e10qsb
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2008
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o |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number 000-19608
ARI Network Services, Inc.
(Exact name of small business issuer as specified in its charter)
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WISCONSIN
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39-1388360 |
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.) |
11425 W. Lake Park Drive, Milwaukee, Wisconsin 53224
(Address of principal executive offices)
Issuers telephone number (414) 973-4300
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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 þ NO o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
As of March 7, 2008 there were 6,659,427 shares of the registrants common stock outstanding.
Transitional Small Business Disclosure Format (check one).
YES o NO þ
ARI Network Services, Inc.
FORM 10-QSB
FOR THE SIX MONTHS ENDED JANUARY 31, 2008
INDEX
PART I FINANCIAL INFORMATION
2
ITEM 1. FINANCIAL STATEMENTS
ARI Network Services, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
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(Unaudited) |
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January 31 |
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July 31 |
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2008 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
761 |
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$ |
1,050 |
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Trade receivables, less allowance for doubtful accounts of $162 and
$148 at January 31, 2008 and July 31, 2007, respectively |
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989 |
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1,302 |
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Work in Process |
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238 |
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223 |
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Prepaid expenses and other |
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253 |
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291 |
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Current portion of deferred income taxes |
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555 |
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|
555 |
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Total Current Assets |
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2,796 |
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3,421 |
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Equipment and leasehold improvements: |
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Computer equipment |
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5,356 |
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5,324 |
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Leasehold improvements |
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128 |
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128 |
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Furniture and equipment |
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2,790 |
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2,749 |
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8,274 |
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8,201 |
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Less accumulated depreciation and amortization |
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7,267 |
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6,991 |
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Net equipment and leasehold improvements |
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1,007 |
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1,210 |
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Long term portion of deferred income taxes |
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1,539 |
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1,539 |
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Goodwill |
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1,079 |
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1,079 |
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Other assets |
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952 |
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1,072 |
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Capitalized software product costs |
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12,649 |
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12,455 |
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Less accumulated amortization |
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11,230 |
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10,849 |
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Net capitalized software product costs |
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1,419 |
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1,606 |
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Total Assets |
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$ |
8,792 |
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$ |
9,927 |
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3
ARI Network Services, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
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(Unaudited) |
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January 31 |
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July 31 |
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2008 |
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2007 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Current portion of notes payable |
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$ |
483 |
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$ |
1,023 |
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Accounts payable |
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208 |
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703 |
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Deferred revenue |
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4,834 |
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5,619 |
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Accrued payroll and related liabilities |
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910 |
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962 |
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Accrued sales, use and income taxes |
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44 |
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28 |
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Accrued vendor specific liabilities |
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190 |
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175 |
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Other accrued liabilities |
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283 |
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124 |
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Current portion of capital lease obligations |
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8 |
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8 |
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Total Current Liabilities |
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6,960 |
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8,642 |
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Long term liabilities: |
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Notes payable (net of discount) |
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369 |
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479 |
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Long term payroll related |
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77 |
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55 |
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Other long term liabilities |
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17 |
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28 |
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Capital lease obligations |
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3 |
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5 |
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Total Long Term Liabilities |
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466 |
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567 |
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Shareholders equity: |
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Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 0 shares issued and
outstanding at January 31, 2008 and July 31, 2007 |
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Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,659,427 and 6,623,605 shares issued and outstanding
at January 31, 2008 and July 31, 2007, respectively |
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7 |
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7 |
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Common stock warrants and options |
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241 |
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195 |
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Additional paid-in-capital |
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94,679 |
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94,627 |
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Accumulated deficit |
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(93,513 |
) |
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(94,091 |
) |
Other accumulated comprehensive income |
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(48 |
) |
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(20 |
) |
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Total Shareholders Equity |
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1,366 |
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718 |
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Total Liabilities and Shareholders Equity |
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$ |
8,792 |
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$ |
9,927 |
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See notes to unaudited condensed consolidated financial statements.
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Note: |
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The balance sheet at July 31, 2007 has been derived from the audited balance sheet at that
date but does not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. |
4
ARI Network Services, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
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Three months ended |
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Six months ended |
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January 31 |
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January 31 |
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2008 |
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2007 |
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2008 |
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2007 |
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Net revenues: |
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Subscriptions, support and other services fees |
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$ |
2,977 |
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$ |
2,754 |
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$ |
5,957 |
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$ |
5,417 |
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Software licenses and renewals |
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|
508 |
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|
575 |
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1,049 |
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|
1,118 |
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Professional services |
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|
737 |
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|
362 |
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1,440 |
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|
659 |
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4,222 |
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3,691 |
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8,446 |
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7,194 |
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Cost of products and services sold: |
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Subscriptions, support and other services fees |
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310 |
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334 |
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594 |
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|
606 |
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Software licenses and renewals * |
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196 |
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206 |
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|
398 |
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|
402 |
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Professional services |
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274 |
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|
44 |
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|
535 |
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|
122 |
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|
780 |
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|
584 |
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|
1,527 |
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|
1,130 |
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Gross Margin |
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3,442 |
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3,107 |
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6,919 |
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6,064 |
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Operating expenses: |
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Depreciation and amortization (exclusive of
amortization of software
products included in cost
of products and services sold) |
|
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186 |
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110 |
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|
381 |
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|
216 |
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Customer operations and support |
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|
256 |
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|
276 |
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|
536 |
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|
544 |
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Selling, general and administrative |
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2,304 |
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|
2,101 |
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|
4,684 |
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|
4,086 |
|
Software development and technical support |
|
|
339 |
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|
359 |
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|
|
688 |
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|
728 |
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|
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|
|
|
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Net operating expenses |
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|
3,085 |
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|
2,846 |
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6,289 |
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5,574 |
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Operating income |
|
|
357 |
|
|
|
261 |
|
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|
630 |
|
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|
490 |
|
Other income (expense): |
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|
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Interest expense |
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(26 |
) |
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(32 |
) |
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(61 |
) |
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|
(70 |
) |
Other, net |
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|
(1 |
) |
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|
27 |
|
|
|
10 |
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|
61 |
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|
|
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|
|
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Total other expense |
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(27 |
) |
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|
(5 |
) |
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(51 |
) |
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|
(9 |
) |
|
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|
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|
|
|
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|
|
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Income before provision for income taxes |
|
|
330 |
|
|
|
256 |
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|
|
579 |
|
|
|
481 |
|
Income tax benefit (provision) |
|
|
5 |
|
|
|
(8 |
) |
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|
(1 |
) |
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(8 |
) |
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Net income |
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$ |
335 |
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|
$ |
248 |
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|
$ |
578 |
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$ |
473 |
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Average common shares outstanding: |
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Basic |
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|
6,656 |
|
|
|
6,304 |
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|
|
6,645 |
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|
|
6,257 |
|
Diluted |
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|
7,000 |
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|
|
6,707 |
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|
|
6,989 |
|
|
|
6,660 |
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Basic and diluted net income per share: |
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Basic |
|
$ |
0.05 |
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|
$ |
0.04 |
|
|
$ |
0.09 |
|
|
$ |
0.08 |
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|
Diluted |
|
$ |
0.05 |
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|
$ |
0.04 |
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|
$ |
0.08 |
|
|
$ |
0.07 |
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|
|
|
|
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|
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|
See notes to unaudited condensed consolidated financial statements.
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* |
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Includes amortization of software products of $187, $198, $381 and $385 respectively and
excludes other depreciation and amortization, which is shown separately |
5
ARI Network Services, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Six months ended |
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|
January 31 |
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|
2008 |
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|
2007 |
|
Operating activities |
|
|
|
|
|
|
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|
Net income |
|
$ |
578 |
|
|
$ |
473 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
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Amortization of software products |
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|
381 |
|
|
|
385 |
|
Amortization of deferred financing costs, debt discount and
excess carrying value over face amount of notes payable |
|
|
18 |
|
|
|
(33 |
) |
Depreciation and other amortization |
|
|
402 |
|
|
|
216 |
|
Stock based compensation related to stock options |
|
|
46 |
|
|
|
68 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
Stock issued as contribution to 401(k) plan |
|
|
37 |
|
|
|
42 |
|
Net change in receivables, prepaid expenses and other
current assets |
|
|
293 |
|
|
|
(485 |
) |
Net change in accounts payable, deferred revenue,
Accrued liabilities and long term liabilities |
|
|
(1,141 |
) |
|
|
(388 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
614 |
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Purchase of equipment and leasehold improvements |
|
|
(61 |
) |
|
|
(292 |
) |
Purchase of assets related to acquisition |
|
|
|
|
|
|
(1,081 |
) |
Software product costs capitalized |
|
|
(194 |
) |
|
|
(181 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(255 |
) |
|
|
(1,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Payments under notes payable |
|
|
(668 |
) |
|
|
(700 |
) |
Payments of capital lease obligations |
|
|
(2 |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
15 |
|
|
|
31 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(655 |
) |
|
|
(669 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(289 |
) |
|
|
(1,945 |
) |
Balance at beginning of period |
|
|
1,050 |
|
|
|
3,584 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
761 |
|
|
$ |
1,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
74 |
|
|
$ |
92 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
10 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities |
|
|
|
|
|
|
|
|
Issuance of common stock in connection with acquisition |
|
$ |
|
|
|
$ |
707 |
|
Debt issued in connection with acquisitions |
|
|
|
|
|
|
700 |
|
Debt assumed in connection with acquisition |
|
|
|
|
|
|
37 |
|
Accrued liabilities related to acquisition |
|
|
|
|
|
|
200 |
|
Stock based compensation related to stock options |
|
|
46 |
|
|
|
68 |
|
See notes to unaudited condensed consolidated financial statements.
