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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2005
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-19608
 ARI Network Services, Inc.
  WISCONSIN
    
    39-1388360(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer Identification No.)
 11425 W. Lake Park Drive, Milwaukee, Wisconsin 53224
   þ o
 o o
   o þ




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##### 



ARI Network Services, Inc.
    PagePART I  FINANCIAL INFORMATIONItem 1 Financial statementsCondensed consolidated balance sheets  October 31, 2005 and July
    
    3-431, 2005Condensed consolidated statements of operations for the three
months ended October 31, 2005 and 2004
    
    5Condensed consolidated statements of cash flows for the three
months ended
October 31, 2005 and 2004
    
    6Notes to unaudited condensed consolidated financial statements
    
    7-9Item 2 Managements discussion and analysis or plan of operation
    
    9-17Item 3 Controls and procedures
    
    19PART II  OTHER INFORMATIONItem 2 Unregistered sales of equity securities and use of proceeds
    
    19Item 6 Exhibits
    
    19Signatures
    
    20302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
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ARI Network Services, Inc.
 
 Consolidated Balance Sheets  (In thousands, except share and per share data)  (Unaudited)
 October 31
    
    
    July 312005
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,555
    
    
    $
    3,651Trade receivables, less allowance for doubtful accounts of $83 and
$71 at October 31, 2005 and July 31, 2005, respectively
    
    
    912
    
    
    
    1,023Prepaid expenses and other
    
    
    195
    
    
    
    203Deferred income taxes
    
    
    160
    
    
    
    160Total current assets
    
    
    4,822
    
    
    
    5,037Equipment and leasehold improvements:Computer equipment
    
    
    4,815
    
    
    
    4,813Leasehold improvements
    
    
    73
    
    
    
    73Furniture and equipment
    
    
    1,777
    
    
    
    1,7026,665
    
    
    
    6,588Less accumulated depreciation and amortization
    
    
    5,974
    
    
    
    5,893Net equipment and leasehold improvements
    
    
    691
    
    
    
    695Deferred income taxes
    
    
    705
    
    
    
    705Other assets
    
    
    9
    
    
    
    10Capitalized software product costs
    
    
    11,105
    
    
    
    10,927Less accumulated amortization
    
    
    9,586
    
    
    
    9,441Net capitalized software product costs
    
    
    1,519
    
    
    
    1,486Total Assets
    
    $
    7,746
    
    
    $
    7,933
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ARI Network Services, Inc.
 Consolidated Balance Sheets  (In thousands, except share and per share data)  (Unaudited)
 October 31
    
    
    July 312005
    
    
    2005LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Current portion of notes payable
    
    $
    1,300
    
    
    $
    1,200Accounts payable
    
    
    402
    
    
    
    323Deferred revenue
    
    
    4,690
    
    
    
    5,441Accrued payroll and related liabilities
    
    
    1,243
    
    
    
    1,134Accrued sales, use and income taxes
    
    
    82
    
    
    
    74Accrued vendor specific liabilities
    
    
    712
    
    
    
    714Other accrued liabilities
    
    
    129
    
    
    
    58Current portion of capital lease obligations
    
    
    4
    
    
    
    4Total current liabilities
    
    
    8,562
    
    
    
    8,948Long term liabilities:Notes payable (net of discount)
    
    
    1,670
    
    
    
    2,037Long term payroll related
    
    
    480
    
    
    
    461Other long term liabilities
    
    
    91
    
    
    
    96Capital lease obligations
    
    
    
    
    
    
    Total long term liabilities
    
    
    2,241
    
    
    
    2,594Shareholders equity (deficit):Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 0 shares issued and
outstanding at October 31, 2005 and July 31, 2005, respectively
    
    
    
    
    
    
    Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,150,764 and 6,064,534 shares issued and outstanding
at October 31, 2005 and July 31, 2005, respectively
    
    
    6
    
    
    
    6Common stock warrants and options
    
    
    36
    
    
    
    36Additional paid-in-capital
    
    
    93,805
    
    
    
    93,751Accumulated deficit
    
    
    (96,904
    )
    
    
    (97,402
    )Total shareholders equity (deficit)
    
    
    (3,057
    )
    
    
    (3,609
    )Total Liabilities and Shareholders Equity (Deficit)
    
    $
    7,746
    
    
    $
    7,933
 See notes to unaudited condensed consolidated financial statements.
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ARI Network Services, Inc.
 
