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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-19608
ARI Network Services, Inc.
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(Exact name of registrant as specified in its charter.)
WISCONSIN 39- 1388360
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
330 E. Kilbourn Avenue, Milwaukee, Wisconsin 53202
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(Address of principal executive office)
Registrant's telephone number, including area code (414) 278-7676
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 31, 1997.
Common Stock, Par Value $.001 Per Shares 14,763,906 Shares Outstanding
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ARI NETWORK SERVICES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED April 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
Page
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Item 1 Financial statements 3-6
Condensed consolidated balance sheets - April 30, 1997 3
and July 31, 1996.
Condensed consolidated statements of operations for the 4
three and nine months ended April 30, 1997 and 1996.
Condensed consolidated statements of cash flows for the 5
nine months ended April 30, 1997 and 1996.
Notes to unaudited condensed consolidated financial statements. 6
Item 2 Management's discussion and analysis of financial condition and 7-13
results of operations.
PART II - OTHER INFORMATION
Exhibits and Reports on Form 8-K
Signatures 13
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ARI NETWORK SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30 July 31
1997 1996
(Unaudited) (Audited)
------------ -----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 250 $ 372
Accounts receivable 1,259 1,306
Prepaid expenses 151 186
------- --------
Total current assets 1,660 1,864
Equipment & leasehold improvements, net of
accumulated depreciation and amortization 251 352
Network systems-net 8,844 9,263
Other Assets 391 0
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Total Assets $11,146 $11,479
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LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Current liabilities:
Accounts payable $ 857 $ 818
Line of credit with shareholders 1,715 3,500
Other current liabilities 1,232 894
Current portion of capital lease obligations 95 64
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Total current liabilities 3,899 5,276
Capital lease obligations 16 22
Shareholders' equity:
Common stock 15 13
Additional paid-in capital 80,860 76,823
Accumulated deficit (73,644) (70,655)
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Total shareholders' equity 7,231 6,181
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Total Liabilities & Shareholders' Equity $11,146 $11,479
======= =======
See notes to unaudited condensed consolidated financial statements.
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ARI NETWORK SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for share data)
(Unaudited)
Three Months Nine Months
Ended Ended
April 30 April 30
1997 1996 1997 1996
Net revenues:
Network and other services $1,240 $ 1,208 $ 3,694 $ 3,185
Software and development 466 199 1,360 435
------ ------- ------- -------
Total net revenues 1,706 1,407 5,054 3,620
Operating Expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown below):
Network and other services 292 242 866 660
Software and development 170 105 541 155
------ ------- ------- -------
Total variable costs of products and services sold 462 347 1,407 815
Depreciation and amortization 421 476 1,414 1,248
Network operations 253 218 740 656
Selling, General & Administrative 1,277 1,239 3,796 3,521
Network and product development 548 463 1,253 1,404
------ ------- ------- -------
Operating expenses before amounts capitalized 2,961 2,743 8,610 7,644
Less capitalized expenses* (384) (374) (720) (1,039)
------ ------- ------- -------
Total net operating expenses 2,577 2,369 7,890 6,605
------ ------- ------- -------
Operating Loss (871) (962) (2,836) (2,985)
Other expense (38) (64) (153) (191)
------- ------- ------- -------
Net loss ($ 909) ($1,026) ($2,989) ($3,176)
======= ======= ======= =======
Average common shares outstanding 14,764 12,699 14,325 12,355
Net loss per common share ($0.06) ($0.08) ($0.21) ($0.26)
* In accordance with FASB 86, includes a portion of network and product
development expense and other operating expenses directly related to the
development process.
See notes to unaudited condensed consolidated financial statements.
