available for general release to customers.
All other software development and support expenditures are charged to expense
in the period incurred.
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. Note 4 further describes certain goodwill costs written down to
net realizable value based upon the Company's future plans.
12
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Equipment and leasehold improvements, capitalized software development 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.
Such analyses necessarily involve judgment. The Company evaluated the ongoing
value of its long-lived assets as of July 31, 2001 and 2000, and the impact on
the Company's results of operations for the year ended July 31, 2001, is
described in Note 4.
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 2001, 2000 and 1999, interest costs of $180,000, $76,000 and $56,000,
respectively, were capitalized and included in the capitalized software
development costs.
OTHER ACCRUED LIABILITIES
Other accrued liabilities include accrued royalties of $574,000 and $486,000
at July 31, 2001 and 2000, respectively.
COMPREHENSIVE INCOME
Net loss for 2001, 2000 and 1999 is the same as comprehensive income defined
pursuant to Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income."
13
ARI Network Services, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
The basic and diluted weighted-average shares used in the net loss per share
calculation are 6,175,000, 6,002,000 and 5,061,000, respectively, in 2001,
2000 and 1999. Basic and diluted net loss per share is the same for all
periods as the impact of all dilutive securities is antidilutive.
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 was
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 adoption of SFAS No. 133 did
not have any impact on the Company's financial statements.
The Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and
Other Intangible Assets," in July 2001. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a
business combination, whether individually acquired or with a group of other
assets, and the accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. Goodwill will no longer be amortized
but instead will be subject to impairment tests at least annually. The Company
is required to adopt and SFAS No. 142 on a prospective basis as of August 1,
2002. As of July 31, 2001, the Company had $15,000 of goodwill; accordingly,
the adoption of SFAS No. 142 is not expected to have a significant impact on
its financial statements.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," has been applied prospectively for transfers
of financial assets occurring after April 1, 2001. SFAS No. 140 replaces SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." As a result of this statement, the Company
has changed the recognition of transactions discussed in Note 6 from a sale to
a secured borrowing to comply with SFAS No. 140.
14
ARI Network Services, Inc.
Notes to Financial Statements (continued)
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.
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
software products.
3. LIQUIDITY AND MANAGEMENT'S PLAN
As further discussed in Note 6, the Company is not in compliance with certain
covenants of its subordinated debenture agreement. Management is currently
negotiating with the subordinated debenture holder to reset the covenants and
payment terms or obtain a waiver. In addition, under the Company's credit
agreement with a shareholder (see Note 5), the Company does not have long-term
credit availability.
The Company has implemented a series of reductions in its work force and plans
to implement other strategies to reduce its cash expenditures, as further
described in Notes 4 and 13.
Management believes the cash flows from the Company's operations in fiscal
2002 will fund its operations and that other strategic or financing options
will provide the Company with the ability to meet its cash flow obligations.
Accordingly, the financial statements have been prepared on the basis of a
going concern, which contemplates realization of assets and satisfaction of
liabilities in the normal course of business.
15
ARI Network Services, Inc.
Notes to Financial Statements (continued)
4. RESTRUCTURING AND OTHER CHARGES
In July 2001, the Board of Directors authorized management to restructure the
Company and discontinue certain noncatalog software products and related
services. Revenue generated from noncatalog product lines was approximately
$5.3 million in 2001. The Company plans to sell or transition these product
lines to other service providers during fiscal 2002. The Company's actions
resulted in a work force reduction of approximately 15%, mainly consisting of
software development and support personnel. The Company communicated all
severance benefits to the 18 affected employees before July 31, 2001.
Additionally, an impairment charge of $7,333,000 was recorded in July 2001
related to long-lived assets for the noncatalog product lines. The Company
estimated undiscounted cash flows expected over the remaining amortization
period of the long-lived assets. Immediately before recording the impairment
charge, the carrying value of goodwill and capitalized software development
costs related to discontinued product lines was $1,203,000 and $6,130,000,
respectively. The discontinued product lines are expected to generate minimal
or negative cash flows (including any estimated sales proceeds) through their
expected date of discontinuance, and accordingly, the Company has recorded an
impairment charge to write off the carrying value of the assets.
The restructuring and impairment charges were determined based upon formal
plans approved by the Company's Board of Directors in July 2001. An additional
restructuring charge will be recognized in fiscal 2002 as described in Note
13. It is possible that further restructuring charges will be recognized in
fiscal 2002 as more information becomes available. Actual proceeds from the
sale of any discontinued product line could differ significantly from amounts
estimated in the Company's impairment analysis.
