-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IxH6k0+/ZQQN6MVzAgL1b9mHFua0zDgK2a3vHym0zXuBxQt6EexqgYnro1BfyX0r aopv2nhk3QzHwNLP1GVXbw== 0001032210-98-000297.txt : 19980331 0001032210-98-000297.hdr.sgml : 19980331 ACCESSION NUMBER: 0001032210-98-000297 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARIS CORP/ CENTRAL INDEX KEY: 0001037186 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 911497147 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22649 FILM NUMBER: 98579098 BUSINESS ADDRESS: STREET 1: 6720 FORT DENT WAY STREET 2: STE 250 CITY: SEATTLE STATE: WA ZIP: 98188-2555 BUSINESS PHONE: 2064332081 MAIL ADDRESS: STREET 1: 6720 FORT DENT WAY STREET 2: SUITE 250 CITY: SEATTLE STATE: WA ZIP: 98188-2555 10-K405 1 FORM 10-K FOR PERIOD ENDED 12/31/1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (MARK ONE) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-22649 ---------------- ARIS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 91-1497147 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2229 112TH AVENUE NE, BELLEVUE, WASHINGTON 98004 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (425) 372-2747 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE CLASS ON WHICH REGISTERED ----- --------------------- COMMON STOCK NASDAQ NATIONAL MARKET
---------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant at March 6, 1998 was approximately $112,500,639. The number of shares of the registrant's Common Stock outstanding at March 6, 1998 was 10,248,003. DOCUMENTS INCORPORATED BY REFERENCE The Company's definitive proxy statement for its annual meeting of shareholders on April 28, 1998, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year, is incorporated by reference in Part III hereof. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS ARIS Corporation ("ARIS" or the "Company") provides an integrated information technology ("IT") solution consisting of consulting and training services and proprietary software products. ARIS' core consulting competencies include packaged application implementation, custom application development and systems architecture planning and deployment. The Company's education division offers instructor-led course titles for IT professionals conducted at ARIS' training centers and at client facilities. The Company's wholly-owned subsidiary, ARIS Software, Inc. ("ASI") develops, markets and supports proprietary software products that enhance Oracle database management and Oracle packaged applications. The Company believes that its ability to provide clients with an integrated IT solution, coupled with its focus on leading-edge technologies, provide it with a unique competitive advantage. INDUSTRY BACKGROUND Enterprises face a rapidly changing, highly competitive environment where access to information through the use of information technology can result in improvements in products and services, lower costs and increased client satisfaction. As the pace of technological change accelerates, an enterprise's ability to evaluate, integrate, deploy and leverage IT systems is becoming a critical competitive issue. International Data Corporation ("IDC") estimates that the worldwide market for IT consulting is projected to grow to $45.6 billion by the year 2001. The complex task of developing and implementing enterprise-wide, mission critical solutions is a costly and time consuming undertaking. For example, enterprise resource planning projects, which generally include planning and integration of manufacturing, distribution and financial systems, require cooperation and coordination of virtually every department within an enterprise. Many enterprises do not have adequate personnel with the requisite technology skills or are reluctant to expand or retool their existing IT departments for particular implementation projects. Confronted with the challenge of designing and implementing more complex IT systems to accomplish their goals, many enterprises are turning to independent IT service providers. Enterprises must ensure that their IT employees possess the skills to operate, maintain and maximize performance of increasingly complex information systems. Each time an enterprise implements a new technology or updates its existing technology, employee training is required. In many large enterprises, IT training is virtually continuous. IDC estimates that the worldwide market for IT education and training is projected to grow to $27.9 billion by 2001. Due to a shortage of in-house instructors experienced in the latest technologies and the high cost of developing and maintaining internal training courses in rapidly evolving technologies, many enterprises are turning to outside firms to train their IT professionals. THE ARIS SOLUTION ARIS provides an integrated IT solution consisting of consulting and training services and proprietary software products that enables its clients to quickly leverage new technologies to deliver and improve operational processes and performance. The ARIS solution includes the following characteristics: Complete IT Solution. ARIS offers its clients an integrated IT solution that addresses the technology requirements and the resource constraints clients face when adopting a new technology. The Company believes that its combination of consulting, training and software products enables its clients to rapidly and effectively implement technologies that improve business processes and the information flow within an organization. Because ARIS develops in-depth knowledge regarding the needs and objectives of its consulting clients, ARIS believes it is strategically positioned to provide custom training solutions for these clients. Consulting Expertise In High-Demand, Leading-Edge Technologies. ARIS fulfills the mission critical technology needs of its clients by designing and implementing solutions using leading-edge technologies from vendors such as Oracle, Microsoft, Lotus, Sun, Novell and others. Expertise in leading-edge technologies allows 1 ARIS to enhance project quality, reduce development time and project costs and effectively develop customized solutions. In addition, ARIS maintains strategic relationships with certain software vendors, providing the Company access to technologies in the early or pre-release cycles of software development. ARIS consultants and project managers use a proprietary methodology, ARIS RAPIDMethod, for packaged application implementation and Oracle's CASE*Method for custom application development relating to Oracle technologies. Quality Course Offerings For High-Demand, Leading-Edge Technologies. ARIS provides public and private instructor-led training to IT professionals on leading-edge technologies The Company uses vendor-supplied and proprietary courseware and training methodologies. The following chart sets forth the vendor authorizations that the Company's various training centers have received:
VENDOR LOCATION AUTHORIZATIONS/CERTIFICATIONS ------------------------------------------------------------------------------- Bellevue, WA (two locations) Microsoft ATEC; Authorized Sun Education Center; Sylvan Prometric Testing Center ------------------------------------------------------------------------------- Chicago, IL (scheduled to open May 15, 1998) Projected to be: Microsoft ATEC; Sylvan Prometric Testing Center; Lotus Authorized Education Center ------------------------------------------------------------------------------- Dallas, TX Microsoft ATEC; Lotus Authorized Education Center ------------------------------------------------------------------------------- Denver, CO (two locations) Microsoft ATEC; Sylvan Prometric Testing Center ------------------------------------------------------------------------------- Bloomington, MN Microsoft ATEC; Lotus Authorized Education Center; Sylvan Prometric Testing Center; VUR Testing Center; CAT Testing Center; ProSoft Affiliate ------------------------------------------------------------------------------- New York, NY Microsoft ATEC; Lotus Authorized Education Center ------------------------------------------------------------------------------- Portland, OR Microsoft ATEC, Sun Education Center ------------------------------------------------------------------------------- Washington, DC Microsoft ATEC, Sylvan Prometric Testing Center ------------------------------------------------------------------------------- Birmingham, UK Microsoft ATEC, Lotus Authorized Education Centre, WST Approved Provider ------------------------------------------------------------------------------- London, UK (three locations) Microsoft ATEC, Sylvan Prometric Testing Centre, Novell Authorized Education Center, Lotus Authorized Education Centre, WST Approved Provider, BACT Partner ------------------------------------------------------------------------------- Oxford, UK Microsoft ATEC, Lotus Authorized Education Centre, WST Approved Provider, Sylvan Prometric Testing Centre
------------------------------------------------------------------------ In addition, the Company has the capacity to provide public and private instructor-led training to IT professionals on Oracle technologies at all of its locations and at client sites using the Company's proprietary courseware. STRATEGY The Company's objective is to be a leading provider of integrated IT solutions by pursuing the following strategies: Leverage Synergies Between Consulting And Training. By offering a combination of consulting and training services, the Company is able to: (i) capitalize on cross-selling opportunities between training and 2 consulting; (ii) increase client referrals; (iii) enhance its name recognition; and (iv) provide a complete solution to its clients. The Company encourages its instructors to participate in consulting projects, enabling instructors to improve their technical knowledge with practical software implementation experience. In addition, the Company offers ongoing training in the latest technologies to its consultants and project managers. Focus On Leading-Edge Technologies. The Company intends to maintain its alignment with leading-edge technology vendors such as Oracle, Microsoft, Lotus, Novell and Sun. By focusing on leading-edge technologies, the Company is able to offer specialized and value-added services to its clients. ARIS may shift or expand its vendor focus over time in order to maintain alignment with leading-edge, emerging technologies. Attract And Retain Highly Skilled IT Professionals. The Company's success depends on its ability to attract, train, motivate and retain highly skilled IT professionals. The Company believes it offers its employees: (i) multiple professional opportunities and challenges to work in one or more of the Company's consulting, training and software divisions; (ii) the ability to work with leading-edge technologies; (iii) attractive compensation plans that align employees' interests and goals with those of the Company; (iv) a stimulating, flexible, entrepreneurial work environment; and (v) the opportunity to receive continuous, ongoing technical training. These factors have resulted in a turnover rate which management believes is below the industry average. Maintain High Levels Of Client Satisfaction. The Company believes that satisfying client expectations is critical to expanding relationships with existing clients and receiving positive references for future sales. The Company requests that its clients complete evaluations of its training classes and consulting projects and a percentage of total cash compensation for consultants and project managers and instructors is directly linked to client satisfaction. Expand Geographic Presence. The Company intends to expand its operations by opening or acquiring additional consulting offices and training centers in strategic geographic locations, including existing markets. ARIS also intends to expand internationally to better service its multinational clients and to gain access to new markets. Since the date of the Company's initial public offering through December 31, 1997, the Company has expanded geographically to New York, New York, Minneapolis, Minnesota and Chicago, Illinois. Pursue Strategic Acquisitions. In addition to ARIS' geographic expansion, between January 1, 1997 and March 6, 1998, ARIS also continued to pursue an aggressive acquisition strategy. During this time-frame, ARIS acquired five complementary businesses: Oxford Computer Group Limited in Oxford, Birmingham and London, United Kingdom; Enterprise Computing Inc., d/b/a Buller Owens & Associates ("Buller Owens") in New York, New York; Agiliti, Inc. in Bloomington, Minnesota; Absolute!, Inc. in Dallas, Texas; and in February 1998, Barefoot Computer Training Limited in London, England ("Barefoot"). The Company plans to continue to pursue additional strategic acquisitions in order to: (i) acquire expertise in new technologies; (ii) expand its client base; (iii) gain access to qualified IT professionals; and (iv) enter new geographic markets. ARIS CONSULTING AND SOFTWARE PRODUCTS ARIS provides IT consulting services primarily to clients that require assistance planning, designing, developing, testing and deploying Oracle, Microsoft and other technologies. ARIS' vendor specific focus has enabled it to develop greater depth of expertise and proprietary methodologies. ARIS currently focuses on three core consulting competencies: packaged application implementation, custom application development and systems architecture planning and deployment. The Company's consulting clients are generally medium to large businesses and governmental agencies. Packaged Application Implementation. ARIS consulting focuses on the high growth packaged enterprise resource planning market, particularly the implementation of Oracle database management and Oracle packaged applications ("Oracle Applications"). ARIS' consultants and project managers use a proprietary methodology, ARIS RAPIDMethod, to implement Oracle Applications consistently and reliably. 3 Custom Application Development. ARIS consulting provides custom application development services, particularly client/server and Internet/intranet projects involving Oracle and Microsoft technologies. For database development, ARIS consultants and project managers use Oracle's CASE*Method information engineering methodology, often in conjunction with Oracle's CASE tool, Designer/2000. In addition, ARIS has developed a library of proprietary reusable software that allows its consultants and project managers to accelerate custom application development. Systems Architecture Planning And Deployment. ARIS consulting provides systems architecture planning and deployment for IT architectures including Microsoft BackOffice, Oracle databases, UNIX and general networking architectures. System architecture engagements involve a range of services including capacity planning, implementation design and planning, readiness assessment, performance tuning and monitoring, configuration and installation, infrastructure management, process evaluation and complete database administration outsourcing. The Company assigns consultants to projects based on specific requirements. Consultant utilization, billing rates and headcount are reviewed regularly by project managers and regional managers, and is reviewed monthly by senior management, to ensure maximum efficiency. Project staffing varies depending on the number of project engagements and the size, duration and location of each engagement. As projects are completed or as new consultants are hired, there may be periods when certain consultants and project managers are not assigned to active client projects. During these periods of non-assignment, consultants and project managers receive training on new technologies, develop methodologies and tools and assist in developing the Company's internal data systems. ARIS Software, Inc. ("ASI"), the Company's wholly-owned subsidiary, currently has two software product suites, ARIS DFRAG and NoetixViews. NoetixViews enables users of Oracle Applications to quickly retrieve non- standard business information from an Oracle database. By establishing a layer of "meta" data, NoetixViews serves as a platform on which customers can build their reporting systems, reducing costly re-design when a new version of an Oracle Application program is released. ASI has developed a custom software element for the Oracle tools division which provides a tightly integrated solution involving Oracle's Discoverer Reporting Tool and ASI's suite of NoetixViews products for Oracle Applications. ARIS DFRAG is a tool used by database administrators to identify and reorganize "fragmented" data in Oracle databases, thereby improving performance. ARIS DFRAG includes a graphical user interface based on Microsoft Windows which can be used to browse and manage database objects within an Oracle database. Management believes ASI's software products enhance the Company's consulting services. Through its consulting and training services, ARIS expects to continue to identify development opportunities for new ASI software products. ARIS TRAINING ARIS is a leading provider of vendor-certified and custom training to IT professionals including Microsoft BackOffice, Oracle database and tools, Sun Solaris and Java, Lotus Notes and Domino, Novell, Internet, and networking technologies. ARIS provides instructor-led training through regularly scheduled open enrollment classes, private classes (using both standard and customized content), and on-line training. ARIS also provides other training related services such as IT skills assessment, curriculum development and training consulting. Each of the Company's instructors has, on average, more than 10 years of professional IT experience. The Company seeks to achieve a high fill rate for each of its public classes without exceeding a maximum class size in order to preserve a high level of individual student attention. The Company devotes considerable resources to maintaining the skills of its instructors who are required to maintain the certifications necessary to teach new course titles as a part of ARIS' Microsoft, Sun, Novell and Lotus authorized training designations. 