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ARI NETWORK SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
APRIL 30
--------
1997 1996
---- ----
Cash flow from operating activities:
Net loss ($2,989) $ (3,176)
Amortization of network system 1,161 836
Depreciation and other amortization 253 412
Net change in operating assets 116 315
Net change in operating liabilities 137 (155)
------- --------
Net cash used in operating activities (1,322) (1,768)
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (86) (10)
Network system costs capitalized (720) (1,039)
Other 10 4
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Net cash used in investing activities (796) (1,045)
Cash flows from financing activities:
Payment of capital lease obligations (6) (52)
Proceeds from issuance of common stock 2,787 1,364
Borrowings (repayments) under line of credit (785) 1,600
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Net cash provided by financing activities 1,996 2,912
------- --------
Net change in cash and cash equivalents (122) 99
Beginning cash and cash equivalents balance 372 236
------- --------
Ending cash and cash equivalents balance $250 $335
======= ========
Cash paid for interest $153 $190
======= ========
Noncash investing and financing activities
Capital lease obligations incurred for:
Network system equipment 71 0
Common stock issued for acquisition 252 0
Common stock issued to repay line of credit 1,000 0
See notes to unaudited condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for fiscal year
end financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
months ended April 30, 1997 are not necessarily indicative of the results that
may be expected for the fiscal year ending July 31, 1997. For further
information, refer to the financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended July 31, 1996.
2. NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during each period.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Total revenue for the quarter ended April 30, 1997 increased $299,000 or 21%
compared to the same period last year, representing the fifth consecutive
quarter of year-over-year revenue improvement. For the nine month period ended
April 30, 1997, total revenue increased $1,434,000 or 40% over the same period
last year. Management projects that, based on current trends, revenue for the
year ending July 31, 1997 will be approximately $7.0 million. See "Forward
Looking Statements."
The Company has a strategy of building a sustainable recurring revenue stream
in selected vertical markets for each of its primary services. Accordingly,
the Company reviews its revenue by two distinct classifications: recurring
versus non-recurring revenue and revenue by vertical market.
The following tables set forth, for the periods indicated, certain revenue
information derived from the Company's unaudited consolidated financial
statements.
RECURRING VS. NON-RECURRING REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30 APRIL 30
-------- --------
(IN THOUSANDS) (IN THOUSANDS)
1997 1996 1997 1996
---- ---- ---- ----
Recurring Revenue $ 1,203 $ 1,008 $ 3,383 $ 2,812
Non-recurring Revenue 503 399 1,671 808
------- ------- ------- -------
Total revenue $ 1,706 $ 1,407 $ 5,054 $ 3,620
======= ======= ======= =======
Recurring revenues for the three and nine month periods ended April 30, 1997
were $1,203,000 and 3,383,000, respectively, which represented increases of 19%
and 20% from the comparable periods last year. Recurring revenues consist of
network traffic fees, maintenance and support fees, transaction fees and
subscription and license renewal fees. The year-to-year increase in recurring
revenue was primarily due to maintenance and support fees in the Agribusiness
and Related Industries and the Transportation Industry. Recurring revenues
represented 71% and 67%, respectively, of total revenue for the three and nine
month periods ended April 30, 1997 compared to 72% and 78% for the same periods
last year. The lower percentage of recurring revenues was due to an increase
in non-recurring revenue from sales of the Company's new Internet-enabled
electronic commerce software applications and customization services.
Management believes a relationship 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 is likely to fluctuate
from quarter to quarter. See "Forward Looking Statements."
Non-recurring revenues for the three and nine month periods ended April 30,
1997 were $503,000 and $1,671,000, respectively, which represented increases of
26% and 107% from the comparable periods last year. Non-recurring revenue is
derived from the sale of software and professional services both of which
increased during the period ended April 30, 1997. The increase was in the
Agribusiness and Related Industries.