6
Notes to Condensed Consolidated Financial Statements
(Unaudited)
January 31, 2008
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for fiscal year end financial statements. In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three and six
months ended January 31, 2008 are not necessarily indicative of the results that may be expected
for the fiscal year ending July 31, 2008. For further information, refer to the financial
statements and footnotes thereto included in the Companys annual report on Form 10-KSB for the
year ended July 31, 2007.
The financial statements include the accounts of ARI Network Services, Inc. and its wholly owned
subsidiaries, ARI Europe B. V. and ARI Outsourced F&I Center, LLC. All inter-company transactions
and balances have been eliminated.
The Companys outsourced F&I Center was suspended in December, 2007, although the LLC remains in
place and the Company may re-initiate operations at a future date. The Company incurred no
significant costs associated with the closing of this office, and expects to incur no addition
costs related to this operation for the remainder of fiscal 2008.
The functional currency of the Companys subsidiary in the Netherlands is the Euro; accordingly,
monetary assets and liabilities are translated into United States dollars at the rate of exchange
existing at the end of the period, and non-monetary assets and liabilities are translated into
United States dollars at historical exchange rates. Income and expense amounts, except for those
related to assets translated at historical rates, are translated at the average exchange rates
during the period. Adjustments resulting from the remeasurement of the financial statements into
the functional currency are charged or credited to comprehensive income.
2. BASIC AND DILUTED NET INCOME PER SHARE
Basic net income per common share is computed by dividing net income by the basic weighted average
number of common shares outstanding during the period. Diluted net income per common share is
computed by dividing net income by the weighted average number of common shares outstanding during
the period and reflects the potential dilution that could occur if all of the Companys outstanding
stock options and warrants that are in the money were exercised (calculated using the treasury
stock method). The following table is a reconciliation of the weighted average number of common
shares and equivalents outstanding in the calculation of basic and diluted net income per common
share (in thousands) for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
January 31 |
|
January 31 |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Weighted average common shares outstanding |
|
|
6,656 |
|
|
|
6,304 |
|
|
|
6,645 |
|
|
|
6,257 |
|
Dilutive effect of stock options and warrants |
|
|
344 |
|
|
|
403 |
|
|
|
344 |
|
|
|
403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
7,000 |
|
|
|
6,707 |
|
|
|
6,989 |
|
|
|
6,660 |
|
3. STOCK-BASED COMPENSATION
Effective August 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standard No. 123R, Share-Based Payment (SFAS 123R), for its stock option and stock purchase
plans. The Company previously accounted for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations and disclosure requirements established by Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (SFAS 123), as
amended by Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure.
The Company adopted SFAS 123R using the modified prospective method. Under this transition method,
compensation cost recognized in fiscal 2007 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of August 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost
for all share-based payments granted subsequent to August 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not
been restated. Compensation cost for options will be recognized in earnings, net of estimated
forfeitures, on a straight-line basis over the requisite service period. There were no capitalized
stock-based compensation costs at January 31, 2008. Total stock compensation expense recognized by
the Company during the three month periods ended January 31, 2008 and 2007 was
7
approximately $37,000 and $42,000. For the six month periods ended January 31, 2008 and 2007 the
expense was $46,000 and $68,000. As of January 31, 2008 and 2007 there was approximately $137,000
and $262,000 of total unrecognized compensation cost related to nonvested options granted under the
plans.
The Company used the Black-Scholes model to value stock options granted. Expected volatility is
based on historical volatility of the Companys stock. The expected life of options granted
represents the period of time that options granted are expected to be outstanding. The risk-free
rate for periods within the contractual term of the options is based on the U.S. Treasury yields in
effect at the time of grant.
As stock-based compensation expense recognized in our results for the three and six months ended
January31, 2008 is based on awards ultimately expected to vest, the amount has been reduced for
estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on our historical experience. Prior to fiscal year 2007, we
accounted for forfeitures as they occurred for the purposes of our pro forma information under SFAS
123.
The fair value of each option grant is estimated using the assumptions in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
January 31, |
|
January 31, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Expected life (years) |
|
10 years |
|
10 years |
|
10 years |
|
10 years |
Risk-free interest rate |
|
|
4.88 |
% |
|
|
4.88 |
% |
|
|
4.88 |
% |
|
|
4.88 |
% |
Expected volatility |
|
|
120 |
% |
|
|
124 |
% |
|
|
120 |
% |
|
|
124 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Employee Stock Purchase Plans
The Companys 1992 Employee Stock Purchase Plan had 62,500 shares of common stock reserved for
issuance, and all 62,500 shares have been issued. The Companys 2000 Employee Stock Purchase Plan
has 175,000 shares of common stock reserved for issuance, and 154,322 of the shares have been
issued as of January 31, 2008. 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, not to exceed 5,000 shares per employee per
year.
1991 Stock Option Plan
The Companys 1991 Stock Option Plan was terminated August 14, 2001, except as to outstanding
options. 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 was granted under the 1991 Plan could 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 were allowed to be granted at the exercise price established by the
Compensation Committee, which could 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 Compensation Committee and shall lapse upon the expiration
of said period, or earlier upon termination of the participants employment with the Company.
At its discretion, the Compensation 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 meets certain
targets or goals, prior to exercising any options.
8
Changes in option shares under the 1991 Plan during the:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Three months ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Period |
|
Value |
|
Options |
|
Price |
|
Period |
|
Value |
Outstanding at
beginning of
period |
|
|
125,186 |
|
|
$ |
2.30 |
|
|
|
1.64 |
|
|
|
|
|
|
|
146,686 |
|
|
$ |
2.28 |
|
|
|
2.60 |
|
|
$ |
13,125 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
|
$ |
3.25 |
|
|
|
|
|
|
|
|
|
Outstanding at end
of period |
|
|
125,186 |
|
|
$ |
2.30 |
|
|
|
1.39 |
|
|
|
|
|
|
|
145,686 |
|
|
$ |
2.27 |
|
|
|
2.34 |
|
|
$ |
13,125 |
|
Exercisable at end
of period |
|
|
125,186 |
|
|
$ |
2.30 |
|
|
|
1.39 |
|
|
|
|
|
|
|
145,686 |
|
|
$ |
2.27 |
|
|
|
2.34 |
|
|
$ |
13,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Six months ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Period |
|
Value |
|
Options |
|
Price |
|
Period |
|
Value |
Outstanding at
beginning of
period |
|
|
125,686 |
|
|
$ |
2.30 |
|
|
|
1.89 |
|
|
|
|
|
|
|
146,686 |
|
|
$ |
2.28 |
|
|
|
2.85 |
|
|
$ |
13,125 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(500 |
) |
|
$ |
4.06 |
|
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
|
$ |
3.25 |
|
|
|
|
|
|
|
|
|
Outstanding at end
of period |
|
|
125,186 |
|
|
$ |
2.30 |
|
|
|
1.39 |
|
|
|
|
|
|
|
145,686 |
|
|
$ |
2.27 |
|
|
|
2.34 |
|
|
$ |
13,125 |
|
Exercisable at end
of period |
|
|
125,186 |
|
|
$ |
2.30 |
|
|
|
1.39 |
|
|
|
|
|
|
|
145,686 |
|
|
$ |
2.27 |
|
|
|
2.34 |
|
|
$ |
13,125 |
|
The range of exercise prices for options outstanding at January 31, 2008 and 2007 was $2.06 to
$9.06 and $2.00 to $9.06, respectively.
1993 Director Stock Option Plan
The Companys 1993 Director Stock Option Plan (Director Plan) has expired and is terminated
except for outstanding options. The Director Plan originally had 150,000 shares of common stock
reserved for issuance to nonemployee directors. Options under the Director Plan were granted at the
fair market value of the stock on the grant date.
Each option granted under the Director Plan is exercisable one year after the date of grant and
cannot be exercised later than ten years from the date of grant.