4 ARIS uses both vendor-designed and proprietary courseware and training methodologies. The Company continually evaluates market demand for training in its core technologies and updates current course titles or develops new course titles to satisfy the changing needs of the market. To ensure that its course titles and instructors meet the needs of the market and maintain the Company's quality standards, each class participant is asked to complete an evaluation of the course materials and of the instructor at the end of their training. These evaluations are used by the Company to modify course offerings and training techniques in order to improve instructor performance. RELATIONSHIPS WITH KEY VENDORS The Company has developed strategic relationships with key vendors of software, particularly Oracle, Microsoft, Sun, Lotus and Novell. These strategic relationships allow the Company to gain access to beta versions of software and the software vendors' marketing channels as well as to receive discounts on software. The Company regularly participates with Microsoft in the development of courseware for new products and trains Microsoft's employees and other ATECs during the early stages of a new product roll out. Certain of these software vendors also compete with the Company in providing IT consulting and training services. Disputes between the Company and these software vendors could result in the loss of vendor certifications, a reduction in the number of client referrals or vendor actions which might adversely affect the Company's ability to compete successfully with its competitors. SALES AND MARKETING The Company sells its consulting and training services directly through its regional sales forces. ASI sells its software products directly through account executives and internal telemarketing representatives and through referrals from the Company's consulting operations. Other important client sources include industry trade shows and referrals from, and joint marketing events with, Oracle, Microsoft and other IT vendors. ARIS' sales personnel are compensated through a combination of a base salary and commissions. Commissions are paid when services are performed or products are shipped rather than when a contract is signed. The ARIS marketing plan includes direct mail solicitations, advertising in IT trade journals, trade show participation and seminars. The Company's course catalogue and Internet web site are integral parts of its marketing effort. COMPETITION The IT consulting industry and the IT training industry are generally regarded as separate industries, each of which is rapidly growing and highly competitive. Within each industry there are a large number of competitors, many of which have significantly greater financial, technical, marketing and human resources and greater name recognition than the Company. The Company believes that its ability to provide clients with an integrated IT solution, coupled with its focus on leading-edge technologies, provide it with a unique competitive advantage. ARIS differentiates itself from its consulting and training competitors by striving to be first to market with new technologies, by leveraging the synergies between consulting and training, by delivering consulting and training in high-demand, leading-edge technologies, by the breadth and depth of its curriculum, convenience of its course scheduling, its ability to deliver consulting and training services in numerous geographic locations, and the quality, skill and reputation of its instructors, consultants and project managers. Nevertheless, the Company competes with companies in both the consulting and training industries. ARIS' principal competitors in the delivery of consulting services are the consulting divisions of the large international accounting firms, the consulting divisions of software vendors such as Oracle, and numerous international, national and regional IT consulting firms. The Company faces competition in the delivery of IT training services from the in-house IT departments of its prospective clients, companies such as International 5 Business Machines and Hewlett-Packard, software vendors such as Oracle, Sun, other Microsoft ATECs, and independent international, national and regional training companies. ASI focuses its software product development on solving problems that few other software companies have addressed. ARIS DFRAG competes with the system management tools distributed by BMC Software, Platinum Technology and Compuware. Although the Company believes few commercially available products currently compete directly with NoetixViews, there can be no assurance that new competitive products will not be developed by Oracle, third party software vendors or by in-house IT departments of the Company's current or potential clients. Management believes that its primary competition in software development will come from custom in-house development. INTELLECTUAL PROPERTY The Company uses certain proprietary consulting and training methodologies, courseware, software applications and products, trademarks and service marks, and other proprietary and intellectual property rights. The Company relies upon a combination of copyright, trademark and trade secret laws, as well as nondisclosure and other contractual arrangements, to protect its proprietary rights. The Company uses client licensing agreements and employee and third- party nondisclosure and confidentiality agreements to limit access to and distribution of its proprietary information. The Company develops custom software applications and methodologies, and training courses and methodologies for third-party software products. The training courses, methodologies and courseware are owned by the Company through agreements with employees and subcontractors, but ownership of software applications developed for clients is often assigned to the client, with the Company retaining limited use licenses. The Company also develops software application tools in the course of its consulting projects. The Company generally seeks to retain significant ownership or marketing rights for adaptation and reuse in subsequent projects. PERSONNEL AND HUMAN RESOURCES As of March 6, 1998, the Company had 593 full-time employees, 441 of whom were in the United States and 152 of whom were in the United Kingdom. Of this total, 232 employees were involved in the sale, delivery and support of training services, 240 employees were involved in the sale, delivery and support of consulting services, 28 employees were involved in the sale, marketing, development and support of software products, and 53 were involved in corporate level management and administration. In addition, the Company retains the services of subcontractors for certain consulting projects and to conduct certain training services. The Company places significant emphasis on the recruitment, training and professional development of its employees, and offers a competitive compensation package. These factors have resulted in attrition rates which management believes are below the industry average. The Company devotes considerable resources to its recruiting efforts. The Company identifies prospective employees through referrals from existing employees and clients, on-campus recruiting at colleges and universities, and by advertising at trade shows and over the Internet. The Company currently has six full-time recruiters. The Company's consultants and project managers benefit from their ability to receive ongoing training in the latest technological advances and developments at the Company's training centers. The ability of the Company to train its consultants and project managers internally provides the Company with a competitive advantage over its competitors, many of whom must contract with third-party instructors to keep their IT professionals current in the latest technologies. In addition, the Company has a six-to-eight week training program for its newly hired IT professionals which includes training in the technologies comprising the Company's core competencies and training in the Company's proprietary methodologies. 6 The Company's compensation package consists of a combination of salary, stock options, 401(k) matching, an employee stock purchase plan and other benefits-related plans. In addition, the Company awards performance-based bonuses to certain employees, including nearly all of its consultants, project managers, instructors, and executive staff managers. The Company believes that by linking employee compensation to the success of the Company, employees are encouraged to focus on client satisfaction and to seek continuous professional development. EFFECTS OF YEAR 2000 ISSUE Although the Company does not believe the Year 2000 issue will have a significant impact on the Company's internal operations or on solutions developed by the Company for clients where the Company has provided an express warranty regarding the Year 2000 issue, there can be no assurance that the Company will not experience interruptions of operations because of Year 2000 problems or become involved in disputes with clients regarding Year 2000 problems involving solutions developed or implemented by the Company or the interaction of such solutions with other applications. Year 2000 problems could require the Company to incur unanticipated expenses, and such expenses could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the purchasing patterns of clients or potential clients may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase services offered by the Company. ITEM 2. PROPERTIES On March 30, 1998, the Company relocated its corporate headquarters to 2229 112th Avenue NE, Bellevue, WA 98004. These premises, which the Company purchased in January 1998, consist of 25,000 square feet of office space and house the Company's corporate, administrative, finance and accounting, human resources, sales and marketing, research and development, legal and IT departments, and also serves as the headquarters for ASI. The Company and its subsidiaries also lease facilities in various locations listed in the table below (as of March 30, 1998):
APPROXIMATE SQUARE NO. OF LOCATION FOOTAGE CLASSROOMS/SEATS FUNCTION - -------- ----------- ---------------- -------- Bellevue, WA 23,500 11/152 Training, Consulting Bellevue, WA (vacating May 1, 1998) 8,000 5/63 Training Beaverton, OR 7,800 4/18 Training, Consulting, Software Beaverton, OR 600 1/12 Training Bloomington, MN 16,000 9/104 Training Chicago, IL (opens May 15, 1998) 7,400 4/60 Training Denver, CO 2,000 1/15 Training, Consulting Denver, CO 7,000 4/42 Training Dallas, TX 7,000 -- Consulting Dallas, TX 6,500 6/76 Training Fairfax, VA 10,500 5/68 Training, Consulting New York, NY 5,000 5/44 Training Tampa, FL 2,000 -- Consulting Birmingham, UK 2,500 4/32 Training London, UK 14,400 17/178 Training London, UK 6,720 9/78 Training London, UK 1,250 3/18 Training Oxford, UK 5,000 -- UK Headquarters, Consulting Oxford, UK 4,000 4/50 Training
7 ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in legal proceedings that arise out of the normal course of business. As of March 6, 1998, the Company was not involved in any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to a vote of the Company's security holders during the fourth quarter of the Company's fiscal year ended December 31, 1997. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS (a) The Company's Common Stock is listed for quotation on the Nasdaq National Market (symbol "ARSC"). The number of shareholders of record of the Company's Common Stock at March 6, 1998 was 126. The Company has never declared or paid any cash dividends on its Common Stock. The Company currently anticipates that it will retain all future earnings for use in the expansion and operations of its business and does not anticipate paying cash dividends in the foreseeable future. High and low closing prices for the Company's Common Stock for each quarter in 1997 are as follows:
YEAR STOCK PRICE ---- --------------- HIGH LOW 1997 ------- ------- First Quarter.............................................. N/A N/A Second Quarter............................................. $22.750 $19.125 Third Quarter.............................................. $31.375 $21.000 Fourth Quarter............................................. $26.375 $19.750
(b) From the effective date of the Company's Registration Statement on Form S-1 filed on April 18, 1997 and declared effective by the Securities and Exchange Commission on June 17, 1997 (Registration No. 333-25409), as amended (the "Registration Statement"), through December 31, 1997, the Company has applied $4 million of the proceeds from its initial public offering (the "Offering") to the repayment of the Company's revolving bank loan, $1,635,000 in connection with the acquisition of other companies, and $2,165,000 to capital expenditures. The Company believes that none of these payments were made, directly or indirectly, to: (i) directors or officers of the Company, or their associates; (ii) persons owning ten percent or more of any class of equity securities of the Company; or (iii) affiliates of the Company. To date, the Company believes that it has used the Offering proceeds in a manner consistent with the use of proceeds described in the Registration Statement. As of December 31, 1997, the remaining $23,442,000 of the Offering proceeds were invested in short term marketable securities. 9 ITEM 6. SELECTED FINANCIAL DATA A summary of selected financial data as of and for the years ended December 31, 1993, December 31, 1994, December 31, 1995, December 31, 1996 and December 31, 1997 are set forth below.
YEARS ENDED DECEMBER 31, 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- RESULTS OF OPERATIONS Revenues $3,686,000 $7,052,000 $14,751,000 $26,898,000 $55,131,000 Expenses $3,238,000 $6,226,000 $12,741,000 $24,884,000 $49,786,000 Net income $ 448,000 $ 826,000 $ 2,010,000 $ 2,014,000 $ 5,345,000 Diluted earnings per share $ 0.10 $ 0.12 $ 0.29 $ 0.27 $ 0.57 DECEMBER 31, 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- FINANCIAL CONDITION Cash, cash equivalents and securities available for sale $ 598,000 $ 274,000 $ 2,491,000 $ 1,573,000 $24,852,000 Total assets $1,607,000 $3,320,000 $ 6,843,000 $12,956,000 $51,970,000 Long-term debt, less current portion $ 10,000 $ -- $ -- $ -- $ -- Shareholders' equity $1,203,000 $2,113,000 $ 4,642,000 $ 8,210,000 $44,918,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's revenue is derived from its consulting and training services and sales and maintenance of its software products. Consulting revenue is derived primarily from professional fees billed to clients. Revenue from contracts that are billed on a time and materials basis is recognized as services are performed. Revenue from fixed price contracts is recognized on the percentage of completion method, based on the ratio of costs incurred to the total estimated project costs. The Company bills its clients on a monthly or semi-monthly basis. Where revenue is recognized before an invoice is sent, the revenue in excess of billings is recorded as work in progress. Occasionally, the Company is requested to provide hardware and software in conjunction with its consulting projects. In such cases, the Company recognizes as revenue only the difference between its cost and the resale price for the software and hardware. Training revenue is derived primarily from fees charged to corporate clients for employee training provided at client facilities or at ARIS' training centers and from fees charged to individual students for open enrollment classes. In its open enrollment classes, the Company seeks to fill each available seat in each scheduled class. The Company continuously monitors this fill rate and may cancel or reschedule classes that are underenrolled. Revenue for a training class is recognized in the month in which the last day of the training event falls. Since a large number of training events are five-day classes that end on a Friday, the number of Fridays in a given month impacts the training revenue for that month. ASI derives software revenue from the sale of its proprietary software product suites, ARIS DFRAG and NoetixViews, and from support contracts with clients who purchase the software products. Revenue is recognized when the software product has been shipped, collectibility is probable and there are no significant obligations of ASI remaining to be performed. Software support is billed at the beginning of the contract period and is recognized ratably through the term of the contract. From March 1993 to March 1997, the Company qualified under the Small Business Administration's Section 8(a) Program, which sets aside a certain percentage of government contracts for minority-owned 10 businesses. As an 8(a) Program participant, the Company was awarded contracts with U.S. government agencies totaling 9.0% and 13.7% of the Company's revenue in 1996 and 1995, respectively. In the first quarter of 1997, the Company ceased to be eligible to participate in the 8(a) Program. RECENT ACQUISITIONS In addition to its internal growth, the Company has grown through strategic acquisitions of complementary businesses. During 1997, the Company made the following acquisitions: OXFORD COMPUTER GROUP LIMITED. In February 1997, the Company acquired the stock of Oxford in exchange for 280,000 shares of ARIS Common Stock. Oxford is a Microsoft ATEC with facilities in Oxford, London and Birmingham, England which also provides IT consulting and training services primarily on Microsoft technologies. BULLER OWENS. In October 1997 the Company acquired the stock of Buller Owens in exchange for 62,531 shares of ARIS Common Stock, 20,844 stock purchase warrants and $1,560,000 cash. Buller Owens is a LAEC and Premium Partner for Lotus and a Microsoft ATEC in New York City. AGILITI, INC. In November 1997 ARIS acquired the stock of Agiliti, Inc. in exchange for 50,941 shares of ARIS Common Stock. Agiliti is a LAEC and Premium Partner for Lotus and a Microsoft ATEC in Bloomington, Minnesota. ABSOLUTE!, INC. In November 1997 ARIS merged with Absolute!, Inc. in exchange for $100,000 cash and 40,909 shares of ARIS Common Stock. Absolute! is a Microsoft ATEC in Dallas, Texas. Each of these transactions was accounted for under the purchase method of accounting. Goodwill resulting from these acquisitions will be amortized over fifteen years. SUBSEQUENT EVENT BAREFOOT COMPUTER TRAINING LIMITED. On February 28, 1998, the Company acquired the stock of Barefoot in exchange for 278,611 shares of ARIS Common Stock. Barefoot is a Microsoft ATEC, a Sylvan Prometric Testing Centre, a BACT and a NAEC. This transaction will be accounted for under the pooling of interests method of accounting. 1997 COMPARED TO 1996 Revenue in 1997 was $55.1 million, representing a 105% increase over revenue of $26.9 million in 1996, a result of increased revenue in each of the Company's business lines. During 1997, the Company's single largest client accounted for 6.2% of revenue, down from 9.1% in 1996. The Company's five largest clients in 1997 accounted for 25% of revenue as compared to 35% of revenue in 1996. During 1997, the Company acquired or opened new or additional offices in New York, New York, Bloomington, Minnesota and Dallas, Texas, as well as London, Birmingham and Oxford, England. These were added to existing offices in Seattle and Bellevue, Washington; Beaverton, Oregon; Denver, Colorado; the metropolitan Washington, D.C. area; St. Petersburg, Florida and Dallas, Texas. Consulting revenue in 1997 was $30.0 million, representing an 84% increase over consulting revenue of $16.3 million in 1996. This increase is primarily attributable to an increase in the number of billable consultants and project managers from 118 at the end of 1996 to 197 at the end of 1997, an approximate 8% increase in average billing rates, and an increase in the number and size of consulting projects. Training revenue in 1997 was $21.5 million, representing a 129% increase over training revenue of $9.4 million in 1996. This increase in revenues is attributable to a number of factors. The acquisition of Oxford 11 in March contributed revenues of $6.7 million; Buller Owens acquired in October contributed $578,000, Agiliti acquired in November contributed $445,000 and Absolute! acquired in November contributed $260,000 to 1997 revenues. Training operations conducted 3,662 classes and 9,888 class days during 1997 compared to 934 classes and 3,740 class days during 1996. The Company continues to experience high demand for numerous Microsoft NT, Internet-related and Sun Microsystems courses. During 1997 the Company has become an authorized provider of Lotus Notes and Domino education in New York City, New York and Minneapolis, Minnesota. Software revenue in 1997 was $3.6 million as compared with software revenue of $1.2 million in 1996. This increase is principally the result of a very significant increase in the Company's sales of the NoetixViews suite of products. Software revenues have been positively impacted by the expansion of the sales staff as well as expansion of marketing and sales efforts at trade shows. Cost of consulting and training was $25.5 million in 1997, representing a 90% increase over cost of consulting and training of $13.4 million in 1996. This increase is primarily attributable to an increase in the number of consultants, project managers and instructors from 149 at the end of 1996 to 285 at the end of 1997. Cost of consulting and training as a percentage of combined consulting and training revenue decreased from 52.0% in 1996 to 49.5% in 1997. This decrease is primarily attributable to a change in the revenue mix with an increase in training revenue on a percentage basis which has slightly higher gross margins. Cost of software increased to $322,000 in 1997 from $93,000 in 1996. This increase coincides with a rise in sales of software licenses and is primarily attributable to the increased costs of packaging and distribution of ARIS DFRAG and NoetixViews. Sales, general and administrative ("SG&A") expense was $20.8 million in 1997, representing a 120% increase over SG&A expense of $9.4 million in 1996. SG&A expense as a percentage of total revenue increased from 35.1% in 1996 to 37.7% in 1997. This increase is due to several factors including the Company's acquisition of Oxford Computer Group in the United Kingdom where SG&A expenses are typically higher than in the Company's United States' operations, changes in the revenue mix with a marginal increase in training and software which have higher SG&A expenses and the impact of opening offices late in 1996 in Dallas, Texas, St. Petersburg, Florida and London, England as well as the opening or expansion of offices in Denver, Colorado and the metropolitan Washington, D.C. area. The number of management, sales and administrative staff increased from 101 at the end of 1996 to 254 at the end of 1997. In 1997, the Company amortized $380,000 of goodwill related to acquisitions compared to $118,000 in 1996. In 1996 the Company also expensed $307,000 of in-process research and development expenses related to the acquisition of Noetix in October 1996. In June 1997 the Company sold 2,300,000 shares of its Common Stock in an initial public offering. Net proceeds to the Company from the offering were $31.2 million. The Company has invested the proceeds realizing dividends and interest amounting to $694,000 and also realized a gain on sale of investments amounting to $280,000 during 1997. During 1996 the Company had net interest and investment income of $124,000. The Company's effective income tax rate in 1997 was 38.8% compared with 40.1% in 1996. The tax rate was higher in 1996, primarily as a result of expensing non-deductible purchased research and development costs for software development of an acquired business while no such costs were expensed in 1997. 