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VERTICAL MARKET REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30 APRIL 30
REVENUE BY -------- --------
VERTICAL MARKETS (IN THOUSANDS) (IN THOUSANDS)
1997 1996 1997 1996
Agribusiness & Related
Industries $ 1,164 $ 810 $ 3,380 $ 2,016
Publishing Industry 316 307 930 925
Transportation Industry 187 187 620 439
Other 39 103 124 240
------- ------- ------- -------
Total Revenue $ 1,706 $ 1,407 $ 5,054 $ 3,620
======= ======= ======= =======
Agribusiness and Related Industries
The Agribusiness and Related Industries comprise several vertical markets
including agricultural and specialty chemicals, feed, seed, outdoor power
equipment, outboard marine, motorcycles and recreational vehicles. Revenues
from the Agribusiness and Related Industries are derived from network traffic
fees, maintenance and support fees, subscription fees, software sales and
professional services fees. Revenues derived from the sale of PLUS(1)(R), the
Company's newly acquired electronic parts cataloging software, are included in
the Agribusiness and Related Industries revenues. See "Other Items." Revenues
from Agribusiness and Related Industries represented 68% and 67% of total
revenue for the three and nine month periods ended April 30, 1997, compared to
58% and 56% for the same periods last year. Management expects that most of
the Company's growth will come from these industries. See "Forward Looking
Statements."
Revenues in the Agribusiness and Related Industries for the three and nine
month periods ended April 30, 1997 were $1,164,000 and $3,380,000,
respectively, which represented increases of 44% and 68% from the comparable
periods last year. The increases in revenue were primarily due to the sale and
customization of all of the Company's software products.
Recurring revenues in the Agribusiness and Related Industries for the three and
nine month periods ended April 30, 1997 were $677,000 and $1,832,000,
respectively, which represented increases of 30% and 22% from the comparable
periods last year. The increases in recurring revenues resulted from more
transactions being transmitted over the Company's network and an increase in
the Company's base of manufacturers, distributors and dealers leading to more
recurring maintenance and subscription fees.
Some of the manufacturers in the AgriChemical/Crop Protection sector of
Agribusiness industry have formed a jointly owned company known as "RAPID" to
promote Electronic Commerce within the industry. RAPID has endorsed the
Company as a "Preferred Provider" of electronic commerce software and services
to the agricultural industry. RAPID's endorsement was primarily the result of
the Agrichemical industry's favorable reaction to the release of the Company's
electronic commerce software, Meppel(TM). Among RAPID's projects is the
development of a directory of physical locations and electronic commerce
trading partners in the "allied industries," which include crop protection and
specialty chemicals, seed, feed and fertilizer. The Company and RAPID have
reached an understanding pursuant to which the Company has created and will
maintain this new directory (the "allied directory") for three years. The
Company's creation and maintenance of the allied directory will result in
non-recurring revenues from file conversion and recurring revenues from file
maintenance. See "Forward Looking Statements."
In July 1996, the Company formed an alliance with Dun & Bradstreet Information
Services ("D&B") to market a standard electronic commerce identification number
("EC-ID(TM)") that will allow companies to precisely identify each business
location involved in an electronic commerce transaction. The allied directory
referred to above will be the first commercial use of the EC-ID(TM).
Management expects that the Company will work with D&B to develop the market
for this service in other industries based on its initial success in the allied
industries. See "Forward Looking Statements."
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Publishing Industry
Revenues in the Publishing Industry are derived from recurring connect time
fees and non-recurring subscription fees charged to the Company's Newsfinder(R)
customers. Newsfinder(R) manages the approximately 20,000 news stories per
week output of the Associated Press ("AP"), providing access for some 800
publishers with approximately 1,300 weekly and monthly newspapers. Revenues in
the Publishing Industry for the three and nine month periods ended April 30,
1997 were $316,000 and $930,000, respectively, compared to $307,000 and
$925,000 for the same periods last year. Publishing revenue represented 18%
of total revenue for the nine month period ended April 30, 1997, compared to
26% for the comparable period last year. Management believes that revenues in
this industry, more than 95% of which are recurring, will continue at
approximately the same level as last year for the remainder of fiscal 1997.
See "Forward Looking Statements."
Transportation Industry
Revenues in the Transportation Industry are derived from maintenance and
support fees, transaction fees and professional service fees charged to the
Association of American Railroads for the creation and maintenance of the
Customer Identification File. Revenues in the Transportation Industry for the
three and nine month periods ended April 30, 1997 were $187,000, and $620,000,
respectively, compared to $187,000 and $439,000 for the same periods last year.
The improvement in revenue for the nine months ended April 30, 1997 was
primarily due to increases in recurring maintenance and support fees as the
project went into production in December, 1995. Management expects revenue in
this industry to remain relatively flat for the foreseeable future. See
"Forward Looking Statements."