9
Changes in option shares under the Director Plan during the:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Three months ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Period |
|
Value |
|
Options |
|
Price |
|
Period |
|
Value |
Outstanding at
beginning of
period |
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
2.72 |
|
|
|
|
|
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
3.72 |
|
|
$ |
152 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end
of period |
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
2.47 |
|
|
|
|
|
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
3.72 |
|
|
|
|
|
Exercisable at end
of period |
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
2.47 |
|
|
|
|
|
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
3.72 |
|
|
$ |
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Six months ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Period |
|
Value |
|
Options |
|
Price |
|
Period |
|
Value |
Outstanding at
beginning of
period |
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
2.97 |
|
|
|
|
|
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
3.97 |
|
|
$ |
152 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end
of period |
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
2.47 |
|
|
|
|
|
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
3.47 |
|
|
|
|
|
Exercisable at end
of period |
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
2.47 |
|
|
|
|
|
|
|
1,313 |
|
|
$ |
2.65 |
|
|
|
3.47 |
|
|
$ |
152 |
|
The range of exercise prices for options outstanding at January 31, 2008 and 2007 was $2.00 to
$3.56.
2000 Stock Option Plan
The Companys 2000 Stock Option Plan (2000 Plan) has 1,950,000 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) nonqualified 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 Compensation Committee.
Each incentive stock 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). Nonqualified stock options do not have this restriction.
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
Compensation Committee or management of the Company, can have a significant effect on the success
of the Company.
10
Changes in option shares under the 2000 Plan during the:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Three months ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Period |
|
Value |
|
Options |
|
Price |
|
Period |
|
Value |
Outstanding at
beginning of period |
|
|
923,789 |
|
|
$ |
1.48 |
|
|
|
6.42 |
|
|
$ |
275,417 |
|
|
|
1,044,374 |
|
|
$ |
1.39 |
|
|
|
7.18 |
|
|
$ |
710,480 |
|
Granted |
|
|
35,500 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
|
60,250 |
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,500 |
) |
|
$ |
.31 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(68,314 |
) |
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
|
|
(7,500 |
) |
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
Outstanding at end
of period |
|
|
890,975 |
|
|
$ |
1.52 |
|
|
|
6.43 |
|
|
$ |
289,823 |
|
|
|
1,082,850 |
|
|
$ |
1.43 |
|
|
|
7.10 |
|
|
$ |
688,028 |
|
Exercisable at end
of period |
|
|
732,611 |
|
|
$ |
1.46 |
|
|
|
5.96 |
|
|
$ |
276,774 |
|
|
|
817,612 |
|
|
$ |
1.33 |
|
|
|
6.57 |
|
|
$ |
605,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Six months ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wt-Avg |
|
|
|
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
Wt-Avg |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Period |
|
Value |
|
Options |
|
Price |
|
Period |
|
Value |
Outstanding at
beginning of period |
|
|
1,013,100 |
|
|
$ |
1.45 |
|
|
|
6.61 |
|
|
$ |
320,062 |
|
|
|
1,054,350 |
|
|
$ |
1.35 |
|
|
|
7.27 |
|
|
$ |
814,975 |
|
Granted |
|
|
35,500 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
|
110,250 |
|
|
$ |
2.02 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,376 |
) |
|
$ |
.30 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(157,625 |
) |
|
$ |
1.10 |
|
|
|
|
|
|
|
|
|
|
|
(61,374 |
) |
|
$ |
1.45 |
|
|
|
|
|
|
|
|
|
Outstanding at end
of period |
|
|
890,975 |
|
|
$ |
1.52 |
|
|
|
6.43 |
|
|
$ |
289,823 |
|
|
|
1,082,850 |
|
|
$ |
1.43 |
|
|
|
7.10 |
|
|
$ |
688,028 |
|
Exercisable at end
of period |
|
|
732,611 |
|
|
$ |
1.46 |
|
|
|
5.96 |
|
|
$ |
276,774 |
|
|
|
817,612 |
|
|
$ |
1.33 |
|
|
|
6.57 |
|
|
$ |
605,278 |
|
Changes in non-vested option shares under the 2000 Plan during the:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Three months ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
|
|
|
|
Wt-Avg Grant Date |
|
|
|
|
|
Wt-Avg Grant |
|
|
Options |
|
Fair Value |
|
Options |
|
Date Fair Value |
Non-vested at beginning of
period |
|
|
123,239 |
|
|
$ |
1.85 |
|
|
|
226,549 |
|
|
$ |
1.72 |
|
Granted |
|
|
35,500 |
|
|
$ |
1.63 |
|
|
|
60,250 |
|
|
$ |
1.95 |
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(375 |
) |
|
$ |
1.80 |
|
|
|
(21,561 |
) |
|
$ |
2.12 |
|
Non-vested at end of period |
|
|
158,364 |
|
|
$ |
1.80 |
|
|
|
265,238 |
|
|
$ |
1.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Six months ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
|
|
|
|
Wt-Avg Grant Date |
|
|
|
|
|
Wt-Avg Grant |
|
|
Options |
|
Fair Value |
|
Options |
|
Date Fair Value |
Non-vested at beginning of
period |
|
|
137,675 |
|
|
$ |
1.79 |
|
|
|
188,799 |
|
|
$ |
1.59 |
|
Granted |
|
|
35,500 |
|
|
$ |
1.63 |
|
|
|
110,250 |
|
|
$ |
2.02 |
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(14,811 |
) |
|
$ |
1.29 |
|
|
|
(33,811 |
) |
|
$ |
1.82 |
|
Non-vested at end of period |
|
|
158,364 |
|
|
$ |
1.80 |
|
|
|
265,238 |
|
|
$ |
1.74 |
|
The range of exercise prices for options outstanding at January 31, 2008 and 2007 was $0.15 to
$2.735.
11
4. ACQUISITIONS
On January 26, 2007, the Company purchased all of the outstanding stock of OC-NET, Inc. (OC-NET).
OC-NET, a privately held corporation in Cypress, CA, provided website development and hosting
services to the Power Sports market (which includes motorcycles, All Terrain Vehicles, snowmobiles
and personal watercraft), as well as certain customers outside the Power Sports market.
Consideration for the acquisition included approximately $1.1 million in cash, 350,000 shares of
the Companys common stock, $700,000 in debt to the sellers and future contingent payments totaling
up to $400,000.
The purchase price of this acquisition has been allocated to specific assets and liabilities
acquired based on the fair value of those identified tangible and intangible assets and liabilities
as determined by an independent valuation. These include capitalized software to be amortized over
4 years and intangibles related to customer relationships and assembled and trained workforce to
be amortized over 5 years as well as goodwill. In addition, the final purchase price will be
determined upon the settlement of the contingencies outlined in the Stock Purchase Agreement
relating to the transaction. As noted above, a total of $400,000 of the total purchase price is
subject to contingencies. It was determined that it was more likely than not that the contingencies
associated with this $400,000 would be resolved such that the Company would owe those amounts.
Accordingly, those amounts have been recorded as liabilities.
In connection with the acquisition of OC-Net, the Company entered into an employment agreement with
Robert Hipp (the Employment Agreement) to serve as a Marketing/Business Development Manager for
the Company. The term of the Employment Agreement is two years.
The foregoing description of the Stock Purchase Agreement and the transactions contemplated thereby
is qualified in its entirety by reference to the Stock Purchase Agreement, attached as Exhibit 2.1
of Form 8-K, dated January 29, 2007 and Form 8-K/A dated April 13, 2007, and incorporated herein by
reference. The acquisition was accounted for under the purchase method; accordingly, its results
are included in the financial statements of the Company from the date of acquisition.
The following table shows actual results of operations for the three and six month periods ended
January 31, 2008 and unaudited pro forma results of operations for the three and six months ended
January 31, 2007, which assumes the acquisition of the OC-Net business occurred at the beginning of
those periods:
Pro Forma Results
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
January 31 |
|
January 31 |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
Actual |
|
Pro Forma |
|
Actual |
|
Pro Forma |
|
|
|
Revenues |
|
$ |
4,222 |
|
|
$ |
4,024 |
|
|
$ |
8,446 |
|
|
$ |
7,853 |
|
Net income |
|
$ |
335 |
|
|
$ |
138 |
|
|
$ |
578 |
|
|
$ |
225 |
|
Earnings per share |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
0.09 |
|
|
$ |
0.03 |
|
Earnings per diluted share |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
0.08 |
|
|
$ |
0.03 |
|
The pro forma information for the three and six months ended January 31, 2007 does not purport to
be indicative of the results that actually would have been obtained if the combined operations had
been conducted during the periods presented and is not intended to be a projection of future
results.
12
5. NOTES PAYABLE
The following table sets forth, for the periods indicated, certain information related to the
Companys debt derived from the Companys unaudited financial statements.
