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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT I
(X) AMENDMENT TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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.
(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
(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 10, 1997.
Common Stock, Par Value $.001 Per Shares 4,162,744 Shares Outstanding
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ARI NETWORK SERVICES, INC.
FORM 10-Q/A
FOR THE THREE MONTHS ENDED October 31, 1997
INDEX
PART I - FINANCIAL INFORMATION
Page
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Item 2 Management's discussion and analysis of financial condition and 3-8
results of operations.
Signatures
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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 October 31, 1997 increased $340,000 or 20%
compared to the same period last year, representing the Company's seventh
consecutive quarter of year-over-year revenue improvement. Management expects
the year-over-year quarterly increases in revenue to continue through fiscal
1998 and that the percentage increase will fluctuate from quarter to quarter.
See "Forward Looking Statements."
The Company provides business-to-business electronic commerce network services
and end user software to customers in selected vertical markets with shared
distribution channels. The Company's strategy is to build sustainable
recurring revenues in these selected vertical markets from each of its primary
services and software products. Accordingly, management reviews the Company's
recurring vs. non-recurring revenue in aggregate and within each vertical
market.
The following table sets forth, for the periods indicated, certain revenue
information derived from the Company's unaudited financial statements.
THREE MONTHS ENDED
OCTOBER 31
(IN THOUSANDS)
PERCENTAGE
VERTICAL MARKET 1997 1996 CHANGE
---- ---- ------
Agribusiness Industry
Recurring $ 633 $ 529 20%
Non-recurring 257 463 (44%)
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Subtotal 890 992 (10%)
Equipment Industry
Recurring 133 72 85%
Non-recurring 386 48 704%
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Subtotal 519 120 333%
Transportation Industry
Recurring 189 174 9%
Non-recurring 64 39 64%
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Subtotal 253 213 19%
Publishing Industry
Recurring 322 303 6%
Non-recurring 11 11 -
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Subtotal 333 314 6%
Other Revenue
Recurring 28 44 (36%)
Non-recurring - - -
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Subtotal 28 44 (36%)
Total Revenue
Recurring 1,305 1,122 16%
Non-recurring 718 561 28%
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Grand Total $2,023 $1,683 20%
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Recurring revenues are derived from network traffic fees, maintenance and
support fees, transaction fees, license renewals and subscription fees. The
year-over-year increase in recurring revenues for the quarter ended October 31,
1997 was primarily due to increased network traffic fees in the Agribusiness
Industry and maintenance and support fees in the Equipment Industry. Recurring
revenues represented 65% of total revenue for the three month period ended
October 31, 1997 compared to 67% for the same period last year. 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 are derived from software license fees and professional
services fees. The year-over-year increase in non-recurring revenues for the
quarter ended October 31, 1997 was primarily due to increases in software
license fees and professional services fees in the Equipment Industry.
Agribusiness Industry
The Agribusiness Industry comprises several vertical markets including
agricultural and specialty chemicals, livestock pharmaceuticals, feed and seed.
Revenues from the Agribusiness Industry are derived from software license fees,
maintenance and support fees, network traffic fees and professional services
fees. Recurring revenues in the Agribusiness Industry increased due to
increases in network traffic fees. The decrease in non-recurring revenues was
due to the completion of substantial sales force automation software
customization projects for two major customers during the fourth quarter of
fiscal 1997. Management expects total revenues in the Agribusiness Industry
will increase for the balance of fiscal 1998. See "Forward Looking
Statements."