Restructuring and other charges recorded in the statement of operations during
the fourth quarter of fiscal 2001 are as follows (in thousands):
Employee termination costs $ 130
Noncancellable operating agreements 303
Asset impairment charges 7,333
-------------
$ 7,766
=============
At July 31, 2001, no payments had been made for any of the restructuring
costs. Other accrued liabilities and noncurrent liabilities include
restructuring accruals of $130,000 and $303,000, respectively, at July 31,
2001.
16
ARI Network Services, Inc.
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND NOTE 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.
On October 22, 2001, the Company and the shareholder amended the agreement to
waive the restrictive covenant requiring maintenance of a minimum level of net
worth at July 31, 2001 and through July 31, 2002, and to increase the interest
rates on borrowings.
The term loan is payable in equal monthly installments over three years
commencing November 1, 1999, and bears interest at prime (6.75% at July 31,
2001) plus 3.25% (amended to prime plus 4% effective October 22, 2001). 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 2.25% (amended to prime
plus 3.25% effective October 22, 2001). Under the line of credit, $200,000 is
outstanding at July 31, 2001.
In connection with the amendment in September 1999, 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
were initially valued at $105,000 for financial statement purposes. The value
allocated to the warrants, which reduced 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, 2001, was $41,000. The
entire agreement is secured by substantially all assets of the Company other
than accounts receivable securitized under the receivable sale agreement
described in Note 6.
17
ARI Network Services, Inc.
Notes to Financial Statements (continued)
5. LINE OF CREDIT AND NOTE PAYABLE TO SHAREHOLDER (CONTINUED)
In connection with the origination of the line-of-credit agreement 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 75,000
shares of its common stock at $2.125 per share. These warrants expire on
December 31, 2001. The agreement contains various restrictive covenants
including maintenance of a minimum level of net worth and restrictions on
additional indebtedness.
6. NOTES PAYABLE
Notes payable consist of the following at July 31 (in thousands):
2001 2000
----------------------------------
Term loan $ 172 $ 266
Note payable to bank 167 479
Convertible subordinated debenture, in default at July 31, 2001 4,000 4,000
Less debt discount for convertible subordinated debenture (1,373) (2,158)
Other 14 42
----------------------------------
2,980 2,629
Less current maturities 2,902 461
----------------------------------
$ 78 $ 2,168
==================================
On April 27, 2000, the Company issued RGC International Investors, LDC (RGC):
(i) a convertible subordinated debenture (the Debenture) for $4,000,000, (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
18
ARI Network Services, Inc.
Notes to Financial Statements (continued)
6. NOTES PAYABLE (CONTINUED)
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. 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.
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 terms of the Debenture require 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. The Company is in violation of this
covenant and has not obtained a waiver for the covenant violation. The
covenant violation allows RGC to accelerate principal repayment and
accordingly, the outstanding amount is due and payable and has been classified
as current in the accompanying balance sheet. In addition, due to the default,
RGC can demand 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
received forbearance from RGC through August 10, 2001, related to the events
of default.
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.
19
ARI Network Services, Inc.
Notes to Financial Statements (continued)
6. NOTES PAYABLE (CONTINUED)
On September 28, 1999, the Company commenced funding under a Receivable Sale
Agreement (the RFC Agreement) with RFC Capital Corporation (RFC) pursuant to
which RFC has agreed to loan amounts to the Company based on a security
interest in certain receivables generated by the Company in the ordinary
course of the Company's business. The RFC Agreement allows for RFC to loan up
to $3,000,000 of the Company's eligible receivables. Under the Agreement, RFC
loans 90% of the eligible receivables from the Company from time to time upon
presentation thereof for a value 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. To comply
with SFAS No. 140, the Company has changed the recognition of these
transactions from a sale to secured borrowing.
At July 31, 2001, a secured borrowing of $469,000 is included in accounts
payable. For the years ended July 31, 2001 and 2000, the Company incurred
$98,000 and $71,000, respectively, of financing expense relating to this
agreement.
Under the RFC Agreement, the Company performs certain servicing,
administrative and collection functions with respect to the secured
receivables. 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.
7. CAPITAL AND OPERATING LEASES
The Company leases office space under operating lease arrangements expiring in
2002 through 2007. The Company is generally liable for its share of increases
in the landlord's direct operating expenses and real estate taxes up to 5% of
the previous year's rent. Total rental expense for the operating leases was
$787,000 in 2001, $616,000 in 2000 and $400,000 in 1999.