Debt Schedule
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31 |
|
July 31 |
|
|
|
|
2008 |
|
2007 |
|
Net |
|
|
(Unaudited) |
|
(Audited) |
|
Change |
|
|
|
Note payable to WITECH: |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of note payable |
|
$ |
|
|
|
$ |
50 |
|
|
$ |
(50 |
) |
Long term portion of note payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total note payable to WITECH |
|
|
|
|
|
|
50 |
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to New Holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable |
|
|
|
|
|
|
500 |
|
|
|
(500 |
) |
Long term portion of notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total face value of notes payable to New Holders |
|
|
|
|
|
|
500 |
|
|
|
(500 |
) |
Carrying value in excess of face value of notes payable |
|
|
|
|
|
|
4 |
|
|
|
(4 |
) |
Debt discount (common stock warrants and options) |
|
|
|
|
|
|
(3 |
) |
|
|
3 |
|
|
|
|
Total carrying value of notes payable to New Holders |
|
|
|
|
|
|
501 |
|
|
|
(501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt related to acquisition of OC-Net: |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable |
|
|
233 |
|
|
|
233 |
|
|
|
|
|
Long term portion of notes payable |
|
|
232 |
|
|
|
350 |
|
|
|
(118 |
) |
|
|
|
Total notes payable |
|
|
465 |
|
|
|
583 |
|
|
|
(118 |
) |
Current cash earn out |
|
|
250 |
|
|
|
250 |
|
|
|
|
|
Long term cash holdback |
|
|
150 |
|
|
|
150 |
|
|
|
|
|
Imputed interest on cash earn out/holdback |
|
|
(13 |
) |
|
|
(32 |
) |
|
|
19 |
|
|
|
|
Total debt related to acquisition of OC-Net |
|
|
852 |
|
|
|
951 |
|
|
|
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
852 |
|
|
$ |
1,502 |
|
|
$ |
(650 |
) |
|
|
|
On April 24, 2003, the Company restructured its debt. In exchange for previously outstanding
securities, the Company issued to a group of investors (collectively, the New Holders), in
aggregate, $500,000 in cash, new unsecured notes in the amount of $3.9 million (the New Notes)
and new warrants for 250,000 common shares, exercisable at $1.00 per share (the New Warrants).
The interest rate on the New Notes is prime plus 2%, adjusted quarterly. The New Notes were
payable in $200,000 quarterly installments commencing March 31, 2004 through December 31, 2005 and
$300,000 quarterly installments commencing March 31, 2006 at the prime interest rate plus 2%. The
New Notes were paid in full on December 31, 2007.
In accordance with SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, the exchange of the previously outstanding securities for $500,000 in cash, the
New Notes and the New Warrants was accounted for as a troubled debt restructuring and no gain was
recorded. Instead the liability in excess of the future cash flows to the New Holders, which was
approximately $322,000, was amortized as a reduction of interest expense over the life of the New
Notes.
On August 7, 2003, the Company purchased from WITECH Corporation 1,025,308 shares of the Companys
common stock, 30,000 common stock warrants and 20,350 shares of Series A Preferred Stock for
$200,000 at closing and an $800,000 promissory note which was payable in $50,000 quarterly
installments through September 30, 2007 at the prime interest rate plus 2%, adjusted quarterly.
The note was paid in full on September 28, 2007.
The Company issued $700,000 of notes in connection with the OC-Net acquisition. The interest rate
on the notes is prime plus 2%, adjusted quarterly (effective rate of 8.00% as of January 31, 2008).
The notes are payable in quarterly principal installments of $58,333, commencing March 31, 2007
through April 30, 2010. The notes do not contain any financial covenants.
13
6. SHAREHOLDER RIGHTS PLAN
On August 7, 2003, the Company adopted a Shareholder Rights Plan designed to protect the interests
of common shareholders from an inadequate or unfair takeover, but not affect a takeover proposal
which the Board of Directors believes is fair to all shareholders. Under the Shareholder Rights
Plan adopted by the Board of Directors, all shareholders of record on August 18, 2003 received one
Preferred Share Purchase Right (a Right) for each share of common stock they owned. These Rights
trade in tandem with the common stock until and unless they are triggered. Should a person or
group acquire more than 10% of the Companys common stock (or if an existing holder of 10% or more
of the common stock were to increase its position by more than 1%), the Rights would become
exercisable for every shareholder except the acquirer that triggered the exercise. The Rights, if
triggered, would give the other shareholders the ability to purchase additional stock of the
Company at a substantial discount. The Rights will expire on August 18, 2013, and can be redeemed
by the Company for $0.01 per Right at any time prior to a person or group becoming a 10%
shareholder.
7. INCOME TAXES
The provision for income taxes is composed of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
January 31 |
|
January 31 |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(113 |
) |
|
$ |
103 |
|
|
$ |
30 |
|
|
$ |
183 |
|
State |
|
|
(20 |
) |
|
|
31 |
|
|
|
8 |
|
|
|
51 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generation / (utilization) of net operating loss carry-
forwards, net of change in valuation allowance |
|
|
128 |
|
|
|
(126 |
) |
|
|
(37 |
) |
|
|
(226 |
) |
|
|
|
|
|
Income tax (benefit) provision |
|
$ |
(5 |
) |
|
$ |
8 |
|
|
$ |
1 |
|
|
$ |
8 |
|
|
|
|
|
|
Provision for income taxes is an estimate based on taxes payable under currently enacted tax laws
and an analysis of temporary differences between the book and tax bases of our assets and
liabilities, including various accruals, allowances, depreciation and amortization and does not
represent current taxes due. The tax effect of these temporary differences and the estimated tax
benefit from tax net operating losses are reported as deferred tax assets and liabilities in the
balance sheet. An assessment of the likelihood that net deferred tax assets will be realized from
future taxable income is performed on a quarterly basis. To the extent that management believes it
is more likely than not that some portion, or all, of the deferred tax asset will not be realized,
a valuation allowance is established. Because the ultimate realizability of deferred tax assets is
highly subject to the outcome of future events, the amount established as a valuation allowance is
a significant estimate that is subject to change in the near future. The change in the valuation
allowance during a period is reflected with a corresponding increase or decrease in the tax
provision in the statement of operations. Because of the uncertainty of long-term future economic
conditions, the estimated future utilization of deferred net tax assets is based on twelve quarters
of projections. The Company made no change in its estimated valuation allowance this quarter.
The Company adopted the provisions of Financial Accounting Standards Board, or FASB, Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48), on August 1, 2007. The implementation of FIN 48 did not have a significant impact on our
results of operations or financial position and therefore no amounts are reserved for uncertain tax
positions as of January 31, 2008.
8. BUSINESS SEGMENTS
Our business segments are internally organized primarily by geographic location of the operating
facilities. In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, we have segregated the Netherlands operation and the US operations into
separate reportable segments. (Refer to Note 1, Significant Accounting Policies, for a
description of segment operations.) We evaluate the performance of and allocate resources to each
of the segments based on their operating results excluding interest and taxes. The accounting
policies for each of the segments are described in Note 1.
14
Information concerning our operating business segments for fiscal 2008 and 2007 is as follows:
Business Segment Information
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
January 31 |
|
|
Percent |
|
|
January 31 |
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netherlands |
|
$ |
177 |
|
|
$ |
160 |
|
|
|
11 |
% |
|
$ |
338 |
|
|
$ |
329 |
|
|
|
3 |
% |
United States |
|
|
4,045 |
|
|
|
3,531 |
|
|
|
15 |
% |
|
|
8,108 |
|
|
|
6,865 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
4,222 |
|
|
|
3,691 |
|
|
|
14 |
% |
|
|
8,446 |
|
|
|
7,194 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netherlands |
|
$ |
(108 |
) |
|
$ |
(155 |
) |
|
|
30 |
% |
|
$ |
(177 |
) |
|
$ |
(312 |
) |
|
|
43 |
% |
United States |
|
|
443 |
|
|
|
403 |
|
|
|
10 |
% |
|
|
755 |
|
|
|
785 |
|
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
335 |
|
|
|
248 |
|
|
|
35 |
% |
|
|
578 |
|
|
|
473 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31 |
|
|
July 31 |
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Total Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Netherlands |
|
$ |
239 |
|
|
$ |
309 |
|
|
|
(23 |
%) |
United States |
|
|
8,553 |
|
|
|
9,618 |
|
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
8,792 |
|
|
|
9,927 |
|
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
|
15
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Total revenue for the three and six month periods ended January 31, 2008 increased $531,000 or 14%
and $1,252,000 or 17%, respectively, compared to the same periods last year, primarily due to an
increase in revenues from the Companys marketing services. Approximately 47% of this six month
growth was organic and 53% was from the OC-Net acquisition. Operating income increased $96,000 or
37% for the three months ended January 31, 2008 and $142,000 or 29% for the six months ended
January 31, 2008, compared to the same periods last year, primarily due to the increase in revenue,
offset in part by increased overhead. Net income increased $87,000 or $0.01 per basic share for
the three months ended January 31, 2008 and $107,000 or $0.01 per basic share for the six months
ended January 31, 2008, compared to the same periods last year. Essentially all of the growth in
net income was organic, as pro forma net income, taking into account the OC-Net acquisition for the
three and six month periods ended January 31, 2006, would have been less than reported net income
for the period. Management expects earnings to continue to increase over the prior fiscal year for
the remainder of fiscal 2008.