Equipment Industry
The Equipment Industry comprises several vertical markets including outdoor
power equipment, outboard marine, automotive, motorcycle, recreational vehicles
and power generation. Revenues from the Equipment Industry are derived from
software license fees, maintenance and support fees, subscription fees, network
traffic fees and professional services fees. Revenues from Empart(TM), the
Company's recently acquired electronic publishing software, are included in the
Equipment Industry revenues. See "Other Items." Recurring revenues in the
Equipment Industry increased due to maintenance and support fees from the
Company's PLUS(1)(R) software acquired in November 1996. Non-recurring revenues
in the Equipment Industry increased primarily due to software license fees from
PLUS(1)(R) and Empart(TM). See "Other Items." Management expects total revenues
in the Equipment Industry will continue to increase for the balance of fiscal
1998. See "Forward Looking Statements."
Transportation Industry
Revenues from the Transportation Industry are derived from maintenance and
support fees, transaction fees and professional services fees charged to the
Association of American Railroads for the creation and maintenance of the
Customer Identification File. The increase in Transportation revenues was due
to growth in recurring maintenance and support fees as the Customer
Identification File increased in size and due to non-recurring professional
services fees for the development of a corporate family linkage file for price
application. Management expects that revenues in the Transportation Industry
will continue at approximately the same level for the remainder of fiscal 1998,
and over time, will become a decreasing percentage of the Company's total
revenues. While relatively flat, this revenue is profitable on the margin and
helps to fund the Company's growth in other areas. See "Forward Looking
Statements."
Publishing Industry
Revenues from the Publishing Industry are derived from recurring connect time
and subscription fees and non-recurring service initiation 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, providing access
to some 800 publishers with more than 1,300 weekly and monthly newspapers.
Management expects that revenues in the Publishing Industry will continue at
approximately the same level for the remainder of fiscal 1998, and over time,
will become a decreasing percentage of the Company's total revenues. While
relatively flat, this revenue is profitable on the margin and helps to fund the
Company's growth in other areas. 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 financial statements.
THREE MONTHS
ENDED
OCTOBER 31,
(IN THOUSANDS)
PERCENTAGE
1997 1996 CHANGE
---- ---- ------
Operating expenses:
Variable cost of products and services sold (exclusive of
depreciation and amortization shown below) $ 475 $ 481 (1%)
Network operations 188 229 (18%)
Selling, general & administrative 1,346 1,316 2%
Research and development 563 340 66%
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Gross cash expenses 2,572 2,366 9%
Depreciation and amortization 414 528 (22%)
Less capitalized expenses (404) (152) 166%
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NET OPERATING EXPENSES $ 2,582 $ 2,742 (6%)
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The decrease in operating expenses was the result of slightly higher gross cash
expenses offset by increased capitalized expenses. The Company's technical
staff (in-house and contracted) is allocated between research and development
and software customization services for customer applications. Therefore
management expects fluctuations between development and capitalized expenses
quarter to quarter, as the mix of development and customization activities will
change based on customer requirements. For the period ended October 31, 1997
the Company's technical resources were focused primarily on the development of
the TradeRoute(TM) and PLUS(1)(R) for Windows(R) products. During the same
period last year, the technical staff was focused primarily on certain large
software customization projects.
Variable cost of products and services sold consists primarily of royalties,
telecommunications and data processing fees, customization labor and temporary
help fees. Variable cost of products and services sold as a percentage of
revenue was 23% and 29% for the three month periods ended October 31, 1997 and
1996, respectively. Management expects gross margins in future quarters to
fluctuate based on the mix of products and services sold. See "Forward Looking
Statements."
Selling, general and administrative expenses increased only $30,000 or 2% for
the three month period ended October 31, 1997 compared to the same period last
year despite a 20% increase in revenues. The increase was primarily due to
higher commissions and selling expenses as a result of the increase in
revenues.
The decrease in depreciation and amortization expense was due to accelerated
amortization of the Company's remaining DOS products in fiscal 1997.
Capitalized expenses represented 72% and 45% of research and development for
the three month periods ended October 31, 1997 and 1996, respectively. The
increase was the result of the shift of technical staff from customization of
software, which is expensed as variable cost of products and services sold, to
capitalized development of TradeRoute(TM) and PLUS(1)(R) for Windows(R).
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OTHER ITEMS
Interest expense decreased $56,000 or 62% for the three month period ended
October 31, 1997 compared to the same period last year. The decrease in
interest expense reflects the conversion of portions of the Company's lines of
credit with shareholders into shares of the Company's Preferred 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 financing.
Net loss decreased $556,000 or 48% for the three month period ended October 31,
1997 compared to the same period last year, representing the Company's fourth
consecutive quarter of year-over-year net loss improvement. Management expects
the year-over-year quarterly improvement in net loss to continue through fiscal
1998. See "Forward Looking Statements."
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 transaction.
CDI was in the business of publishing electronic parts catalogs and the
software that dealers and repair shops use to read the catalogs. CDI had the
parts catalogs of over 20 manufacturers in the Outdoor Power Equipment.,
Outboard Marine and Motorcycles and Power Sports industries. Its customer base
included Toro, Arctic Cat, 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.