1996 COMPARED TO 1995 Revenue in 1996 was $26.9 million, representing an 82% increase over revenue of $14.8 million in 1995, a result of increased revenue in each of the Company's business lines. During 1996, the Company's single largest client accounted for 9.1% of revenue, down from 21.8% in 1995. The Company's five largest clients in 1996 accounted for 35% of revenue as compared to 53% of revenue in 1995. 12 Consulting revenue in 1996 was $16.3 million, representing a 68% increase over consulting revenue of $9.7 million in 1995. This increase is primarily attributable to an increase in the number of billable consultants and project managers from 52 at the end of 1995 to 118 at the end of 1996, an approximate 10% increase in average billing rates and an increase in the number and size of consulting projects. Training revenue in 1996 was $9.4 million, representing a 96% increase over training revenue of $4.8 million in 1995. This increase is attributable to a number of factors, including the acquisition of SQLSoft in May 1996 and SofTeach in October 1996, and an increase in the number of public classes held from 194 in 1995 to 299 in 1996. Software revenue in 1996 was $1.2 million as compared with software revenue of $205,000 in 1995. This increase is principally the result of an increase in the sales of ARIS DFRAG and the acquisition of Noetix in October 1996, which added approximately $474,000 in revenue in the fourth quarter of 1996. Cost of consulting and training was $13.4 million in 1996, representing an 86% increase over cost of consulting and training of $7.2 million in 1995. This increase is primarily attributable to an increase in the number of consultants, project managers and instructors from 69 at the end of 1995 to 149 at the end of 1996. Cost of consulting and training as a percentage of combined consulting and training revenue increased from 49.3% in 1995 to 52.0% in 1996. This increase is primarily attributable to lower utilization of consultants in 1996 resulting from a large number of newly hired consultants that did not begin billing time on client projects immediately upon being hired. The lower utilization was partially offset by a 10% increase in average billing rates. Cost of software increased to $93,000 in 1996 from $42,000 in 1995. This increase coincides with the rise in sales of software licenses and is primarily attributable to the costs of packaging and distribution of ARIS DFRAG 4.0 and NoetixViews. SG&A expense was $9.4 million in 1996, representing a 109% increase over SG&A expense of $4.5 million in 1995. SG&A expense as a percentage of total revenue increased from 30.8% in 1995 to 35.1% in 1996. This increase is due primarily to the opening of four offices in Dallas, London, St. Petersburg and the metropolitan Washington, D.C. area, including expenses related to the hiring of personnel required to staff these offices and an increase in expenditures for recruitment and training of IT professionals. The number of management, sales and administrative staff increased from 46 at the end of 1995 to 101 at the end of 1996. In 1996, the Company had $307,000 of in-process research and development expenses related to the acquisition of Noetix and amortization of intangible assets of $118,000 related to acquisitions made by the Company in 1996. In each of 1995 and 1996, the Company had other income of $115,000 consisting primarily of interest income on cash and cash equivalents. The Company's effective income tax rate in 1996 was 40.1% compared with 35.1% in 1995. The increase in 1996 was primarily attributable to purchased research and development costs for software development of an acquired business and an increase in liability for state income tax resulting from the geographic expansion of ARIS' service offerings. LIQUIDITY AND CAPITAL RESOURCES Operating cash flows during fiscal 1997 were favorably impacted by higher net income as a result of increased operating activities partially offset by increased working capital requirements, especially the increase in net receivables amounting to $6.2 million. The increase in receivables is due to the significant growth of the Company compared to the prior year, accounts receivable from the four companies acquired in 1997 (aggregating $2.3 million) as well as a lengthening of the collection period. 13 Cash generated from operations combined with the net proceeds to the Company from its initial public offering of Common Stock has resulted in the Company holding $24.8 million in cash and investments in marketable debt securities at the end of fiscal 1997. This compares to $1.6 million at the end of fiscal 1996. Net cash used in investing activities in 1997, 1996 and 1995 was $18.1 million, $2.7 million and $1.4 million, respectively. Net cash spent for the acquisition of other businesses was $1.7 million in 1997, $1.4 million in 1996 and $112,000 in 1995. Capital expenditures in fiscal 1997, 1996 and 1995 were $2.2 million, $1.2 million and $911,000, respectively. The Company anticipates that capital expenditures related to expected expansion will continue in the coming year and will continue to be financed by operational cash flows generated within the year as well as utilization of invested funds, if needed. Net cash provided by financing activities was $24.7 million, $910,000 and $142,000 in 1997, 1996 and 1995, respectively. In June 1997 the Company sold 2,300,000 shares of its Common Stock in an initial public offering. Net proceeds to the Company from the offering were $31.2 million. The Company has invested the proceeds realizing dividends and interest amounting to $694,000 and also realized a gain on sale of investments amounting to $280,000 during 1997. Proceeds amounting to $69,000 for the exercise of options with respect to 46,569 shares of the Company's Common Stock were realized in 1997 compared to $2,000 similarly realized in 1996. Management anticipates that in 1998 cash and marketable securities will be employed for general corporate purposes including the opening of new offices, potential acquisitions of companies and other business opportunities as they may arise. The Company has an $8 million line of credit with US Bank, a division of First Bank Systems. The credit line provides funds for general business purposes as well as the acquisition of companies and is secured by substantially all of the Company's assets. The credit line contains various affirmative and negative covenants which require, among other things, maintenance of a certain level of working capital and a certain current ratio. The Company is in compliance with all requirements of the agreement. During 1997 the Company utilized the line of credit to acquire 415,000 shares of its Common Stock and borrowed $4 million on the line of credit. Proceeds from the Company's initial public offering were utilized to repay the borrowing in June 1997. At the end of 1997 there were no borrowings against the credit line. The credit line expires on June 1, 1998. Management anticipates that the credit line will be renewed in an amount suitable to meet its requirements upon or prior to expiration of the existing agreement. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," in June 1997. This statement establishes new standards for reporting and displaying comprehensive income in the financial statements. In addition to net income, comprehensive income includes charges or credits to equity that are not the result of transactions with shareholders. This statement is effective for fiscal years beginning after December 15, 1997. Adoption of this standard will only require additional financial statement disclosure detailing the Company's comprehensive income. In June 1997, FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes new standards for reporting information about operating segments in interim and annual financial statements. This statement is also effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact, if any, this statement will have on disclosures in the consolidated financial statements. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Many of the following important factors discussed below have been discussed in the 14 Company's prior filings with the Securities and Exchange Commission. Management of the Company wishes to caution readers that the following important factors, among others, could in the future cause the Company's actual results to differ from those expressed in any forward-looking statements made by, or on behalf of, the Company. RECRUITMENT AND RETENTION OF INFORMATION TECHNOLOGY PROFESSIONALS The Company's future success will depend in large part on its ability to attract, develop, motivate and retain highly skilled information technology ("IT") professionals, particularly project managers, consultants and instructors. Highly skilled IT professionals are in high demand and are likely to remain a limited resource for the foreseeable future. The Company competes for consultants and project managers with other consulting firms, software vendors and consumers of IT consulting services. The Company competes for instructors with other training service providers, software and hardware vendors and the in-house IT training departments of major corporations. There can be no assurance that the Company will be successful in hiring and retaining a sufficient number of IT professionals to staff its consulting projects and to meet demand for instructor-led classes. ABILITY TO MANAGE GROWTH AND INTEGRATE ACQUISITIONS The Company has experienced rapid growth that has placed, and will continue to place, significant demands on its management and other resources. The Company expects to continue to hire additional personnel, open new offices and make acquisitions. To manage its growth effectively, the Company must continue to improve its operational, financial and other management processes and systems, and to attract, develop, motivate and retain highly skilled IT professionals. In addition, the Company's success depends largely on management's ability to maintain high levels of employee utilization, project and instructional quality and competitive pricing for its services. Few of the Company's senior management previously have managed a business of the Company's size or have significant prior experience managing a public company. No assurance can be given that the Company will be successful in managing its growth. Since 1995 the Company has pursued an aggressive growth strategy by acquiring companies in complementary service, product and geographic markets. There can be no assurance that the Company will be able to integrate any acquisition successfully into its organization. The failure to integrate any of the Company's recent or future acquisitions successfully into the Company or the inability to achieve anticipated revenue and operating results during the integration process could have a material adverse effect on the Company's business, financial condition and results of operations. CUSTOMER CONCENTRATION The Company has derived, and believes that it may continue to derive, a significant portion of its revenue from a limited number of large clients. There can be no assurance that the volume of work performed for specific clients will be sustained from year to year, or that a major client in one year will engage the Company in a subsequent year. Any significant reduction in the scope of work performed for the Company's principal clients or a number of smaller clients, the failure of anticipated projects for current clients to materialize, or deferrals, modifications or cancellations of ongoing projects by current clients could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY VENDORS OF SOFTWARE TECHNOLOGY The Company relies on formal and informal relationships with key providers of software technology, in particular, Microsoft, Oracle, Lotus, Novell and Sun. The Company participates in a number of Microsoft, Oracle, Lotus, Novell and Sun programs that enable the Company to obtain early information about new software products and courseware, and to benefit from the increased credibility and enhanced reputation resulting from vendor accreditation. Any significant changes to the vendor sponsored programs in which the Company participates or any deterioration in the relationship between the Company and a key vendor could result in the loss of vendor certifications, a reduction in the number of client referrals or render actions which might adversely affect the Company's ability to compete successfully. 15 VARIABILITY OF QUARTERLY OPERATING RESULTS The Company's operations and related revenue and operating results historically have varied from quarter to quarter, and the Company expects these variations to continue. Factors causing such fluctuations have included and may include: the number, size and scope of consulting projects; the contractual terms and degree of completion of such projects; project delays; variations in utilization rates and average billing rates for consultants and project managers due to vacations, holidays and the integration of newly hired consultants; the inability of the Company to conduct as many four- and five- day courses due to national holidays and vacation schedules, particularly, in the fourth quarter; frequency of training classes and demand for training following new software product releases; variations in fill rates in training classes; integration of acquired entities; and general economic conditions. Because a significant percentage of the Company's expenses, particularly personnel costs and rent, are relatively fixed in advance of any particular quarter, shortfalls in revenue caused by these and other factors may cause significant variations in operating results in any particular quarter. PROJECT RISKS Most of the Company's consulting agreements permit the client to terminate an engagement without cause and without significant penalty upon 14 or fewer days' notice to the Company. Clients may from time to time terminate their agreements with the Company due to the Company's failure to meet their expectations or for other reasons. Additionally, contracts to perform services for the U.S. government may be subject to renegotiation. The termination or renegotiation of one or more engagements by the Company's clients could adversely affect revenue and operating results, damage the Company's reputation, and adversely affect its ability to attract new business. Additionally, the Company has undertaken and may in the future undertake fixed price consulting projects. From time to time the Company may establish a price or project schedule before the client's design specifications are completed. The Company's failure to accurately estimate the resources required for such projects or its failure to complete its contractual obligations in a manner consistent with the project plan upon which the fixed price/fixed schedule contract was based could have a material adverse effect on the profitability of such projects. GROWTH THROUGH ACQUISITIONS The Company intends to continue growing through strategic acquisitions of businesses that the Company believes will complement its operations. The success of the Company's plan to grow through acquisitions depends on, among other things, the Company's ability to (i) identify and acquire businesses on terms that management considers attractive, (ii) integrate acquired businesses into its organization; and (iii) retain the acquired businesses' key personnel and principal clients. Any future acquisitions would be accompanied by the risks commonly encountered in such transactions, including difficulties associated with assimilating the personnel and operations of the acquired business, the Company's inability to achieve expected financial results or strategic goals for the acquired business, the potential disruption of the Company's ongoing business, the diversion of significant management and other resources and the maintenance of uniform standards, controls, procedures and policies. There can be no assurance that the Company will be able to identify future acquisition candidates or to successfully overcome the risks and challenges encountered in completing and integrating future acquisitions. The Company's failure or inability to implement and manage its acquisition strategy could have a material adverse effect on the Company's business, financial condition, and results of operations. In addition, future acquisitions could require the Company to issue dilutive equity securities, incur debt or contingent liabilities, and amortize expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on the market for and the price of the Company's Common Stock. RELIANCE ON KEY PERSONNEL The Company's continuing success will depend in large part on the continued services of a number of key employees including Paul Song, its founder, President, Chief Executive Officer and Chairman. The loss of the 16 services of Mr. Song, certain of the Company's senior management or other key personnel could have a material adverse effect on the Company. The Company has entered into employment agreements containing non-competition, non- solicitation and non-disclosure clauses with all of its management, consultants and project managers and instructors, except Mr. Song. These contracts, however, do not guarantee that these individuals will continue their employment with the Company. In addition, there is no guarantee that the non-competition and non-solicitation provisions of these agreements would be enforced by a court if the Company were required to seek to enforce its rights thereunder. The loss of one or more of the Company's key employees to a current or potential competitor could result in the loss of existing or potential clients to such competitor adversely affecting revenues and operating income. Effective January 1, 1998, the Company terminated its "key man" life insurance policy in the amount of $2.0 million on the life of Mr. Song. INTERNATIONAL OPERATIONS A substantial portion of the Company's revenue is derived from its international operations. If the Company makes other international acquisitions in the future, an even larger portion of its revenues could be derived from its international operations. The Company faces certain risks inherent in conducting business internationally, such as unexpected changes in regulatory requirements, difficulties in staffing and managing foreign operations, differing employment laws and practices in foreign countries, longer payment cycles, seasonal reductions in business activity during the summer months in Europe and certain other parts of the world, and potentially adverse tax consequences. Any of these factors could adversely affect the success of the Company's international operations. There can be no assurance that such factors will not have a material adverse effect on the Company's international operations and, consequently, on the Company's consolidated financial condition and results or operations. The Company may also face risks from foreign currency fluctuations. To date the Company has not entered into any forward exchange contracts or other hedging activities in anticipation of foreign currency fluctuations, but it may do so in the future. COMPETITION The IT consulting industry and the IT training industry are generally regarded as separate industries, each of which is rapidly growing and highly competitive. Within each industry there are a large number of competitors, many of whom have significantly greater financial, technical, marketing and human resources and greater name recognition than the Company. The Company's principal competitors in the delivery of consulting services are the consulting vendors such as Oracle, and numerous international, national and regional IT consulting firms. The Company faces competition in the delivery of IT training services from the in-house IT departments of its prospective clients, companies such as International Business Machines and Hewlett- Packard, software vendors, other Microsoft ATECs, and independent international, national and regional training companies. The Company's software product, ARIS DFRAG, competes with system management tools distributed by BMC Software, Platinum