Critical Accounting Policies and Estimates
General
The Companys discussion and analysis of its financial condition and results of operations are
based upon its financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an on-going basis, the Company evaluates its estimates, including those related to customer
contracts, bad debts, capitalized software product costs, financing instruments, revenue
recognition and other accrued expenses. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its financial statements.
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, license and license
renewal fees and catalog subscription fees is recognized ratably over the period the service is
provided. Revenue under arrangements that include acceptance terms beyond the Companys standard
terms is 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. 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 under arrangements with customers who are not the ultimate users
(resellers) is deferred if there is any contingency on the ability and intent of the reseller to
sell such software to a third party. Amounts invoiced to customers prior to recognition as revenue
as discussed above are reflected in the accompanying balance sheets as deferred revenue.
Bad Debts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Company currently reserves for most
amounts due over 90 days, unless there is reasonable assurance of collectibility. If the financial
condition of the Companys customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Use of Estimates
The preparation of the Companys financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions about
accrued expenses that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Legal Provisions
The Company is periodically involved in legal proceedings arising from contracts, patents or other
matters in the normal course of business. The Company reserves for any material estimated losses
if the outcome is reasonably certain, in accordance with the provisions of SFAS No. 5 Accounting
for Contingencies.
16
Impairment of Long-Lived Assets
Equipment and leasehold improvements and capitalized software product costs 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.
Cash and Cash Equivalents
The Companys investment policy, as approved by the Board of Directors, is designed to provide
preservation of capital, adequate liquidity to meet projected cash requirements, optimum yields in
relationship to risk, market conditions and tax considerations and minimum risk of principal loss
through diversified short and medium term investments. Eligible investments included direct
obligations of the U.S. Treasury, obligations issued or guaranteed by the U.S. government, certain
time deposits, certificates of deposits issued by commercial banks, money market mutual funds,
asset backed securities and municipal bonds. The Companys current investments include commercial
paper and money market funds with terms not exceeding ninety days.
Debt Instruments
The Company valued debt discounts for warrants for shares of the Companys common stock granted in
consideration for notes payable using the Black Scholes valuation method. Non-cash interest
expense is recorded for the amortization of the debt discount over the term of the debt.
Deferred Tax Asset
The tax effect of the temporary differences between the book and tax bases of assets and
liabilities and the estimated tax benefit from tax net operating losses are reported as deferred
tax assets and liabilities in the balance sheet. An assessment of the likelihood that net deferred
tax assets will be realized from future taxable income is performed. Because the ultimate
realizability of deferred tax assets is highly subject to the outcome of future events, the amount
established as valuation allowances is considered to be a significant estimate that is subject to
change in the near term. To the extent a valuation allowance is established or there is a change
in the allowance during a period, the change is reflected with a corresponding increase or decrease
in the tax provision in the statement of operations.
Stock-Based Compensation
Effective August 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standard No. 123R, Share-Based Payment an Amendment of FASB Statement Nos. 123 and 95 (SFAS
123R), for its stock option and stock purchase plans. The Company previously accounted for these
plans under the recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations and
disclosure requirements established by Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation (SFAS 123), as amended by Statement of Financial
Accounting Standard No. 148, Accounting for Stock-Based Compensation Transition and Disclosure
(SFAS 148).
Revenues
The Company is a leading provider of electronic parts catalogs and related technology and services
to increase sales and profits for dealers, distributors and manufacturers in the manufactured
equipment market. The Company currently provides 102 catalogs of manufactured equipment from 76
manufacturers via CD-Rom to approximately 22,000 dealers (and to others via the worldwide web) in
approximately 89 countries in 12 segments of the worldwide manufactured equipment market including
outdoor power, power sports, motorcycles, agricultural equipment, marine, recreation vehicles
(RV), floor maintenance, auto and truck parts after-market, construction, and others primarily in
the U.S., Canada, Europe and Australia. Collectively, dealers and distributors have approximately
70,000 CD catalog subscriptions and there are many others who use our web products to view their
data. The Company supplies three types of software and services: (1) robust Web and CD-ROM
interactive electronic parts catalogs, (2) marketing services including custom and template-based
website services and technology-enabled direct mail services and e-mail marketing services and (3)
communication or transaction services.
The following table shows the products and services that the Company offers, a brief description of
them and the industries where they are currently in use.
Electronic Catalog Products And Services
|
|
|
|
|
Product or Service |
|
Description |
|
Primary Industry/Market |
PartSmart® ClassicÔ
|
|
Electronic parts catalog for equipment dealers, formerly PartSmart Version 6
|
|
Equipment- all sub-markets except RV |
|
|
|
|
|
PartSmart® 8Ô
|
|
Electronic parts catalog for equipment dealers
|
|
Equipment- all sub-markets except RV |
|
|
|
|
|
PartSmart® WebÔ
|
|
Web based electronic parts catalog, formerly
EMPARTweb
|
|
Equipment all sub-markets |
|
|
|
|
|
Lookupparts.com
|
|
PartSmart Web-based lookup service offered to
dealers on a subscription basis
|
|
Equipment all sub-markets except RV |
17
|
|
|
|
|
Product or Service |
|
Description |
|
Primary Industry/Market |
PartSmart® WebÔ ASP
|
|
Electronic parts catalog viewing software
offered as a hosted service for individual
distributors and manufacturers, formerly
EMPARTweb ASP
|
|
Equipment all sub-markets |
|
|
|
|
|
PartSmart® CartÔ
|
|
Add-on product to PartSmart Web that
facilitates order taking from the catalog
|
|
Equipment all sub-markets |
|
|
|
|
|
PartSmart® Data Manager
|
|
Electronic parts catalog creation software
used to produce catalogs for viewing on
PartSmart Classic, PartSmart 8, and PartSmart
Web
|
|
Equipment all sub-markets |
|
|
|
|
|
PartSmart® Data
Publisher
|
|
Add-on product to PartSmart Data Manager that
facilitates the creation of a file of parts
and related information for use in PartSmart
PDF Catalog Composer Module
|
|
Equipment all sub-markets |
|
|
|
|
|
PartSmart® PDF Catalog
Composer Module
|
|
Add-on product to PartSmart Data Manager that
facilitates the creation of a parts manual,
price sheet or other parts-related
publications in the Adobe Acrobat format for
printing, electronic distribution or online
display
|
|
Equipment all sub-markets |
|
|
|
|
|
Electronic publishing
services
|
|
Project management, data conversion, editing,
production, and distribution services for
manufacturers who wish to outsource catalog
production operations
|
|
Equipment all sub-markets |
|
|
|
|
|
EMPARTviewer
|
|
Electronic parts catalog viewing software
|
|
Equipment RV |
|
|
|
|
|
Professional services
|
|
Project management, software customization,
data conversion, back-end system integration,
roll-out management, and help desk support
services
|
|
Equipment all sub-markets |
MARKETING SERVICES
|
|
|
|
|
Product or Service |
|
Description |
|
Primary Industry/Market |
WebsiteSmart Pro
|
|
Software to create
customized websites
and conduct
business
electronically,
including optional
shopping cart,
superseding
WebsiteSmart.
|
|
Equipment primarily
outdoor power, power
sports |
|
|
|
|
|
WebsiteSmart
|
|
Software to create
customized websites
and conduct
business
electronically,
including optional
shopping cart
|
|
Equipment primarily
outdoor power, power
sports |
|
|
|
|
|
Professional Services
|
|
Large-scale website
creation, hosting
and maintenance
services
|
|
Equipment all sub-markets |
|
|
|
|
|
ARI MailSmart
|
|
Direct mail
solution that
enables users to
cost-effectively
and efficiently
reach customers and
prospects with
customized messages
|
|
Equipment all sub-markets |
|
|
|
|
|
eMailSmart
|
|
Email solution that
enables users to
stay in touch with
customers through
special offers and
a quarterly
newsletter
|
|
Equipment all sub-markets |
|
|
|
|
|
Content Management
Services
|
|
Add-on solution to
WebsiteSmart and
Website- Smart Pro
that automatically
updates a website
with Weather
Alerts, promotions
based on customer
seasonality and
supplier promotions
|
|
Equipment all sub-markets |
eCommERCE Products and Services
|
|
|
|
|
Product or Service |
|
Description |
|
Primary Industry/Market |
TradeRoute®
|
|
Document handling
and communications
for product
ordering, warranty
claims and other
business documents
|
|
Equipment Outdoor power and RV |
|
|
|
|
|
WarrantySmart
|
|
Web-based
end-to-end warranty
claims processing
system that enables
dealers,
distributors and
manufacturers to
streamline product
registration and
warranty claim
submission and
processing, as well
as check claim
status online
|
|
Equipment all sub-markets |
As part of our historical business practice, the Company continues to provide electronic
transaction services to the North American agribusiness industry, representing approximately 3% of
total revenue for the six months ended January 31, 2008.