20
ARI Network Services, Inc.
Notes to Financial Statements (continued)
7. CAPITAL AND OPERATING LEASES (CONTINUED)
Minimum lease payments under remaining capital and operating leases are as
follows (in thousands):
Fiscal year ending Capital Leases Operating Leases
------------------------------------------------------------------------------------------------------------
2002 $184 $ 811
2003 153 378
2004 11 353
2005 2 257
2006 - 157
Thereafter - 29
---------------------------------------------
Total minimum lease payments 350 $1,985
=======================
Amounts representing interest and taxes 19
----------------------
Present value of minimum capital lease payments 331
Less amounts payable in one year 173
----------------------
$158
======================
8. SHAREHOLDERS' EQUITY
Preferred Stock
At July 31, 2001, 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, 2001,
are $1,030,000.
21
ARI Network Services, Inc.
Notes to Financial Statements (continued)
9. STOCK PLANS
Employee Stock Purchase Plans
The Company's 1992 Employee Stock Purchase Plan had 62,500 shares of common
stock reserved for issuance, and all 62,500 shares have been issued through
July 31, 2001.
The Company's 2000 Employee Stock Purchase Plan has 75,000 shares of common
stock reserved for issuance, and none of the shares have been issued as of
July 31, 2001. 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.
1991 Stock Option Plan
The Company's 1991 Stock Option Plan (1991 Plan) had 850,000 shares of common
stock authorized for issuance through August 14, 2001. Options granted under
the 1991 Plan may be either: (a) options intended to qualify as incentive
stock options under Section 422 of the Internal Revenue Code of 1986, as
amended (the Code), or (b) nonqualified stock options.
Any incentive stock option that is granted under the 1991 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 1991 Plan is exercisable for a period of ten
years from the date of grant (five years in the case of a holder of more than
10% of the voting stock of the Company) or such shorter period as determined
by the 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.
22
ARI Network Services, Inc.
Notes to Financial Statements (continued)
9. STOCK PLANS (CONTINUED)
Changes in option shares under the 1991 Plan are as follows:
2001 2000 1999
------------------------- --------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------- --------------------------- ------------------------
Outstanding at the
beginning of the year 513,220 $7.20 675,849 $5.58 528,715 $6.45
Granted 106,000 2.33 181,950 8.36 213,175 2.83
Exercised - - (223,136) 1.89 (784) 2.18
Forfeited (74,789) 4.33 (121,443) 9.63 (65,257) 3.68
------------------------- --------------------------- ------------------------
Outstanding at the end of
the year 544,431 $6.67 513,220 $7.20 675,849 $5.58
========================= =========================== ========================
Exercisable 368,849 $5.63 308,774 $7.55 429,763 $8.01
========================= =========================== ========================
Available for grant 40,999 72,210 132,717
============ ============== ===========
The weighted-average contractual life of options outstanding at July 31, 2001,
was 7.5 years. The range of exercise prices for options outstanding at July
31, 2001, was $2 to $32.
2000 Stock Option Plan
The Company's 2000 Stock Option Plan (2000 Plan) has 450,000 shares of common
stock authorized for issuance. Options granted under the 2000 Plan may be
either: (a) options intended to qualify as incentive stock options under
Section 422 of the Code, or (b) nonqualifed stock options.
Any incentive stock option that is granted under the 2000 Plan may not be
granted at a price less than the fair market value of the stock on the date of
the grant (or less than 110% of the fair market value in the case of a
participant who is a 10% shareholder of the Company within the meaning of
Section 422 of the Code). Nonqualified stock options may be granted at the
exercise price established by the Stock Option Committee.
Each option granted under the 2000 Plan is exercisable for a period of not
more than ten years from the date of grant (five years in the case of a
participant who is 10% shareholder of the Company).
23
ARI Network Services, Inc.
Notes to Financial Statements (continued)
9. STOCK PLANS (CONTINUED)
Eligible participants include current and prospective employees, nonemployee
directors, consultants or other persons who provide services to the Company
and whose performance, in the judgment of the Stock Option Committee or
management of the Company, can have a significant effect on the success of the
Company.
Changes in option shares under the 2000 Plan during the year ended July 31,
2001, are as follows:
Weighted-Average
Options Exercise Price
-------------------------------------------
Granted 320,400 $ 1.24
Forfeited (19,275) (1.34)
-------------------------------------------
Outstanding at the end of the year 301,125 $ 1.23
===========================================
Exercisable 63,781 $ 1.35
===========================================
Available for grant 148,875
==================
The weighted-average contractual life of options outstanding at July 31, 2001,
was 9.6 years. The range of exercise prices for options outstanding at July
31, 2001, was $.33 to $1.75.