Technology and Compuware. Although the Company believes few commercially available software products currently compete directly with the Company's other software product, NoetixViews, there can be no assurance that new competitive products will not be developed by Oracle, third-party software vendors or by in-house IT departments of the Company's current or potential clients. There can be no assurance that any future products will not achieve greater market acceptance than the Company's software products. Failure by the Company to compete successfully in the consulting or training market would have a material adverse effect on the Company's business, financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE The Company's success also depends in part on its ability to develop IT solutions that keep pace with continuing changes in technology, evolving industry standards and changing client preferences. This may require the Company to make substantial expenditures to develop new consulting services, course titles and courseware, to hire new consultants, project managers and instructors and to acquire new software and hardware. If the 17 Company is unable, for financial or other reasons, to make those expenditures, hire additional qualified personnel, or make the necessary acquisitions, the Company's ability to compete effectively may be materially and adversely affected. INTELLECTUAL PROPERTY RIGHTS The Company uses certain proprietary consulting and training methodologies, courseware, software applications and products, trademarks and service marks and other proprietary and intellectual property rights. The Company relies upon a combination of copyright, trademark and trade secret laws, as well as nondisclosure and other contractual arrangements, to protect these proprietary rights. The Company uses client licensing agreements and employee and third party nondisclosure and confidentiality agreements to limit access to and distribution of its proprietary information. There can be no assurance that the steps taken by the Company to protect its intellectual property rights will be adequate to deter misappropriation of such rights or that the Company will be able to detect unauthorized uses and take immediate or effective steps to enforce its rights. If substantial unauthorized uses of the Company's proprietary rights were to occur the Company's could be required to engage in costly and time-consuming litigation to enforce its rights. In addition, the Company does business in countries that do not provide protection or enforcement of intellectual property rights to the same extent as the United States, and on the Internet, which is not currently subject to comprehensive regulation. The Company develops custom software applications and methodologies, and training courses and methodologies for third-party software products. The training courses, methodologies, and courseware are owned by the Company through agreements with employees and subcontractors, but ownership of software applications developed for clients is often assigned to the client, with the Company retaining limited use licenses. The Company also develops software application tools in the course of its consulting projects. The Company generally seeks to retain significant ownership or marketing rights for adaptation and reuse in subsequent projects. Issues relating to the ownership of and rights to use training courses and methodologies, courseware, and software applications and other tools can be complicated and there can be no assurance that disputes will not arise that affect the Company's ability to resell or reuse such products and methodologies. There can be no assurance that the Company's competitors will not independently develop products or methodologies functionally similar to the Company's products and methodologies, or that third parties will not claim that the Company's current or future products, courseware or services infringe their proprietary rights. Although the Company believes that its products, courseware and services do not infringe on any third-party intellectual property rights, there can be no assurance that such a claim will not be asserted against the Company in the future or that, if asserted, any such claim will be defended successfully. CONTROL BY PRINCIPAL SHAREHOLDERS Paul Song, the Company's founder, President, Chief Executive Officer and Chairman, is the Company's single largest shareholder. Mr. Song's wife, Tina Song, is Vice President of Administration, directs Human Resources and Information Technology for the Company and is the Company's third largest shareholder. A family limited partnership controlled by Mr. and Mrs. Song is the Company's second largest shareholder. As of December 31, 1997, Mr. and Mrs. Song beneficially own 45.0521% of the Company's outstanding shares of Common Stock. As a result, Mr. and Mrs. Song will likely be able to control the affairs and management of the Company and the outcome of any matters requiring a shareholder vote (other than those matters for which a supermajority vote is required under Washington law or the Company's Amended and Restated Bylaws), including the election of the members of the Board of Directors. Such control could delay or prevent a change in control of the Company. Other members of Mr. Song's immediate family, including his brother, John Y. Song, Vice President of North America Education, own an aggregate of 220,000 shares of the Common Stock and options to purchase an additional 60,800 shares of Common Stock. POTENTIAL LIABILITY TO CLIENTS Many of the Company's engagements involve projects that are critical to the operations of its clients' businesses and provide benefits that may be difficult to quantify. Any failure in a client's information system 18 could result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. Although the Company generally attempts to limit contractually its liability for damages arising from negligent acts, errors, mistakes or omissions in rendering its services, there can be no assurance that the limitations of liability set forth in its service contracts will be enforceable or would otherwise protect the Company from liability for damages. The Company maintains general liability insurance coverage up to $6.0 million in the aggregate and coverage for errors and omissions up to $3.0 million in the aggregate. There can be no assurance, however, that such coverage will continue to be available on commercially reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the Company's insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against the Company that exceed available insurance coverage or changes in the Company's insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect the Company's business, financial condition and results of operations. POTENTIAL VOLATILITY OF STOCK PRICE The market for securities of early stage, small market capitalization companies is volatile, often as a result of factors unrelated to an issuer's operations. The Company believes factors such as quarterly variations in operating results, changes in relationships between the Company and certain key vendors of software products, general conditions in the IT industry or the industries in which the Company's clients compete and changes in earnings estimates by securities analysts could contribute to the volatility of the price of the Company's Common Stock and cause significant price fluctuations. These factors, as well as general economic conditions, could adversely affect the market price of the Common Stock. Furthermore, securities class action litigation against issuers is not uncommon, particularly following periods of volatility in the market price of an issuer's securities. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. Any adverse determination in such litigation could subject the Company to significant liabilities. ANTI-TAKEOVER PROVISIONS The Company is subject to anti-takeover provisions of Chapter 23B.17 of the Washington Business Corporation Act (the "WBCA") which prohibits, subject to certain exceptions, a merger, sale of assets or liquidation of a corporation involving a 20% shareholder unless determined to be at a fair price or approved by disinterested directors or disinterested shareholders. In addition, Chapter 23B.19 of the WBCA prohibits a corporation registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act") from engaging in certain significant transactions with a 10% shareholder. Significant transactions include, among others, a merger with or disposition of assets to the 10% shareholder. Further, the Company's Amended and Restated Articles of Incorporation (the "Restated Articles") provide for a classified Board of Directors with staggered, three-year terms. Also, the Board has the authority to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the preference and other rights thereof without any further vote or action by the Company's shareholders. The issuance of preferred stock, together with the effect of other anti-takeover provisions in the Restated Articles and under the WBCA, may have the effect of delaying, deferring or preventing a change in control of the Company and could limit the price that certain investors might be willing to pay in the future for the Common Stock. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The primary market risk to which ARIS' operations are exposed is the effects of changes in foreign currency exchange rates. Income from ARIS' foreign operations is frequently denominated in foreign currencies, thereby creating exposure to changes in exchange rates. This foreign currency exposure is monitored by the Company as an integral part of the Company's overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company's results. The effect of changes in exchange rates on ARIS' earnings has been small relative to other factors that also affect earnings, such as sales and operating margins. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE IN FORM 10-K - ------------------------------------------------------------------------------- Consolidated Income Statements--years ended December 31, 1995, 1996 and 1997 21 - ------------------------------------------------------------------------------- Consolidated Balance Sheets--December 31, 1996 and 1997 22 - ------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity--years ended December 31, 1995, 1996 and 1997 23 - ------------------------------------------------------------------------------- Consolidated Statements of Cash Flow--years ended December 31, 1995, 1996 and 1997 24 - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 25-39 - ------------------------------------------------------------------------------- Report of Price Waterhouse LLP, Independent Auditors 40
- -------------------------------------------------------------------------------- 20 ARIS CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995 1996 1997 Revenues, net: Consulting $9,725,000 $16,312,000 $29,999,000 Training 4,821,000 9,385,000 21,476,000 Software 205,000 1,201,000 3,656,000 ---------- ----------- ----------- Total revenues 14,751,000 26,898,000 55,131,000 ---------- ----------- ----------- Cost of sales: Consulting and training 7,176,000 13,353,000 25,460,000 Software 42,000 93,000 322,000 ---------- ----------- ----------- Total cost of sales 7,218,000 13,446,000 25,782,000 ---------- ----------- ----------- Gross profit 7,533,000 13,452,000 29,349,000 Selling, general and administrative expense 4,548,000 9,434,000 20,787,000 Amortization of intangible assets 4,000 118,000 380,000 Research and development expense 307,000 Acquisition expenses 347,000 428,000 ---------- ----------- ----------- Income from operations 2,981,000 3,246,000 7,754,000 ---------- ----------- ----------- Other income (expense): Investment income 57,000 89,000 280,000 Interest income, net 18,000 35,000 694,000 Other 40,000 (9,000) 1,000 ---------- ----------- ----------- 115,000 115,000 975,000 ---------- ----------- ----------- Income before income tax 3,096,000 3,361,000 8,729,000 Income tax expense 1,086,000 1,347,000 3,384,000 ---------- ----------- ----------- Net income $2,010,000 $ 2,014,000 $ 5,345,000 ========== =========== =========== Basic earnings per share $ 0.30 $ 0.28 $ 0.61 ========== =========== =========== Weighted average number of common shares outstanding 6,777,000 7,261,000 8,726,000 ========== =========== =========== Diluted earnings per share $ 0.29 $ 0.27 $ 0.57 ========== =========== =========== Weighted average number of common and common equivalent shares outstanding 7,012,000 7,403,000 9,444,000 ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 21 ARIS CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 1997 ASSETS ------ Current assets: Cash and cash equivalents $ 177,000 $ 9,388,000 Investments in marketable securities 1,396,000 15,464,000 Accounts receivable, net of allowance for doubtful accounts of $300,000 and $642,000 5,169,000 11,359,000 Consulting contracts in progress 428,000 618,000 Income tax receivable 186,000 Prepaid expenses and other assets 438,000 1,649,000 ----------- ----------- Total current assets 7,794,000 38,478,000 ----------- ----------- Property and equipment, net 2,517,000 5,397,000 ----------- ----------- Intangible and other assets, net 2,645,000 8,095,000 ----------- ----------- Total assets $12,956,000 $51,970,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 787,000 $ 2,331,000 Accrued payroll 902,000 2,077,000 Other accrued expenses 294,000 633,000 Notes payable 1,500,000 Deferred revenue 199,000 1,405,000 Income tax payable 51,000 Deferred income taxes 351,000 29,000 ----------- ----------- Total current liabilities 4,033,000 6,526,000 ----------- ----------- Deferred income taxes 713,000 526,000 ----------- ----------- Commitments and contingencies (Note 9): Shareholders' equity: Preferred stock; 5,000,000 shares authorized; none issued and outstanding -- -- Common stock, no par value; 100,000,000 shares au- thorized -- -- Additional paid-in-capital 1,943,000 37,504,000 Retained earnings 6,042,000 7,481,000 Net unrealized holding gain (loss) on investments 225,000 (63,000) Cumulative foreign currency translation adjustment (4,000) ----------- ----------- Total shareholders' equity 8,210,000 44,918,000 ----------- ----------- Total liabilities and shareholders' equity $12,956,000 $51,970,000 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 22 ARIS CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NET UNREALIZED CUMULATIVE COMMON HOLDING FOREIGN STOCK ADDITIONAL GAIN (LOSS) CURRENCY TOTAL SHARES PAID-IN- RETAINED ON TRANSLATION SHAREHOLDERS' ISSUED AMOUNT CAPITAL EARNINGS INVESTMENTS ADJUSTMENT EQUITY BALANCE AT DECEMBER 31, 1994 4,200,000 $ -- $ 14,000 $ 2,018,000 $ 84,000 $ 2,116,000 Shares issued in acquisition 1,400,000 263,000 263,000 Stock options exercised 1,191,000 64,000 64,000 Tax benefit related to stock options exercised 78,000 78,000 Net income 2,010,000 2,010,000 Unrealized holding gain on investments 111,000 111,000 --------- ----- ----------- ----------- --------- ----------- BALANCE AT DECEMBER 31, 1995 6,791,000 -- 419,000 4,028,000 195,000 4,642,000 Shares issued in acquisition 790,900 1,614,000 1,614,000 Stock redemption (40,000) (100,000) (100,000) Stock options exercised 14,000 2,000 2,000 Tax benefit related to stock options exercised 8,000 8,000 Net income 2,014,000 2,014,000 Unrealized holding gain on investments 30,000 30,000 --------- ----- ----------- ----------- --------- ----------- BALANCE AT DECEMBER 31, 1996 7,555,900 -- 1,943,000 6,042,000 225,000 8,210,000 Shares issued in initial public offering, net of offering costs 2,300,000 31,242,000 31,242,000 Shares and warrants issued in acquisitions 434,381 4,371,000 4,371,000 Stock redemption (415,000) (121,000) (3,906,000) (4,027,000) Stock options exercised 46,569 69,000 69,000 Unrealized holding loss on investments (63,000) (63,000) Realization of holding gain upon sale of investments (225,000) (225,000) Foreign currency translation adjustment $(4,000) (4,000) Net income 5,345,000 5,345,000 --------- ----- ----------- ----------- --------- ------- ----------- BALANCE AT DECEMBER 31, 1997 9,921,850 $ -- $37,504,000 $ 7,481,000 $ (63,000) $(4,000) $44,918,000 ========= ===== =========== =========== ========= ======= ===========
The accompanying notes are an integral part of these consolidated financial statements. 23 ARIS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 1996 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,010,000 $ 2,014,000 $ 5,345,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 201,000 661,000 1,627,000 (Gain) loss on sale of property and equipment (18,000) 6,000 Gain on sale of investments (280,000) Purchased research and development 307,000 Changes in assets and liabilities net of effects of acquisitions: (Increase) in accounts receivable (484,000) (1,548,000) (3,895,000) (Increase) in consulting contracts in progress (49,000) (408,000) (164,000) (Increase) decrease in income tax receivable (186,000) 186,000 (Increase) in prepaid expenses and other assets (36,000) (21,000) (933,000) Increase (decrease) in accounts payable (178,000) 140,000 (68,000) Increase in accrued expenses 116,000 704,000 377,000 Increase (decrease) in deferred revenue 124,000 (363,000) 654,000 Increase (decrease) in income taxes payable 320,000 (383,000) (101,000) Increase (decrease) in deferred taxes 196,000 (217,000) (160,000) ----------- ----------- ------------ Net cash provided by operating activities 2,202,000 706,000 2,588,000 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (381,000) (462,000) (32,436,000) Sales of investments 362,000 18,204,000 Purchase of property and equipment (911,000) (1,196,000) (2,165,000) Acquisition of businesses, net of cash acquired (112,000) (1,427,000) (1,726,000) Proceeds from sale of property and equipment 27,000 43,000 ----------- ----------- ------------ Net cash used in investing activities (1,377,000) (2,680,000) (18,123,000) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from initial public offering, net of offering costs 31,242,000 Stock options exercised 64,000 2,000 69,000 Repurchase of common stock (100,000) (4,027,000) Tax benefit related to stock options exercised 78,000 8,000 Payments on borrowings (500,000) (12,363,000) Proceeds from borrowings 1,500,000 9,825,000 ----------- ----------- ------------ Net cash provided by financing activities 142,000 910,000 24,746,000 ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 967,000 (1,064,000) 9,211,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 274,000 1,241,000 177,000 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,241,000 $ 177,000 $ 9,388,000 =========== =========== ============