18
The following table sets forth, for the periods indicated, certain revenue information derived from
the Companys unaudited financial statements. In the table below, revenue is categorized by
customer location, rather than by ARI subsidiary. Since some non-North American customers are
billed from the US subsidiary, the presentation is different from the segment reporting in Note 8
above.
Revenue by Location and Service
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
January 31 |
|
|
Percent |
|
|
January 31 |
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
North American |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog subscriptions |
|
$ |
2,527 |
|
|
$ |
2,625 |
|
|
|
(4 |
%) |
|
$ |
5,119 |
|
|
$ |
5,208 |
|
|
|
(2 |
%) |
Catalog professional services |
|
|
320 |
|
|
|
312 |
|
|
|
3 |
% |
|
|
609 |
|
|
|
594 |
|
|
|
3 |
% |
Marketing services |
|
|
581 |
|
|
|
294 |
|
|
|
98 |
% |
|
|
1,117 |
|
|
|
511 |
|
|
|
119 |
% |
Marketing professional services |
|
|
419 |
|
|
|
|
|
|
|
100 |
% |
|
|
828 |
|
|
|
|
|
|
|
100 |
% |
Dealer & distributor communications |
|
|
152 |
|
|
|
149 |
|
|
|
2 |
% |
|
|
315 |
|
|
|
347 |
|
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3,999 |
|
|
|
3,380 |
|
|
|
18 |
% |
|
|
7,988 |
|
|
|
6,660 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rest of the World |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog subscriptions |
|
|
220 |
|
|
|
267 |
|
|
|
(18 |
%) |
|
|
455 |
|
|
|
470 |
|
|
|
(3 |
%) |
Catalog professional services |
|
|
3 |
|
|
|
44 |
|
|
|
(93 |
%) |
|
|
3 |
|
|
|
64 |
|
|
|
(95 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
223 |
|
|
|
311 |
|
|
|
(28 |
%) |
|
|
458 |
|
|
|
534 |
|
|
|
(14 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog subscriptions |
|
|
2,747 |
|
|
|
2,892 |
|
|
|
(5 |
%) |
|
|
5,574 |
|
|
|
5,678 |
|
|
|
(2 |
%) |
Catalog professional services |
|
|
323 |
|
|
|
356 |
|
|
|
(9 |
%) |
|
|
612 |
|
|
|
658 |
|
|
|
(7 |
%) |
Marketing services |
|
|
581 |
|
|
|
294 |
|
|
|
98 |
% |
|
|
1,117 |
|
|
|
511 |
|
|
|
119 |
% |
Marketing professional services |
|
|
419 |
|
|
|
419 |
|
|
|
100 |
% |
|
|
828 |
|
|
|
|
|
|
|
100 |
% |
Dealer & distributor communications |
|
|
152 |
|
|
|
149 |
|
|
|
2 |
% |
|
|
315 |
|
|
|
347 |
|
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,222 |
|
|
$ |
3,691 |
|
|
|
14 |
% |
|
$ |
8,446 |
|
|
$ |
7,194 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
Catalog Subscriptions
North American catalog subscription revenues are derived from software license fees, license
renewal fees, software maintenance and support fees, catalog subscription fees, hosting and other
miscellaneous subscription fees charged to dealers, distributors and manufacturers for the use of
the Companys catalog products in the United States and Canada. Catalog subscription revenues
decreased for the three and six month periods ended January 31, 2008, compared to the same periods
last year, primarily due to the non-renewal of two significant OEM customer subscriptions. Catalog
subscription renewals from the Companys North American dealers were approximately 88% for the six
months ended January 31, 2008. Management expects revenues from catalog subscriptions in North
America to decline for the remainder of fiscal 2008 compared to the prior year due to these lost
OEM subscriptions.
Catalog Professional Services
Revenues from the Companys North American catalog professional services are derived from software
customization labor, data conversion labor, data conversion replication fees, travel and shipping
fees primarily charged to manufacturers in the United States and Canada. Revenues from catalog
professional services in North America increased slightly for the three and six month periods ended
January 31, 2008, compared to the same periods last year, primarily due to customization labor
charged for the deployment of new web-based manufacturer databases. Management expects revenues
from catalog professional services in North America to decrease somewhat for the remainder of
fiscal 2008 compared to the prior year as the Company focuses more of its sales efforts in
marketing services.
19
Marketing Services
Revenues from the Companys North American marketing service subscriptions are derived from set-up,
postage, hosting, access fees and commissions for on-line sales charged to dealers, distributors
and manufacturers in the United States and Canada for the Companys website products and services.
Revenues from marketing services in North America increased for the three and six month periods
ended January 31, 2008, compared to the same periods last year, primarily due to increased sales of
the Companys Website Smart Pro (acquired as part of the OC-Net transaction) as a result of the
Companys investments in sales and marketing for the marketing services business. Revenues from
Website Smart Pro are included in Marketing services beginning January 27, 2007. Management
expects revenues from marketing services in North America to continue to increase for the remainder
of fiscal 2008, compared to the prior year, due to recurring revenues from the OC-Net acquisition
and new sales as the Company continues to focus its resources in this market.
Marketing Professional Services
Revenues from the Companys North American marketing professional services are derived from website
customization labor primarily charged to manufacturers, distributors and other customers in the
United States. Revenues from marketing services in North America resulted primarily from
customization of websites related to contracts acquired with OC-Net. Management believes that this
area represents an opportunity for growth in the future through selling new contracts.
Dealer and Distributor Communications
Revenues from dealer and distributor communications are derived from license renewal fees, software
maintenance, customization labor and other communication fees charged for dealers and distributors
to communicate with manufacturers in the manufactured equipment industry and the agricultural
inputs industry. Dealer and distributor communication revenues increased slightly for the three
month period ended January 31, 2008 but decreased for the six month period ended January 31, 2008,
compared to the same periods last year, primarily due to a decline in the base of customers as the
Company focused the business primarily on its catalog products in the equipment industry.
Management expects revenues from dealer and distributor communication products will be a declining
percentage of total revenue for the remainder of fiscal 2008, compared to the prior year.
Rest of the World
Catalog Subscriptions
Catalog subscription revenues from the rest of the world are derived from software license fees,
license renewal fees, software maintenance and support fees, catalog subscription fees, and other
miscellaneous subscription fees charged to dealers, distributors and manufacturers outside of North
America for the use of the Companys catalog products. Catalog subscription revenues for the rest
of the world decreased for the three and six month periods ended January 31, 2008, compared to the
same periods last year, primarily due to a decline in the number of subscriptions purchased and/or
renewed directly by dealers. Management expects catalog subscription revenues from the rest of the
world to decrease slightly in fiscal 2008, compared to the prior year, due to a lack of new
manufacturer titles for the telesales team to sell.
Catalog Professional Services
Revenues from the Companys rest of the world catalog professional services are derived from
software customization labor, data conversion labor, data conversion replication fees, travel and
shipping fees primarily charged to manufacturers that do not reside in North America. Revenues
from catalog professional services in the rest of the world has decreased significantly for the
three and six month periods ended January 31, 2008, compared to the same periods last year,
primarily due to the lack of sales to manufacturers. Management expects revenues from catalog
professional services in the rest of the world to continue to decline compared to the prior year
without any new manufacturer contracts.
20
Cost of Products and Services Sold
The following table sets forth, for the periods indicated, certain information regarding revenue
and cost of products and services sold which is derived from the Companys unaudited financial
statements.