 Consolidated Statements of Operations  (In thousands, except per share data)
(Unaudited)
 Three months endedOctober 312005
    
    
    2004Net revenues:Subscriptions, support and other services fees
    
    $
    2,564
    
    
    $
    2,402Software licenses and renewals
    
    
    518
    
    
    
    576Professional services
    
    
    409
    
    
    
    2973,491
    
    
    
    3,275Cost of products and services sold:Subscriptions, support and other services fees
    
    
    181
    
    
    
    193Software licenses and renewals *
    
    
    158
    
    
    
    154Professional services
    
    
    111
    
    
    
    82450
    
    
    
    429Gross margin
    
    
    3,041
    
    
    
    2,846Operating expenses:Depreciation and amortization (exclusive of amortization of
software products included in cost of products and
services sold)
    
    
    80
    
    
    
    54Customer operations and support
    
    
    303
    
    
    
    262Selling, general and administrative
    
    
    1,859
    
    
    
    1,709Software development and technical support
    
    
    275
    
    
    
    259Net operating expenses
    
    
    2,517
    
    
    
    2,284Operating income
    
    
    524
    
    
    
    562Other income (expense):Interest expense
    
    
    (49
    )
    
    
    (44
    )Other, net
    
    
    23
    
    
    
    12Total other income (expense)
    
    
    (26
    )
    
    
    (32
    )Income before provision for income taxes
    
    
    498
    
    
    
    530Income tax benefit (provision)
    
    
    
    
    
    
    (36
    )Net income
    
    $
    498
    
    
    $
    494Average common shares outstanding:Basic
    
    
    6,126
    
    
    
    5,951Diluted
    
    
    6,729
    
    
    
    6,248Basic and diluted net income (loss) per share:Basic
    
    $
    0.08
    
    
    $
    0.08Diluted
    
    $
    0.07
    
    
    $
    0.08
 See notes to unaudited condensed consolidated financial statements.
 
 *
    
    Includes amortization of software products of $145 and $141 and excluding other depreciation
and amortization shown separately 5




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ARI Network Services, Inc.
 
 Consolidated Statements of Cash Flows  (In thousands)
(Unaudited)
 Three months endedOctober 312005
    
    
    2004Operating activitiesNet income
    
    $
    498
    
    
    $
    494Adjustments to reconcile net income to net cash provided
by operating activities:Amortization of software products
    
    
    145
    
    
    
    141Amortization of deferred financing costs, debt discount and
excess carrying value over face amount of notes payable
    
    
    (16
    )
    
    
    (21
    )Depreciation and other amortization
    
    
    81
    
    
    
    54Deferred income taxes
    
    
    
    
    
    
    Stock issued as contribution to 401(k) plan
    
    
    21
    
    
    
    37Net change in receivables, prepaid expenses and other
current assets
    
    
    119
    
    
    
    422Net change in accounts payable, deferred revenue,
accrued liabilities and other long term liabilities
    
    
    (472
    )
    
    
    (392
    )Net cash provided by operating activities
    
    
    376
    
    
    
    735Investing activitiesPurchase of equipment and leasehold improvements
    
    
    (77
    )
    
    
    (69
    )Software product costs capitalized
    
    
    (178
    )
    
    
    (602
    )Net cash used in investing activities
    
    
    (255
    )
    
    
    (671
    )Financing activitiesPayments under notes payable
    
    
    (250
    )
    
    
    (251
    )Payments of capital lease obligations
    
    
    
    
    
    
    (3
    )Proceeds from issuance of common stock
    
    
    33
    
    
    
    3Net cash used in financing activities
    
    
    (217
    )
    
    
    (251
    )Net decrease in cash
    
    
    (96
    )
    
    
    (187
    )Cash at beginning of period
    
    
    3,651
    
    
    
    3,357Cash at end of period
    
    $
    3,555
    
    
    $
    3,170Cash paid for interest
    
    $
    65
    
    
    $
    64Cash paid for income taxes
    
    $
    
    
    
    $
    55
 See notes to unaudited condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
October 31, 2005
 1. BASIS OF PRESENTATION
    2. BASIC AND DILUTED NET INCOME PER SHARE
  Three months endedOctober 312005
    
    
    2004Weighted average common shares outstanding
    
    
    6,126
    
    
    
    5,951Dilutive effect of stock options and warrants
    
    
    603
    
    
    
    297Diluted weighted average common shares outstanding
    
    
    6,729
    
    
    
    6,248
 3. STOCK-BASED COMPENSATION
  Three months endedOctober 312005
    
    
    2004Net income, as reported
    
    $
    498
    
    
    $
    494Stock-based compensation using the
fair value method
    
    
    (82
    )
    
    
    (35
    )Pro forma net income
    
    $
    416
    
    
    $
    459Net income per shareBasic  as reported
    
    $
    0.08
    
    
    $
    0.08Basic  pro forma
    
    $
    0.07
    
    
    $
    0.08Diluted  as reported
    
    $
    0.07
    
    
    $
    0.08Diluted  pro forma
    
    $
    0.06
    
    
    $
    0.07
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4. NOTES PAYABLE
   5. SHAREHOLDER RIGHTS PLAN
  6. INCOME TAXES
  Three months endedOctober 312005
    