On September 30, 1997, the Company completed the acquisition of Empart
Technologies, Inc., in a stock for assets transaction. Empart Technologies,
Inc. was a California-based developer of software for electronic parts
catalogs. Empart's products included EMPART publisher(TM), which converts data
from a variety of forms into an electronic format, and EMPART viewer(TM), a
high-end configurable parts catalog. Empart's customers included ABB Power
Generation, Inc., Yamaha Electronics of America, the auto dealer service group
of Automatic Data Processing, Inc. (ADP) and Coachmen Recreational Vehicle
Company. Empart Technologies is the Company's second acquisition in less than
12 months. The acquisition is not expected to have a material impact on the
Company's financial position. However, this non cash transaction is reflected
in several line items of the Company's balance sheet, but is not reflected in
the statements of cash flows because the acquisition was a non-cash
transaction. See "Forward Looking Statements."
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, certain cash flow
information derived from the Company's unaudited financial statements.
THREE MONTHS ENDED
OCTOBER 31
(IN THOUSANDS)
PERCENTAGE
1997 1996 CHANGE
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Net cash used in operating activities before changes
in working capital ($179) ($621) 71%
Net cash used in investing activities (480) (114) (321%)
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Subtotal (659) (735) 10%
Effect of net changes in working capital (211) 211 (200%)
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Net cash used in operating and investing activities ($870) ($524) (66%)
Net cash used in operating activities before changes in working capital
decreased due to cost controls and increased revenues. Management believes
that, based on current trends, the Company will achieve positive cash flow from
operations before changes in working capital in the quarter ending July 31,
1998. Net cash used in investing activities increased due to the development
of TradeRoute(TM) and PLUS(1)(R) for Windows(R).
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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. The Company also expects to incur significant
expenditures for research and development. The Company expects to fund
research and development costs and negative cash flow from operations in fiscal
1998 from the sale of securities and from a line of credit secured with the
Company's accounts receivables. See "Forward Looking Statement."
At October 31, 1997, the Company had cash of approximately $1,422,000 compared
to approximately $64,000 at July 31, 1996. During first quarter fiscal 1998,
the Company raised $1,119,000 exclusive of expenses from the sale of common
stock. The proceeds were used to fund operations and retire portions of the
outstanding revolving credit lines.
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 was repaid September 30, 1997 and the balance of the WITECH Line is
due on December 31, 1997. The Company expects to satisfy the obligation or to
renegotiate an extension of the line of credit, although there can be no
assurance that either of these will occur. See "Forward Looking Statement."
Interest due on the WITECH Line is at the rate of prime plus 2%. On November
17, 1997, the Company repaid $950,000 of the Senior Line from the proceeds of
the common stock. In connection with obtaining the WITECH Line in 1993, the
Company issued a warrant to WITECH for the purchase of up to 125,000 shares of
its common stock at a price of $8.00 per share and 50,000 shares of its common
stock at a price of $9.00 per share pursuant to an amendment dated November 5,
1996. The Company has also issued a usage warrant to WITECH for a maximum of
25,000 shares of its common stock at a price of $9.00. Pursuant to the terms
of the warrants, the exercise price was reduced to $4.00 when the Company
issued common stock at that price during the quarter ended October 31, 1997.
As of November 30, 1997 there were $534,000 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 1998 in order to
meet its requirements for operations and development investments. Management
believes that sufficient financing for fiscal 1998 will be available from the
sale of additional securities and from additional borrowings. The Company has
a registration statement in effect for the sale of up to an additional 500,000
shares of common stock, of which 112,500 shares remain unsold. 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. On a long term basis, management believes that
financing for the Company's operations, as well as capital expenditures, will
come principally from cash generated from operations. 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 revenues are based on contracts
signed and product delivered. Non-recurring revenues are affected by the time
required to close large license fee and development agreements, which cannot be
predicted with any certainty due to customer requirements and decision-making
processes.
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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 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 materially affect or predict the volume
of transactions per customer.
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.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARI Network Services, Inc.
(Registrant)
Date: December 30, 1997 /s/ Brian E. Dearing
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Brian E. Dearing,
Chairman of the Board (and
acting CFO)