Cost of Products and Services Sold as a Percent of Revenue by Revenue Type
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
Six months ended |
|
|
|
|
January 31 |
|
|
|
|
|
January 31 |
|
|
|
|
2008 |
|
2007 |
|
% Chg |
|
2008 |
|
2007 |
|
% Chg |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog subscriptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
2,747 |
|
|
$ |
2,892 |
|
|
|
(5 |
%) |
|
$ |
5,574 |
|
|
$ |
5,678 |
|
|
|
(2 |
%) |
Cost of revenue |
|
|
250 |
|
|
|
278 |
|
|
|
(10 |
%) |
|
|
574 |
|
|
|
573 |
|
|
|
0 |
% |
Cost of revenue as
a percent of
revenue |
|
|
9 |
% |
|
|
10 |
% |
|
|
|
|
|
|
10 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog professional services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
323 |
|
|
|
356 |
|
|
|
(9 |
%) |
|
|
612 |
|
|
|
658 |
|
|
|
(7 |
%) |
Cost of revenue |
|
|
172 |
|
|
|
112 |
|
|
|
54 |
% |
|
|
337 |
|
|
|
237 |
|
|
|
42 |
% |
Cost of revenue as
a percent of
revenue |
|
|
53 |
% |
|
|
31 |
% |
|
|
|
|
|
|
55 |
% |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing services subscriptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
581 |
|
|
|
294 |
|
|
|
97 |
% |
|
|
1,117 |
|
|
|
511 |
|
|
|
118 |
% |
Cost of revenue |
|
|
208 |
|
|
|
174 |
|
|
|
20 |
% |
|
|
348 |
|
|
|
268 |
|
|
|
30 |
% |
Cost of revenue as
a percent of
revenue |
|
|
36 |
% |
|
|
59 |
% |
|
|
|
|
|
|
31 |
% |
|
|
52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing professional services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
419 |
|
|
|
|
|
|
|
100 |
% |
|
|
828 |
|
|
|
|
|
|
|
100 |
% |
Cost of revenue |
|
|
147 |
|
|
|
|
|
|
|
100 |
% |
|
|
262 |
|
|
|
|
|
|
|
100 |
% |
Cost of revenue as
a percent of
revenue |
|
|
35 |
% |
|
|
0 |
% |
|
|
|
|
|
|
32 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer and distributor communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
152 |
|
|
|
149 |
|
|
|
2 |
% |
|
|
315 |
|
|
|
347 |
|
|
|
(9 |
%) |
Cost of revenue |
|
|
3 |
|
|
|
20 |
|
|
|
(85 |
%) |
|
|
6 |
|
|
|
52 |
|
|
|
(88 |
%) |
Cost of revenue as
a percent of
revenue |
|
|
2 |
% |
|
|
13 |
% |
|
|
|
|
|
|
2 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
4,222 |
|
|
$ |
3,691 |
|
|
|
14 |
% |
|
$ |
8,446 |
|
|
$ |
7,194 |
|
|
|
17 |
% |
Cost of revenue |
|
$ |
780 |
|
|
|
584 |
|
|
|
34 |
% |
|
|
1,527 |
|
|
|
1,130 |
|
|
|
35 |
% |
Cost of revenue as
a percent of
revenue |
|
|
18 |
% |
|
|
16 |
% |
|
|
|
|
|
|
18 |
% |
|
|
16 |
% |
|
|
|
|
Cost of catalog subscriptions consists primarily of reseller fees, software amortization costs,
catalog replication and distribution costs. Cost of catalog subscriptions as a percentage of
revenue remained relatively the same for the three and six month periods ended January 31, 2008,
compared to the same periods last year. Management expects gross margins may, as a percent of
revenue from catalog subscriptions, vary slightly from quarter to quarter due to the timing of data
shipments and to variations in the recognition of revenue which does not directly correlate to
software amortization expense, which is generally on a straight-line basis.
Cost of catalog professional services consists of customization and catalog production labor. Cost
of professional services as a percentage of revenue increased for the three and six month periods
ended January 31, 2008, compared to the same periods last year, primarily due to an increase in
non-billable catalog production costs. Management expects cost of catalog professional services to
fluctuate from year to year depending on the mix of services sold, the portion of customizations
which are billable and on the Companys performance towards the contracted amount for customization
projects.
Cost of revenue for marketing service subscriptions consists primarily of website setup labor,
software amortization costs, postcards, printing and distribution costs. Cost of marketing services
as a percentage of revenue decreased for the three and six month periods ended January 31, 2008,
compared to the same periods last year, primarily due to increased revenue from the Companys
Website
21
products, which have a higher margin than the Companys MailSmart products. Management expects
gross margins, as a percent of revenue from marketing services, to increase over the prior year for
the remainder of fiscal 2008, as customers renew their Website products, without incurring one-time
start-up costs which are charged in the first year of sale.
Cost of revenues for marketing professional services consists of website customization labor
associated primarily with new contracts acquired with OC-Net in January 2007. Management expects
cost of marketing professional services to fluctuate from year to year depending on the Companys
performance towards the contracted amount for customization projects and the actual labor rates
negotiated in customer contracts.
Cost of dealer and distributor communications revenue consists primarily of telecommunication
costs, royalties and software customization labor. Cost of dealer and distributor communications
as a percentage of revenue decreased significantly for the three and six month periods ended
January 31, 2008, compared to the same periods last year, primarily due to a decrease in
telecommunication costs and software customization labor. Management expects gross margins, as a
percent of revenue from dealer and distributor communications, to remain relatively the same as the
current quarter for the remainder of fiscal 2008.
Operating Expenses
The following table sets forth, for the periods indicated, certain operating expense information
derived from the Companys unaudited financial statements.
Operating Expenses
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
January 31 |
|
|
|
|
|
|
January 31 |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
% Chg |
|
|
2008 |
|
|
2007 |
|
|
% Chg |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer operations and support |
|
$ |
256 |
|
|
$ |
276 |
|
|
|
(7 |
%) |
|
$ |
536 |
|
|
$ |
544 |
|
|
|
(1 |
%) |
Selling, general and administrative |
|
|
2,304 |
|
|
|
2,101 |
|
|
|
10 |
% |
|
|
4,684 |
|
|
|
4,086 |
|
|
|
15 |
% |
Software development and technical support |
|
|
339 |
|
|
|
359 |
|
|
|
(6 |
%) |
|
|
688 |
|
|
|
728 |
|
|
|
(5 |
%) |
Depreciation and amortization |
|
|
186 |
|
|
|
110 |
|
|
|
70 |
% |
|
|
381 |
|
|
|
216 |
|
|
|
76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating expenses |
|
$ |
3,085 |
|
|
$ |
2,846 |
|
|
|
8 |
% |
|
$ |
6,289 |
|
|
$ |
5,574 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer operations and support consists primarily of server room operations, software maintenance
agreements for the Companys core network and customer support costs. Customer operations and
support costs decreased for the three and six month periods ended January 31, 2008, compared to the
same periods last year, primarily due to a decrease in temporary help used to support the Companys
products. Management expects customer operations and support costs to continue to be lower than
the previous year for the remainder of fiscal 2008, due to the use of temporary help to support a
new release of the Companys catalog software in fiscal 2007.
Selling, general and administrative expenses (SG&A) increased for the three and six month periods
ended January 31, 2008, compared to the same periods last year, as the Company invested in the
outsourced finance & insurance (F&I) sales initiative in the North American market and operating
costs for the California location, which was added to the Company with the OC-Net acquisition and
provides website customization and support for the Companys new WebsiteSmart Pro product. SG&A,
as a percentage of revenue, decreased from 57% for the six month period ended January 31, 2007 to
55% for the same period this year, as the growth in revenue more than offset the increase in costs.
The company discontinued the F&I operation in December, 2007 but incurred no significant costs
associated with the closing, and expects to incur no addition costs related to this operation for
the remainder of fiscal 2008. Management expects SG&A costs as a percentage of revenue to be lower
than the previous year for the remainder of fiscal 2008, as the operating costs of the OC-Net
acquisition will be included in both years and due to the discontinuation of the F&I initiative,
although an acquisition, if one were to occur, could have a material impact on these results.
The Companys technical staff (in-house and contracted) performs software development, technical
support, software customization and data conversion services for customer applications. Software
development and technical support costs decreased for the three and six month periods ended January
31, 2008, compared to the same period last year, primarily due to an increase in the allocation to
cost of sales for professional services revenue driven, in turn, by demand for marketing
professional services. Management expects fluctuations from quarter to quarter, as the mix of
development and customization activities will change based on customer requirements even if the
total technical staff cost remains relatively constant.
Depreciation and amortization expense increased for the three and six month periods ended January
31, 2008, compared to the same periods last year, primarily due to the amortization of new software
and equipment and the amortization of intangible assets associated with the OC-Net acquisition.
Management expects depreciation and other amortization to stabilize in the second half of fiscal
2008 as the OC-Net acquisition is fully integrated.
22
Other Items
Interest expense includes both cash and non-cash interest. Interest paid was approximately $16,000
and $43,000 for the three and six month periods ended January 31, 2008, and $41,000 and $92,000 for
the three and six month periods ended January 31, 2007, respectively. In addition, excess debt
principal was amortized to offset interest expense by approximately $10,000 and $18,000 for the
three and six month periods ended January 31, 2008 and $9,000 and $22,000 for the three and six
month periods ended January 31, 2007, respectively.
Net income increased from $248,000 for the three month period ended January 31, 2007, to $335,000
for the three month period ended January 31, 2008 and from $473,000 for the six month period ended
January 31, 2007, to $578,000 for the three month period ended January 31, 2008 primarily due to
the increase in revenue, offset in part, by increased overhead. Management expects earnings to
continue to increase over the prior year for the remainder of fiscal 2008.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, certain cash flow information derived
from the Companys unaudited financial statements.