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OPERATING EXPENSES
The following table sets forth, for the periods indicated, certain operating
expense information derived from the Company's unaudited consolidated financial
statements.
THREE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30 APRIL 30
-------- --------
(IN THOUSANDS) (IN THOUSANDS)
1997 1996 1997 1996
---- ---- ---- ----
Operating expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown below) $ 462 $ 347 $ 1,407 $ 815
Network operations 253 218 740 656
Selling, General & Administrative 1,277 1,239 3,796 3,521
Network and product development 548 463 1,253 1,404
-------- ------- ------- -------
Gross cash expenses 2,540 2,267 7,196 6,396
Depreciation and amortization 421 476 1,414 1,248
Less capitalized expenses (384) (374) (720) (1,039)
-------- ------- ------- -------
NET OPERATING EXPENSES $ 2,577 $ 2,369 $ 7,890 $ 6,605
======== ======= ======= =======
Net operating expenses for the three and nine month periods ended April 30,
1997 increased 9% and 19%, respectively, over the comparable periods last year
mainly due to increased variable cost of products and services sold. Gross
cash expenses for the three and nine month periods ended April 30, 1997
increased 12% and 13%, respectively, over the comparable periods last year.
The increases in variable cost of products and services sold and selling
expense were directly attributable to the increase in sales. Variable cost of
products and services sold consists primarily of royalties, telecommunications
and data processing fees, customization labor and temporary help fees.
Temporary help is used by the Company in connection with its database
management services. Variable cost of products and services sold as a
percentage of revenue for the three and nine month periods ended April 30, 1997
were 27% and 28%, respectively, compared to 25% and 23% for the same periods
last year. Variable cost of products and services sold as a percentage of
revenue will vary by quarter due to the product sales mix. Variable cost of
products and services sold as a percentage of revenue was slightly higher
compared to last year due to increased software and customization sales, which
have relatively higher variable costs and to the variable costs associated with
the maintenance of the Transportation Industry database which first went into
production in December, 1995. Management expects margins in future quarters to
be similar to the current quarter assuming a revenue mix of approximately
two-thirds recurring and one-third non-recurring. See "Forward Looking
Statements."
Selling, general and administrative expenses for the three month period ended
April 30, 1997 increased only 3% over the same period last year despite a 21%
increase in revenue. Selling, general and administrative expenses for the nine
month period ended April 30, 1997 increased 8% despite a 40% increase in
revenue over the same period last year as the Company filled open positions in
sales and administration and paid higher commissions and selling expenses as a
result of the increase in revenues.
For the three month period ended April 30, 1997, depreciation and amortization
expense decreased by 12% over the same period last year because the Company's
IBM 3090 mainframe computer was fully depreciated and replaced with a less
costly and more efficient IBM 9121-311 mainframe with increased capacity. For
the nine month period ended April 30, 1997, depreciation and amortization
expense increased by 13% over the same period last year as the Company began to
amortize ARISE(TM), Meppel(TM) and other related development projects.
For the nine months ended April 30, 1997, capitalized expenses decreased by 31%
compared to the same period last year due to the completion of the ARISE(TM)
and Meppel(TM) core products and the focus of the development staff shifting
to
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software customization, which is a variable cost of products and services sold.
Management anticipates that capitalized expenses will increase over the next
six to twelve months as a result of the Company investing in development of the
Company's Internet-enabled electronic commerce parts ordering and electronic
parts catalog applications for the Company's equipment dealer services business
(the "Dealer Software"). See "Forward Looking Statements."
Network and software development expenditures for the nine month period ended
April 30, 1997 were primarily attributable to the development of the Dealer
Software. For the same period last year, network and software development
included development expenses attributable to ARISE(TM) and the re-engineering
of the Company's telecommunications management systems to employ TCP/IP
Internet transport protocols and other Internet software standards for
electronic commerce services. Management anticipates that network and product
development expense and capitalized expenses will continue at approximately the
same level during the remainder of fiscal 1997 as a result of the Company's
continued investment in Internet-enabled electronic commerce applications. See
"Forward Looking Statements."