1993 Director Stock Option Plan
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.
24
ARI Network Services, Inc.
Notes to Financial Statements (continued)
9. 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:
2001 2000 1999
------------------------- --------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------- --------------------------- ------------------------
Outstanding at the
beginning of the year 62,086 $6.76 54,879 $ 6.12 40,433 $7.35
Granted 13,379 2.01 27,261 8.09 14,446 2.66
Exercised - - (11,509) 3.23 - -
Forfeited (19,325) 6.04 (8,545) 11.62 - -
------------------------- --------------------------- ------------------------
Outstanding at the end of
the year 56,140 $5.88 62,086 $ 6.76 54,879 $6.12
========================= =========================== ========================
Exercisable 43,701 $6.98 38,390 $ 5.56 40,433 $7.35
========================= =========================== ========================
Available for grant 82,351 76,405 95,121
============ ============== ===========
The weighted-average contractual life of options outstanding at July 31, 2001,
was 7.5 years. The range of exercise prices for options outstanding at July
31, 2001, was $1.78 to $17.00.
Certain nonemployee directors have been granted stock options outside of the
Director Plan aggregating 50,000 shares of common stock at $2.50 to $9 per
share.
25
ARI Network Services, Inc.
Notes to Financial Statements (continued)
9. 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
2001 2000 1999
------------------------------------------------------------
Pro forma net loss (in thousands) $ (13,950) $(8,647) $(3,996)
Pro forma net loss per share $ (2.26) $ (1.44) $ (0.79)
26
ARI Network Services, Inc.
Notes to Financial Statements (continued)
9. STOCK PLANS (CONTINUED)
The weighted-average fair value of the options granted in 2001 and 2000 was
$1.49 and $7.76, respectively.
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% to 6%,
dividend yield of 0%; expected common stock market price volatility factors
ranging from .6 to 1.1 and an expected life of the options of ten years.
During 2001, 6,000 of the stock options granted were to a nonemployee in
exchange for services. No performance commitment existed at the date of grant
for the nonemployee options granted. At each reporting period, the Company
records compensation expense for the fair value of the options as calculated
using the Black-Scholes method. Compensation expense is being recorded over
the period of the service agreement.
10. 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):
2001 2000
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 30,650 $ 31,723
Deferred revenue 1,880 1,216
Goodwill 1,010 368
Other 720 863
------------------------------------
Total deferred tax assets 34,260 34,170
Valuation allowance for deferred tax assets (33,700) (30,895)
------------------------------------
Net deferred tax asset 560 3,275
Deferred tax liabilities :
Network system (250) (3,036)
Other (310) (239)
------------------------------------
Net deferred taxes $ - $ -
====================================
As of July 31, 2001, the Company has unused net operating loss carryforwards
for federal income tax purposes of $36,757,000 expiring in 2007 through 2021.
27
ARI Network Services, Inc.
Notes to Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
In addition, the Company has unused net operating loss carryforwards for
federal income tax purposes of $6,132,000 expiring in 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. Also, the
Company has unused net operating loss carryforwards for federal income tax
purposes of $2,038,000 expiring between 2012 and 2014, of which not more than
$116,000 annually can be utilized to offset taxable income. Use of the net
operating loss carryforwards is restricted under Section 382 of the Code
because of changes in ownership in 1987 and 1992.
A reconciliation between income tax expense and income taxes computed by
applying the statutory federal income tax rate to net loss is as follows (in
thousands):
2001 2000 1999
--------------------------------------------------
Computed income taxes at 34% $(4,429) $(2,585) $(1,161)
Permanent items 451 435 7
Net operating loss carryforward 3,978 2,150 1,154
--------------------------------------------------
Income tax expense $ - $ - $ -
==================================================
11. 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 2001
(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.
12. CONTINGENCIES
The Company is involved in various claims brought about by certain parties
that are incidental to its operations. In the opinion of management, the
outcome of these matters will not have a material adverse impact on the
Company's financial position or results of operations.
28
ARI Network Services, Inc.
Notes to Financial Statements (continued)
13. SUBSEQUENT EVENTS
In September 2001, the Company eliminated ten software development positions,
resulting in an additional restructuring charge of approximately $43,000.
29