    
    2004Current:Federal
    
    $
    169
    
    
    $
    31State
    
    
    30
    
    
    
    5Deferred
    
    
    
    
    
    
    Utilization of net operating loss carryforwards
    
    
    (199
    )
    
    
    Income tax benefit (provision)
    
    $
    
    
    
    
    ($36
    )
  8




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7. CLAIM FOR INDEMNIFICATION
  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Results of Operations
   Critical Accounting Policies and Estimates
 General
   Revenue Recognition
  9




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Bad Debts
  Use of Estimates
  Impairment of Long-Lived Assets
  Debt Instruments
  Deferred Tax Asset
  Stock-Based Compensation
   10




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Revenues
   Catalog, Customer and Subscription Information by Region
(As of October 31, 2005)
 Distinct
    
    
    DistinctDistinct
    
    
    
    
    
    
    Distributors
    
    
    DealersCatalogs
    
    
    Manufacturers
    
    
    Subscriptions
    
    
    (Estimated)
    
    
    (Estimated)North America
    
    
    81
    
    
    
    59
    
    
    
    73,201
    
    
    
    103
    
    
    
    23,018Rest of World
    
    
    56
    
    
    
    10
    
    
    
    9,693
    
    
    
    36
    
    
    
    7,106Included in both Regions
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    88
    
    
    
    69
    
    
    
    82,894
    
    
    
    139
    
    
    
    30,124
 Catalog
    
    =
    
    A separately sold and/or distributed parts catalog. A manufacturer may have more than
one catalog. More than one brand or distinct product line may be included in a
catalog.Distinct Manufacturer
    
    =
    
    A single independent manufacturer, not owned by another
manufacturer, served by
ARI. Distinct manufacturers are included in the region they most serve even if they
have catalogs in both regions.Subscription
    
    =
    
    Catalogs subscribed to by a single dealer or distributor. A dealer or
distributor may subscribe to more than one catalog.Distinct Distributor
    
    =
    
    A single independent distributor, not owned by another distributor,
served by ARI. A
distributor generally buys from manufacturers and sells to dealers.Distinct Dealer
    
    =
    
    A single independent servicing dealer, not owned by another dealer,
served by ARI.
   11




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Revenue by Geography and Service
(In Thousands)
 Three months endedOctober 31
    
    
    Percent2005
    
    
    2004
    
    
    ChangeNorth AmericaCatalog subscriptions
    
    $
    2,578
    
    
    $
    2,425
    
    
    
    6
    %Catalog professional services
    
    
    355
    
    
    
    295
    
    
    
    20
    %Dealer marketing services
    
    
    68
    
    
    
    48
    
    
    
    40
    %Dealer & distributor communications
    
    
    227
    
    
    
    281
    
    
    
    -19
    %Subtotal
    
    
    3,228
    
    
    
    3,049
    
    
    
    6
    %Rest of the WorldCatalog subscriptions
    
    
    214
    
    
    
    216
    
    
    
    -1
    %Catalog professional services
    
    
    49
    
    
    
    10
    
    
    
    394
    %Subtotal
    
    
    263
    
    
    
    226
    
    
    
    17
    %Total RevenueCatalog subscriptions
    
    
    2,792
    
    
    
    2,641
    
    
    
    6
    %Catalog professional services
    
    
    404
    
    
    
    305
    
    
    
    32
    %Dealer marketing services
    
    
    68
    
    
    
    48
    
    
    
    40
    %Dealer & distributor communications
    
    
    227
    
    
    
    281
    
    
    
    -19
    %Total
    
    $
    3,491
    
    
    $
    3,275
    
    
    
    7
    %
 North America
 Catalog Subscriptions
  Catalog Professional Services
  Dealer Marketing Services
  12




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Dealer and Distributor Communications
  Rest of the World
 Catalog Subscriptions
  Catalog Professional Services
  13




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Cost of Products and Services Sold
  Cost of Products and Services Sold as a Percent of Revenue by Revenue Type  (In thousands)
 Three months endedOctober 31
    
    
    Percent2005
    
    
    2004
    
    
    ChangeCatalog subscriptionsRevenue
    
    $
    2,792
    
    
    $
    2,641
    
    
    
    6
    %Cost of revenue
    
    
    278
    
    
    
    261
    
    
    
    7
    %Cost of revenue as a percent of revenue
    
    
    10
    %
    
    
    10
    %Catalog professional servicesRevenue
    
    
    404
    
    
    