OTHER ITEMS
Interest expense for the three months ended April 30, 1997 was $38,000,
compared to $64,000 last year. The decrease in interest expense reflects the
conversion of portions of debt financing under the Company's lines of credit
with shareholders into shares of the Company's Common Stock. See "Liquidity
and Capital Resources." Interest expense will fluctuate depending on the use
and timing of financing through lines of credit and/or additional equity
funding.
Net loss for the three month period ended April 30, 1997 decreased by 11% or
$117,000 compared to the same period last year. For the nine month period ended
April 30, 1997, the net loss decreased by 6% or $187,000 compared to the same
period last year. These improvements can be attributed to the factors
described above.
Management is pursuing a strategy of supplementing its internal growth with
strategic and synergistic acquisitions. On November 4, 1996, the Company
completed the acquisition of cd\*.IMG, Inc. ("CDI") in a stock for stock
transaction. CDI was in the business of publishing electronic catalogs and the
software that an end user needs to read the catalogs. CDI had the parts
catalogs of over 20 manufacturers in the Outdoor Power Equipment, Outboard
Marine and Recreational Vehicle industries. Its customer base included Toro,
Artco, Kohler, Tecumseh, Mercury Marine, Harley Davidson and Outboard Marine
Corporation. CDI's operations have been consolidated into the Company's. As a
result of the acquisition, the Company recognized goodwill in the amount of
$434,000 which is being amortized over a five year period. The acquisition of
CDI has not otherwise had a material effect on the Company's current financial
position.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating and investing activities decreased by 25% or $695,000
for the nine month period ended April 30, 1997, compared to the same period
last year. Net cash used in operating and investing activities excluding
changes in operating assets and liabilities improved 20% from $2,973,000 for
the nine months ended April 30, 1996 to $2,371,000 for the same period during
fiscal 1997. The Company expects to continue to incur operating losses for the
fiscal year ending July 31, 1998 and there can be no assurance that
profitability will be achieved thereafter. Management believes that, based on
current trends, the Company will achieve positive cash flow from operations
(excluding changes in working capital items) in the quarter ended July 31,
1998. See "Forward Looking Statements." The Company also expects to continue
to incur significant expenditures for software development and network
construction and expansion. The Company's software development and network
construction and expansion costs and negative cash flow from operations
historically have been funded primarily from the sale of securities and
currently from lines of credit with shareholders.
At April 30, 1997, the Company had cash and cash equivalents of approximately
$250,000 compared to approximately $372,000 at July 31, 1996. During the nine
months ended April 30, 1997, the Company raised $2,787,000 from the sale of
common stock. The proceeds were used to fund operations and repay portions of
the outstanding revolving credit lines.
On December 13, 1996, the Company repaid borrowings from WITECH Corporation
("WITECH") and QUAESTUS Limited Partnership under a previously existing secured
line of credit (the "Senior Line"). Of the $1,465,000 outstanding under the
Senior Line at December 13, 1996, $1,000,000 was repaid by conversion of such
amount into
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shares of the Company's common stock at a rate of $2.25 per share. The
remaining $465,000 was borrowed under the WITECH Line described below.
The Company has a line of credit with WITECH, (the "WITECH" Line) that has
been in place since October 4, 1993. The WITECH Line was amended on May 30,
1997 to include a bridge loan of $500,000, bringing the line up to $2,500,000.
The bridge loan is due no later than September 30, 1997 and the balance of the
WITECH Line is due on December 31, 1997. Interest due on the WITECH Line is at
the rate of prime plus 2%. Under the WITECH Line, the Company has issued a
commitment warrant to WITECH for the purchase of up to 500,000 shares of its
common stock at a price of $2.00 per share and 100,000 shares of its common
stock at a price of $2.25 per share pursuant to an amendment dated November 5,
1996. The Company has also issued a usage warrant to WITECH for a maximum of
100,000 shares of its common stock at a price of $2.25. The exercise price of
the warrants is reduced if the Company issues common stock at less than the
then current exercise price. As of June 4, 1997 there were $2,000,000 of
borrowings outstanding under the WITECH Line.