See Note 14 for supplemental cash flow information. The accompanying notes are an integral part of these consolidated financial statements. 24 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND OPERATIONS ARIS Corporation (the Company) provides a range of information technology consulting services including database management, enterprise resource planning, custom applications development and packaged applications implementation and training to clients worldwide, with offices in Seattle and Bellevue, Washington; Beaverton, Oregon; Denver, Colorado; Dallas, Texas; Fairfax, Virginia; St. Petersburg, Florida, Bloomington, Minnesota; New York, New York; and Oxford, Birmingham and London, England. The Company also develops niche software programs which it has licensed in the United States and Europe. The Company utilizes the significant accounting policies summarized below in preparing its financial statements. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include short-term investments with an original maturity of three months or less. INVESTMENT SECURITIES The Company's investment securities at December 31, 1996 and 1997 are classified as available-for-sale and are recorded at fair value. Fair value is based upon quoted market prices. The increase or decrease in market value from period to period relating to available-for-sale marketable securities, net of deferred income tax, is included as a separate component of shareholders' equity. Cost of securities sold is determined using the specific identification method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to income as incurred. Additions, improvements and major replacements are capitalized. For financial reporting purposes, depreciation is provided using the straight-line method over the estimated useful lives of depreciable assets. Estimated useful lives of property and equipment range from three to eight years. INTANGIBLE ASSETS Intangible assets include the cost of business acquisitions allocated to capitalized software, non-compete agreements and goodwill which are amortized over approximately three years for capitalized software, 25 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) approximately two years for non-compete agreements and fifteen years for goodwill. Capitalized software amortization is computed as described below while the straight-line method is used for other intangible assets. The carrying value of intangible assets is assessed for any permanent impairment by evaluating the operating performance and future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of the expected future net cash flows is less than book value in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. SOFTWARE DEVELOPMENT COSTS Software development costs incurred in conjunction with product development are charged to product development expense until technological feasibility is established. Thereafter, through general release of product, all software product development costs are capitalized and reported at the lower of unamortized cost or net realizable value of each product. The establishment of technological feasibility and the on-going assessment of the recoverability of costs require considerable judgment by the Company with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life and changes in the software and hardware technology. After consideration of the above factors, the Company amortizes capitalized software costs at the greater of the amount computed using (a) the ratio of current revenues for a product to the total of current and anticipated future revenues, or (b) the straight-line method over the remaining estimated economic life of the product. RESEARCH AND DEVELOPMENT Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The costs of business acquisitions allocated to in- process research and development are expensed immediately. REVENUE RECOGNITION Time and Material Consulting Contracts The Company recognizes revenue as services are rendered. Fixed-price Consulting Contracts Revenues from fixed-price contracts are recognized on the percentage-of- completion method, measured by the cost incurred to date to estimated total costs for the contract. This method is used because management considers expended costs to be the best available measure of contract performance. Contract costs include all direct labor, material and any other costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. EDUCATION AND TRAINING Tuition revenue is recognized on the last day the class is held. 26 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SOFTWARE The Company accounts for software revenues in accordance with the American Institute of Certified Public Accountants' Statement of Position 91-1, Software Revenue Recognition. Revenues earned under software license agreements with end users are generally recognized when the software has been shipped, collectibility is probable, and there are no significant obligations remaining. The Company initially defers revenue on the sale of extended software service contracts which is then recognized on a straight-line basis over the life of the contract period. INCOME TAXES Provision for income taxes has been recorded in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the liability method of SFAS 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expenses amounted to $95,000, $80,000 and $193,000 in 1995, 1996 and 1997, respectively. FOREIGN CURRENCY TRANSLATIONS The financial statements of the Company's foreign subsidiary have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" (SFAS 52). Under the provisions of SFAS 52, all assets and liabilities in the balance sheet of the foreign subsidiary, whose functional currency is the U.K. Pound Sterling, are translated at year-end exchange rates, profit and loss accounts are translated at average exchange rates prevailing during the period and translation gains and losses are accumulated in a separate component of shareholders' equity. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents and other current assets and liabilities such as accounts receivable, accounts payable and accrued liabilities as presented in the consolidated financial statements approximates fair value based on the short-term nature of these instruments. Investments in marketable securities are carried at fair value in the accompanying consolidated balance sheet. STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation," which was effective for the Company beginning in 1996. Under the provisions of this Statement, employee stock-based compensation expense is measured using either the intrinsic-value method as prescribed by Accounting Principles Board Opinion No. 25 or the fair value method described in Statement No. 123. Companies choosing the intrinsic-value method are required to disclose the pro forma impact of the fair value method on net income. The Company has elected to continue accounting for its employee stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25. Stock-based awards granted to other than employees are valued at fair market value on the date of grant. 27 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NET INCOME PER SHARE Statement of Financial Accounting Standards No. 128 (SFAS 128) was issued in February 1997. This pronouncement modifies the calculation and disclosure of earnings per share and was adopted by the Company during 1997. Under the provisions of SFAS 128, basic earnings per share is calculated as income available to common stockholders divided by the weighted-average number of common shares outstanding during the periods. Diluted earnings per share is based on the weighted-average number of shares of common stock and common stock equivalents outstanding during the periods, including options and warrants computed using the treasury stock method. All earnings per share amounts from prior periods have been restated to reflect the adoption of SFAS 128. YEAR 2000 The Company has conducted a review of its data management systems and has determined that no significant modifications are necessary to existing systems to allow them to properly process data during year 2000 and thereafter. 2. ACQUISITIONS The Company has embarked upon an acquisition program which included the acquisition of one company during 1995, three companies during 1996 and four companies during 1997. All of these acquisitions have been accounted for by the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on management's estimates, arms-length negotiations with the sellers and in some cases, independent appraisals. The common stock issued as consideration in these acquisitions has been recorded at its estimated fair value at the date the acquisition was announced. The results of operations of the acquired companies have been included in consolidated results of operations of the Company from the date of the acquisitions. The following is a description of the terms of the various acquisitions: 1995 On January 1, 1995, the Company acquired the stock of Clarity, Inc., a training company based in Bellevue, Washington in exchange for 1,400,000 shares of the Company's common stock and cash. A summary of assets acquired, liabilities assumed and purchase price paid is as follows:
Consideration: Cash $117,000 Value of common stock 263,000 -------- $380,000 ========
The cost allocated to Clarity Inc.'s assets and liabilities at the date of the acquisition is as follows: Cash $ 5,000 Accounts receivable 300,000 Prepaid and other current assets 76,000 Goodwill 64,000 Property and equipment 185,000 Accounts payable and accrued liabilities (250,000) ---------
$ 380,000 =========
28 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1996 On May 1, 1996, the Company acquired the stock of SQLSoft, Inc., a training company based in Bellevue, Washington in exchange for 707,900 shares of the Company's common stock. On October 1, 1996, the Company acquired the assets and liabilities of SofTeach Corporation, a training company based in Denver, Colorado in exchange for 42,000 shares of the Company's common stock and a combination of notes payable and cash. On October 1, 1996, the Company acquired the stock of Noetix Corporation, a software development company which develops software modules which interface with Oracle database applications software in exchange for 40,000 shares of the Company's common stock and cash. A summary of assets acquired, liabilities assumed and purchase price paid for the 1996 acquisitions is as follows:
SQLSOFT, INC. SOFTEACH CORP. NOETIX CORP. Consideration: Cash $ 750,000 $ 835,000 Note Payable 500,000 Value of common stock $1,317,000 152,000 145,000 Acquisition Costs 26,000 ---------- ---------- ---------- $1,317,000 $1,402,000 $1,006,000 ========== ========== ==========
The cost allocated to the assets and liabilities at the date of the acquisition is as follows:
SQLSOFT, INC. SOFTEACH CORP. NOETIX CORP. Cash $ 60,000 $ 124,000 Accounts receivable 537,000 73,000 $ 273,000 Prepaid and other current assets 73,000 35,000 Intangible assets: Software technology--completed 384,000 Software technology--in progress (Charged to research and development expense) 307,000 Non-compete agreements 150,000 Goodwill 942,000 956,000 260,000 Property and equipment 464,000 226,000 9,000 Accounts payable and accrued liabilities (759,000) (12,000) (377,000) ---------- ---------- ---------- $1,317,000 $1,402,000 $1,006,000 ========== ========== ==========
1997 On February 28, 1997, the Company acquired the stock of Oxford Computer Group Limited (Oxford), a company that provides information technology consulting and training services with offices in Oxford, London and Birmingham in exchange for 280,000 shares of unregistered common stock. On October 1, 1997, the Company acquired the stock of Enterprise Computing Inc. (doing business as Buller Owens and Associates (Enterprise)), an information technology training company located in New York, 29 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) New York, in exchange for 62,531 shares of unregistered common stock, 20,844 stock purchase warrants and cash of $1,560,000. In connection with the acquisition of Enterprise, the Company entered into a $500,000 earn-out agreement with the former shareholders based on attainment of certain future financial goals. On November 1, 1997, the Company acquired the stock of Agiliti, Inc., an information technology training company located in Bloomington, Minnesota, in exchange for 50,941 shares of unregistered common stock. On November 1, 1997, the Company acquired the stock of Absolute!, Inc., an information technology training company located in Dallas, Texas, in exchange for 40,909 shares of unregistered common stock and cash of $100,000. In connection with the acquisition of Absolute!, the Company entered into a $500,000 earn-out agreement with the former shareholder based on attainment of certain future financial goals. A summary of assets acquired, liabilities assumed and purchase price paid for the 1997 acquisitions is as follows:
OXFORD ENTERPRISE AGILITI ABSOLUTE! Consideration: Cash $1,560,000 $100,000 Value of common stock $1,400,000 1,125,000 $950,000 709,000 Value of Warrrants 187,000 Acquisition costs 96,000 15,000 ---------- ---------- -------- -------- $1,496,000 $2,872,000 $965,000 $809,000 ========== ========== ======== ========
The cost allocated to the assets and liabilities at the date of the acquisition is as follows:
OXFORD ENTERPRISE AGILITI ABSOLUTE! Cash $ 5,000 $ 40,000 Accounts receivable 1,140,000 $ 365,000 $ 493,000 297,000 Prepaid and other current assets 337,000 39,000 70,000 8,000 Goodwill 1,095,000 2,672,000 1,066,000 902,000 Property and equipment 1,283,000 212,000 350,000 60,000 Notes payable (930,000) (76,000) Accounts payable and accrued liabilities (2,364,000) (416,000) (84,000) (422,000) ----------- ---------- ---------- --------- $ 1,496,000 $2,872,000 $ 965,000 $ 809,000 =========== ========== ========== =========
30 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the entities acquired in 1996 and 1997 had been acquired as of the beginning of the periods presented, including the impact of certain adjustments:
YEAR ENDED DECEMBER 31, 1995(1) 1996(2) 1997(3) Net sales $21,003,000 $43,235,000 $63,427,000 Net income $ 2,220,000 $ 2,079,000 $ 4,934,000 Basic earnings per share $ .29 $ .26 $ .55 Diluted earnings per share $ .28 $ .26 $ .51
- -------- (1) Adjusted to include the results of operations of SQLSoft, Inc., SofTeach Corporation and Noetix Corporation for the year ended December 31, 1995, including the impact of certain adjustments. (2) Adjusted to include the results of operations of SQLSoft, Inc., SofTeach Corporation and Noetix Corporation prior to acquisition and the results of operations of Oxford, Enterprise, Agiliti and Absolute! for the year ended December 31, 1996, including the impact of certain adjustments. (3) Adjusted to include the results of operations of Oxford, Enterprise, Agiliti and Absolute! prior to acquisition, including the impact of certain adjustments. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the years presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. The company recorded expenses associated with acquisition of businesses during 1996 and 1997 of $347,000 and $428,000, respectively. Costs were primarily for professional fees and expenditures to facilitate integration of business systems of acquired businesses with the Company following the mergers. Additional charges are expected to be recognized in subsequent reporting periods as businesses acquired during 1997 are further integrated. During 1996 the Company expensed $307,000 of in-process research and development costs following the acquisition of Noetix Corporation. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, 1996 1997 Computer equipment $2,528,000 $5,114,000 Furniture and fixtures 503,000 1,159,000 Software 157,000 250,000 Other 166,000 870,000 ---------- ---------- 3,354,000 7,393,000 Less: Accumulated depreciation (837,000) (1,996,000) ---------- ---------- $2,517,000 $5,397,000 ========== ==========
31 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. INTANGIBLE AND OTHER ASSETS Intangible and other assets consist of the following:
DECEMBER 31, 1996 1997 Goodwill $2,222,000 $ 7,957,000 Capitalized software costs 430,000 430,000 Non-compete agreements 150,000 150,000 Prepaids and other 403,000 1,828,000 ---------- ----------- 3,205,000 10,365,000 Less: Accumulated amortization (122,000) (621,000) ---------- ----------- 3,083,000 9,744,000 Less: Current portion (438,000) (1,649,000) ---------- ----------- Total noncurrent intangibles and other assets $2,645,000 $ 8,095,000 ========== ===========
5. INVESTMENTS Investments in marketable securities at December 31, 1996 and 1997 consist of mutual fund investments totaling $1,396,000 and investments in debt securities totaling $15,464,000, respectively. These investments have been classified as available-for-sale and, accordingly, the excess of fair value over cost, net of tax, has been included as a separate component of shareholders' equity at December 31, 1996 and 1997. The debt securities held at December 31, 1997 have maturities ranging from April 1998 to December 1998. 6. MAJOR CUSTOMERS During 1995 and 1996, the Company had consulting sales to one customer that aggregated 22% and 9%, respectively, of total revenue. Accounts receivable related to this customer were 22% and 7% of total accounts receivable at December 31, 1995 and 1996, respectively. No single customer accounted for more than 7% of total revenues in 1997. Prior to the Company's initial public offering described in Note 10, the Company qualified as a minority-owned enterprise under the Section 8(a) program administered by the U.S. Small Business Administration. Total Section 8(a) sales were $2,051,000 and $2,430,000 during 1995 and 1996, respectively. Subsequent to the initial public offering, the Company no longer qualifies under Section 8(a). 32 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. INCOME TAXES Income tax expense consists of the following:
YEAR ENDED DECEMBER 31, 1995 1996 1997 Current: Federal $ 763,000 $1,429,000 $3,023,000 State 40,000 110,000 328,000 Foreign 209,000 ---------- ---------- ---------- 803,000 1,539,000 3,560,000 ---------- ---------- ---------- Deferred: Federal 264,000 (204,000) (129,000) State 19,000 12,000 (19,000) Foreign (28,000) ---------- ---------- ---------- 283,000 (192,000) (176,000) ---------- ---------- ---------- Total tax expense $1,086,000 $1,347,000 $3,384,000 ========== ========== ==========
Pretax operating results of the Company's foreign subsidiary are income of $516,000 in 1997. The principal reasons for the variation from the customary relationship between income taxes at the statutory federal rate and that shown in the consolidated statements of income are as follows:
YEAR ENDED DECEMBER 31, 1995 1996 1997 Statutory federal income tax rate $1,053,000 $1,143,000 $2,968,000 Goodwill 1,000 17,000 66,000 State income taxes, net of federal income tax benefit 39,000 80,000 204,000 Purchased research and development 104,000 Nondeductible meals and entertainment 8,000 32,000 53,000 Other (15,000) (29,000) 93,000 ---------- ---------- ---------- $1,086,000 $1,347,000 $3,384,000 ========== ========== ==========
33 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Temporary differences which give rise to a significant portion of deferred tax assets and liabilities are as follows:
DECEMBER 31, 1996 1997 Adjustments to cash basis accounting for tax purposes $ 672,000 $553,000 Depreciation and amortization 333,000 300,000 Unrealized gain on marketable securities 124,000 Intangible assets 106,000 Other 1,000 ---------- -------- Gross deferred tax liabilities 1,130,000 959,000 ---------- -------- Bad debt allowance 8,000 180,000 Accrued vacation and bonuses 39,000 76,000 Research and development credit 19,000 Unrealized loss on marketable securities 40,000 NOL carry-forward 108,000 ---------- -------- Gross deferred tax assets 66,000 404,000 ---------- -------- $1,064,000 $555,000 ========== ========
8. DEBT At December 31, 1997, the Company had an $8,000,000 line of credit which is collateralized by substantially all of the Company's assets. All of this line was available at December 31, 1997. Borrowings against the line of credit will bear interest at the lender's prime rate. The amounts outstanding at December 31, 1996 under the Company's line of credit and the notes payable were repaid during 1997 with proceeds from the Company's initial public offering. 9. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company rents all its office space under non-cancelable operating leases with initial terms in excess of one year. Future minimum rental commitments under operating leases for years ending December 31 are as follows: 1998 $1,759,000 1999 1,490,000 2000 1,492,000 2001 1,373,000 2002 933,000 Thereafter 597,000 ---------- $7,644,000 ==========
Rent expense for 1995, 1996 and 1997 was $253,000, $702,000 and $1,778,000, respectively. Subsequent to year end the Company entered into an agreement to purchase an unfinished building for approximately $4,300,000. Management estimates that the Company will invest an additional $800,000 to complete the building. The building will serve as the corporate headquarters. 34 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) LEGAL PROCEEDINGS The Company is involved in certain legal proceedings that have arisen in the normal course of business. Based on the advice of legal counsel, management does not anticipate that these matters will have a material effect on the Company's consolidated financial position or results of operations. 10. SHAREHOLDERS' EQUITY In June 1997, ARIS completed an initial public offering of 2,300,000 shares of common stock with net proceeds of approximately $31,242,000. In November 1997, the Company adopted the ARIS Corporation 1998 Employee Stock Purchase Plan (the Stock Purchase Plan), which permits employees of the Company to purchase common stock through payroll deductions at 85% of market value each six months beginning January 1 and July 1. All full-time employees of the Company are eligible to participate in the Stock Purchase Plan. An aggregate of 300,000 shares of common stock has been authorized for issuance under the Stock Purchase Plan. No shares were purchased as of December 31, 1997. 11. EARNINGS PER SHARE The difference between the weighted-average number of common shares outstanding used to calculate basic earnings per share and the weighted- average number of common and common equivalent shares outstanding used to calculate diluted earnings per share is the incremental shares attributed to outstanding options and warrants to purchase common stock computed using the treasury stock method.