    305
    
    
    
    32
    %Cost of revenue
    
    
    100
    
    
    
    61
    
    
    
    64
    %Cost of revenue as a percent of revenue
    
    
    25
    %
    
    
    20
    %Dealer marketing servicesRevenue
    
    
    68
    
    
    
    48
    
    
    
    40
    %Cost of revenue
    
    
    31
    
    
    
    16
    
    
    
    94
    %Cost of revenue as a percent of revenue
    
    
    46
    %
    
    
    33
    %Dealer and distributor communicationsRevenue
    
    
    227
    
    
    
    281
    
    
    
    (19
    %)Cost of revenue
    
    
    41
    
    
    
    91
    
    
    
    (55
    %)Cost of revenue as a percent of revenue
    
    
    18
    %
    
    
    32
    %TotalRevenue
    
    $
    3,491
    
    
    $
    3,275
    
    
    
    7
    %Cost of revenue
    
    
    450
    
    
    
    429
    
    
    
    5
    %Cost of revenue as a percent of revenue
    
    
    13
    %
    
    
    13
    %
     14




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Operating Expenses
  Operating Expenses  (In thousands)
 Three months endedOctober 31
    
    
    Percent2005
    
    
    2004
    
    
    ChangeCustomer operations and support
    
    $
    303
    
    
    $
    262
    
    
    
    16
    %Selling, general and administrative
    
    
    1,859
    
    
    
    1,709
    
    
    
    9
    %Software development and technical support
    
    
    275
    
    
    
    259
    
    
    
    6
    %Depreciation and amortization
    
    
    80
    
    
    
    54
    
    
    
    48
    %Net operating expenses
    
    $
    2,517
    
    
    $
    2,284
    
    
    
    10
    %
     Other Items
   Acquisitions
  15




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Liquidity and Capital Resources
  Cash Flow Information  (In thousands)
 Three months endedOctober 31
    
    
    Percent2005
    
    
    2004
    
    
    ChangeNet income
    
    $
    498
    
    
    $
    494
    
    
    
    1
    %Amortization of software products
    
    
    145
    
    
    
    141
    
    
    
    3
    %Amortization of deferred finance costs and
debt discount
    
    
    (16
    )
    
    
    (21
    )
    
    
    24
    %Depreciation and other amortization
    
    
    81
    
    
    
    54
    
    
    
    50
    %Stock issued as contribution to 401(k) plan
    
    
    21
    
    
    
    37
    
    
    
    (43
    %)Net change in working capital
    
    
    (353
    )
    
    
    30
    
    
    
    (1277
    %)Net cash provided by operating activities
    
    
    376
    
    
    
    735
    
    
    
    (49
    %)Net cash used in investing activities
    
    
    (255
    )
    
    
    (671
    )
    
    
    62
    %Net cash used in financing activities
    
    
    (217
    )
    
    
    (251
    )
    
    
    14
    %Net change in cash
    
    ($
    96
    )
    
    ($
    187
    )
    
    
    49
    %
    Debt Schedule  (In thousands)
 October 31
    
    
    July 312005
    
    
    2005
    
    
    Net(Unaudited)
    
    
    (Audited)
    
    
    ChangeNote payable to WITECH:Current portion of note payable
    
    
    200
    
    
    
    200
    
    
    
    Long term portion of note payable
    
    
    200
    
    
    
    250
    
    
    
    (50
    )Total note payable to WITECH
    
    
    400
    
    
    
    450
    
    
    
    (50
    )Notes payable to New Holders:Current portion of notes payable
    
    
    1,100
    
    
    
    1,000
    
    
    
    100Long term portion of notes payable
    
    
    1,400
    
    
    
    1,700
    
    
    
    (300
    )Total face value of notes payable to New Holders
    
    
    2,500
    
    
    
    2,700
    
    
    
    (200
    )Carrying value in excess of face amount of notes payable
    
    
    82
    
    
    
    105
    
    
    
    (23
    )Debt discount (common stock warrants and options)
    
    
    (12
    )
    
    
    (18
    )
    
    
    6Total carrying value of notes payable to New Holders
    
    
    2,570
    
    
    
    2,787
    
    
    
    (217
    )Total debt
    
    $
    2,970
    
    
    $
    3,237
    
    
    $
    (267
    )
 16




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Forward Looking Statements
  18




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ITEM 3. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
 
 19




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SIGNATURES
  ARI Network Services, Inc.(Registrant)Date:
    
    December 15, 2005
    
    /s/ Brian E. Dearing

Brian E. Dearing, Chairman of the Board and Chief Executive Officer/s/ Timothy SherlockTimothy Sherlock, Chief Financial Officer
 20