The only financial covenant in the WITECH Line is that the Company must
maintain a net worth (calculated in accordance with generally accepted
accounting principles) of at least $5.3 million. The Company has been, and is
currently, in compliance with the financial covenant in the Agreement and
currently expects to comply with such covenant or obtain any required waivers
or raise additional equity, if necessary. See "Forward Looking Statements."
The Company will require additional financing during fiscal 1997 in order to
meet its requirements for operations and development investments. Management
believes that sufficient financing for fiscal 1997 and Fiscal 1998 will be
available from the sale of additional securities and from additional borrowings
from existing shareholders. Management believes that, based on current trends,
the Company will achieve positive cash flow from operations (excluding changes
in working capital items) in the quarter ended July 31, 1998. See "Forward
Looking Statements." The Company continues to explore alternatives for
additional financing, but no assurances can be given that additional financing
will be available on commercially reasonable terms. On a long term basis,
management believes that financing for the Company's operations, including
capital expenditures, will come principally from cash generated from
operations, the sale of additional equity or other third party financing,
capital leases, additional borrowings from shareholders (including extensions
of the WITECH Line, if available) and other sources of capital if available.
See "Forward Looking Statements."
FORWARD LOOKING STATEMENTS
Certain statements contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward looking statements.
Several important factors can cause actual results to materially differ from
those stated or implied in the forward looking statements. Such factors
include, but are not limited to the growth rate of the Company's selected
market segments, the positioning of the Company's products in those segments,
variations in demand for and cost of customer services and technical support,
customer adoption of Internet-enabled Windows(R) applications and their
willingness to upgrade from DOS versions of software, the Company's ability to
release new software applications and upgrades on a timely basis, the Company's
ability to establish and maintain strategic alliances, the Company's ability to
manage its costs, the Company's ability to manage its business in a rapidly
changing environment, the Company's ability to finance capital investments, and
the Company's ability to implement its acquisition strategy to increase growth.
Projected revenues are difficult to estimate because the Company's revenues and
operating results may vary substantially from quarter to quarter. The primary
cause of the variation is attributed to non-recurring revenues from software
license and customization fees. License fee revenue is based on contracts
signed and product delivered within the quarter. Non-recurring revenue is
affected by the time required to close large license fee and development
agreements, which cannot be predicted with any certainty due to customer
requirements and decision-making processes.
Recurring revenues are also difficult to estimate. Recurring revenues from
maintenance and subscription fees may be estimated based on the number of
subscribers to the Company's services but will be affected by the renewal ratio
which cannot be determined in advance. Recurring revenues from network traffic
fees and transaction fees are difficult to estimate prior to the end of the
quarter as they are determined by usage. Usage is a function of the number of
subscribers and the number of transactions per subscriber. Transactions
include product ordering, warranty claim processing, inventory and sales
reporting, parts number updates and price updates. The Company cannot affect
or predict the volume of transactions per customer.
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Although the Company has recently introduced and plans to expand its Internet
enabled Windows(R) portfolio of products, the marketplace is highly competitive
and there can be no assurance that a customer will select the Company's
software and services over that of a competitor. The environment in which the
Company competes is characterized by rapid technological changes, dynamic
customer demands, and frequent product enhancements and product introductions.
Some of the Company's current and potential competitors have greater financial,
technical, sales, marketing and advertising resources than the Company. The
widespread acceptance of the Internet may increase the usage of the Company's
product applications and may change the manner in which the Company charges for
its services.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 10.1 Amendment Number 10 to the Loan Agreement dated May 30, 1997
between the Company and WITECH Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter, the Company filed a Form 8-K dated
February 6, 1997 and a Form 8-K dated February 19, 1997.
Both reports related to ITEM 5 of Form 8-K and no financial
statements were filed.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARI Network Services, Inc.
(Registrant)
Date: June 13, 1997 /s/ Brian E. Dearing
------------------------------
Brian E. Dearing, President &
CEO (and acting CFO)