YEAR ENDED DECEMBER 31, 1995 1996 1997 Weighted-average number of common shares outstanding 6,777,000 7,261,000 8,726,000 --------- --------- --------- Effect of dilutive securities: Warrants 3,215 Options 235,000 142,000 714,785 --------- --------- --------- 235,000 142,000 718,000 --------- --------- --------- Weighted-average number of common and common equivalent shares outstanding 7,012,000 7,403,000 9,444,000 ========= ========= =========
Options to purchase 50,100 shares of common stock at prices ranging from $23.75 to $31.38 per share were outstanding during the second half of 1997 but were not included in the computation of diluted earnings per share for 1997 because the options' exercise price was greater than the average market price of the common shares. The options, which expire in 2007, were still outstanding at December 31, 1997. 12. STOCK OPTIONS AND WARRANTS Prior to January 1995, the Company from time to time granted non-qualified stock options to key employees. These grants were not part of any formal plan. In January 1995, the Company adopted the ARIS Corporation 1995 Stock Option Plan (the 1995 Plan) which provides for the granting of qualified or non- qualified stock options to employees, directors, officers and certain non- employees of the Company as determined by the Plan Administrator. The Company authorized 35 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1,600,000 shares of its common stock for issuance under the 1995 Plan. The date of grant, option price, vesting period and other terms specific to options granted under the 1995 Plan are to be determined by the Plan Administrator. The option price for stock options granted is based on the fair market value of the Company's stock on the date of grant. Options granted under the 1995 Plan expire seven years from the date of grant and vest over periods of up to four years. The Company ended grants under the 1995 Plan in March 1997. In March 1997, the Company adopted the ARIS Corporation 1997 Stock Option Plan (the 1997 Plan) which provides for the granting of qualified or non- qualified stock options to employees, directors, officers and non-employee directors of the Company as determined by the Plan Administrator. The Company authorized 2,000,000 shares of its common stock for issuance under the 1997 Plan, subject to certain adjustments, reduced by the number of shares that have been granted and have not subsequently become available for grant under the 1995 Plan. The 1997 Plan provides for automatic, non-discretionary grants of 5,000 non-qualified stock options to non-employee directors for each year of service. For all other grants under the 1997 Plan, the date of grant, option price, vesting period and other terms specific to options granted under the 1997 Plan are to be determined by the Plan Administrator. The option price for stock options granted is based on the fair market value of the Company's stock on the date of grant. Options granted under the 1997 Plan expire ten years from the date of grant and vest over periods of up to four years. In connection with the acquisition of Enterprise as discussed in Note 2, the Company issued 20,844 warrants with an exercise price of $23.988 and a fair value of $8.95 during 1997. Additionally, during 1997 the Company issued 4,000 warrants with an exercise price of $10.00 to certain consultants of the Company. A summary of the activity for non-qualified stock options granted prior to 1995, the 1995 Stock Option Plan, and the 1997 Stock Option Plan is presented below:
1995 1996 1997 --------------------- ------------------ -------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE Outstanding at beginning of year 1,205,000 $0.05 134,000 $0.30 354,000 $ 2.12 Granted 120,000 0.34 262,000 2.79 1,255,000 11.32 Exercised (1,191,000) 0.05 (14,000) 0.09 (47,000) 1.47 Forfeited (28,000) 0.78 (95,000) 7.98 ---------- ------- --------- Outstanding at end of year 134,000 0.30 354,000 2.12 1,467,000 9.63 ========== ======= ========= Options exercisable at year-end 111,000 .029 118,000 .067 162,000 1.10 ========== ======= ========= Weighted-average fair value of options granted during the year $0.08 $0.50 $4.81
The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE $ .19 - $ 3.62 281,000 5.19 $ 1.74 162,000 $1.10 $ 5.00 - $ 9.40 831,000 6.23 $ 6.66 -- -- $13.00 - $31.38 355,000 9.71 $22.79 -- --
36 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for stock options issued to employees. Had compensation cost for the Plans been determined based upon the fair value at the grant date consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's net income and net income per share would have been as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 ---------- ---------- ---------- Net income $2,008,000 $1,993,000 $4,937,000 Basic earnings per share .30 .27 .57 Diluted earnings per share .29 .27 .52
The fair value of the options granted was calculated using an option-pricing model with the following assumptions: dividend yield of zero percent, volatility of zero percent for periods prior to the initial public offering and a volatility of 59.32% for the post-initial public offering period, risk free interest rate ranging from 5.36% to 7.05%, and an expected life of 4.75 years. 13. PROFIT SHARING PLAN The Company maintains a qualified defined contribution profit sharing 401(k) plan which covers full time employees with one month of service. Employer contributions to the plan are discretionary. There were no employer contributions to the plan for 1995, 1996 or 1997. 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES The Company paid interest of $3,000, $34,000 and $144,000 during 1995, 1996 and 1997, respectively. The Company paid $423,000, $2,123,000 and $3,320,000 in income taxes during 1995, 1996 and 1997, respectively. As more fully described in Note 2, the Company acquired SQLSoft, Inc., SofTeach Corporation, Noetix Corporation, Oxford, Enterprise, Agiliti and Absolute! in exchange for a combination of stock, cash and notes payable. 15. OPERATING BUSINESS GROUPS The Company is engaged in three distinct businesses consisting of database consulting services, information technology training and software sales. Total revenue by segment represents sales to unaffiliated customers. Inter-segment sales are not material. Operating profit represents total revenue less operating expenses. In computing operating profit none of the following items has been added or deducted: general corporate expenses, interest income or expense or income taxes. Identifiable assets are those assets used in the operations of each industry segment. Corporate assets primarily consist of cash, investments and certain prepaid expenses. 37 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Summarized financial information by business group for 1995, 1996 and 1997 is as follows:
CONSULTING TRAINING SOFTWARE GROUP GROUP GROUP CORPORATE TOTAL 1995: Revenue $ 9,725,000 $ 4,821,000 $ 205,000 $14,751,000 Operating profit $ 3,645,000 $ 1,161,000 $ (22,000) $(1,803,000) $ 2,981,000 Identifiable assets $ 2,740,000 $ 1,189,000 $ 16,000 $ 2,898,000 $ 6,843,000 Depreciation and amorti- zation $ 58,000 $ 127,000 $ 4,000 $ 12,000 $ 201,000 Capital expenditures $ 201,000 $ 500,000 $ 6,000 $ 204,000 $ 911,000 1996: Revenue $16,312,000 $ 9,385,000 $1,201,000 $26,898,000 Operating profit $ 3,884,000 $ 1,381,000 $ (325,000) $(1,694,000) $ 3,246,000 Identifiable assets $ 5,437,000 $ 3,880,000 $1,659,000 $ 1,980,000 $12,956,000 Depreciation and amorti- zation $ 26,000 $ 439,000 $ 68,000 $ 128,000 $ 661,000 Capital expenditures $ 28,000 $ 1,001,000 $ 31,000 $ 136,000 $ 1,196,000 1997: Revenue $29,999,000 $21,476,000 $3,656,000 $55,131,000 Operating profit $ 7,805,000 $ 3,041,000 $ 990,000 $(4,082,000) $ 7,754,000 Identifiable assets $ 7,842,000 $15,566,000 $2,193,000 $26,369,000 $51,970,000 Depreciation and amorti- zation $ 79,000 $ 1,128,000 $ 245,000 $ 175,000 $ 1,627,000 Capital expenditures $ 380,000 $ 1,411,000 $ 105,000 $ 269,000 $ 2,165,000
16. GEOGRAPHIC SEGMENT INFORMATION Major operations outside the United States comprise Oxford, which was purchased by the Company in 1997. Certain information regarding operations in this geographic segment is presented in the table below. Intercompany sales between Oxford and ARIS are not material.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 ------------------------------------ UNITED STATES EUROPE TOTAL Net sales $45,868,000 $9,263,000 $55,131,000 Operating profit $ 7,192,000 $ 562,000 $ 7,754,000 Identifiable assets $47,513,000 $4,457,000 $51,970,000
38 ARIS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 17. QUARTERLY INFORMATION (UNAUDITED)
1996 Q1 Q2 Q3 Q4 ---- -- -- -- -- Net sales $ 4,427,000 $ 6,274,000 $ 7,135,000 $ 9,062,000 Gross profit 2,246,000 3,260,000 3,433,000 4,513,000 Net income 506,000 789,000 630,000 89,000 Basic earnings per share .07 .11 .08 .01 Diluted earnings per share .07 .11 .08 .01 1997 Q1 Q2 Q3 Q4 ---- -- -- -- -- Net sales $10,409,000 $13,507,000 $14,582,000 $16,633,000 Gross profit 5,460,000 7,248,000 7,843,000 8,798,000 Net income 1,044,000 1,303,000 1,587,000 1,411,000 Basic earnings per share .14 .17 .16 .14 Diluted earnings per share .13 .16 .15 .13
18. SUBSEQUENT EVENT On February 28, 1998, the Company completed a merger with Barefoot Computer Training Limited, a company that provides information technology training services in London, England. Under the terms of the merger, to be accounted for as a pooling of interests, the Company issued 278,611 shares of its common stock in exchange for all of the outstanding shares of Barefoot common stock. All prior periods will be restated to give effect to the merger. Combined revenues, net income, basic earnings per share and diluted earnings per share for the year ended December 31, 1996 were $32,231,000, $2,197,000, $.30 and $.30, respectively; combined revenues, net income, basic earnings per share and diluted earnings per share for the year ended December 31, 1997 were $62,530,000, $5,769,000, $.66 and $.61, respectively. This pro forma financial information is provided for comparative purposes only and may not be indicative of the results to be expected in the future. 39 ARIS CORPORATION REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of ARIS Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of ARIS Corporation and its subsidiaries at December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Seattle, Washington January 28, 1998, except Note 18 which is February 28, 1998 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure. PART III Part III is incorporated herein by reference from the Company's definitive proxy statement issued in connection with the Company's 1998 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the Company's 1997 fiscal year. Certain information regarding the executive officers of the Company is set forth in Part I of this Report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: (1) Financial Statements--all consolidated financial statements of the Company as set forth under Item 8 of this Report. (2) Financial Statement Schedule--see index on page 44 of this Report. The independent auditor's report with respect to the financial statement schedules appears on page 43 of this Report. All other financial statements and schedules not listed are omitted because either they are not applicable or not required, or the required information is included in the consolidated financial statements. (3) Exhibits--see Exhibit index. (b) Reports on Form 8-K: A current report on Form 8-K was filed with the Securities and Exchange Commission on September 26, 1997, in connection with the acquisition of Enterprise Computing Inc. An amended current report on Form 8-K/A was filed with the SEC on November 25, 1997, to include the financial statements in connection with the acquisition of Enterprise Computing Inc. 41 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARIS CORPORATION /s/ Paul Y. Song By: _________________________________ Paul Y. Song Chairman of the Board, Chief Executive Officer and President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Paul Y. Song and Thomas W. Averill, or either of them, such person's true and lawful attorneys-in-fact and agents, with full power of substitution, and resubstitution, for such person and in such person's name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as such person might or could do in person, hereby ratify and confirming all that said attorneys-in-fact and agents, or any substitute or substitutes of any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on the 24th day of March, 1998.
SIGNATURE TITLE /s/ Paul Y. Song Chairman of the Board, Chief Executive ___________________________ Officer and President (Principal Executive Paul Y. Song Officer) /s/ Thomas W. Averill Vice President, Finance and Chief Financial ___________________________ Officer (Principal Financial and Thomas W. Averill Accounting Officer) /s/ Kendall W. Kunz Senior Vice President, North America and ___________________________ Director Kendall W. Kunz /s/ Bruce R. Kennedy Director ___________________________ Bruce R. Kennedy /s/ Kenneth A. Williams Director ___________________________ Kenneth A. Williams
42 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of ARIS Corporation Our audits of the consolidated financial statements referred to in our report dated January 28, 1998 appearing on page 28 of the 1997 Annual Report to Shareholders of ARIS Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Price Waterhouse LLP Seattle, Washington January 28, 1998 43 INDEX TO FINANCIAL STATEMENT SCHEDULE
SCHEDULE ----------- Schedule II Valuation and Qualifying Accounts and Reserves Exhibit 99.1
44 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 2.1 Agreement and Plan of Merger dated September 13, 1997, among (C) the Company, Enterprise Computing Inc., d/b/a Buller Owens & Associates and each of the stockholders of Enterprise Computing Inc. (Exhibit 2.1) 3.1 Amended and Restated Articles of Incorporation. (Exhibit 3.1) (A) 3.2 Amended and Restated Bylaws. (Exhibit 3.2) (A) 4.1 Articles IV and V of the Amended and Restated Articles. (A) (Exhibit 4.1) 4.2 Articles II, IV, VI, VII, IX, X and XI of the Amended and (A) Restated Bylaws. (Exhibit 4.2) 10.1 Applied Relational Information Systems, Inc. 1995 Stock Option (A) Plan. (Exhibit 10.1) + 10.2 ARIS Corporation 1997 Stock Option Plan. (Exhibit 10.2) + (A) 10.3 ARIS Corporation 1998 Employee Stock Purchase Plan. (Exhibit (B) 99.1) + 10.4 Employment Agreement dated July 22, 1992 between the Company (A) and Kendall W. Kunz. (Exhibit 10.4) + 10.5 Employment Agreement effective as of December 31, 1994 between (A) the Company and Jeffrey W. Gilles. (Exhibit 10.5) + 10.6 Employment Agreement dated February 11,1991 between the Company (A) and John Y. Song. (Exhibit 10.6) + *10.7 Form of Indemnification Agreement for Directors and Officers + 10.8 Summary of Key Person Insurance Policy dated February 13, 1996, (A) written by New York Life Insurance Company, owned by the Company, naming Paul Y. Song as the insured. (Exhibit 10.7) 10.9 Summary of Insurance held by the Company prepared by Acordia (A) Northwest, Inc. on March 10, 1997. (Exhibit 10.8) 10.10 Credit Agreement between the Company and U.S. Bank of (A) Washington, National Association, dated March 14, 1997. (Exhibit 10.9) 10.11 Registration Rights Agreement dated as of February 28, 1997 by (A) and between the Company and certain holders of Common Stock. (Exhibit 10.10) 10.12 Registration Rights Agreement dated as of February 28, 1997 by (A) and between the Company and Charles Henderson Cunningham. (Exhibit 10.11) 10.13 Promissory Note in the amount of $500,000 dated September 30, (A) 1996 by the Company, as Maker, and SofTeach Corporation, as Holder. (Exhibit 10.12) 10.14 Promissory Note in the amount of $1,240,800 dated October 1, (A) 1996 by ARIS Software, Inc. as Maker, and the Company, as Holder. (Exhibit 10.13) 10.15 Promissory Note Intercompany Loan dated October 1, 1996 by ARIS (A) Software, Inc. as Maker, and the Company as Holder. (Exhibit 10.14) *10.16 Purchase and Sale Agreement dated as of December 19, 1997 between Vangard Management Company, Jeff Foushee, Lock Anderson and Richard Barker and the Company. 10.17 Office Building Lease dated May 5, 1994 between the Company, as (A) tenant and John C. Radovich, as landlord, for the administrative offices located at Fort Dent One, as amended. (Exhibit 10.15) 10.18 Agreement for the sale and purchase of the entire issued share (A) capital of Oxford Computer Group Limited dated February 14, 1997, by and among the Company and the Shareholders of Oxford Computer Group Limited. (Exhibit 10.35) 10.19 Sun Microsystems Educational Services U.S. Strategic Alliance (A) Agreement by and between SunService, a division of Sun Microsystems Inc. and the Company. (Exhibit 10.36) 10.20 Microsoft vendor contracts (Exhibit 10.37) (A) 10.21 Oracle vendor contracts (Exhibit 10.38) (A) *21.1 List of the Company's Subsidiaries.
45
EXHIBIT NO. DESCRIPTION ------- ----------- *23.1 Consent of Price Waterhouse L.L.P., independent certified public accountants for the Company. **24.1 Power of Attorney (Included in the signature page to this Annual Report on Form 10-K). *27.1 Financial Data Schedule *99.1 Schedule II--Valuation and Qualifying Accounts and Reserves.