Cash Flow Information
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
January 31 |
|
|
|
|
|
|
January 31 |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
% Chg |
|
|
2008 |
|
|
2007 |
|
|
% Chg |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
335 |
|
|
$ |
248 |
|
|
|
35 |
% |
|
$ |
578 |
|
|
$ |
473 |
|
|
|
22 |
% |
Amortization of software products |
|
|
187 |
|
|
|
198 |
|
|
|
(6 |
%) |
|
|
381 |
|
|
|
385 |
|
|
|
(1 |
%) |
Amortization of deferred finance costs
and
debt discount |
|
|
10 |
|
|
|
(22 |
) |
|
|
145 |
% |
|
|
18 |
|
|
|
(33 |
) |
|
|
155 |
% |
Depreciation and other amortization |
|
|
207 |
|
|
|
110 |
|
|
|
88 |
% |
|
|
402 |
|
|
|
216 |
|
|
|
86 |
% |
Stock based compensation related to
stock
options |
|
|
37 |
|
|
|
42 |
|
|
|
(12 |
%) |
|
|
46 |
|
|
|
68 |
|
|
|
(32 |
%) |
Stock issued as contribution to 401(k)
plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
42 |
|
|
|
(12 |
%) |
Net change in working capital |
|
|
(722 |
) |
|
|
(464 |
) |
|
|
(56 |
%) |
|
|
(848 |
) |
|
|
(873 |
) |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
54 |
|
|
|
112 |
|
|
|
(52 |
%) |
|
|
614 |
|
|
|
278 |
|
|
|
121 |
% |
Net cash used in investing activities |
|
|
(126 |
) |
|
|
(1,342 |
) |
|
|
91 |
% |
|
|
(255 |
) |
|
|
(1,554 |
) |
|
|
84 |
% |
Net cash used in financing activities |
|
|
(245 |
) |
|
|
(322 |
) |
|
|
24 |
% |
|
|
(655 |
) |
|
|
(669 |
) |
|
|
2 |
% |
Effect of foreign currency exchange rate
change on cash |
|
|
3 |
|
|
|
|
|
|
|
100 |
% |
|
|
7 |
|
|
|
|
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash |
|
$ |
(314 |
) |
|
$ |
(1,552 |
) |
|
|
80 |
% |
|
$ |
(289 |
) |
|
$ |
(1,945 |
) |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities decreased for the three month period ended January 31,
2008, compared to the same period last year, primarily due to changes in working capital. The
effect of net changes in working capital is dependent on the timing of payroll and other cash
disbursements, accruals and the timing of invoices and may vary significantly from quarter to
quarter. Net cash provided by operating activities increased for the six month period ended
January 31, 2008, compared to the same period last year, primarily due to the increase in net
income before depreciation and amortization.
Net cash used in investing activities decreased for the three and six month periods ended January
31, 2008, compared to the same periods last year, primarily due to the acquisition of OC-Net in
January, 2007 and the decrease in equipment expenditures in fiscal 2008. Management expects cash
used in investing activities to continue to decrease compared to the prior year for the remainder
of fiscal 2008, although there may be fluctuations quarter to quarter, depending on the timing of
expenditures.
Net cash used in financing activities decreased for the three and six month periods ended January
31, 2008, compared to the same periods last year, primarily due to the decrease in debt, as
described in Note 5 to the financial statements. Management believes that funds generated from
operations will be adequate to fund the Companys operations, investments and debt payments for the
foreseeable future, although additional financing may be necessary if the Company were to complete
a material acquisition or to make a large investment in its business.
At January 31, 2008, the Company had cash and cash equivalents of approximately $761,000 compared
to approximately $1,050,000 at July 31, 2007.
23
Acquisitions
Since December 1995, the Company has had a formal business development program aimed at
identifying, evaluating and closing acquisitions that augment and strengthen the Companys market
position, product offerings, and personnel resources. Since the programs inception, six business
acquisitions and one software asset acquisition have been completed, all of which have been fully
integrated into the Companys operations as of January 31, 2008.
The business development program is still an important component of the Companys long-term growth
strategy and the Company expects to continue to pursue it aggressively.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of March 7, 2008.
Forward Looking Statements
Certain statements contained in this Form 10-QSB 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 Companys annual report on Form 10-KSB for the
year ended July 31, 2007, which is incorporated herein by reference. The forward-looking
statements are made only as of the date hereof, and the Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements.
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures that are designed to ensure that
information required to be disclosed by it in the reports filed by it under the Securities Exchange
Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. The Company carried out an evaluation, under
the supervision and with the participation of its management, including its Chief Executive
Officer, of the effectiveness of the design and operation of its disclosure controls and procedures
pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Companys Chief
Executive Officer concluded that the Companys disclosure controls and procedures are effective as
of January 31, 2008.
There have been no changes in the Companys internal control over financial reporting identified
in connection with the evaluation discussed above that occurred during the quarter ended January
31, 2008 that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may be involved in litigation relating to claims arising out of our
operations in the usual course of business. The Company had no litigation relating to claims arising out of our operations in the usual course
of business for the six month period ended January 31, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended January 31, 2008, the Company did not sell any equity securities which
were not registered under the Securities Act or repurchase any of its equity securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) |
|
The Company held its 2007 Annual Meeting of Shareholders on December 20, 2007. |
|
(b) |
|
Votes cast for the election of William C. Mortimore to serve as director until the 2010
Annual Shareholders Meeting were as follows: |
|
|
|
|
|
For |
|
|
5,012,705 |
|
Withheld authority to vote for |
|
|
643,369 |
|
Votes cast for the election of Richard W. Weening to serve as director until the 2010 Annual Shareholders Meeting were as
follows:
|
|
|
|
|
For |
|
|
4,888,430 |
|
Withheld authority to vote for |
|
|
767,644 |
|
(c) |
|
Votes cast to amend the Corporations 2000 Stock Option Plan were as follows: |
|
|
|
|
|
For |
|
|
2,394,576 |
|
Against |
|
|
908,816 |
|
Abstained |
|
|
10,680 |
|
Votes cast to ratify the appointment of Wipfli LLP as ARIs auditors for the year ending July 31, 2008 were as follows:
|
|
|
|
|
For |
|
|
5,586,196 |
|
Against |
|
|
28,625 |
|
Abstained |
|
|
41,252 |
|
ITEM 5. OTHER INFORMATION
On March 13, 2008, the Company entered into an employment agreement (the Agreement) with
Brian E. Dearing, the Chief Executive Officer of the Company. The Agreement provides that Mr.
Dearing will continue as Chief Executive Officer for the term of the Agreement, unless subject to
earlier termination as provided for in the Agreement or in the event that the Companys Board
recruits and hires a replacement chief executive officer, in which case Mr. Dearing will continue
as the executive Chairman of the Board of the Company. In addition to the provisions described
below, the Agreement contains customary confidentiality, non-competition and non-solicitation and
other provisions.
The term of the Agreement is three years, subject to earlier termination in accordance with the
terms of the Agreement. Following the three-year term, the Agreement will automatically be renewed
for successive one-year periods unless terminated by either party prior to the third year of the
employment term or the commencement of each renewal term. The Agreement provides that Mr. Dearing
will receive an annual salary of $192,686.78; will continue to be eligible to participate in the
Companys Management Incentive Bonus Plan; will be eligible to participate in stock option plans
and grants, if any, that are offered to senior executive/officer employees of the Company; and will
be entitled to receive perquisites and benefits provided by the Company to its senior executives,
subject to applicable eligibility criteria.
Under the Agreement, in the event that Mr. Dearing is terminated without cause, by death or
disability or for good reason (as such terms are defined in the Agreement), Mr. Dearing will
have the right to receive: (1) any unpaid base salary; (2) any earned but unpaid bonus due to him
as of the effective date of the termination; (3) his base salary, at the rate in effect at the time
of termination, through the remaining term of the Agreement; (4) a bonus for the remainder of the
term of the Agreement, calculated in accordance with the Agreement; and (5) acceleration of all of
his outstanding unvested options as of the date of the termination. If Mr. Dearing is terminated
for cause or if he resigns from employment with the Company, or if the Agreement is not renewed,
he will have the right to receive any unpaid base salary and any earned but unpaid bonus due to him
as of the effective date of the termination. If Mr. Dearing retires in accordance with the
Companys any retirement plan or policy for senior executive adopted by the Company, he will have
the right to receive any unpaid base salary and any earned but unpaid bonus due to him as of the
effective date of the termination, and any additional benefits provided under the retirement plan
or policy.
The foregoing description of the Agreement does not purport to be complete and is qualified in its
entirety by reference to the text of the Agreement, which is attached to this Form 10-QSB as
Exhibit 10.1 and incorporated herein by reference.
ITEM 6. EXHIBITS
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10.1 |
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Employment Agreement between the Company and Brian E. Dearing, dated as of March 13, 2008. |
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31.1 |
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Section 302 Certification of Chief Executive Officer. |
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32.1 |
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Section 906 Certification of Chief Executive Officer. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
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ARI Network Services, Inc.
(Registrant) |
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Date:
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March 17, 2008
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/s/ Brian E. Dearing
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Brian E. Dearing, Chief Executive Officer and Acting Chief Financial Officer |
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