- -------- + Management contract or compensatory plan * Included herewith ** See signature page. (A) Incorporated by reference to designated exhibit included with the Company's Registration Statement on Form S-1, registration number 333- 25409. (B) Incorporated by reference to designated exhibit included with the Company's Registration Statement on Form S-8, registration number 333- 40923. (C) Incorporated by reference to designated exhibit included with the Company's Current Report on Form 8-K dated September 24, 1997 (SEC File number 000-22649.) 46 EX-10.7 2 FORM OF IDEMNIFICATION AGREEMENT EXHIBIT 10.7 ARIS CORPORATION INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT, dated as of _____________, 199__, between ARIS CORPORATION, a Washington corporation (the "Company"), and __________________, a director and/or officer of the Company (the "Indemnitee"). RECITALS A. Indemnitee is a director and/or officer of the Company and in such capacity is performing valuable services for the Company. B. The Company and Indemnitee recognize the difficulty in obtaining directors' and officers' liability insurance, the significant cost of such insurance and the general reduction in the coverage of such insurance. C. The Company and Indemnitee further recognize the substantial increase in litigation subjecting directors and officers to expensive litigation risks at the same time that such liability insurance has been severely limited. D. The shareholders of the Company have adopted bylaws (the "Bylaws") providing for the indemnification of the directors, officers, agents and employees of the Company to the full extent permitted by the Business Corporation Law of Washington (the "Statute"). E. The Bylaws and the Statute specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between the Company and the members of its Board of Directors and its officers with respect to indemnification of such directors and officers. F. In order to induce Indemnitee to serve, or to continue to serve, as a director and/or officer of the Company, the Company has agreed to enter into this Agreement with Indemnitee. AGREEMENTS In consideration of the recitals above, the mutual covenants and agreements herein contained, and Indemnitee's continued service as a director and/or officer after the date hereof, the parties to this Agreement agree as follows: 1. INDEMNITY OF INDEMNITEE 1.1. SCOPE The Company agrees to hold harmless and indemnify Indemnitee to the full extent permitted by law, notwithstanding that such indemnification is not specifically authorized by this Agreement, the Company's Articles of Incorporation, the Bylaws, the Statute or otherwise. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule regarding the right of a Washington corporation to indemnify a member of its board of directors or an officer, such changes, to the extent that they would expand Indemnitee's rights hereunder, shall be within the purview of Indemnitee's rights and the Company's obligations hereunder, and, to the extent that they would narrow Indemnitee's rights hereunder, shall be excluded from this Agreement; provided, however, that any change that is required by applicable laws, statutes or rules to be applied to this Agreement shall be so applied regardless of whether the effect of such change is to narrow Indemnitee's rights hereunder. 1.2. NONEXCLUSIVITY The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders or disinterested directors, the Statute, or otherwise, whether as to action in Indemnitee's official capacity or otherwise. 1.3. INCLUDED COVERAGE If Indemnitee was or is made a party, or is threatened to be made a party, to or is otherwise involved (including, without limitation, as a witness) in any Proceeding (as defined below), the Company shall hold harmless and indemnify Indemnitee from and against any and all losses, claims, damages, liabilities or expenses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid in settlement and other expenses incurred in connection with such Proceeding) (collectively, "Damages"). 1.4. DEFINITION OF PROCEEDING For purposes of this Agreement, "Proceeding" shall mean any actual, pending or threatened action, suit, claim or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, in which Indemnitee is, was or becomes involved by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company or that, being or having been such a director, officer, employee or agent, Indemnitee is or was serving at the request of the Company as a director, officer, employee, trustee or agent of another corporation or of a partnership, joint venture, trust or other enterprise (collectively a "Related Company"), including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action (or inaction) by Indemnitee in an official capacity as a director, officer, employee, trustee or agent or in any other capacity while serving as a director, officer, employee, trustee or agent; provided, however, that, except with respect to an action to enforce the provisions of this Agreement, "Proceeding" shall not include any action, suit, claim or proceeding instituted by or at the direction of Indemnitee unless such action, suit, claim or proceeding is or was authorized by the Company's Board of Directors. 1.5. DETERMINATION OF ENTITLEMENT In the event that a determination of Indemnitee's entitlement to indemnification is required pursuant to Section 23B.08.550 of the Statute or a successor statute or pursuant to other applicable law, the appropriate decision- maker shall make such determination; provided, however, that Indemnitee shall initially be presumed in all cases to be entitled to indemnification, that Indemnitee may establish a conclusive presumption of any fact necessary to such a determination by delivering to the Company a declaration made under penalty of perjury that such fact is true and that, unless the Company shall deliver to Indemnitee written notice of a determination that Indemnitee is not entitled to indemnification within twenty (20) days after the Company's receipt of Indemnitee's initial written request for indemnification, such determination shall conclusively be deemed to have been made in favor of the Company's provision of indemnification and Company hereby agrees not to assert otherwise. 1.6. SURVIVAL The indemnification provided under this Agreement shall apply to any and all Proceedings, notwithstanding that Indemnitee has ceased to be a director, officer, employee, trustee or agent of the Company or a Related Company. 2. EXPENSE ADVANCES 2.1. GENERALLY The right to indemnification of Damages conferred by Section 1 shall include the right to have the Company pay Indemnitee's expenses in any Proceeding as such expenses are incurred and in advance of such Proceeding's final disposition (such right is referred to hereinafter as an "Expense Advance"). 2.2. CONDITIONS TO EXPENSE ADVANCE The Company's obligation to provide an Expense Advance is subject to the following conditions: 2.2.1 UNDERTAKING If the Proceeding arose in connection with Indemnitee's service as a director or an officer of the Company (and not in any other capacity in which Indemnitee rendered service, including service to any Related Company), then Indemnitee or his representative shall have executed and delivered to the Company an undertaking, which need not be secured and shall be accepted without reference to Indemnitee's financial ability to make repayment, by or on behalf of Indemnitee to repay all Expense Advances if and to the extent that it shall ultimately be determined by a final, unappealable decision rendered by a court having jurisdiction over the parties and the question that Indemnitee is not entitled to be indemnified for such Expense Advance under this Agreement or otherwise. 2.2.2. COOPERATION Indemnitee shall give the Company such information and cooperation as it may reasonably request and as shall be within Indemnitee's power. 2.2.3. AFFIRMATION Indemnitee shall furnish, upon request by the Company and if required under applicable law, a written affirmation of Indemnitee's good faith belief that any applicable standards of conduct have been met by Indemnitee. 3. PROCEDURES FOR ENFORCEMENT 3.1. ENFORCEMENT In the event that a claim for indemnity, an Expense Advance or otherwise is made hereunder and is not paid in full within sixty days (twenty days for an Expense Advance) after written notice of such claim is delivered to the Company, Indemnitee may, but need not, at any time thereafter bring suit against the Company to recover the unpaid amount of the claim (an "Enforcement Action"). 3.2. PRESUMPTIONS IN ENFORCEMENT ACTION In any Enforcement Action the following presumptions (and limitation on presumptions) shall apply: (a) The Company shall conclusively be presumed to have entered into this Agreement and assumed the obligations imposed on it hereunder in order to induce Indemnitee to continue as a director and/or officer of the Company; (b) Neither (i) the failure of the Company (including the Company's Board of Directors, independent or special legal counsel or the Company's shareholders) to have made a determination prior to the commencement of the Enforcement Action that indemnification of Indemnitee is proper in the circumstances nor (ii) an actual determination by the Company, its Board of Directors, independent or special legal counsel or shareholders that Indemnitee is not entitled to indemnification shall be a defense to the Enforcement Action or create a presumption that Indemnitee is not entitled to indemnification hereunder; and (c) If Indemnitee is or was serving as a director, officer, employee, trustee or agent of a corporation of which a majority of the shares entitled to vote in the election of its directors is held by the Company or in an executive or management capacity in a partnership, joint venture, trust or other enterprise of which the Company or a wholly owned subsidiary of the Company is a general partner or has a majority ownership, then such corporation, partnership, joint venture, trust or enterprise shall conclusively be deemed a Related Company and Indemnitee shall conclusively be deemed to be serving such Related Company at the request of the Company. 3.3. ATTORNEYS' FEES AND EXPENSES FOR ENFORCEMENT ACTION In the event Indemnitee is required to bring an Enforcement Action, the Company shall indemnify and hold harmless Indemnitee against all of Indemnitee's fees and expenses in bringing and pursuing the Enforcement Action (including attorneys' fees at any stage, including on appeal); provided, however, that the Company shall not be required to provide such indemnity for such attorneys' fees or expenses if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such Enforcement Action was not made in good faith or was frivolous. 4. LIMITATIONS ON INDEMNITY; MUTUAL ACKNOWLEDGMENT 4.1. LIMITATION ON INDEMNITY No indemnity pursuant to this Agreement shall be provided by the Company: (a) On account of any suit in which a final, unappealable judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto; or (b) For Damages that have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company. 4.2. MUTUAL ACKNOWLEDGMENT The Company and Indemnitee acknowledge that, in certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying Indemnitee under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Furthermore, Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 5. NOTIFICATION AND DEFENSE OF CLAIM 5.1. NOTIFICATION Promptly after receipt by Indemnitee of notice of the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission so to notify the Company will not relieve the Company from any liability which it may have to Indemnitee under this Agreement unless and only to the extent that such omission can be shown to have prejudiced the Company's ability to defend the Proceeding. 5.2. DEFENSE OF CLAIM With respect to any such Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company may participate therein at its own expense; (b) The Company, jointly with any other indemnifying party similarly notified, may assume the defense thereof, with counsel satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof, the Company shall not be liable to Indemnitee under this Agreement for any legal or other expenses (other than reasonable costs of investigation) subsequently incurred by Indemnitee in connection with the defense thereof unless (i) the employment of counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such action, or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in (ii) above; (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent; (d) The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent; and (e) Neither the Company nor Indemnitee shall unreasonably withhold its, his or her consent to any proposed settlement. 6. SEVERABILITY Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable, as provided in this Section 6. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 7. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION (a) This Agreement shall be interpreted and enforced in accordance with the laws of the state of Washington. (b) This Agreement shall be binding upon Indemnitee and upon the Company, its successors and assigns, and shall inure to the benefit of Indemnitee, Indemnitee's heirs, personal representatives and assigns and to the benefit of the Company, its successors and assigns. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. ARIS CORPORATION By ------------------------------------------ Paul Song, President and Chief Executive Officer INDEMNITEE: -------------------------------------------- EX-10.16 3 PURCHASE AND SALE AGREEMENT EXHIBIT 10.16 PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement ("Agreement") is made as of this 19th day of December 1997, by and between ARIS CORPORATION, a Washington corporation ("Purchaser") and VANGARD MANAGEMENT COMPANY, JEFF FOUSHEE, LOCH ANDERSON and RICHARD BARKER (collectively referred to herein as "Seller"). This is an agreement to purchase and sell certain real and personal property as provided herein. 1. Sale of the Property. Seller agrees to sell and Purchaser -------------------- agrees to purchase on the terms hereafter stated all of the Seller's right, title and interest in and to the following described real and personal property (collectively referred to herein as the "Property"): 1.1 Real Property. All the land and related improvements ------------- commonly known as Lakeland Office Building, located at 2229 - 112th Avenue NE, Bellevue, Washington (the "Building"), consisting of approximately 25,000 square feet of office space, as more particularly described in Exhibit "A" hereto, together with all improvements and other property of any kind located in or upon the property constituting fixtures (the "Real Property"). 1.2 Personal Property. Together with any and all tangible ----------------- and intangible personal property located on the Real Property and used in connection with its operation (collectively referred to herein as the "Personal Property"). 2. Purchase Price. The purchase price for the Property -------------- ("Purchase Price") is Four Million Three Hundred Thousand and No/100's Dollars ($4,300,000.00) payable as follows: 2.1 Earnest Money Deposit. Upon execution of this Agreement, --------------------- Purchaser shall deliver to Pacific Northwest Title Company of Washington, Inc. ("Escrow Company") a cash deposit of Two Hundred-Fifteen Thousand ($215,000.00) Dollars, which shall be non-refundable (except as otherwise provided in this Agreement) but applicable against the Purchase Price due at Closing, together with any interest accrued thereon. Escrow Company shall hold the Earnest Money Deposit in an interest bearing account with Seattle First Bank, with interest accruing on the Earnest Money Deposit for the benefit of Purchaser. 2.2 Balance. The balance of the Purchase Price shall be paid ------- in cash at Closing under this Agreement. 3. Closing of Escrow ----------------- 3.1 Closing Date. The close of escrow shall be in the ------------ offices of Escrow Company within ten (10) days following the completion of the Building's shell and core substantially in accordance with the plans and specifications identified in Exhibit "B" hereto (the "Building Plans"), as evidenced by a written certification of substantial completion issued by the Building's architects, Ruhl-Parr & Associates ("Ruhl-Parr") (the "Closing" or "Closing Date"). During the term of this Agreement, Purchaser and Purchaser's agents shall be provided with reasonable access to the Building and the Property in order to inspect the progress of construction and to determine the status of the Building's completion, and Purchaser shall immediately advise Seller in writing with respect to any defects or deficiencies in the work which may exist. At least five (5) days prior to Ruhl-Parr's issuance of its certification of substantial completion, Seller will provide written notice of this fact to Purchaser, and Purchaser shall promptly advise Seller and Ruhl-Parr in writing with respect to any defects or deficiencies in the Building's shell or core and any work which has not been completed as required by the Building Plans. Seller agrees to advise Ruhl-Parr to consider any information submitted by Purchaser in its decision to issue its certificate of substantial completion. It is understood and agreed that Ruhl-Parr's certificate may include a list of construction work to be completed or corrected by Seller which Ruhl-Parr determines is not essential to be completed prior to the Building being deemed to be substantially complete (the "Punch List Work"). Seller agrees to complete such Punch List Work as soon as possible either prior or subsequent to the Closing Date, such completion to be evidenced by a written notice issued by Ruhl-Parr. In the event all or any portion of the Punch List Work cannot be completed by Seller prior to the Closing Date, Ruhl-Parr shall estimate in writing the reasonable cost of completing such work, and 150% of this amount shall be held back by the Escrow Company from the Purchase Price pending Seller's completion of said work to the reasonable satisfaction of Ruhl-Parr. If Purchaser disagrees with the determination of substantial completion or the cost of completing the Punch List Work as determined by Ruhl- Parr, then Purchaser shall immediately so notify Seller in writing and Ruhl-Parr and Allbee-Romein shall meet and attempt to resolve the determination to the mutual satisfaction of Purchaser and Seller. If the determination is not resolved within three (3) business days of written notice by Purchaser to Seller, then Ruhl-Parr and Allbee-Romein shall immediately select a third independent architect who shall make a final determination which shall be binding upon Purchaser and Seller, such determination to be completed within three (3) business days after the appointment of the independent architect. All Punch List Work shall be completed within thirty (30) days after the Closing Date unless otherwise agreed in writing by Seller and Purchaser; provided, in the event certain items of the Punch List Work cannot be completed within said thirty (30) day period for reasons beyond the reasonable control of Seller, Seller shall have such additional time as is reasonably required in order to complete said work. 3.2 Deliveries Into Escrow. Purchaser and Seller shall ---------------------- deposit with Escrow Company all instruments, documents and monies necessary to complete the transaction in accordance with this Agreement. Prior to the Closing Date (or at such earlier time as provided herein or as may be mutually agreed upon), Seller and/or Purchaser shall deliver or cause to be delivered to escrow the following items, all of which shall be duly executed and acknowledged where appropriate: 3.2.1 Statutory Warranty Deed. A statutory warranty deed ----------------------- duly executed by Seller conveying marketable fee title to the Real Property from Seller to Purchaser, subject to no conditions or exceptions other than the exceptions approved pursuant to paragraph 4.1 (the "Approved Exceptions"). 3.2.2 Bill of Sale. A bill of sale duly executed by ------------ Seller in a form reasonably acceptable to Purchaser conveying marketable title to the Personal Property, if any, to Purchaser, which shall contain Seller's warranties and representations that at the time of execution and delivery Seller is lawfully possessed to good title to the Personal Property, that Seller has the right and authority to sell the Personal Property to Purchaser and that the Personal Property is free of all encumbrances except for current taxes not yet payable and which are approved title exceptions. 3.2.3 Title Policy. Seller shall deliver at Closing the ------------ title policy specified in paragraph 4.1 hereof. 3.2.4 Assignment of Permits and Warranties. Seller shall ------------------------------------ deliver at Closing an assignment of all rights and interests in and to the Building Plans, permits, licenses and warranties relating to the Building. 3.2.5 Other Deliveries. Seller and Purchaser shall ---------------- deliver into escrow all other certificates, statements, documents and instruments required of Seller and Purchaser hereunder to close this transaction. Seller and Purchaser shall deliver or cause to be delivered to escrow such modified and additional documents as either of them may reasonably require to consummate the transaction under this Agreement. 3.2.6 Lien Release. Seller shall deliver at Closing a ------------ lien release or waiver from the contractor for the completed Building shell. 3.3 Closing Costs. Seller shall pay one-half the Escrow ------------- Company's fees (including sales taxes applicable thereto); the premium for a standard coverage title insurance policy for Purchaser; all excise taxes and state and county transfer taxes, if any; recording fees; and a real estate brokerage commission due to Pacific Real Estate Partners. Purchaser shall pay one-half of the Escrow Company's fees (including sales taxes applicable thereto); a real estate brokerage commission due to Puget Sound Properties; and the additional premium for an extended coverage title policy, together with any costs and expenses related thereto. In addition to the costs specified above, Purchaser and Seller shall each be responsible for their own attorneys' fees. All real and personal property taxes shall be prorated as of Closing. 4. Title and Survey ---------------- 4.1 Title. Title to the Property shall be free of all ----- encumbrances, defects or assessments, except easements and restrictions of record. Rights reserved in federal patents or state deeds, building or use restrictions and building or zoning regulations shall not be deemed to constitute defects or encumbrances for purposes of this Agreement. Seller has delivered to Purchaser under Title Order No. 323257 (Second Report) dated December 12, 1997, a preliminary commitment for a standard coverage owner's title insurance policy issued by Pacific Northwest Title Company of Washington, Inc. (the "Title Company"), including a copy of all recorded documents. Seller agrees to convey title at closing by statutory warranty deed free and clear of all liens, encumbrances and defects, except as specifically permitted by the Approved Title Exceptions listed in Exhibit "C". 4.2 Survey. Seller shall provide Purchaser and the Title ------ Company with the most recent survey of the Real Property by a surveyor duly licensed in the State of Washington. Seller also agrees to assist Purchaser in obtaining prior to Closing an ALTA "as built" survey of the Property which shall show the improvements as constructed, the location of all easements and confirmation that the Building does not encroach onto any of the easements and is constructed within the boundary lines of the Property. The receipt of such a survey shall be a condition precedent to Purchaser's obligation to close. 5. Risk of Loss. If, prior to Closing, the Building is destroyed ------------ or materially damaged by fire or other casualty in an amount in excess of One Hundred Thousand and No/100's Dollars ($100,000.00), whether or not insured, or there is a condemnation or taking of all or any part of the Property by power of eminent domain or deed in lieu thereof, this Agreement, at the option of Purchaser, shall become null and void, the Earnest Money shall be returned to Purchaser, and the escrow shall be canceled. In the event of any such destruction, material damage, condemnation or taking, Purchaser shall have the right to elect to proceed with the purchase of the Property, in which event (or in the event the Building is damaged in an amount less than $100,000.00) Seller shall pay to Purchaser any and all insurance proceeds and/or condemnation awards or proceeds received by Seller and shall assign to Purchaser all rights of Seller to receive any future insurance proceeds or condemnation awards. 6. Seller's Warranties and Representations. The following --------------------------------------- warranties and representations of Seller to Purchaser shall be effective on the date Seller executes this Agreement and the Closing Date: 6.1 Litigation. To the best of Seller's actual knowledge, ---------- there is no litigation and there are no other claims, actions or proceedings pending (including without limitation condemnation proceedings, assessments, public improvements, lien claims by contractors, materialmen or suppliers, or any other matter which would or could create a lien or encumbrance) and, to the best of Seller's actual knowledge, there are no proposed, threatened or anticipated actions with respect to any matter affecting the Property or its operation. If Seller is notified of any litigation or action proposed, threatened or instituted with respect to all or any portion of the Property prior to Closing, Seller shall promptly deliver written notice thereof to Purchaser. 6.2 No Other Breaches. To the best of Seller's actual ----------------- knowledge, neither the execution of this Agreement, Seller's performance of its obligations hereunder, nor the completion of the transaction contemplated hereby, will violate or constitute a breach by Seller of any statute, bylaw, regulation, ordinance or agreement to which Seller is a party or by which Seller or the Property may be bound. 6.3 Compliance With Laws. To the best of Seller's actual -------------------- knowledge, the ownership, operation and use of the Property complies with and will be carried on in accordance with applicable governmental licenses, permits and authorizations and in accordance with all applicable laws, regulations and ordinances. Seller has not received and has no actual knowledge of any notices from any governmental body or any other person claiming any violation of applicable federal, state or local statutes, regulations or laws, including without limitation any building, fire, health, or safety codes, environmental or pollution laws, zoning ordinances, seismic requirements and regulations for the benefit of handicapped persons, nor has Seller received any written or oral notice from any governmental agency requiring any work, repair, construction, alteration or installation with respect to all or any portion of the Property. 6.4 Asbestos and PCBs. The Property will not at Closing ----------------- contain any asbestos-containing materials or any electrical transformers, fluorescent light fixtures with ballasts or other equipment containing polychlorinated biphenyls. 6.5 Hazardous Material. To the best of Seller's actual ------------------ knowledge, during Seller's ownership of the Property and at any time prior to Seller's ownership of the Property, there has been no emission, spill, release or discharge into or upon the air, soils or any improvements located on the Property, surface water or ground water, or the waste treatment storage or disposal systems servicing all or any portion of the Property, of any toxic, dangerous or hazardous substances, contaminants or wastes as defined or regulated under applicable Washington State or federal law, at, from, to, or upon the Property (any of which is hereafter referred to as a "Hazardous Discharge"). 6.6 Completion of Construction. The Building has been, and -------------------------- at the completion of Closing will be, constructed substantially in accordance with the Building Plans, except for minor deviations and inconsistencies which do not materially affect the value or integrity of the Building 7. Defaults; Remedies. In the event that Seller fails to perform ------------------ its obligations under the Agreement, Purchaser shall have the option to waive such default, or may bring an action for any and all legal or equitable remedies permitted by law, including without limitation specific performance, or Purchaser may terminate this Agreement and, upon such termination, the Earnest Money and all accrued interest shall be returned to Purchaser. In the event Purchaser fails, without legal excuse, to complete the Purchase of the Property, the Earnest Money Deposit made by Purchaser (exclusive of any accrued interest) shall be forfeited to Seller as the sole and exclusive remedy available to Seller for such failure. 8. Notices. All notices required or given under this Agreement ------- shall be in writing and either delivered by hand or via overnight mail courier (such as Federal Express), transmitted by telecopy or other facsimile transmittal or deposited in U.S. certified or registered mail return receipt requested and addressed as follows: Purchaser: ARIS Corporation 6720 Fort Dent Way, Suite 150 Seattle, WA 98188-2555 Facsimile No.: (425) 433-1182 Attention: Mr. Thomas Averill Seller: Vangard Management Company 545 Bellevue Way SE, Suite 12 Bellevue, WA 98004 Facsimile No.: (425) 454-3794 Attention: Mr. William C. Summers All notices shall be deemed delivered to and received by a party upon personal, overnight courier or facsimile delivery, or three (3) days after depositing in U.S. certified or registered mail as provided above. Address and facsimile numbers for notice may be changed by notice in the manner above provided. 9. Brokerage Commission. Seller and Purchaser agree to pay the -------------------- real estate brokerage commissions indicated in paragraph 3.3. Seller and Purchaser hereby represent to the other that neither has discussed this Agreement or the subject matter thereof with any other real estate broker or salesperson so as to create any legal right in any such broker or salesperson to claim a real estate commission or similar fee with respect to the purchase and sale of the Property contemplated by this Agreement. Purchaser and Seller hereby indemnify each other against and agree to defend and hold the other harmless from any and all claims for any real estate commission or similar fees arising out of or in any way connected with any claimed agency relationship with the indemnitor. 10. License to Enter Real Property. Effective as of the execution ------------------------------ of this Agreement, Seller grants to Purchaser and Purchaser's authorized representatives a limited license to enter the Property at any reasonable time or times to inspect any portion of the Property and to conduct, or cause to be conducted, at Purchaser's sole expense, such tests, sampling and evaluations upon the Property as Purchaser may deem necessary; provided, however, that -------- ------- Purchaser shall give prior notice of any such entry, and shall cooperate with Seller and Seller's construction personnel. Purchaser shall indemnify and hold Seller and the Property harmless from and against all claims, liabilities, demands, damages, judgments, liens, costs or expenses of any kind whatsoever, arising from the activities of Purchaser on the Property permitted under this Agreement, except to the extent that the same are caused by the negligent act or omission of Seller or any of Seller's representatives, employees or agents. 11. Completion of Construction. Seller agrees to complete the -------------------------- construction of the Building's shell and core substantially in accordance with the Building Plans as soon as possible, but in any event no later than March 15, 1998. If Seller fails to substantially complete the Building shell and core by March 15, 1998, Seller will reimburse Purchaser for any increased rent or other additional charges ("holdover costs") Purchaser thereafter incurs as a result of its need to holdover in its existing premises after the expiration of the term of its lease. If Seller fails to substantially complete the Building shell and core by April 15, 1998, Purchaser shall have the option to either (i) terminate this Agreement by written notice to Seller and receive a refund of its Earnest Money Deposit, or (ii) continue this Agreement in effect in which event Purchaser will be entitled to a credit against the Purchase Price in the amount of $100.00 per day for each day after April 15, 1998, until the Building shell and core is substantially complete, in addition to reimbursement for any additional holdover costs incurred by Purchaser at its existing premises. If Purchaser so elects to terminate this Agreement, Seller will reimburse Purchaser for all of the costs incurred by Purchaser in making improvements to the Building, including architectural and engineering costs. Such reimbursement shall be due and payable within thirty (30) days after the presentation to Seller by Purchaser of written evidence of the costs so incurred by Purchaser. Prior to Closing, Purchaser shall have the right to request in writing modifications and/or additions to the Building's shell and core as described in the Building Plans, and Seller agrees to complete such work, provided: (i) the completion of the requested modifications and/or additions will not be considered in determining whether the Building is substantially complete, as provided in paragraph 3.1; (ii) a written change order with respect thereto is executed by Seller, Purchaser and the Building's construction contractor, which shall include the costs associated with the requested changes and any demolition or additional costs related thereto; and (iii) the amount of the change order, plus any applicable taxes, related architectural or engineering fees and any permit fees applicable thereto, is paid directly to the Building's contractor prior to the commencement of such work. Promptly after receiving any request by Purchaser for changes in the Building shell and core, Seller (or Seller's contractor) will provide Purchaser with written notice of (a) the additional costs, if any, of making any such changes, and (b) the estimated delay, if any, in substantial completion of the Building's shell and core which will result from any such requested change. Purchaser shall have three (3) business days after receiving such notice to either authorize Seller and its contractor to proceed with the requested change or waive its request for the requested change. All tenant improvements related to the Building, which are specifically excluded from the scope of the Building Plans and the Building's lien-free completion, are the exclusive responsibility of Purchaser, including all space planning, construction documents and permits related thereto. So long as Purchaser's tenant improvements are constructed by Foushee & Associates, Inc. as general contractor pursuant to a written contract, and such tenant improvements are substantially in conformance with the attached space plans, Seller agrees to permit Purchaser to proceed with the construction of its tenant improvements prior to substantial completion of the Building shell and core. In such event, Purchaser and Seller shall work together (and shall cause their respective contractors to work together) to permit the improvements to proceed in a manner which does not interfere with Seller's completion of construction of the Building shell and core. Purchaser shall be responsible for any damages to the Building caused by Purchaser or its contractors as a result of the commencement of such work, and Purchaser shall indemnify, defend and hold Seller harmless from any claims for mechanics' or materialmens' liens against the Property resulting from the conduct of such work by Purchaser or its contractors. 12. Exchange Provisions. Purchaser acknowledges that it is the ------------------- intention of Seller to enter into a tax-free exchange (or exchanges), as permitted by Section 1031 of the Internal Revenue Code, in connection with this transaction. Accordingly, Seller's rights and obligations pursuant to this Agreement may be assigned to one or more exchange facilitator(s) in order to accomplish this result. Purchaser agrees to cooperate with Seller in any manner reasonably requested in order to enable Seller to qualify for said exchange(s), provided, Purchaser shall not be required to incur any additional costs or liabilities as a result of such cooperation. 13. Miscellaneous Provision ----------------------- 13.1 Washington Law Governs. This Agreement shall be governed ---------------------- by and interpreted under the laws of the State of Washington. 13.2 Binding. This Agreement shall inure to and be binding ------- upon the heirs, successors, assigns and representatives of Purchaser and Seller. 13.3 Venue. In any action instituted to enforce the Agreement ----- or any provision hereof exclusive venue shall lie in the Superior Court of the State of Washington of King County, and the parties hereto submit to the jurisdiction of such Court. 13.4 Attorneys' Fees. The prevailing party in any action --------------- instituted to enforce this Agreement or any provision hereof shall be entitled to recover its reasonable attorney's fees and court costs, including attorneys' fees and costs on any appeal from judgment, from the non-prevailing party. 13.5 Time of Essence. Time is of the essence of every --------------- provision of this Agreement. 13.6 Entire Agreement. The Agreement represents the entire ---------------- Agreement between the parties relating to the purchase and sale of the Property and supersedes any and all prior agreements, negotiations and discussions between the parties. 13.7 Amendments. Any amendment or addendum to the Agreement ---------- must be in writing and signed by Seller and Purchaser before it is an effective amendment or addendum. 13.8 Counterparts. This Agreement may be executed in any ------------ number of identical counterparts, and all such counterparts taken together shall be construed as one and the same Agreement. 13.9 Confidentiality. Purchaser and Seller agree to maintain --------------- this Agreement and its terms and conditions strictly confidential, and they agree to instruct their respective agents and employees accordingly. 13.10 Seller's and Purchaser's Authority. Seller and Purchaser ---------------------------------- have the full power, capacity and authority to enter into this Agreement and consummate this sale subject to the terms of this Agreement, and the person or persons signing the Agreement on behalf of Seller and Purchaser have full power and authority to execute this Agreement as a fully binding obligation. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PURCHASER: ARIS CORPORATION By: /s/ Thomas W. Averill ------------------------- Its: Vice President - Finance --------------------------- SELLER: VANGARD MANAGEMENT COMPANY By: /s/ signature illegible -------------------------- Its: authorized signatory ----------------------- /s/ Jeff Foushee ------------------------ Jeff Foushee /s/ Loch Anderson ---------------------- Loch Anderson /s/ Richard Barker Richard Barker EXHIBIT "A" LAKELAND OFFICE BUILDING LEGAL DESCRIPTION Lot 2, City of Bellevue Short Plat Number CSPS-92-5300, recorded under Recording Number 9212229017, said short plat being a portion of that portion of Stanley Park, according to the plat thereof recorded in Volume 57 of Plats, pages 39 and 40, in King County, Washington, vacated by City of Bellevue Ordinance Number 2322; TOGETHER WITH an easement as delineated on said short plat for ingress, egress and utilities over, under and across the southerly 12.5 feet of Lot 1 of said short plat. EXHIBIT "B" LAKELAND OFFICE BUILDING BUILDING PLANS The building plans have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy will be furnished to the Securities and Exchange Commission upon request. EXHIBIT "C" LAKELAND OFFICE BUILDING APPROVED TITLE EXCEPTIONS The approved title exceptions have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy will be furnished to the Securities and Exchange Commission upon request. EX-21.1 4 LIST OF THE COMPANY'S SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT ARIS Software, Inc. Incorporated under the laws of Washington 1417 - 116/th/ Avenue NE, Suite 200 Bellevue, WA 98004 Oxford Computer Group Limited Incorporated under the laws of England and Wales Wolsey Hall 66 Banbury Road Oxford, England OX2 6PR Barefoot Computer Training Limited Incorporated under the laws of England and Wales Telephone House 77 Paul Street London, England EC2A 4PT EX-23.1 5 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-40923) of ARIS Corporation of our report dated January 28, 1998 appearing on page 28 of the 1997 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 44 of this Form 10-K. Price Waterhouse LLP Seattle, Washington March 27, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 9,388 15,464 12,001 (642) 0 38,478 7,393 (1,996) 51,970 6,526 0 0 0 0 44,918 51,970 55,131 55,131 25,782 47,377 (975) 0 (694) 8,729 3,384 5,345 0 0 0 5,345 .61 .57
EX-99.1 7 FINANCIAL STATEMENT SCHEDULE II EXHIBIT 99.1 ARIS CORPORATION FINANCIAL STATEMENT SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF PERIOD EXPENSES DEDUCTIONS PERIOD ------------ ----------- ---------- ----------- YEAR ENDED DECEMBER 31, 1994 Allowance for doubtful accounts......... $ 53,050 $ 68,200 $(15,050) $106,200 YEAR ENDED DECEMBER 31, 1995 Allowance for doubtful accounts......... $106,200 $233,423 $(60,623) $279,000 YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts......... $279,000 $ 50,553 $(29,553) $300,000 YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts......... $300,000 $391,000 $(49,000) $642,000
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